Fair cities

Worldwide there are major differences between cities in the chance of a decent life for citizens. That’s not fair because disadvantaged people can hardly improve their own destiny, while society as a whole can, but does not. At least, not enough to be qualified as humane. What can society do? This article provides answers.

The header photo is a striking picture of inequality between residents of Sao Paulo. The affluent district of Morumbi on the left and the Paraisópolic favela on the right. The differences go far beyond what is visible. Think of the jobs, the income and the self-confidence of adults and the possibility for children to be educated and to build a decent live.

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Fair cities is part eleven of a series of essays on how cities can become more humane. That means finding a balance between sustainability, social justice and quality of life. This requires far-reaching choices. Once these choices have been made, it goes without saying that we use smart technologies to achieve these goals.  The essays that have already been published can be found here.

Below, I start with an overview of the growing inequality at global and national level. Then I focus on inequality within cities with regards to income and housing and its consequences. Finally, solutions are discussed and I argue why the division of assets between the private and the public sector must change substantially.

Wealth and poverty on global level

From the beginning of the industrial revolution to the present, the wealth of nations, has increased and at the same time the distribution within most nations became more unequal. The question is, who are the winners and losers.

The first comprehensive answer came in 2013 from the Serbian-American economist Branco Milanovic and his colleague Christoph Lakner, when they presented the famous elephant curve. They compared the percentual differences in real income (corrected for inflation) in 1988 and 2008 between the poorest 10% and the wealthiest 10% and all other deciles in between. The calculations were based on World Bank data.

The graph below shows the results. This graph is called the elephant curve because of the striking resemblance to the back of an elephant.

Increase in real income between 1988 – 2008 in percentages per decile. Source: The Economist.

The graph shows that the households in the 75th to 85th percentiles of the income distribution in 2008 are hardly better off than 20 years earlier. This dramatic dip was used to explain the rise of Donald Trump, nationalism, Brexit and more.

However, this rash conclusion overlooked that the households in each decile were not necessarily the same in 1988 and 2008, due to differences in growth of income and population in different parts of the world.

Milanovic and Lakner had been aware of this and they had made an alternative chart that does consider the changing composition of each decile. In its shape, the alternative chart (above) still looks like an elephant, but the fate of the lower middle classes in the US and Europe seems less dramatic.

The data for the Milanovic and Lakner chart go to 2008. A team of economists — led by Facundo Alvaredo, Lucas Chancel, and the famous inequality research trio Thomas Piketty, Emmanuel Saez, and Gabriel Zucman — recently revealed the 2018 World Inequality Report, which contains data until 2016. They replicated the elephant curve, using the alternative form as starting-point.

Total income growth in percentage by percentile across all world regions, 1980 – 2016. Source: 2018 World Inequality Report.

Whether the elephant is still recognizable does not really matter; the trunk reaches much higher and the head is much smaller, which reflects even higher income growth for the rich on earth. Poor residents in developing countries also improve in this calculation, but less compared to the improve of the global top 1%, 0.1%, 0.01%, and even 0.001%. From 1980 to 2016, the global top 1% captured more than twice as much growth in their income as the bottom 50%.

Why these differences? In the first place, the 2018 Inequality Report had even more data available than Milanovc and Lakner, among others income tax records. But the main reason is that in 2016 the rich had more than made up for a possible fall in their income growth during the crisis.

At the same time, the data also reveal that extreme poverty (living on less than $ 1.90 per person per day) in all major regions in the world has declined, that the growth in income in the emerging countries has been significant and indeed that in the US and Europe most people only saw a modest growth between 1980 – 2016.

So far, the graphs show relative growth. But what about the absolute growth in personal (not household) incomes, also using data from the 2018 Inequality Report.  The table below shows what really has happened between 1980 and 2016 (corrected for inflation).

Total income growth in dollars by percentile across all world regions, 1980 – 2016. Source: 2018 World Inequality Report.

The poorest 20% of the population gained 82% over this period. That means that people who earned $2.40 per day in 1980, saw their incomes grew in 36 years to $4.36 per day, meaning 5 cents per day per year.

For the poorest 60% of humanity, the average person saw their annual income increase by $1,200, over in 36 years. Those in the 80–90th percentile (represented as losers in the elephant graph) saw their real income rise by a factor four compared to the poorest 60%.  For the richest 1%, this was a factor 100.

By graphically depicting the increase in income, the elephant disappears and is replaced by an ominous scythe, symbolizing how the rich harvest the abundance of the world for themselves.

Absolute changes in income from 1980 – 2016 (corrected for inflation). Based on data from the 2018 Global Poverty Report.

Differences in income al national level

Below, I delve into the causes of the extreme increase in wealth of the highest percentiles in the western world and in the US in particular.

Multinational companies have earned gold worldwide since 1980. In 2019 the profits of the 100 biggest global companies reached $15,000 billion[1]. In 2017 the gross global product was $ 87,000 billion and the total of government expenses was $ 23,000 billion. Find more details in the chart below, albeit the data are older.

[1] https://medium.com/technicity/worlds-100-largest-companies-by-revenue-in-2019-d6d53dd1851d

Profits after tax in trillion dollars and as a percentage of the global GDP of global corporates. Source: Harvard Business Review.

The huge increase in profits is a direct consequence of globalization: Growing global trade made possible by global competition, automation, offshoring, and low raw material prices.

Part of the huge profits was investments capital; the other part went to shareholders and ceos as part of their compensation. They are about 40% of the very rich we met in the top percentiles in the graphs in the first section. The other 60% are lawyers, consultants, financial advisors, mostly working for corporations too.

Disney: fun, but not for everybody

Within companies, the share of employees in the income varies enormously. For example, the ceo of the Walt Disney company earns $75 million a year, that is 1025 times more than an average employee of that company. If he lowered his salary from $75 million to $10 million every employee of the company would earn 15% more.

According to Paul Oyer, professor at Stanford Graduate School of Business: the last 50 years have been terrible for people with lower skills. Adjusted for inflation, the average earnings of a man who didn’t go to college is lower now than it was 50 years ago. That’s unheard of. But not only people with ‘lower skills’ meet difficulties. Middle to lower upper class double income families (up to a family income of $ 100,000) must also scrutinize their expenses, in particular due to extreme high rents in big cities.

US corporations recently have been obliged to report pay ratio data. These data reveal that Walt Disney is not an exception. A few examples: car parts maker Aptiv (ceo-worker pay ratio: 2,526 to 1), the employment agency Manpower (2,483 to 1), amusement park owner Six Flags (1,920 to 1), Del Monte Produce (1,465 to 1), and apparel maker VF (1,353 to 1). Democrats and even a few Republicans are trying to put an end to these extremes, in vain so far.

A well-documented report by Lawrence Mishel and Julia Wolfe from the Economic Policy Institute published August 14, 2019, reveals that average ceo compensation in the US in 2018 (350 largest companies) was $17,2 million on average (including $ 7,5 million in stock options realized), with a ceo – worker pay ratio of 278 to 1. The amount of compensation is 9,2% more than in 2017, and 52.6% more since 2009. An average employee earned in 2018 just 5,3% more than in 2009.

In ‘better times’ (2000), the average ceo compensation was $21.5 million (in 2018 dollars), reflecting a worker-pay ratio of 386 to 1.

The world’s most depressing data visualization

Printing Money is the result of two weeks of work by Neal Agarwal, a true artist in the field of data visualization. It imagines various hourly rates of pay as a printing press, scattering dollar bills across the page at the speed at which they are earned: The person with a minimum wage, a US teacher, a software specialist, an average CEO and…. you, reader. In addition, the financial results of a couple of companies, and the growth of the national deficit of the US flow across the screen. Just click here to open the animation. With thanks to Fast Company.

Considering a somewhat longer period, ceo compensation has dramatically increased. In 2018 it was 940,3% higher than in 1978. In the same period, the average salary increase for employees was 11,9%. Accordingly, the ceo – worker pay ratio, was 30 – 1 in 1978, and 20 – 1 in 1965.

The ceo compensation is 4 to 5 times higher than the rest of senior management that represents 40% of the 1% highest earners in the US. They do not have to worry; their earnings increased 339,2% between 1978 and 2017.

But these are averages. Here are some examples (compensation in 2018). Jeff Bezos (Amazon): compensation unknown personal assets $114 billion. Larry Page (Google): compensation $1; personal assets $31 billion. Tim Cook (Apple): compensation $136 million, personal assets: $800 million. Jamie Dimon (JPMorgan Chase): compensation $31 million, assets unknown.

Compared with the US, ceo compensation is the Netherlands is ‘modest’, also considering the progressive tax system. In 2018, Nancy McKinstry, ceo of Publishing company Wolters-Kluwer topped the list of ceo earnings with a compensation of € 14.5 million, of which she said she paid 50% taxes.

Instead of addressing the negative impact of the extremely high ceo compensation and skew ceo – worker pay ratios for employee engagement and performance in general, I will discuss the impact on society as a whole.

The upcoming new class war

The ‘official’ justification of the extreme compensation of ceos is their alleged market value. According to a 2013 report from the Institute for Policy Studies called Bailed Out, Boosted and Busted, 38% of the 25 best-paid ceos over a period of 25 years failed and nevertheless easily returned in other companies. Almost all bankers who are responsible for the financial crisis have retained their functions. Moreover, there is no market for ceos; until recently they were members of old boys’ networks, that assign each other governmental positions, memberships of influential advisory committees, and well-paid jobs. To the annoyance of the ‘old’ elite, the highest ranks of the most successful companies today, are filled with outsiders, often students who founded extremely successful startups: Apple, Google, Amazon, Facebook, Airbnb, Spotify and the like.

In the second half of the 20th century, the concept of class struggle lost its significance, also for many progressives. Many countries in the western world developed into a welfare state, with a certain form of equality, material well-being for many, a libertine culture, democracy, freedom of expression, informal consultation between employers and employees, a deliberative approach to conflicts of interest, international cooperation and relaxation of the cold war.

Initially, globalization seemed to fit in with this development: One world that connected different cultures and nations and promoted student exchange and international travel. However, the true identity of globalism appeared soon in the form of a growing dominance of multinational companies. As mentioned earlier, these companies were extremely successful which was reflected in their revenues and profits.

Many books have been written about the effects of globalization, but an in-depth analysis of the impact on society has not taken place. In a fascinating book ‘The new class struggle’, Michael Lind examines, among other things, the contribution of two founders to this concept: James Burnham’s view of the management revolution and the concept of technostructure of John Kenneth Galbraith. In the short interview below, Michael Lind sets out his vision of the new class struggle and also discusses how society can overcome it.

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Burnham and Galbraith both refer to a new type of society, ruled by those who control the means of production: Business executives, technicians, bureaucrats, politicians and academics. The managerial revolution replaces the old entrepreneurial capitalism and ‘old’ public management.  The new ‘managerial’ societies erode small, independent states, and group them around the main industrial centers in Europe, Asia and America, competing for the dominance of the remaining uncaptured portions of the earth. Internally, each of these societies is hierarchical, with an elite of talent, capital and influencers at the top and a mass of workers at the bottom. Administrative elites transfer political and economic power to executive agencies, transnational bureaucracies and treaty organizations. Their ‘technostructure’ includes capital-intensive, science-based, high-tech industries like manufacturing and business and financial services which they rely on. Increasing economies of scale result in a tendency in these industries to grow, resulting in oligopolies or monopolies, replacing markets with their own artificial intelligence-led decision-making with the support of national governments.

As Michael Lind states:  Derided and disempowered, large elements of the native working classes in Western democracies have turned to charismatic tribunes of anti-system populism in electoral rebellions against the selfishness and arrogance of managerial elites.

It is fascinating to see, how reality unveils in the direction that Burnham and Galbraith predicted, but also how the elite and the new ‘underclass’ have their own dynamics. People like Donald Trump, Silvio Berlusconi and Boris Johnson are representatives of the ‘old elite’ but are appropriated by the ‘losers’ of the globalism as a kind of ‘divine leaders’ whose ‘alternative truths’ are effectively hiding that their politics make their followers even bigger losers.

The Edelman Trust Barometer

The Edelman Trust Barometer is a tool used worldwide to measure people’s trust (based on perceived competence and ethics) in institutions like business, government, science and media and also how they feel about contemporary issues, like inequality, climate, work and migration. A distinction is made between the ‘informed public (including the aforementioned ‘elite’ and ‘managerial class’) and ‘the mass population’. Look at a very brief summary of the 2020 Edelman Trust Barometer by Richard Edelman himself.

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According to Edelman’s measurements a large majority of ‘the mass’ in most parts of the world do not believe they will be better off in five years’ time, and 56 percent believe that capitalism in its current form is now doing more harm than good in the world…  Fears are stifling hope, and long-held assumptions about hard work leading to upward mobility are now invalid.

The 2020 version shows that widespread pessimism with regard to society, work security, healthcare and inequality dominates in contrast to ‘the elite’, which is way more optimistic. No institution is trusted; government the least and business the most, primarily because it is considered as most competent.  From an ethical point of view business is mistrusted too.

The most trusting people live in China; the least trust is in Russia.

Percentage confidence in the ability of different types of leaders to address their country’s challenges. Source The 2020Edelman trust Barometer.

According to the report, the battle for trust will be fought on the field of ethical behavior. This gives clear indications for what business and government should do: Respondents expect companies to focus on paying fair wages and retraining. For government, the actions include reducing party politics, addressing community-level problems and partnering with business and NGOs.

If business and government are good listeners, the new class struggle is less unbridgeable as it looks. Anyway, for each of them cities are waiting for thorough actions to tackle poverty and give a significant part of all citizens fair chances for the future. Below I will take a closer look at urban poverty and answer the question of how more humane development is possible at the urban level.

The new divide in the city

All global cities enable visual encounters with the new class struggle, albeit in some places those encounters better can be avoided. In search of extreme wealth and poverty and what is between, five photographs suffice.

Smith Mansion, US. Photo Bestbudbrain Licensed by Creative Commons 4.0.

The first picture is an example of how the wealthiest people live, mostly in gated communities, luxury condominiums – often bought as investment objects – or both. They travel a lot and have fancy pieds à terre in different places, often gentrificated centers of towns.

Semidetached house in Queens, New York. Photo Piqsels, Public Domain.

The second group of pictures show pretty neighborhoods, luxury apartments or family houses, two cars affront, inhabited mostly by white working couples, who unanimously emphasize that both of them work hard and commute for hours – ignoring a lurking burn out – and have to spent most money to sustain their way of life, and to pay the fees of their children’s schools.

Evington, Leicester. Photo NotfromUtrecht, Licenced by Creative Commons 3.0.

The third picture represents the group of lower middle-income people. They live in less prettier suburbs, dense concentrations of terraced houses and apartments. A double income is necessary and in case of only one working parent, poverty is lurking.

Frederick Douglass Housing Project Detroit. Photo Albert Duce, Licensed under Creative Commons 3.0.

At first sight, images of these from apartments – the fourth group – do not look bad, but they are infamous examples of failed social housing. Many have concentrations of urban poor, immigrants, undocumented people, and single-parent families. There is a large degree of worklessness and high criminality, juvenile gangs and vandalism. One of the biggest challenges for city government is to create decent housing for poorer citizens without concentrating them. In many places these ‘projects’ are being demolished in order to separate the former inhabitants and enable them to have a new start. However, as long as they stay poor, nothing will change.

Homeless in tents. Caste Street Brighton. Photo Huntersmith7 Licensed under Creative Commons 4.0.

The fifth group are saddening and shaming pictures of the homeless and their primitive shelters; drug addicts, people with mental disabilities, and working people who cannot afford a house anymore. Being homeless does not always mean sleeping on the street, but having no regular home. This group is growing fast, in spite of many projects to offer them forms of adapted housing.

There is a lot of variation within each group and the images also differ between cities. In developing countries different photos can be shoot, albeit the essence is the same. Many inhabitants live here in favela’s, but there are also large differences. Some are no more than shelters, without sanitation, water and electricity. Others are more organized and have more facilities and here most inhabitants are not waiting to be replaced to newly-build heavy populated apartments. I prefer to be rich among the poor, then poor among the rich, one of the inhabitants of the Sao Paulo Paraisópolisfavela (see header picture) said.

Being poor in the Netherlands

The Netherlands between 1950 – 1980 is an example of rather decent living conditions for the large majority of the people, most of them living in single-family houses and with modest differences in income and assets. Visualization of the differences between social groups would have resulted in slightly different photographs only. Add to that well-equipped neighborhood shopping centers, ample medical, social, educational and transport facilities and a rather mixed-income, albeit mostly white population. When al last the shortness of houses was solved in the 1970s, the nation seemed happy. In the meantime, the renovation of old city centers and adjacent areas progressed, offering a larger variety of housing and living opportunities.

This relatively favorable situation has come to an end during the last decades, in spite of large investments in the maintaining and improving the housing stock. There are many reasons for this. Many go back to globalism, directly or indirectly. However, the government itself, infected by the austerity virus, is responsible too. The rediscovery of the ‘blessings of the market’ resulted in a mandatory focus for housing corporations on the provision of houses for the lowest income groups. Building houses for those who are better off, has been left to ‘the market’ and property developers looked for more attractive locations to serve this group, resulting in increasing spatial segregation between income groups. Neighborhoods that are dominated by the cheapest social housing provided by housing corporations saw their mixed social composition disappear and they saw the number of immigrants, refugees, and mentally-disabled persons rise.  This in turn accelerated the departure of those who are a better-off.

At the same time, cutbacks resulted in a decrease in the visual presence of the polity, but also to the disappearance of schools and social services, for instance ‘concierges’ who often functioned as the ‘glue’ in the neighborhood.

The problems in the low-income neighborhoods get bigger every year: Unemployment, poverty and malnutrition, children with limited abilities to speak Dutch, loitering, shop lifting, theft and burglary, drugs abuse, and gangs. Many neighborhoods that were quite integrated communities thirty years ago have fallen apart and give rise to individual coping-behavior with abandonment as the ultimate solution.

The aforementioned developments are not characteristic for Dutch cities – on the contrary, elsewhere problems are even more fierce – but the rather attractive physical appearance even of the most problematic neighborhoods hides how serious the problems are.

Social map of Tilburg (the Netherlands). The orange and red colored segments of neighborhoods, combine an increase of low-income inhabitants and fast grow of nuisance.


Below, I will focus on solutions, radical interventions – as will appear.  First, I will pay attention to the solution of poverty in general. Next, I will discuss the importance of mixed neighborhoods. Most solutions are comprehensive and are costly. Therefore, in the last section, I will answer the question where does the money has to come from.

The struggle against poverty

The Economic Security Project has documented that 40% of all Americans have difficulty meeting their basic needs. But even in a rich country with modest inequality such as the Netherlands, one to every ten households live in relative poverty and one of every ten children is malnourished.

Poverty: jobs or financial aid

In 2018, The US National Academy of Sciences published an exhaustive, impartial, and evidence-based report on the most effective way to reduce child poverty by half in the next ten years. Based on a thorough study of policy examples and scientific literature, the authors have developed the Roadmap for Reducing Child Poverty, which is explained in the short video below.

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The report estimates that child poverty costs $800 billion to $1.1 trillion each year due to increased crime, deteriorated health, and lower earnings when poor kids grow up. The report proposed a package, including:

  • Earned income tax credit, that makes child care fully refundable;
  • Increasing minimum wage to $10.25 per hour;
  • Schooling for (legal) immigrants;
  • Child allowance of $2,700 per year;
  • Additional child benefit of $1.200 per year for single-parent families.

The cost of this scheme is $111.6 billion per year. Child allowances – known for years in the Netherlands – are considered the most important components of the plan, and other authoritative proposals argue for an even higher amount, up to $ 3,600 per year.

The discussion about supporting poor families to ease child poverty goes back

to 1996 when a dramatic shift took place away from guaranteed income support for poor households to an approach to poverty reduction based on forced employment.

The authors of the 2018 report conclude that there is insufficient evidence that compulsory employment reduces child poverty.

The preference for income support over compulsory employment is less surprising than it seems. The earnings from the jobs offered were the same as the former cash supply, thus minimizing the incentive to exchange money for work. Moreover, many poor people were not prepared for jobs; they lacked self-confidence and basic skills. Extensive training and supervision in the workplace had been necessary to make employment a success.

Stanford University Basic Income Lab

The desirability of a basic income is one of the components of the Green New Deal to counter soaring economic inequality. Cities across the country are experimenting to determine what a basic income policy might look like. To facilitate such experiments, the Stanford Basic Income Lab and the National League of Cities have released a Toolkit entitledBasic Income in Cities: A Guide to City Experiments and Pilot Projects. Everyone who is interested, anywhere in the world, will find actionable tools to set-up pilot projects. Many rigorous studies across the globe already demonstrate that cash-based programs are effective policy tools: They consistently reduce poverty and improve wellbeing while both maintaining productivity and minimizing bureaucratic overhead.

As far as I can judge, a pitfall is that families get used to allowances, food banks, thrift stores and ultimately to living in poverty. This stigmatizes adults and children and reduces their chances for a better future life.  That is why paving the way for a well-paid job for one or both parents seems to be the ultimate means to escape poverty.

The importance of well-paid jobs

A job provides not only offer the financial means for a decent life, but also opportunities for personal growth, social contacts, dignity and the opportunity to contribute to society. Therefore, the Green New Deal in the US argues not only for investments in the transition to a 100% sustainable economy, but also for creating millions well-pays jobs to enable this transition.

In the same vein, Ben Dankbaar and Johan Muysken argue for guaranteed jobs in the public sector for everybody. They assume that (1) everyone is entitled to full and meaningful work and (2) that it is the duty of the government to enable this. Moreover, the minimum wage makes it possible for someone who works 36 hours a week to receive sufficient income for a decent life. As a consequence, governments at the local, regional and national level must create thousands of jobs. Not only to open the way to a decent life for many, but also to perform numerous tasks that are currently abandoned.

It is also important to emphasize the right to decent work in times when automatization, robotization and artificial intelligence could eliminate many jobs. Therefore, not only the public sector, but also industry and institutions should be held responsible for full-employment in the future, possibly for fewer hours per week, year or life.

A report has recently been published in the Netherlands that emphasizes the need for a fundamental revision of the labor market. The amount of flexible work – nearly one million of self-employed people – has gone too far. Moreover, about 20% of the labor force has a temporary contract, that is twice the average of the OESO. The report insists that the number of regular jobs must increase considerably, but at the same time the social security rights connected with regular jobs must be eased to decrease reluctant of employers to create regular jobs. The commission also argues for life-long learning and for basic jobs.

Both jobs and basic income are indispensable

The fundamental question that I try to answer in this article is how to create the conditions for households to live a decent life. I have always thought that a well-paid job is by far the most important element in reaching this goal. That is why I was reluctant to accept the idea of a basic income. The video below was an eye-opener for me. Single working middle class mothers – it could have been fathers as well – explain why their salaries fall short for a decent life, given that in the US two incomes have become the ‘new normal’ and the size of salary has been adjusted accordingly.

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It makes no sense to return to a situation where one income is sufficient for every household. Instead, the Economic Security Project proposes to provide $500 per month to everyone in the lower and middle classes, moving millions from poverty.

For this reason, it occurred to me to distinguish two income components: A regular salary for all (adult) working members of a household and on top of it a basic allowance for each household, paid by the government, possibly including child allowances. In doing so, one fixed salary plus one basic allowance ensure a decent life for the members of the household. In families with a basic allowance plus two salaries, income taxation can play a slight moderating role.

Mixed neighborhoods

There is ample proof that to reduce social problems in neighborhoods a mixed population and a rich variety of housing types is required, together with the abandonment of poverty. Therefore, a focus on improvement of housing quality for poorer groups alone, offers no solution for problem areas. Instead, neighborhoods must be reshaped in mixed areas. Housing corporations must be allowed to build rental houses for lower and middle income groups and project developers must be obliged to build a sufficient percentage of social housing and houses for starters. A seamless cooperation between the government, the housing corporations and commercial project developers is necessary.

Appartments in the Tilburg (Netherlands) neighbourhood Jerusalem, demolished in 2012. Photo: Brabants Dagblad (2012).

It is inevitable that parts of the housing stock must be demolished instead of being renovated to make room for more expensive houses to allow mixing income groups. Resistance of the former inhabitants can be reduced by offering them affordable alternatives in places where originally more expensive houses were planned. Nobody must have reason the believe that former inhabitants are being driven out in favor of the well-off.

This requires a permanent dialogue with the inhabitants of neighborhoods to be innovated.

Mitigating housing prices

The market mechanism has poisoned the availability of affordable houses for lower and middle incomes. City governments have only few effective means to mitigate the development of prices and speculation in particular. Tightening up the conditions for granting building-permits to enforce mixing of housing types, is one of these.

A new policy area for the future will be the renovation of older middle-class houses that have become too large for their mostly older inhabitants and too expensive for most buyers. This renovation can be focused on two goals: Isolating and splitting into two separated less-expansive apartments.

Rehabilitation of public finance

According to the 2020 Inequality Report, economic inequality is mainly the result of the unequal ownership of capital. The graph below shows that since 1970, a large transfer has taken place from public to private ownership in almost all countries. Private ownership, concentrated in global business and rich persons, has increased considerably. Public ownership in most prosperous countries is negative or close to zero. The only exceptions are Norway, a country that has cumulated large reserves from the earnings of its oil export and China, that kept most of its prospering businesses in state ownership. It is obvious that most governments lack resources to tackle inequality because of its limited resources.

In 2015, the value of net public wealth (or public assets) in the US was negative (-17% of net national income) while the value of net private wealth (or private assets) was 500% of national income. In 1970, net public wealth amounted to 36% of national income while the figure was 326% for net private wealth. Net private wealth is equal to new private assets minus net private debt. Net public wealth is equal to public assets minus public debt.
The rise of private capital and the fall of public capital in rich countries, 2007 – 2016. Source: World Poverty Report

As if this is not enough, another particularly toxic aspect of globalization has to be mentioned; corporate tax avoidance. The 2020 Poverty Report: This kind of tax avoidance has become an art form at which the cleverest firms, like Apple, excel. Because of these practices, governments lose at least $500 billion a year. In 2018, 60 of the 500 largest companies – including Amazon, Netflix, and General Motors – paid no tax in the US, despite reporting joint global profits of $80 billion. This behavior has a devastating impact on national tax revenues and undermines the public’s sense of fairness.

The allocation of national earnings is fundamentally flawed. In the last four decades national elites have managed to direct these earnings to companies and wealthy people, while at the same time leaving governments to resolve negative externalities, grateful exploiting their lack of cooperation and unity. They were even more grateful for the support from their elite mates within these governments themselves, the Thatchers and the Reagans and political parties that wanted to cut national budgets even further.

Portland: Taxing inequality

In Oregon, the city of Portland has taken over Branko Milanović’s proposal to introduce taxation on intended inequality. The City of Portland imposes a 10% tax on companies that pay top executives more than 100 times their average wage and a 20% surcharge if the income differences exceed 250 times the average wage.

Humane policy

A humane society thrives when the vast majority of its members feels free, equally trated, independent, valued and accepted and are proud of their lives and work.

To achieve this goal, the trend towards greater inequality must be reversed by enabling governments at all levels and in all parts of the world to overcome poverty and to invest trillions in work, health care, education, inadequate infrastructure and lowering global warming.

The OECD’s is considering how to to curve some of the worst practices of tax avoidance, such as shifting money between subsidiaries and the Base Erosion and Profit Shifting (BEPS) initiative, which has already yielded some benefits, although according to Joseph Stiglitz it is only patchwork fixes to a fundamentally flawed and incorrigible status quo.

To overcome this patchwork, more effective tools are needed to restore the balance in asset building by governments and companies and to allow governments to do its work in the benefit of all human beings. Examples:

  1. A tax system for companies based on national revenues and profits;
  2. Ban on the use of “transfer pricing” within international companies in international transactions;
  3. All companies must prioritize their contribution to society and consider appropriate profit as a means to maintain their continuity. To this end, they must be accredited as a benefit corporation;
  4. Guaranteed paid jobs for every adult person who wants to work;
  5. Ensuring that every household has an income that allows a decent life for all members, for example through an additional variable basic income;
  6. Reduction of management remuneration to a maximum of ten times the average income of the employees of that company;
  7. Ban on supplements such as bonuses and stock options;
  8. Progressive tax on income from personal assets;
  9. Realistic prices for raw materials and agricultural products for the benefit of workers in poor countries and farmers in rich countries;
  10. Supporting social entrepreneurship throughout the world and in developing countries in particular;
  11. Discouraging labor migration to limit brain drain by increasing the prospects of a reasonable income in developing countries;
  12. Continued support for peacekeeping in conflicts around the world, by strengthening the UN instead of NATO;
  13. In the short term, the national banks carefully provide investment capital for governments without increasing the national deficit.

The fight against inequality is in everyone’s interest.

Written by Professor Herman van den Bosch, Professor at Open University of The Netherlands.

Header image: Tuca Viera, published in Folha de Sao Paulo (2007).

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