Sharing the wealth can create prosperity
andyt @ Sat Dec 01, 2012 1:08 am
$1:
When Branko Milanovic, a World Bank economist, published The Haves and the Have-Nots, a study of global income inequality last year, one of his most striking observations was the extent to which the subject was taboo in the United States.
As Mr. Milanovic explained, “I was once told by the head of a prestigious think tank in Washington, D.C., that the think tank’s board was very unlikely to fund any work that had income or wealth inequality in its title. Yes, they would finance anything to do with poverty alleviation, but inequality was an altogether different matter.”
“Why?” Mr. Milanovic asked. “Because ‘my’ concern with the poverty of some people actually projects me in a very nice, warm glow: I am ready to use my money to help them. Charity is a good thing; a lot of egos are boosted by it and many ethical points earned even when only tiny amounts are given to the poor. But inequality is different: Every mention of it raises in fact the issue of the appropriateness or legitimacy of my income.”
I recalled Mr. Milanovic’s remarks this week when I found myself on a panel at the Brookings Institution, one of those Washington research groups, discussing income inequality, including the research collected in a new book published by Brookings titled Inequality in America. In reply, Kemal Dervis, the vice-president of Brookings, who co-wrote the book and led the panel, joked that if he turns up on the job market next month, we will know he overstepped the mark.
It was a characteristically polished line – Mr. Dervis is a former Turkish cabinet minister – but the truth is that the Brookings event was a sign of the recent sea change in the U.S. public discourse about income inequality.
As recently as this summer, it still seemed like Americans were allergic to any explicit discussion of income inequality. That was the reasoning of Republicans and of many previously non-partisan wealthy businessmen who responded to President Barack Obama’s call for higher taxes on millionaires and billionaires with accusations of class war.
But at the polls in November, something surprising, at least for the Romney strategists, happened. A very muted, democratic version of class war was fought, and the lower classes won.
Even the patriarch of American capitalists, Warren Buffett, has decided it is okay to talk about income inequality. In an op-ed in The New York Times, Mr. Buffett pointed out that the wealth of the 400 richest Americans has increased more than fivefold over the past 20 years. As Mr. Buffett put it, “my gang has been leaving the middle class in the dust.”
The Brookings panel confirmed that assessment and offered three important takeaways about the causes and consequences of rising income inequality. One was that government matters. Like most students of the subject, the assembled economists agreed that rising inequality was driven partly by economic forces like technology and globalization.
But the state can choose to mute the impact of the invisible hand. Paradoxically, in much of the Western world, and particularly in the United States, even as the power of these economic shifts has become more profound, government efforts to mitigate them have become weaker.
A second theme of the Brookings discussion helps to explain one reason that has happened – the economy has gone global, but nation-states have not. Higher taxes on the rich may be a logical response to rising income inequality, but actually levying those taxes is getting harder in an age of global capital flows. Mr. Buffett said it was “sickening” that rich people and companies use the Cayman Islands to lower their tax bills, but moral outrage is a weak weapon against international tax arbitrage.
If you are still not convinced that all this matters, consider the third, and most striking, possibility raised at the Brookings panel. Set aside any moral or political concerns you may have about rising income inequality – worries about poverty, justice, undue political influence or even social mobility. According to Mr. Dervis, a growing number of economists suspect that once inequality passes a certain point, it may jeopardize economic stability and economic growth.
As his book argues, “rebalancing of the distribution of income may play a role in unlocking the U.S. economy’s growth potential in a sustainable way.”
Now that is a truly radical thought, and it brings us back to Mr. Milanovic’s earlier view that income inequality was a forbidden subject in the United States.
Worrying about the poor is one thing. To contend that equality is necessary for growth is an altogether different and more radical idea. Three decades later, trickle-down economics has met its antithesis. We are set for one of the great battles of ideas of our time.
As Mr. Milanovic explained, “I was once told by the head of a prestigious think tank in Washington, D.C., that the think tank’s board was very unlikely to fund any work that had income or wealth inequality in its title. Yes, they would finance anything to do with poverty alleviation, but inequality was an altogether different matter.”
“Why?” Mr. Milanovic asked. “Because ‘my’ concern with the poverty of some people actually projects me in a very nice, warm glow: I am ready to use my money to help them. Charity is a good thing; a lot of egos are boosted by it and many ethical points earned even when only tiny amounts are given to the poor. But inequality is different: Every mention of it raises in fact the issue of the appropriateness or legitimacy of my income.”
I recalled Mr. Milanovic’s remarks this week when I found myself on a panel at the Brookings Institution, one of those Washington research groups, discussing income inequality, including the research collected in a new book published by Brookings titled Inequality in America. In reply, Kemal Dervis, the vice-president of Brookings, who co-wrote the book and led the panel, joked that if he turns up on the job market next month, we will know he overstepped the mark.
It was a characteristically polished line – Mr. Dervis is a former Turkish cabinet minister – but the truth is that the Brookings event was a sign of the recent sea change in the U.S. public discourse about income inequality.
As recently as this summer, it still seemed like Americans were allergic to any explicit discussion of income inequality. That was the reasoning of Republicans and of many previously non-partisan wealthy businessmen who responded to President Barack Obama’s call for higher taxes on millionaires and billionaires with accusations of class war.
But at the polls in November, something surprising, at least for the Romney strategists, happened. A very muted, democratic version of class war was fought, and the lower classes won.
Even the patriarch of American capitalists, Warren Buffett, has decided it is okay to talk about income inequality. In an op-ed in The New York Times, Mr. Buffett pointed out that the wealth of the 400 richest Americans has increased more than fivefold over the past 20 years. As Mr. Buffett put it, “my gang has been leaving the middle class in the dust.”
The Brookings panel confirmed that assessment and offered three important takeaways about the causes and consequences of rising income inequality. One was that government matters. Like most students of the subject, the assembled economists agreed that rising inequality was driven partly by economic forces like technology and globalization.
But the state can choose to mute the impact of the invisible hand. Paradoxically, in much of the Western world, and particularly in the United States, even as the power of these economic shifts has become more profound, government efforts to mitigate them have become weaker.
A second theme of the Brookings discussion helps to explain one reason that has happened – the economy has gone global, but nation-states have not. Higher taxes on the rich may be a logical response to rising income inequality, but actually levying those taxes is getting harder in an age of global capital flows. Mr. Buffett said it was “sickening” that rich people and companies use the Cayman Islands to lower their tax bills, but moral outrage is a weak weapon against international tax arbitrage.
If you are still not convinced that all this matters, consider the third, and most striking, possibility raised at the Brookings panel. Set aside any moral or political concerns you may have about rising income inequality – worries about poverty, justice, undue political influence or even social mobility. According to Mr. Dervis, a growing number of economists suspect that once inequality passes a certain point, it may jeopardize economic stability and economic growth.
As his book argues, “rebalancing of the distribution of income may play a role in unlocking the U.S. economy’s growth potential in a sustainable way.”
Now that is a truly radical thought, and it brings us back to Mr. Milanovic’s earlier view that income inequality was a forbidden subject in the United States.
Worrying about the poor is one thing. To contend that equality is necessary for growth is an altogether different and more radical idea. Three decades later, trickle-down economics has met its antithesis. We are set for one of the great battles of ideas of our time.
http://www.theglobeandmail.com/report-o ... le5824012/
andyt @ Sat Dec 01, 2012 1:19 am
Actually it's not a new idea that too steep an income inequality harms economic growth as much as too little.
I like the part about the difference between talking about poverty and income inequality.
kilroy @ Sat Dec 01, 2012 11:25 am
Yah, it's been around for a bit. This crazy notion that for consumption to continue people have to have money proportionate to to the value of goods being offered for sale.
A couple of different options come to mind if you are planning an economy so that you and your friends can have it all... You can force wages down in an acceptable way in the worlds largest economy, the North American/European one, by offering lower cost goods made in third world countries. This has the advantage of keeping the body politic on side, which is always a nice warm feeling.
Another option, and these can happen in the same time frame, is to ensure ignorance of the costs of getting wealthy, cancer, acid rain, sun burns, global warming, soil depletion, third world conditions and not just in the third world... Of course this is trickier because, unlike the focus presentation of having the horn of plenty overflowing, people can actually see forests being stripped, water being polluted, and housing becoming exorbitant.
andyt @ Sat Dec 01, 2012 12:13 pm
It's not just about consumption. People are more productive if they feel they're getting a fair share of the pie. They cooperate more. And justice system and medical costs go down the less poverty you have. You need a certain amount of inequality to spur people on, after that you're just shooting yourself in the foot.
Those environmental problems you mention would come about even if we had less income inequality. If we were all poor, no way could the planet support 7 billion people. If the whole world is middle class (as of course it wants to be) no way the planet has enough resources to support that lifestyle for 7 billion for very long.
kilroy @ Sat Dec 01, 2012 1:10 pm
True, it's not just about consumption, although consumption has been the major economic force behind wealth accumulation and disparity. I wonder if we have changed the ratio at all in this last 50-60 years, or if we have just managed to maintain the same kind of social structure but over a larger proportion of the planets population. So our health has improved by being middle income earners but is the middle of millions on one side and pennies on the other side also the middle of the population? I don't think so.
I think that consumption affects environmental conditions in a couple of ways. Our usage of resources is as you say not sustainable, but also our mental attitude towards consumption as a good allows us to set aside or more likely not notice the effect of our consumption. Whether we are all poor, or all middle class over the coming years is up to us and I suggest that the middle might be less than current North american consumption standards. Which could still allow for a pretty decent standard of living.
BartSimpson @ Mon Dec 03, 2012 5:51 pm
The whole topic of 'income inequality' is based on envy. If you're jealous of the wealthy then study what they do and then become wealthy yourself.
No one's stopping you.
But if all you want to do in life is to utilize the power of government to steal on your behalf then you deserve to be stopped.
Gunnair @ Mon Dec 03, 2012 5:57 pm
BartSimpson BartSimpson:
The whole topic of 'income inequality' is based on envy. If you're jealous of the wealthy then study what they do and then become wealthy yourself.
No one's stopping you.
But if all you want to do in life is to utilize the power of government to steal on your behalf then you deserve to be stopped.
No one's stopping you.
But if all you want to do in life is to utilize the power of government to steal on your behalf then you deserve to be stopped.
Well it's not that easy, Bart and you know that. That's a tired old chestnut anyway since there simply ain't enough resources for all to become wealthy.
kilroy @ Mon Dec 03, 2012 6:22 pm
BartSimpson BartSimpson:
The whole topic of 'income inequality' is based on envy. If you're jealous of the wealthy then study what they do and then become wealthy yourself.
No one's stopping you.
But if all you want to do in life is to utilize the power of government to steal on your behalf then you deserve to be stopped.
No one's stopping you.
But if all you want to do in life is to utilize the power of government to steal on your behalf then you deserve to be stopped.
It is based on a whole lot of different considerations, envy isn't necessarily in the top few. Pity would be one, still a virtue I hear...
Anger is another, the idea that some bunch of elitist whackos think they can abuse the Earths resources just for their own enrichment.
A desire to change direction, from one observed many times in history, and away from corrupt and powerful dictatorship.
But the OP suggests the need to equalize thigs somewhat in order to develop a sustainable economy, one that will be able to continue into the future which might have some relevance to our grandkids.
andyt @ Tue Dec 04, 2012 12:59 am
Gunnair Gunnair:
Well it's not that easy, Bart and you know that. That's a tired old chestnut anyway since there simply ain't enough resources for all to become wealthy.
I disagree. Wealth is relative, so there will always be people more wealthy than others. (Bart said lefties are pedantic, thought I'd prove him right here).
But Bart can't handle more than black or white thinking. What this article is talking about is the level of income inequality. Too little and there's no motivation for people to do better for themselves. Too much, and you hurt productivity and cooperation. It's not really that complicated a concept, but I guess for some it's just beyond them.
kilroy @ Tue Dec 04, 2012 2:33 pm
The second point explained by this, 'Higher taxes on the rich may be a logical response to rising income inequality, but actually levying those taxes is getting harder in an age of global capital flows.' is really important. A corporate citizen doesn't have the same motivations as a small community based business. In fact I question the whole value of having such a citizenship in a global marketplace.
In this discussion where the wealth concentrations evade responsibility, as Mr Buffet suggests, why would we accept them as countrymen. The same thing with different motivations as Conrad Black going for lordship. No allegiance is binding but that of corporate continuance.
That may change for them when all human and natural capital has been exploited to the point where our current recession is worldwide and all the money devalues, but I'm not sure corporate intelligence will grasp it even then. Where have all the flowers gone?
JaredMilne @ Wed Dec 05, 2012 6:12 pm
Back in the 19th century, we had children being worked for 14 hours a day, people being paid in worthless scrip that could only be redeemed at a company store, people often ending up impoverished or dead if they suffered from medical problems they had no control over, and most people not having a chance for a better life because they had little or no opportunity for an education.
I have a hard time seeing how exactly most people were really free back then. Hell, Communism actually emerged in response to those appalling conditions.
However, with things like minimum wages, public health care, limited work days and free education, millions upon millions of people actually gained more leisure time, more discretionary income, and more of a capacity to improve their situations. In short, they became more free thanks to a positive government intervention.
What's a guy supposed to do if he loses his job because a business owner f*cks up or the market crashes? How's he supposed to feed his family until he finds another job? What if his kid has a crippling medical condition that requires expensive medicine or surgery, and he can't pay for it because he has no health insurance? How's he supposed to consume and contribute to the economy? How much of a capacity does he actually have to exercise his innate rights and freedoms?
Of course government intervention can do just as much harm as it can good. Of course unions can overreach and go too far. Of course taxes can be too high. Of course cuts sometimes need to be made. The people who point out these things are quite right, and I agree with them. I also agree about the horrors of Communism-to paraphrase Kent Brockman, Marxism simply doesn't work.
But what I don't get is why it has to be an all-or-nothing thing. Apparently a society can only either be a heavily taxed welfare state or a radically laissez-faire society. Why can't we recognize both the positive advantages of private enterprise and capitalism AND government social programs? They each have their strengths and weaknesses, and in the best circumstances they can complement each other's strengths and compensate for each other's weaknesses.
Back in the 1930s, many Canadian business owners actually came to support the idea of a social safety net both because it undermined the appeal of Communism and also gave many more members of the public more money to spend on the products those business owners were making. If Canada has prospered, it's been through a worthwhile combination of individual, private enterprise and collective government action.
kilroy @ Wed Dec 05, 2012 9:33 pm
It would be great, how do you establish such even handedness? My only suggestion would be for people to walk out on the big corps that seem focused on their central control.
DanSC @ Wed Dec 05, 2012 11:43 pm
I sympathize with Mr. Milanovic's ideas, but just calling for sharing the wealth without having a real plan is a non-starter. The main current plan is to raise incomes on the wealthy, which just sends money to the government. What happens next? Not much, at least not currently. Right now the words "sharing the wealth" conjure memories of George W. Bush giving everyone $300; a lot of long-term good that did.
Bill O'Reiley (hold your rage) made a very good point during one of his appearances on The Daily Show with Jon Stewart. I wish I could find a video that wouldn't block Canadian IP addresses, but he said he's be more than willing to pay more taxes if he thought it would do any good. I don't completely agree with him on the federal level, but my taxes in California will go up next month and I know the money will be wasted on giving ex-police chiefs a quarter-million dollar annual pension while city buildings can't pay the electric bill.