Editorial 1 : Does inequality lead to growth?
Context
Researchers from the Paris School of Economics have shown inequality in modern India to be greater than colonial times.
Inequality
- Several argue that inequality harms democratic processes. Some inequality, others argue, is actually beneficial, since it acts as an incentive to entrepreneurs to start businesses, thereby increasing employment and welfare for others.
- This view is mistaken, for inequality can have deleterious economic effects as well.
- Consider one form of inequality, that of concentration of monopoly power amongst capital relative to labour.
- This can have negative effects on consumption, welfare, and growth. If done properly, wealth taxes and distribution can have positive effects.
Monopoly power and consumption
- Billionaires draw their wealth from monopoly. Their business groups are dominant players in their specific market. This allows them to set prices instead of being determined by the market.
- The extent of mark-ups above the cost of production is determined by their monopoly power.
- Thus, for any given level of money wages, real wages — which determine purchasing power — are lower in economies with strong monopolies.
- These monopoly effects are currently being experienced as the cost-of-living crises affecting the developed economies.
- The phenomenon of “greedflation”, or companies raising prices to increase profit margins in the wake of multiple demand-and-supply shocks due to the pandemic, has been pointed to as contributing to high rates of inflation in the West.
- Textbook economics shows us that the profit-maximising level of output under a monopoly is less than under a competitive economy, implying a welfare loss
- Thus, the presence of monopolies can lead to lower real wages and lower levels of output and investment.
Inequality and growth
- For example, a company decides to set up a new factory. Before the new capital stock is created, wages are paid out to workers to build it. The income of the workers is spent on purchasing goods, which increases the income of goods-sellers, whose increased income results in purchases of other goods, and so on.
- The total increase in the income of workers and goods-sellers is greater than the initial investment. This process is called the ‘multiplier’ effect, wherein investment raises incomes by a greater proportion than the initial investment.
- When companies exercise market power, mark-ups and prices will be higher.
- Real wages of workers are lower, and they can only purchase lesser items. However companies, because of higher margins, will enjoy the same amount of profits from the sale of a lesser amount of goods.
- The increase in income from a given amount of investment will be lesser under monopoly because of reduced consumption power. Thus, investment will have a weaker effect on growth under monopoly while not affecting profits.
- One can argue that consumption of the rich can help boost growth. While the absolute amount of consumption of the rich is more, they consume a smaller proportion of their incomes.
- The multiplier process depends on the proportion of consumption from incomes. An unequal economy will put lesser incomes in the hands of those with a greater propensity to consume, leading to weaker expansion in the economy.
Redistribution and growth
- Some argue that the ‘cure’ of redistribution can prove more harmful than the disease of inequality by affecting job creation.
- Entrepreneurs would see reduced incentives for amassing wealth under a high-tax regime, resulting in a scale-back of investment and jobs.
- Investment occurs under the influence of future profit expectations, while wealth is accumulated past profits.
- No doubt, the difficulty in converting profits into wealth may deter some business-owners from undertaking investment.
- But an economy with high expectations of profit would ensure businesses invest even if wealth is taxed. Redistribution can generate forces to spur growth even if some billionaires pull back on investment.
- For one, if wealth is redistributed and increases income, the multiplier process would become stronger. Businesses would be more willing to invest where purchasing power is strong.
- If monopolies are curtailed, then prices would be lower and real wages higher, leading to greater demand.
Conclusion
Redistribution is not a silver bullet, and too high a rate of taxation can become a net drain on an economy. Used in conjunction with other policy measures, curtailing inequality can lead to a healthier economy.
Editorial 2 : Tonga volcano could cause unusual weather for rest of decade: study
Context
Hunga Tonga-Hunga Ha’apai erupted on January 15, 2022, in the Pacific Kingdom of Tonga. It created a tsunami, which triggered warnings across the entire Pacific basin, and sent sound waves around the globe multiple times. The eruption could have lingering effects on our winter weather for years to come.
A cooling smoke cloud
- Usually, the smoke of a volcano — and in particular the sulphur dioxide contained inside the smoke cloud — ultimately leads to a cooling of the earth’s surface for a short period.
- This is because the sulphur dioxide transforms into sulphate aerosols, which send sunlight back into space before it reaches the surface.
- This shading effect means the surface cools down for a while, until the sulphate falls back down to the surface or gets rained out.
The case in Hunga Tonga
- Because it was an underwater volcano, Hunga Tonga produced little smoke, but a lot of water vapour:100–150 million tonnes, or the equivalent of 60,000 Olympic swimming pools.
- The enormous heat of the eruption transformed huge amounts of sea water into steam, which then shot high into the atmosphere with the force of the eruption.
- All that water ended up in the stratosphere: a layer of the atmosphere between about 15 and 40 kilometres above the surface, which produces neither clouds nor rain because it is too dry.
- Water vapour in the stratosphere has two main effects. One, it helps in the chemical reactions that destroy the ozone layer, and two, it is a very potent greenhouse gas.
- There is no precedent in observations of volcanic eruptions to know what all that water would do to our climate, and for how long.
- This is because the only way to measure water vapour in the entire stratosphere is via satellites. These have only existed since 1979, and there hasn’t been an eruption similar to Hunga Tonga in that time.
Follow the vapour
- Some studies focused on the more traditional effects of volcanic eruptions, such as the amount of sulphate aerosols and their evolution after the eruption, some concentrated on the possible effects of the water vapour, and some included both.
- The large ozone hole from August to December 2023 was at least in part due to Hunga Tonga. The simulations predicted that ozone hole almost two years in advance.
- Notably, this was the only year we would expect any influence from the volcanic eruption on the ozone hole. By then, the water vapour had just enough time to reach the polar stratosphere over Antarctica, and during any later years, there would not be enough water vapour left to enlarge the ozone hole.
- As the ozone hole lasted until late December, with it came a positive phase of the Southern Annular Mode during the summer of 2024.
- For Australia, this meant a higher chance of a wet summer, which was exactly opposite what most people expected with the declared El Niño.
- In terms of global mean temperatures, which are a measure of how much climate change we are experiencing, the impact of Hunga Tonga is very small, only about 0.015 degrees Celsius.
- This means that the incredibly high temperatures we have measured for about a year now cannot be attributed to the Hunga Tonga eruption.
Disruption for the rest of the decade
- But there are some surprising, lasting impacts in some regions of the planet.
- For the northern half of Australia, our model predicts colder and wetter than usual winters up to about 2029.
- For North America, it predicts warmer than usual winters, while for Scandinavia, it again predicts colder than usual winters.
Conclusion
The volcano seems to change the way some waves travel through the atmosphere. And atmospheric waves are responsible for highs and lows, which directly influence our weather.
