United States

Addressing Growing Inequality through Inclusive Growth: Insights for the US and Beyond

 

Remarks by Angel Gurría, Secretary-General, OECD

The Brookings Institution

Friday, 17 April, United States


Ladies and Gentlemen,

 

President Kennedy once said that ‘the rising tide lifts all boats’. But across much of the world the last three decades have seen the tide of growth lift millionaires’ yachts, only to leave the rafts of the poorest stuck in the mud.

 

Growing unequal

Let me give you a few numbers to spell out exactly what I mean. Across the 34 advanced economies that make up the OECD, the average income of the richest 10% is now almost 10 times that of the poorest 10%, up from 7 times 25 years ago.[i] Inequality has risen even in traditionally egalitarian countries, like Norway or Sweden.

 

The situation in emerging markets and developing countries is even worse. The income gap between the top and bottom 10 percent hits 50 times in Brazil, around 30 times in Mexico, and a staggering one hundred times in South Africa.

 

Inequality is also a burning issue here in the United States. This is a country founded on egalitarian principles. It is nation known as a land of hope and opportunity, a place where – with some smarts and hard work – everyone has the potential to become the next Warren Buffet or Bill Gates. That is the American Dream!

 

Yet today, even as the US continues to lead the recovery from the Great Recession, there is a nagging sense that things are not getting better for everyone, as wealth and opportunity become disproportionately concentrated in the hands of those at the top.

 

This is borne out in the data. Thirty years ago, the average income of the top 10 percent here in the US was 12 times higher than the bottom 10 percent. At the last count that figure had risen to 16.5 times.

 

What is more, those at the very top are doing even better. America’s top 0.1 percent currently lay claim to around 8 percent of national pre-tax income. To put that in perspective, that’s around twice the share of their equivalents in Canada, the United Kingdom and Switzerland. This gives the US the dubious honour of being some way out in front as the most unequal among rich countries.

 

The OECD’s numbers tell a clear-cut story of how our traditional economic growth agenda has neglected inclusiveness. Yet to begin to tackle this problem, we have to understand that inequality is not just about money. It touches every area of people’s lives.

 

Take education as an example. Right across the OECD, children from poor families are more likely to attend sub-standard schools than their wealthier peers. This initial disadvantage follows them, and many end up with lower paid jobs. In the US, around 15% of the variation in student performance is explained by socio-economic background. That is about the OECD average, but it’s still too high!  

 

And to make matters worse, life-expectancy in OECD countries is correlated with education level. Our data show that at age 30, those with the lowest levels of education are on average expected to live roughly six years less than their well-educated counterparts.

 

Here in the US, the most well-educated white males are expected to live as many as 14 years longer than the most poorly-educated African-American males. This is first and foremost a profound social tragedy, but it also has severe economic consequences

 

The consequences of rising inequalities

Evidence suggests that when rising inequality perpetuates exclusion, it leads to poorer economic performance. Recent OECD research estimates that rising inequality has knocked as much as 7 percentage points off cumulative GDP growth in the US since 1990. That’s slightly better than Mexico, the UK or Norway, but it still amounts to well over a trillion dollars of lost output. And that can be directly traced to families with lower incomes slipping behind because they underinvest in education and skills.

 

Inequalities also impose a cost on our democracies, hitting trust and engagement. Across the OECD the percentage of people who trust their government slumped to 42% in 2014. That’s hardly a rave review of an inclusive political process!  

 

Clearly, something should be done. I can tell you from my own experience that governments right across the world are waking up to the dangers of growing unequal. Just last month I was in Beijing, to launch an OECD report on Inclusive Growth in China, which the government will use to inform their thirteenth next five year plan. Today, many countries- from Sweden, to Korea, and New Zealand - are talking about how to tackle inequalities as an urgent priority. Talk is important, but what about action?

 

The OECD can help! Our Inclusive Growth Initiative sets out to support member countries in turning inclusiveness into a fundamental driver of growth. It builds on some of the lessons we have learnt in over two decades of analysing and assessing inequalities.

 

And as Mr Dervis - a member of our advisory group on Inclusive Growth – can attest, the results of our work have clearly shown that there doesn’t have to be a trade-off between growth and equality. On the contrary, if you want sustainable long-term economic growth, then you need policies that include all members of society in it, especially the disadvantaged.

 

Making inclusive growth happen

Our flagship report All on Board: Making Inclusive Growth Happen, sets out a number of areas where governments can make a difference to promote Inclusive Growth. Let me share a couple of concrete examples with you, that are particularly relevant to the US.

 

  • First, there is a real need to ensure that everyone - regardless of wealth, race, creed or gender - has access to high quality education and training opportunities throughout their lives. The OECD’s Programme for International Student Assessment (PISA) underlines that excellence through equity is possible. Experience from the Nordic countries, Singapore, or Shanghai suggests that expanding low-income families’ access to high-quality pre-schools makes a real difference. In the US, the Plan for Early Education for all Americans is a crucial step in this direction and efforts should continue.  

 

  • Second, job policies aimed at bringing disadvantaged groups into employment can also promote growth overall. Measures to help women better reconcile their work and family lives will be key to creating an economy where everyone can make ends meet. Such measures could take many forms, but granting access to paid family leave nationally and expanding access to quality early childhood education and care would be an important start.

 

  • Third, health is intimately linked with income and employment. Making health insurance coverage universal is essential to reducing health inequalities. Yet the most vulnerable also need additional attention from policy makers to compensate for bad health outcomes and non-financial barriers to health care.

 

  • Finally, governments could also do more to raise incomes for those on low wages by expanding the earned income tax credit, and putting in place higher minimum wages. More generally, there is ample scope for wide ranging reforms of tax and transfer systems that would not blunt incentives to work, save or invest.

 

Ladies and Gentlemen,

We can no longer afford to think about growth and inclusiveness as if they were separate, or even worse, opposite concepts. The real test of a healthy economy is not the extent to which it empowers those at the top to expand their fortunes, but rather the chances it bestows on those at the bottom to create theirs.

Thank you.