Why the rich get richer and the poor get poorer

There are both ethical and political reasons for wanting to address the growing gap between rich and poor, according to experts ranging from economists and political scientists to social workers and activists.

The perception that a few people are getting rich at the expense of the rest of us is fuelling a backlash, from the Occupy movement that began in 2011 to the austerity protests in Europe, to the worker walkouts in support of a higher minimum wage last year in the U.S.

The fear is that the world is developing what one expert calls a "Downton Abbey economy", with a small wealthy class – the 1 per cent – and a large class of poor workers. Meanwhile, the middle class is being squeezed with higher prices and stagnant wages, forcing many to go into personal debt to try to keep up.

Opinion is divided over what has caused the change and even more controversy over what to do about.

James Myles, a senior research fellow at the University of Toronto's school of public policy and governance, says there are there are economic costs to having people grow poorer, including a lack of spending power to fuel the economy.

“Canadian inequality has not reached American peaks, but the real concern among people who’ve been studying this issue is about the long-term trend – that’s what has people upset and concerned,” Myles said in an interview with CBC’s The Lang & O’Leary Exchange.

There are also political costs, such as the growing disaffection seen in protest movements. Many people fear a plutocracy, in which government policy is dictated by the wealthy, Myles said.

When the rich get richer they get more powerful and that puts them in the position to lobby for policies that make them richer still- former Clinton advisor Larry Summers

“One way of thinking about it is that in the ‘50s and ‘60s, we had huge economic growth but the benefits of growth were pretty evenly distributed among the population – you didn’t see rising income inequality,” he said.

“Since 1980 or so, you also saw some economic growth – not as much as in the past – but most of those gains have been going to the top. In the middle and the bottom, income growth has been sluggish or stagnant,” he added.

Having a large stable middle class is a sign of a wealthy country, says James Galbraith, author of Inequality and Instability: A Study of the World Economy Just Before the Great Crisis.

Financial crisis heightened inequality

He says the 2008 financial crisis helped bring income inequality into sharp relief.

“At the high end, it’s a very small number of people who have been scoring very big. In the financial sector, the bankers, in the technology sector, in the energy sector,” he said.

Those people seemed not to be affected by the economic downturn that resulted from the 2008 bank failures and subprime mortgage crisis, although it was poor banking decisions that triggered the global meltdown.

But ordinary people were very affected, losing their homes because of the dodgy mortgage business and having their jobs threatened. The “mortgage debacle” should never have happened, Galbraith said.

“At the bottom end for a very large number of people it’s the collapse of economic security. It’s the collapse of retirement security, of the value of their homes, of their job security, the decline in the services they rely on – public schools, health care, the amenities of life,” he said.

Protect the social safety net

Galbraith does not believe globalization is a big factor in growing inequality. He says people should turn their eyes close to home, demanding fair tax codes and a stronger social safety net.

“We have good systems – they need to be protected and expanded, not cut – it’s under constant threat,” he said.

Larry Summers, who was Secretary of the Treasury under Bill Clinton and is now a Harvard professor, says he believes any solution has to be global.

“There’s a concern that if you tax capital, capital will move out. That’s why this has to be done in a spirit of global cooperation,” he told CBC News, adding that there is a movement at the G8 and G20 to move toward more taxation of capital.

He is critical of what he calls the "continuing sway of old bad ideas" including the perception that somehow money trickles down to the poor.

"The idea that somehow it’s taxes and high capital costs that are holding back investment — that seems to me to be an absurdity in the era of zero interest rates," he said.

Who is going to pay?

Summers said he believes that in the U.S. the constant push for tax cuts and the erosion of union bargaining rights has led to greater income inequality.

“In many countries especially in U.S., those with more money get one formal vote, but they’re able to get more through the influence they have in campaign finance and in other ways. When the rich get richer they get more powerful and that puts them in the position to lobby for policies that make them richer still,” Summers said.

Myles agrees, adding that governments understand how to improve equality, through investment in income transfers and infrastructure such as health and education. The real trick is who will pay for those things, he said.

“We have lots of ideas of what to do about it dating back to the 1990s,” Myles said.

“Some of them involve income redistribution, many involve what’s called social investment, early childhood education, job training for young adults, but no one wants to pay for it.”