New Paradigms, Social Justice, and Distributive Policy

The gestation of a new socioeconomic paradigm includes as an essential element a distributive policy guided toiwards the search for equality and social justice.

The contractive economic phase initiated globally in the mid-1970s was characterized by a general fall in employment levels, accompanied by decreasing growth and investment. In addition, from the institutional point of view, there was an erosion of the set of rules and mechanisms inherent to the “Fordist” socioeconomic regulation paradigm typical of the postwar phase of high growth, where labor unions were important actors. Since then, the unions lost part of their membership and most of their influence, not only over the resolution of the distributive conflict and the determination of wages but also over the general social evolution. The increase in unemployment pushes down on real salaries, which stagnate or decline, producing a universal fall in the participation of wages in national income. On the other hand, the share of profits and unearned incomes increases. In particular, financial deregulation, the liberalization of the international flows of capital and the general financialization of the individual economies cause an increase in financial earnings. The decay in the functional distribution of income—i.e. the fall in wages as compared to capitalists’ and rentiers’ incomes—is one of the main factors behind the almost universal increase in inequality of income distribution since the mid-1970s.

A detailed study on the causes of the general increase in inequality during the period concludes that the main causing factors are the liberalization of international capital flows and the deregulation of the labor market [1] . These policies deepened the tendencies towards deterioration in the distribution between capital and labor inherent to the contractive economic phase, worsening the regressive income redistribution effect.

A generalized characteristic of the increase in inequality in this phase has been the unprecedented rise in the relative income of the ultra-rich. The portion of the total income received by the richest 1% has doubled in several rich countries since the mid-1970s, with the United States as leading case [2]. This is the most notorious change in the income distribution over the last decades: income has concentrated in the highest centiles, practically at the expense of all the rest.

Another way of looking at the income redistribution in favor of the richest segments is from the perspective of the distribution among social classes. In the typical case of the United States, evidence shows that the notable increase in inequality in that country is exclusively due to the rise in income inequality between the class of rentiers and capitalists and the rest of the society [3]. This abysmal fracture between the ultra-rich and the rest of the population is the basic differential characteristic of the income distribution in Latin America.

The policies of financial liberalization and “labor market deregulation” (euphemism for “elimination of social rights”) were not the only pro-cyclical policy measures of the neoliberal period. Fiscal policy also accompanied the regressive general tendency of the economic policies. As the other aspects of the socioeconomic policy, the effects of the fiscal policy during the contractive phase went towards exacerbating the inherent drift towards inequality that was generated by the cycle. In the case of Latin America, for example, tax reforms introduced during this period generally transferred the tax burden of high-income groups to the middle classes and the poor. A wide study of the literature on fiscal incidence concludes that in only 13 out of 36 countries fiscal systems were progressive—the rest were regressive or proportional [4]. Furthermore, it concludes that tax progressivity diminished in several developing countries after fiscal reforms were introduced.

A new expansive phase should reverse this long-lasting process of regressive redistribution. A new growth regime necessarily implies the constitution of a new mode of distributional regulation and of aggregate demand generation. A new way of regulation in the expansive phase might establish a new set of progressive distributive rules, mechanisms, and institutions, capable of sustaining a continuous unfolding of the new “digital” technological paradigm, based on information and communication technologies [5]. In general terms, all these forms of regulation tend to incorporate the large marginal and semi-marginal social groups, excluded from the political and social body during the contractive phase.

The basic economic policy regulation tools are the public budget and institutional innovation. Both expenditure and income policies have redistributive effects. Economic policy has at its disposal a whole panoply of instruments, quantitative (taxes, transfers, social spending, etc.) as well as qualitative (agrarian and natural resources reform, educational reform, or that of retirements and pensions, etc.) to influence the way in which economic growth benefits different social groups.

On the side of public revenues, it is inherent to the expansive phase the reversion of the generalized regressive role of taxation. This implies the gestation of new progressive, efficient forms of taxation, capable of increasing the progressive distributive role of the public budget. On the side of public spending, the public budget also has important distributive effects. Depending on how it is conceived, infrastructure spending—for example expenditure destined for electric, communication, or transport infrastructure—tends to benefit certain social and income groups more than others. Public investments in health, sanitation, housing and, particularly, in education, can be used with progressive redistribution purposes in terms of vital capabilities and opportunities. The investment in programs of (re)distribution of land and other productive assets and the promotion of associative forms of production and credit, are among the many examples of redistributive public spending. Of all forms of public spending, however, the ones that more directly and rapidly decrease inequality and poverty are the direct money transfers, such as maternity and child support subsidies [6].

In sum, a socioeconomic policy consistent with a new expansive period and with the gestation of a new socioeconomic paradigm includes as an essential element a distributive policy aimed at searching for more equality and social justice. For that reason, strategies of this new phase should necessarily count on the precise and detailed knowledge of the generation and distribution of income, to allow for a careful design of redistributive policies and a thorough long-term follow up.