Why Tackling Global Economic Inequality Is Liberal Democracy’s Next Big Challenge

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Hampton Stephens

Globally, economic inequality is on the rise, leading to social polarization, nationalism, violence, criminal behavior and the emergence of populist politics. 

Inequality became resurgent as an issue in U.S. politics after the global financial crisis. But it has a much longer and more prominent history in middle- and low-income countries, where economic inequality takes on additional importance because it is coupled with low average incomes and in many places extreme poverty. It’s hard to argue that income inequality is not an important problem where inequality exists alongside abject poverty. 

However, while it’s easy to be convinced that not much can be done about the causes of economic inequality, the best evidence available demonstrates that this way of thinking is wrong. Inequality cannot be completely controlled, but policymakers have a wide variety of tools at their disposal to produce changes in how the economic pie is divided.

While it would be inaccurate to say that government policy can always strictly control distributional outcomes, it would be equally inaccurate to say that governments are powerless to reduce inequality in any substantial measure. Government policy can effectively reduce inequality with explicit redistribution and/or market conditioning. And while the latter set of policies is not often discussed in the context of distributional outcomes, these policies are important tools that can be deployed to impact the causes of economic inequality. 

Income inequality and the difficulty of making ends meet for the working poor are also part of what’s fueling the Yellow Vest movement in France. The movement began as a revolt against a proposed gas tax hike, but quickly broadened to include social inequality as a central grievance. The tax burden required to fund France’s social welfare model has become heavier over the years, and wages have not kept pace. But the Yellow Vest movement also expresses a feeling of neglect and exclusion in France’s exurbs and rural regions, where inhabitants are most dependent on their cars for transportation, but also where the French state and many institutions representative of French society have progressively disengaged over the past decade. This neglect is most visible in small villages, where post offices have closed, doctors and health care disappeared, and government funding dried up. But it is felt across wide swaths of the country, where opportunity for social and economic advancement has receded and no one in the urban enclaves of affluence bothered to notice. 

One of the dangers of not addressing the problem of economic inequality is a further rise of populism—which often presents itself as a solution to income inequality—and its accompanying threats to liberal democracy. In the aftermath of the global financial crisis, anti-trade rhetoric, and a corresponding discussion of globalization’s winners and losers, became a prominent feature of the populist backlash in Europe and the U.S. Populist politicians married their anti-globalization message to a social one that is against outsiders and stokes fear about migration, foreign workers and terrorism. This was particularly true in the United Kingdom, which shocked the world by voting in favor of leaving the European Union in the Brexit referendum in June 2016, and in the United States, where anti-trade bias is a key pillar of President Donald Trump’s economic platform. The challenge of economic inequality is significant. But the costs of inaction are higher, as populism redefines the tenor and content of politics on both sides of the Atlantic.