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Poverty Amidst Plenty: The Unnecessary Global Fracture

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From Obama's state of the union address, from the World Economic Forum in Davos, in European capitals, in international organizations the same sound of alarm: Growing income inequality is threatening the world economy.

Why so much fuss the casual observer could ask? Is winning and losing not part of the human condition?

Income inequality is not necessarily a bad thing. We need to reward top performers and motivate entrepreneurs. When I was a university professor, I would certainly not give all students automatic As. That would have been counterproductive. Similarly, rewarding economic success is desirable while encouraging failure is not.

But, today, contemporary income inequality has become very dangerous for at least four reasons:

First, the distance between the richest and the poorest is probably the highest ever. If a CEO were to earn, say, 100 times, the remuneration of the lowest employee, that could be acceptable. But when the ratio becomes 1000 or 10,000 to one we have to ask serious questions.

A recent Oxfam study found that the top 85 billionaires have the same net worth as the bottom 3.5 billion people on this planet (i.e., half the world population).

A couple of years ago, a hedge fund manager made $5 billion in one year, while producing nothing in particular. To place that in perspective, a middle level executive making $50,000 a year would need 100,000 years of work to match that amount. Is this reasonable ?

Second, many of today's billionaires amassed their fortune without, as was the case of the hedge fund manager, creating much value added for the world. In the financial world, money breeds money. If a Steve Jobs or a Bill Gates were to accumulate billions, more power to them, because they have, in exchange, produced tremendous value added for the rest of us. No one can resent their success.

But, today with the deregulation of the global economy and the development of highly sophisticated financial algorithms which few people understand, it is indeed possible to make billions quite effortlessly just by manipulating a computer mouse and possessing inside information without bothering to produce anything. Flipping real estate is a good example. Nothing is added to the economy, yet the flipper could make a fortune. Flipping stocks, playing the derivative market, and speculating on toxic assets may achieve the same result: instant fortunes. Is that desirable ?

Third, not only is the distance between richest and poorest the highest ever, but people at the bottom still live in utter misery. Inequality is a relative term. If the poorest were still comfortable in absolute terms that could be okay. In a billionaire club, the lowly simple millionaires could feel bad, but our hearts will not bleed for them. But the $1 per day lowest income world population is genuinely underfed, under housed (if housed at all) and unemployed. That hurts.

Fourth, and perhaps most important, the present global fracture between very rich and very poor is completely avoidable. As I argue in my new book Buffets and Breadlines: Is the World Broke or Just Mismanaged, in spite of impressions to the contrary, America, Europe, Asia and the world as a whole have never been as rich in the entire course of human history. The global economy churns out a $75 trillion world economic output for 7 billion people, which produces a potential per capita income of $10,000-plus for every man woman and child on this planet. This has never, ever, been seen before.

Not that everyone should necessarily earn $10,000 exactly. As we have argued, some inequality in outcomes is healthy and desirable. But the juxtaposition of the all you can eat, all you can waste Buffet world with a subsistence level Breadline World marked by penury and want is not.

There is more than enough to go around. This is not the Titanic with very few lifeboats. Our Titanic is still afloat and is not necessarily in danger of sinking if appropriate policies are applied. Why pretend there are only a few lifeboats for the rich?

What to do? The priorities set by Obama, the new consciousness of the dangers of inequality at Davos, the IMF and the OECD etc. are all long overdue. The take away is simple: We have to pay much more attention to the distribution of income than to more production.

Growth alone, is not the answer. If we move from a $75 trillion to a $100 trillion world economy, things will not change automatically, because of the winner takes all dynamic of the present unregulated world system. If you put more money on a poker table, does that mean that all the players will win something? Not at all. One player with the best hand will take the pot, whether that pot be small or large. There are no consolation prizes. It's in the nature of the game. In poker world economics, winners take all.

Communism made the huge mistake of relying too much on distribution and not rewarding entrepreneurs. It failed miserably. There was not enough to go around. People revolted.
Uncontrolled capitalism, relying only on perpetual growth with little concern for distribution could fail as miserably. There is enormous wealth available. Why not spread a little bit more evenly?

We need a golden mean, a method to eliminate misery and poverty because we can certainly afford to, while still rewarding dynamic entrepreneurs. It is doable, at minimum cost to the wealthy, but the "how" should be left for another time.

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Kimon Valaskakis is a former ambassador of Canada to the OECD and now president of the New School of Athens. He is the author of a new book 'Buffets and Breadlines: Is the World Really Broke or Just Mismanaged?'