Making the reduction of income inequalities the sole focus of public policy — dubbed macreconomic populism — has been a recurring presence in Latin American economic history. At certain times over the past 40 years, it has been costly and traumatic, which is true today for Venezuela and Argentina.

This policy approach often overlooks internal restrictions such as the simultaneous need for sustainable fiscal balance, price stability and wage alignment based on productivity. There are also external limitations such as balancing trade and improving the country’s international credit rating, all hopefully within a framework of growth. And populism today has acquired an additional association with bad institutions that aggravate the problem of concentrated markets.

The populist cycle, which lives through three phases of varying duration, is often attributed to irrational voting motivated by an overwhelming faith in electoral promises that ignores potential long-term consequences. Others see the durability in populism in the unfortunate combination of unsatisfied social and political demands, as well as the absence of institutions that equitably distribute the benefits and burdens of society.

From 1990 to 2003, Argentina had a growth rate of just 2.1% of GDP, an unemployment rate of 14.6% and average inflation rate of 197%. Venezuela grew about 2.5% a year up until 1999, with unemployment at 10.1% and average inflation of about 46%. There was public dissatisfaction with economic performance in both countries. There were calls to redistribute incomes as part of reactivating and restructuring the economy, as successor regimes took power.

In the first part of that period between early 2000 and 2011, attending to the social clamor of both countries was the recurring theme that justified a relentless rise in public spending and “raids” into market territority by imposing price controls of various types. The public welcomed measures such as fossil fuel subsidies as high as 80%, taxes and restrictions on dollar trading,  import/export quotas, and certain tax incentives and industry nationalization.

External conditions were favorable. Increasing Chinese demand from 2002 boosted energy and commodities prices during that period — soya 25%, cereals 49.5% and oil 103.5%. This gave the confused impression of impressive growth, with rates of 4.8% and 7.1% of GDP for Venezuela and Argentina, respectively.

But the bill for these policies inevitably arrives. A more than 40% fall in crude oil prices and about 20% for other raw materials has decimated the revenues of both countries. Growing unemployment, the end of protected jobs, food and consumer shortages, power cuts and ballooning debt are all symptoms announcing the coming, third phase of the populist cycle: crisis and collapse. The International Monetary Fund expects both economies to shrink about 2% in 2015, and the mid-term panorama is somber.

Evidence shows that macroeconomic populism is unstable  macroeconomic despite advances in the “good years,” perhaps because of its exclusively short-term focus. Both these countries need institutions that will create credible and stable expectations that encourage investment, rather than promises that destroy what was built before them.

Alexis Goldsmotih writes:  A group of Americans with a different agenda for the future of banking-people are pushing hard for policy change. They’re advocates of public banking, and they want to see new banks created that would be owned and operated by the government, usually at the state or city level. (This would greatly increase the amount of investment capital available for small business development, local infrastructure, and affordable public transportation, none of which are much favored by private banks seeking a high return on investment.).

Gwendolyn Hallsmith is one of those advocates. She’s currently the executive director of the Public Banking Institute, but she worked previously as a public servant in Montpelier, Vermont, where she resides and ran for mayor in 2014. Hallsmith also spent some time in divinity school, and you can hear it in her voice-which is soft but strong and deliberately paced.

To Hallsmith, the main advantage of a public bank is lower-cost financing, which can enable the state to pay for things like building affordable housing, repairing infrastructure, and expanding educational opportunities. And each of these projects creates jobs.

Hallsmith said: Public banks “allow cities, counties, and states to finance important public priorities without needing to rely on Wall Street and pay the hidden interest tax that Wall Street imposes on all our money.”

The quest to achieve public banking at the state and local level has been a long slog. Until quite recently, you had to go back almost 100 years to find the last major victory: the founding of the bank of North Dakota, the only state-run public bank in the United States, which was established in 1919.

But interest has been picking up around the country. Santa Fe, New Mexico, voted in October to conduct a study on the feasibility of a city-run public bank. And in December, the Seattle City Council’s finance committee hosted experts in public banking to explore the topic.

But nowhere have the steps toward public banking been more successful than in the state of Vermont. There, Hallsmith and other advocates won a small victory against Wall Street through an effort so relentless and strategic that it would have made any banking lobbyist proud. They combined savvy organizing with data-driven reports and policy briefs to prove the benefits of a public bank-like avoiding fat interest payments to Wall Street banks-for the state’s economy.   A Fight for Public Banks

Jusstin Fox writes:  CEO of Aetna Life Insurance  Mark T. Bertolini asked executives at his company to read Thomas Piketty’s “Capital in the 21st Century.” Then he announced that the company will raise the wages of its lowest-paid workers to at least $16 an hour and cut their health-care bills

Moises Naim writes:  The profound impact of Piketty’s book Capital is largely a result of the fact that it was published at a time when growing economic inequality has become an American preoccupation. Since the United States has proven so adept at globalizing its anxieties and exporting its policy debates, the Piketty phenomenon is extending to places where inequality has been pervasive for so long that the public seemed inured to it and resigned to passively accept it. Now, members of many of these societies are actively debating how to bring inequality down.

In order for this discussion to be valuable, however, the problem requires a more complete diagnosis. It is not accurate to assert that in countries like Russia, Nigeria, Brazil, and China, the main driver of economic inequality is a rate of return on capital that is larger than the rate of economic growth. A more holistic explanation would need to include the massive fortunes regularly created by corruption and all kinds of illicit activities. In many countries, wealth grows more as a result of thievery and malfeasance than as a consequence of the returns on capital invested by elites (a factor that is surely at work too).

Corruption-fueled inequality flourishes where there are no incentives to hinder it.
To channel Piketty, inequality will continue to rise in societies where “c > h.” Here, “c” stands for the degree to which corrupt politicians and public employees, along with their private-sector cronies, break laws for personal gain, and “h” represents the degree to which honest politicians and public employees uphold fair governing practices. Corruption-fueled inequality flourishes in societies where there are no incentives, rules, or institutions to hinder corruption. And having honest people in government is good, but not enough. The practices of pilfering public funds or selling government contracts to the highest bidder must be seen as risky, routinely detected, and systematically punished.

Most of the roughly 20 nations from which Piketty forms his analysis classify as high-income countries and rank among the least-corrupt in the world, according to Transparency International. Unfortunately, most of humanity lives in countries where “c > h” and dishonesty is the primary driver of inequality. This point has not attracted as much attention as Piketty’s thesis. But it should.

Clive Crook writes:   Piketty’s Capital was certainly the book of the year in its timeliness.  It sold over 500,000 copies.  The subject of inequality has come to the fore worldwide.  In the US, it is sure to be a central topic in the 2016 presidential campaign.

Whether or not Piketty’s analysis is correct is a subject of hot debate among economists.  The basic formula, which argues that the rate of return on capital is greater than the rate of economic growth, The fact that r is greater than g, he says, tends to give owners of capital an increasing share of national income; unless this is offset, by global warfare or other interruptions, it serves to widen inequality.

This formula has been contested and recently Daron Acemoglu (MIT) and James Robinson (Harvard) took the book to task.  One problem with this, as Acemoglu and Robinson explain, is that g and r aren’t independent, as Piketty’s reasoning requires. Piketty’s view about the future gap between r and g is a conjecture not a deduction, and one that’s at odds with most of the empirical evidence. Even if r did perpetually exceed g, many other factors — including a relatively modest amount of social mobility — would be capable of offsetting the effect on income inequality.

The Middle Class is disappearing in America.  As study after study has shown, the US economic recovery has been a top-heavy affair, with the bulk of the wealth regained from the Great Recession benefitting the wealthiest Americans.

A report by the Pew Research Center found that the wealth gap between high income Americans and middle income Americans is now the biggest on record. “In 2013, the median wealth of the nation’s upper-income families ($639,400) was nearly seven times the median wealth of middle-income families ($96,500), the widest wealth gap seen in 30 years.

Additionally, the net worth of America’s high-income families is nearly 70 times that of lower income families.

Wealth, which Pew defines as “the difference between the value of a family’s assets (such as financial assets as well as home, car and businesses) and debts,” is different from income (the amount of money a family brings in in a given year), another measure of widening inequality that has come under scrutiny in recent years. The two are related, and wages and income have certainly stalled as the rest of the economy picks up steam.

Wealth, however, is a deeper measure of financial well-being, taking into account reserves that a family might be able to fall back on in the event emergencies, like layoffs, and live off during retirement. In the wake of the Recession, higher income families have managed to regain some or all of the wealth they’ve lost, while middle and lower income families remain behind.

That growing disparity has  a lot to do with the nature of the recovery over the past six years or so. The stock market has long erased all of the losses it suffered after the 2008 crash, and the wealthiest Americans tend to have a larger proportion of their money tied up in such investments.

Middle class Americans, on the other hand, have more wealth tied up in their homes – compared to the investment sector, and the housing collapse decimated such wealth for many. In comparison to the stock market rally, the housing recovery has been relatively weak.

“Upper-income families have begun to regain some of the wealth they lost during the Great Recession, while middle-income families haven’t seen any gains,” Pew concluded.

The wealth gap may have been exacerbated by the recovery, but it was growing long before.  In the 30 years since the Federal Reserve started keeping track, the richest Americans have nearly doubled their nest eggs. Middle income Americans have grown theirs by just 2.3 percent.

Rising income inequality has cost European economies up to 10 percent in lost economic output over the past twenty years, according to a new report by the bloc’s leading economic thinktank.

The richest 10 percent across the OECD’s 34 member countries earn 9.5 times as much as the poorest 10 percent.

The report, published by the OECD, refutes the concept of ‘trickle-down economics’ which the political establishment in most western countries have signed up to for the past generation.

While a raft of recently published research has demonstrated that countries with high levels of income inequality suffer from higher levels of crime and health and social costs, there has hitherto been little evidence that it acts as an active drag on economic performance.

The richest 10 percent across the OECD’s 34 member countries, most of whom are EU members, now earn 9.5 times as much as the poorest 10 percent, up from a 7:1 ratio in the 1980s.

However, France, Ireland and Spain bucked the trend, where lower gaps between rich and poor actually gave a marginal boost to economic growth prior to the economic crisis, while inequality has had a more detrimental effect in the UK and Finland – where it shaved off nine percent from growth – than in Italy and Sweden which lost an estimated six percent of output between 1990 and 2010 because of rising inequality.

“Income inequality has a sizeable and statistically significant negative impact on growth,” the report says, adding that “redistributive policies achieving greater equality in disposable income has no adverse growth consequences.”

The research indicates that income inequality gradually lowers the educational achievement of students with poor parents, lowering social mobility in the process.

“Addressing high and growing inequality is critical to promote strong and sustained growth,” said Angel Gurria, the OECD’s Secretary General, at the the launch of the report.

“Countries that promote equal opportunity for all from an early age are those that will grow and prosper,” he added.

In response, the OECD urges governments to hike property taxes on property and wealth and scrap tax breaks that disproportionately benefit higher earners, alongside greater support for the bottom 40 percent of earners to make sure that they are not left further behind.

“As top earners now have a greater capacity to pay taxes than ever before, governments may consider re jigging their tax systems,” argues the report, adding that governments should also increase access to education, healthcare and training.

“Anti poverty programmes will not be enough,” it states.