Is greater income equality desirable?

You earn £150,000 a week.  I earn £200 a week.  Why such a gulf?  You, by virtue of being the beneficiary of the natural lottery of genetics, are a world-class footballer.  If some income inequality is caused by those who succeed because they are the ones who are the most talented, then this is unfair.  A natural lottery, because of its sheer arbitary nature, should not decide who becomes the most prosperous in society.  Greater income equality is necessary to minimise nature's crapshoot.

This argument is severely weakened because it assumes that individuals have no bearing on how well they do in life.  Yes, a world-class footballer may have been talented to begin with - but the reason he made it to the top ahead of the thousands of other equally talented footballers who did not is because he worked hard.  We cannot deny that hard work has led to the success of many high earners.  Thus, although talent may be seen as a necessary condition to become a footballer - it is not sufficient (it requires hard work, too).

So, greater income equality may not be desirable in terms of fairness.  But, it may be desirable from a macroeconomic outlook.  By redistributing income from the richest to the poorest, we may be able to stimulate large economic growth.  Lower income groups tend to have a higher marginal propensity to spend.  This extra consumption in the economy will increase aggregate demand, and hence, stimulate economic growth.

In terms of maximising the overall happiness of society, greater income equality may be the path too.  As you earn more and more, the marginal utility of income diminishes.  If I give £10 to Bill Gates, his overall happiness will not be increased much (if anything).  But if I gave that £10 to a homeless child, his happiness is drastically improved - he can have a hot dinner that evening.

There is also a political case for greater income equality.  Democracies are intended to give each person an equal opportunity to influence the governing of their country.  Income inequality vitiates this democratic goal - those who are richer are able to "buy influence."  We have seen this illustrated by numerous scandals - the 'Cash for Honours' scandal to name one.  High income earners also exert disproportionate influence in another indirect way: the rich can afford an expensive private education which gives them the best employment prospects.  They then become the elite of that country - and run the country that way.  Income equality would remove this dent in so-called democracies.

Buy British? Or not...

In the late 1960s, the 'I'm Backing Britain' campaign was launched - a campaign to encourage British consumers to buy British goods and services.  The campaign was well-received: Union Jacks sprung up all over the place, newspapers were enthusiastic and even the government lent its support.

With the British economy in the doldrums, there have been calls to 'buy British.'  The argument goes like this: buy British because the manufacturing sector is in dire need of a boost and people are losing their jobs.  But, should we really be promoting economic nationalism?

My first objection is on ethical grounds.  Yes, the British economy may be struggling - but so too are other economies.  In all likelihood, a farmer in Brazil is probably suffering more than his equivalent in Britain.  So, if we are 'buying British' to support struggling farmers, then perhaps it would make more sense to 'buy Brazilian' to support struggling Brazilian farmers.

Some may claim that our first and foremost duty is towards our own citizens.  I ask - on what grounds?  I certainly agree that a government has a duty to help its citizens - that's how global governance functions - each government helps its own people.  But this duty does not extend to consumers.  Consumers should buy their goods blind of what country it is produced in.

Even if you do not accept this line of thinking, then there is an economic case for not 'buying British.'  If David Cameron proclaims that British consumers should buy British goods, how are other countries likely to react?  They will naturally retaliate with a similar response - 'buy our goods not theirs.'  Since the British economy relies on international trade, it shows that a 'buy British' campaign can be counter-productive.

A managed democracy

Russia only pays lip-service to democracy.  Elections exist, but few doubt the outcome.  Political opposition exist, but most realise that only shambolic opposition is allowed a platform - real, credible opposition is suppressed.

Mr Putin has been pulling the strings behind the scene while Medvedev has been President.  In March, Putin will be relected for a further six years in office.  Russia is set to have 22 years of Vladimir Putin.  It's safe to say that Russia is a managed democracy. 

The new scramble for Africa

The prospects for growth in Africa are promising.  Mozambique has grown 8% in the last decade; Africa grew by 4.7% in 2010; and the World Bank has increased its growth forecast for sub-Saharan Africa to 5.3%.

The Chinese are capitalising on these economic opportunities.  China is now South Africa's largest trading partner.  It has invested heavily across Africa: from deals to import coal from Mozambique and oil from Nigeria to building roads and railways in Lesotho.

Not only will these investments boost the natural resource industries but it will have large spin-off effects.  The infrastructure the Chinese are building will facilitate economic growth in all industries.  The Chinese may look to manufacture goods in Africa as Chinese labour costs begin to rise.

However, China must realise that their role is not limited to making sound business decisions.  They should not be propping up rogue regimes like Zimbabwe by doing business with them.  China need to recognise its international duty to promote good government - their investment in vicious regimes should be conditioned on improvements in government conduct.

Don't give aid to dictatorships - it's immoral

It is commonplace to hear the argument that not giving aid to dictatorships is immoral.  The argument goes: by not giving aid, you are the hurting the people you are trying to help.  It is counterproductive and probably makes the people hate the West (if they don't already, with state propaganda).

However, using a utilitarian calculus, denying aid may the moral action.  Suppose the West gave £100 of aid to the Burmese Junta.  £20 worth of aid may have reached the people (and if it did, it would probably be falsely labelled "from the Burmese Junta"!)  But, the other £80 would be used to further oppress the people: buying more arms and funding state brutality.  Thus, giving aid to dictatorships can hurt the people more than they gain.

Good politics, bad economics: homeownership

The financial crisis was triggered by a crisis in the sub-prime mortgage market in the USA.  When interest rates rose, many homeowners who were unable to meet their increased repayments defaulted.  This led to banks having to write off billions.  Confidence and lending evaporated and a crisis began.

The reason for increased homeownership in the USA can be understood through political motives (in terms of getting votes).  In an attempt to tackle the rising inequality in America, politicians faced several options.  They could improve the failing education sector - but this was the hard option that would not breed instant results.  They could increase taxation and redistribution - but this would be politically unpopular.  Therefore, they were left with their option, the one with the least political resistance - cheap credit.

Cheap credit seemed like the panacea.  It would push up house prices creating a positive wealth effect.  Households, feeling richer, would consume more.  It would create jobs in the real estate and housing construction.  And, best of all, the costs lay in the future.  This was a politician's perfect scenario: cheap credit would yield large, instant and widely distributed benefits.

Unfortunately, the expansion of cheap credit would soon catch up with us.  Household debt became untenable.  A prime example where good politics can make bad economics...

A word of caution: The Vickers report

The Independent Commission on Banking (ICB) was set up to investigate how to prevent another big financial crisis like 2008 in which governments have to bailout failing banks.  RBS and Lloyds were both rightly regarded as "too big to fail" and were partly bought up by the taxpayer.

The ICB proposes that the retail arm of banks being ringfenced from their other operations; and that banks hold significantly more capital to be able to absorb its own losses.  Ring-fencing will provide greater security for retail depositors - they know that their money cannot be used to bail out reckless investment banking decisions.

However, forcing UK lenders to hold more equity than international competitors will harm British competitiveness.  New regulations need to be made multi-laterally if they are not to be counter-productive.

The real problem still remains: banks are too important to fail.  Until this issue is dealt with, the chances of another big financial crisis is high.