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The Labyrinth of Income Inequality

Power structures are sustained by the “knowledge” designed to protect them. There exists a labyrinth, so carefully crafted, which encloses economic success. But most get stuck in its complex pattern and their whole lives are spent running in vicious circles or following plans that provide a satisfactory facade of ascendancy. For instance, India witnesses a highly skewed distribution of wealth and has been flagged as a “poor and very unequal country with an affluent elite” where the top 10% holds 57% of the total national income, including 22% held by the top 1%, while the bottom 50% holds just 13%[1]. So, why doesn’t everyone possess the map of this labyrinth, and how can they acquire it?

The sticky floor of poverty Poverty

has been the most constant facet of wealth distribution. Throughout history, the stratification of economic classes and riches has risen exponentially, but the sticky floor of poverty has always stood the test of time. An expression used to describe persistent poverty due to cyclical and generational impacts is “poverty begets poverty”. It brings out the systemic effects of impoverishment and lack of support systems and safety nets which breed inequality and financial illiteracy that trap the poor in a cycle with seemingly no exit. It is not their intrinsic characteristics that cage them in poverty but rather their circumstances and shortage of opportunities. The numerous policies that aim to mitigate the burden of meeting daily consumption expenditure and promote asset-building activities have the lowest take-up rate simply because of the lack of awareness. The grip of this poverty trap prevents people from utilising their full potential, and the tragedy is the widespread waste of people's abilities where they may be employed, but have extremely low earnings.

The working class: Hamster in the wheel

The people who do start to earn more get exploited by taxes and bills. Tax collection seems to spotlight the income of those who give away more than they ultimately get, and sideline the enormous hidden incomes of others. As their earnings increase, they don’t qualify for welfare benefits and are ambushed with mounting bills that lead many back to square one. This is the cruel paradox of the welfare schemes that entrap the very people that they were designed to protect. They get caught up in a continuous cycle of earning money and spending it on expenses which stems from their poor money management. The system has been wired in such a way that most of them, misguided by the exploitation camouflaged as development, earn just enough to work for the middle class and rich, but never enough to be one of them.

Disappearing middle class

Recently, income inequality has led to increased stratification within this class where it largely benefits the top. So, the term ‘middle class’ has been segregated into lower-middle class and upper-middle class. This polarization has drastically reduced the security provided by ‘middle-income salary’ which used to be a luxury label for many. In the analysis of consumer choice, the fungibility of money prescribes that consumption decisions are based exclusively on the consumer’s total wealth—its composition is irrelevant. However, various empirical studies[2][3][4] cast a cloud of doubt due to its generality and suggest that decision-makers often do not decide globally but rather evaluate parts of a decision separately. This is observed in the lower-middle class where they compartmentalize their wealth into distinct budget categories and allocate their spending capacity. But as the cost of living increases without a relative increase in their paycheck, the proportion of their disposable income gliding towards savings and investments dwindles and this reduces the potential for upward mobility. As they cut corners, they wonder whether the transition from working class to ‘middle class’ was as impressive as it seemed, whether the grass that appeared greener from the other side was worth the continuous struggle. In a Washington Post op-ed, economist Robert Samuelson wrote, "Though economic opportunities abound, the capacity to take advantage of them does not.” This has led to lopsided growth where the upper-middle class has benefited from honed money management skills and some have even successfully channelled the money flow towards a consistent rise in incomes.

Money regimen of the rich

Juxtaposing all other classes with the situation of the affluent, we see that they create a self-sustaining loop that generates money. They possess multiple income avenues (both created and inherited) and steer their assets towards investments with high returns. The key focus is on putting their money where it is going to grow, usually in stocks, bonds, and other types of stable investments. Here “wealth begets wealth” as they have access to exclusive investment opportunities and hire wealth managers who guarantee high returns. Analysis of the nexus between financial education and poverty shows that financial literacy moulds efficient monetary decisions and behaviour necessary for economic mobility.

Improvidus Apto Quod Victum

Effective data collection is a crucial part of data analytics and essential in finding answers to these problems. In India, the methodologies termed as ‘questionable’ and ‘faulty’ are the ones that show increasing inequality. The data on income and wealth is insufficient, and opaque information on the inequality that is driven by the upper-income groups contributes to the enlarging gulf between the rich and the poor. India should focus on transparent data collection methods, hold evading people accountable and use statistical tools like the Palma ratio (the share of all income received by 10% of people with the highest disposable income divided by the share of all income received by 40% of people with the lowest disposable income[5]) which offers an overall view of the severity of this situation. After data analysis, the next step is deciding the focus of the problem-solving approach. The growth-based versus equality-based narratives represent an essential conflict that frequently comes up. Focusing just on one side may lead us to a dead end if we don't grasp how growth and inequality are related. For growth, it is important to tap into the productive pool of the masses.

This can be accomplished through economic investment by the government and leveraging the demographic dividend. The fiscal multiplier effect occurs when an initial injection into the economy causes a huge final increase in national income. This extra government spending causes an increase in infrastructure investment which leads to job creation due to the demand for labour in both the development process and the ongoing management and maintenance. Therefore, the equality factor comes in as people can participate in an economy that they once had no place in. However, welfare schemes must not be pulled back for a certain period when there is a slight increase in the income bracket as there is no guarantee for financial stability. The key concern is people-oriented development, so, by providing specially tailored programs for financially illiterate people, low-cost banking facilities and initiatives that break the cycle of poverty, their economic welfare and upward mobility can be ensured and this will act as a corollary to sustainable and inclusive growth. Ultimately, the dilemma is whether we merely choose to be aware of this insidious economic system or transcend to the labyrinth’s centre.

Havisha Singh

Citations:

[1] World Inequality Report 2022. (n.d.). https://wir2022.wid.world/

[2] Thaler, Richard & Shefrin, Hersh. (1988). The Behavioural Life-Cycle Hypothesis. Economic Inquiry. 26. 609-43. 10.1111/j.1465-7295.1988.tb01520.x.

[3] Thaler, R. (1985). Mental Accounting and Consumer Choice. Marketing Science, 4(3), 199–214. https://www.jstor.org/stable/183904

[4] CFP Board, Zhang, C.Y. and Sussman, A.B. (2018). The Role of Mental Accounting in Household Spending and Investing Decisions. CFP Board (Ed.).

[5] Palma ratio - OECD (2022), Income inequality (indicator). doi: 10.1787/459aa7f1-en

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