Collective Bargaining And Rising Inequalities: Do The OECD And IMF Get It?

In a paper published in spring 2015, the IMF’s research department made the case for trade unions and collective bargaining as a powerful tool to keep inequalities in check.

Whereas previous literature and statistics were already showing the existence of such a link, the IMF paper went even further by pointing out that trade unions and collective bargaining not only tend to reduce inequalities by pushing up wages at the lower end of the pay scale but also limit the income share captured by the top 10% of income earners. Moreover, the IMF research found that high trade union membership also influences the extent to which the tax system and the welfare state redistribute revenues in a more equal way.

In two recent working papers, the OECD Economics Department also focusses on the theme of inequalities and this in ways one would not necessarily expect.

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US Tax System: Inequality, Unbelievably, Gets Worse - by Steven Rattner

The Democrats’ loss  in the midterm elections was unfortunate on many levels, but particularly because the prospect of addressing income inequality grows dimmer, even as the problem worsens.

To only modest notice, during the campaign the Federal Reserve put forth more sobering news about income inequality: Inflation-adjusted earnings of the bottom 90 percent of Americans fell between 2010 and 2013, with those near the bottom dropping the most. Meanwhile, incomes in the top group rose.

Lower taxes means less for government to spend on programs to help those near the bottom. Social Security typically provides a retiree with about half of his working income; European countries often replace two-thirds of earnings.

Similarly, we spend less on early childhood education and care. And another big difference, of course, is the presence of national health insurance in most European countries.

All told, social spending in the United States is below the average of that of the wealthiest countries. And other governments help their less fortunate citizens to a greater extent than we do in ways that are not captured in the income statistics. The United States, which is the only developed country without a national paid parental leave policy, also has no mandated paid holidays or annual vacation; in Europe, workers are guaranteed at least 20 days and as many as 35 days of paid leave.

To his credit, President Obama has succeeded in keeping income disparities from growing even wider, by such measures as by forcing tax rates on the wealthiest Americans up toward fair levels.

Meanwhile, on the programmatic side, among the many meritorious aspects of the much-maligned Affordable Care Act are its redistributionist elements: higher taxes on investment income and some health care businesses are being used to provide low-cost or free health care to a projected 26 million Americans near the bottom of the income scale.

Read more: New York Times

Downtown Abbey Economy: Why the US needs tax reform to avoid a 'Downton Abbey' economy - by Lawrence Summers

The United States may be on course to becoming a "Downton Abbey" economy. There are valid causes for concern about inequality: sharp increases in the share of income going to the top 1% of earners, a rising share of income going to profits, stagnant real wages and a rising gap between productivity growth and growth in median family incomes.

 A generation ago, it could have been asserted that the economy's overall growth rate was the dominant determinant of growth in middle-class incomes and progress in reducing poverty. This is no longer a plausible claim.

Issues associated with an increasingly unequal distribution of economic rewards are likely to stay long after cyclical conditions have normalised and budget deficits have been addressed. Those who condemn President Obama's concern about inequality as "tearing down the wealthy" and un-American populism have, to put it politely, limited historical perspective. Consider some past presidential rhetoric.

Franklin Roosevelt said of the financial industry in his first inaugural address: "Practices of the unscrupulous money changers stand indicted in the court of public opinion … they know only the rules of a generation of self-seekers … and when there is no vision the people perish." In 1936, Roosevelt asserted that "we had to struggle with the old enemies of peace – business and financial monopoly, speculation, reckless banking …

They are unanimous in their hate for me, and I welcome their hatred."

Harry Truman observed: "The Wall Street reactionaries are not satisfied with being rich … They want a return of the Wall Street economic dictatorship." John Kennedy, dismayed by a steel price increase, was quoted cursing the executives. Richard Nixon announced in 1973 that he had "ordered the Internal Revenue Service to begin immediately a thoroughgoing audit of the books of companies which raised their prices more than 1.5% above the January ceiling".

Bill Clinton complained during his first presidential campaign that "America is evolving a new social order, more unequal, more divided, more impenetrable to those who seek to get ahead. Although America's rich got richer … the country did not … the stock market tripled but wages went down."

Meanwhile, the ratio of corporate tax collections to the market value of US corporations is near a record low, thanks to various loopholes. And the estate tax can be substantially avoided by those prepared to plan and seek sophisticated advice. Closing loopholes that only the wealthy can enjoy would enable targeted tax measures such as the earned-income tax credit to raise the incomes of the poor and middle class more than dollar for dollar by incentivising working and saving.

It is ironic that those who profess the most enthusiasm for market forces are least enthusiastic about curbing tax benefits for the wealthy. Sooner or later, inequality will be addressed. Much better that it be done by letting market forces operate and then working to improve the result than by seeking to thwart their operation.

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