I was struck by the tenacious misconception that economic growth is needed in order to address inequality as expressed for example in the recent blog on the Capital Institute website titled Transcending the Tension between Climate Change and Inequality by founder John Fullerton.
We know climate change is linked to our global economic activity and its voracious appetite for energy, mostly in the form of fossil fuels which increase concentration of CO2 in the atmosphere. Some argue that the problem of inequality cannot be addressed without economic growth and hence the tension referred to in John Fullerton’s blog.
Let’s get this one point straight – economic growth in the US has not reduced but actually increased inequality in the US since the 80s as I discussed in my blog post Economic Growth and Inequality.
In fact, over the last 20 years, economic growth has greatly accelerated inequality in the US as the top 1% captured an ever increasing slice of the benefits of economic growth as the chart below shows.
What influences inequality is not economic growth per se, but how the benefits of economic growth are shared among the various strata of society. During the period between 1947 and 1979 the US economy grew twelve-fold and such economic growth coexisted with a slight decrease in income inequality as shown in the chart below.
The bottom 80% of the population saw their standard of living increase by an average of 110% while the top 20% of the population saw their standard of living increase by 99%. In other words, income inequality between the bottom 80% of the population and the top 20% decreased by about 10% over that 32 year period. That was achieved primarily through a fiscal policy that taxed corporate incomes and top individual incomes at a much higher rate than we do today. Corporate income tax was above 45% and the top individual income tax rate was above 70% during that period. In fact from 1951 to 1964, when the average GDP growth was a robust 5.8% the corporate income tax rate was 51% and the top individual income tax rate was 91%.
So, how to we address at the same time the challenges posed by climate change and income inequality?
Here is an idea proposed by The Progress Report – a Sky Trust citizen dividend.
The idea is to apply a steep carbon tax to CO2 emissions and divide the tax revenues equally among all adult US citizens. I would argue that such tax revenues should be divided equally among all adults in the world since poor countries, and especially the poorest people in those countries, tend to be bearing the brunt of the carbon pollution of rich countries and should be compensated for the negative effects such pollution has on their health and livelihood. A stark illustration of the problem was the tragic typhoon in the Philippines last year.
The UK Government Stern Review on the Economics of Climate Change estimates the social cost of CO2 emission to be around $100 per metric ton. Given 2012 estimates of world total CO2 emissions of about 34.5 GT (34.5 billion metric tons) such carbon tax would generate $3,450 billion per year and therefore an annual dividend of about $700 dollar per year for each adult in the world. Contrary to what seems to be assumed in almost all economic discussions, Homo sapiens is not the only species on this planet. A better plan for the use of those revenues would be to provide the $700 of yearly carbon dividend only to the half of the human population under the median world income and use the other half of the carbon tax revenues, i.e. $1,725 billion, for habitat restoration and climate adaptation for the millions of fellow species on this precious planet called Earth.
Notice, that about 2.6 billion humans are currently living on less than $2 a day, so such carbon dividend will roughly double the income of the bottom half of the adult world population eliminating extreme poverty around the world.
The idea that there is a tradeoff between tackling the challenges of climate change and addressing inequality is simply preposterous. We can use the climate change challenge to finally address the issue of extreme poverty around the world while at the same time providing the proper economic incentives to reduce carbon pollution and accelerating energy conservation and the shift towards renewable energy.