But the long-term costs of inequality threaten more than our national economies. Social cohesion itself is at stake, as living standards decline and the building blocks of social mobility – universal education, healthcare, social security and collective bargaining – are stripped away. Without equal opportunities, most people will neither be able to share equitably nor work creatively in a dynamic, global economy. Likewise, far too few will gain from an uptick in global growth.
This de facto discrimination gives rise to a dangerous crony capitalist system, one that distorts economic development and corrupts our democratic institutions. Power and influence are consolidated and concentrated at the top, allowing public resources to be siphoned off for private benefit. Financial profits are privatized, while losses are socialized. Policies are alternately dictated by special interests and market panics.
Citizens are predictably alienated and frustrated by this lack of democratic legitimacy. Many see democracy itself as bankrupt and prefer to abstain. Others turn to extremist groups, fueling the increasingly toxic polarization of politics.
(Read more: Income Inequality: Is It Good for Everyone?)
Our democracies were not designed to function effectively or equitably under a global economy. That's why measures to promote post-crisis economic recovery must be matched with policies to promote democratic recovery, redistributing not just wealth but power to our citizens. Referendums, citizen juries, decentralized power and e-democracy are just some of the tools available to empower our societies.
But rebuilding trust in democracy is not just about ensuring participation. Alongside progressive taxation and a living wage, one simple way to restore a sense of social equality and social justice in a global economy is the introduction of a financial transaction tax. Financial institutions would be wise to realize that investing a tiny fraction of their profits in the public good is in their interest: more jobs means higher productivity, and greater social equity means less economic and political volatility.
To those who claim that unfettered capitalism is a social good, and that reducing inequality is futile, Pope Francis recently sent a powerful message worth heeding: "I ask you to ensure that humanity is served by wealth and not ruled by it." This should be the goal of any leader with an interest in the long-term prosperity and sustainability of our global society.
George Papandreou was Greece's Prime Minister from October 2009 to November 2011.