Crisis Augments Inequality, and Inequality Generates Crisis

It is known that crises generally augment inequality, but it is not equally acknowledged that inequality is one of the factors responsible for the occurrence of recurrent crises. Crisis and inequality, inequality and crisis generate a dangerous destabilizing spiral.
It is known that crises generally augment inequality, but it is not equally acknowledged that inequality is one of the factors responsible for the occurrence of recurrent crises. Crisis and inequality, inequality and crisis generate a dangerous destabilizing spiral.

Crises tend to augment inequality…

When a crisis occurs, there is a traumatic crunch that hits most financial assets and real economy investments; consumption, real wages, investment and fiscal revenue fall. In this whirlwind, those who have the capital and the information to take advantage of violent and unexpected opportunities gain by going in the opposite direction of the affected ones, obtaining benefits that are unimaginable in normal times. When many are harmed and a few gain wealth concentration grows, and so does inequality.

This tendency, frequent outcome of a crisis, is very difficult yet not impossible to revert. To offset it, public policy should make a double great effort: mobilizing a wealth of resources and using them efficiently.

Financing powerful counter-cyclical measures to stimulate the economy requires to have available a large stock of resources. How can it be obtained? One choice is to increase tax pressure, but that threatens consumption and the very production that sought to be boosted. Another possibility is to increase public indebtedness with the hope of cutting it back once out of the crisis. Another option is sharing in the results of those who have the chance to take advantage of sudden opportunities. Measures such as levies or withholdings designed to seize a portion of extraordinary gains, tend to pay a high political cost since they generate reactions among the affected ones that may end up being destabilizing.

In addition to raising resources, the economic authority must channel them efficiently toward dynamic sectors and players so that, with that aid, these may be able to face adverse conditions and help boost the economy. Such dynamism is not the exclusive property of those who are already well established: it also resides in millions of disadvantaged or excluded players who are thirsty for accessing opportunities.

Thus, the effort for adopting countervailing measures to put a halt to greater concentration and inequality is huge, but it also entails serious risks and major challenges. Every time there is an intervention in terms of redistribution of economic flows, we have to address the risk of possible deviations and the challenge to be effective.

As to deviations, a whole series of leakages toward other social or sector destinations, often unforeseen or overlooked, may occur. For instance, via prices of raw materials, inputs or financial services, the economic flows intended to support certain activities may end up being accumulated in the hands of third parties rather than in those of the intended players.

Deviations may also occur due to corruption, political patronage, and cronyism with certain contractors, among many other situations.

As to the challenges, one of the greatest ones is that of reconciling the urgency to finance players and recovery-boosting activities with the need to make sure that the conditions that led the economy into the crisis will not be reproduced. That is, we will have to bet on what is in existence as well as on what does not exist: mobilize those structures that are ready to be used and, at the same time, transform them in order to give way to the immense entrepreneurial reservoir that nests at the bottom of the social pyramid. In fact, it is not just a question of rebuilding the pre-crisis systemic power but also of ensuring a better sustainable development course. This will call for major strategic changes, among which two stand out because of their significance and impact: it will be necessary to adjust the rules of economic functioning (regulations, rewards and punishments) and ensure greater capital formation at the base of the production system.

Often, when a crisis bursts, available resources become over-demanded in relation to the urgencies of the moment, and quick ways to apply them are sought. This generates a bias in favor of large corporations having the capacity to quickly absorb and use financing. It is not easy to speed up recovery and, at the same time, prevent that the exit of a crisis end up in greater concentration and inequality.

… and inequality creates conditions that generate crises

Inequality leads the economic system to depart from organic growth, affects social cohesion, triggers conflicts, and creates conditions that generate new crises.

In organic growth, the level and structure of effective demand accompany and absorb what the vibrant economic system is capable of producing. Instead, what prevails in many countries is concentration-oriented growth that causes the middle and low-income sectors to significantly lag behind. In this context, effective demand becomes segmented between an affluent consumption stratum and vast majorities of consumers who cannot improve their income, become indebted to maintain their standard of living and, hence, sooner or later, fall into over-borrowing. Dangerous financial bubbles are born and inflated, until one day they burst, sweeping along the financial system that enabled (and profited from) them and then, by domino effect, the rest of the economic system.

Concentration-oriented growth is not expressed only in this gap between the genuine income of middle and low-income sectors and the production system supply. There are other effects such as the concentration of savings and its channeling toward high ─though disguised─ risk financial products; greed and the absence of limits in certain financial dealers; the willful or negligent complicity of a considerable number of national and international public regulators; the concentration of investment in certain clusters of the economic system, which deepens the divorce between high-tech, highly efficient segments in relation to a huge and increasingly lagging universe of small and micro-producers.

Economic concentration has, in addition, its counterpart at the political and communicational level, which favors the homogenization of strategic thinking. It also determines a certain demand profile that sends signals to the production apparatus about what type of production should be offered. Superfluous consumption grows among affluent sectors, a consumption pattern that the media and advertising spread to the ever more indebted middle-income sectors. Instead of responsible consumption there prevails exacerbated consumerism that augments accelerated environmental destruction. The consumerist zeal ignores the debacle of poverty and indigence, ruptures protective networks, favors addictions and the alienated search for substitute happiness.

Transforming a dynamics that generates systemic instability

If inequality is to a large extent responsible for generating a crisis such as the current one, and if, when a crisis breaks out, the most frequent occurrence is that pre-existing inequality worsens, how can we transform that inequality-crisis-more inequality dynamics entailing systemic instability? There is no other formula than acting both during the crisis and after the same is overcome.

Even though we sketched some ideas in the previous paragraphs, many more economic, social, political, environmental and psychological variables are at stake and impact on the course of events. They make up a heterogeneous and complex system in which all components are interconnected, and where the different players’ relative power to influence the way of functioning weighs heavily. From these multiple relationships, which are mediated and conditioned by state intervention (which, in turn, is the result of that confluence of forces), there emerges the social and economic fabric of each society and the course of its economy.

A society’s unchangeable past as well as its desired future, impact on the development of a crisis. The past contributes the existing structures, with their virtues and defects; the future, the guiding utopias. The urge to halt the economic destruction (exacerbated by the widespread panic) leads to use the most dynamic segment of the existing production apparatus, which concentrates the aid that the public sector eagerly seeks to pour into the economic system. Yet, in turn, the crisis unleashes forces that flow like non-crystallized lava, crack opening spaces for transformation that can be influenced by the desired future. Interests entrenched in their privileges weaken, and there is a certain shift from economic toward political power, which is the one that leads the recovery by adopting emergency measures and allocating resources. In addition, people’s anxiety exerts pressure on the incumbent governments to take decisive action, which enables them to change both course and way of functioning.

As always, old and new, the existent and the desired, what is known and what is to be explored, are part of the trajectory; if properly weighed, both perspectives make a contribution. What happens is that today’s acceleration imposes new operational circumstances upon helmsmen: they are forced to make quick decisions based on information that speed renders impossible to confirm and, sometimes, to understand. Suddenness and instantaneity shorten reflection times and precipitate decisions that increase the chance of erring and not perceiving the complexity of unprecedented processes. Hence, today more than ever it is necessary to anticipate events so as to condition how they unfold. We need to have available well designed sets of measures to face up to the concentration-oriented growth pattern and eliminate inequality; from macroeconomic regulations, to mesoeconomic initiatives of production chain leading units, to direct support to the bottom of the social and economic pyramid (.1) This battery of measures should be implemented to regulate the proper
operation of the economic system, and be also prepared to become a constituent part of emergency interventions to address unforeseeable course disruptions. Economic processes flow ceaselessly; time is too short and problems are of such a magnitude that we do not have room to improvise solutions.

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1. See Opinion Sur’s e-books “The Storm of the Century: the Economic Crisis and its Consequences”, “International Crisis: Adjusting the Course and Improving the Systemic Functioning” and “Coming Out of the Crisis towards Sustainable Development”.

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