Inequality and the world economy

True Progressivism

A new form of radical centrist politics is

needed to tackle inequality without
hurting economic growth
Oct 13th 2012 | From the print edition

BY THE end of the 19th century, the first age of globalisation and a spate of new
inventions had transformed the world economy. But the Gilded Age was also a
famously unequal one, with Americas robber barons and Europes Downton Abbey
classes amassing huge wealth: the concept of conspicuous consumption dates back
to 1899. The rising gap between rich and poor (and the fear of socialist revolution)
spawned a wave of reforms, from Theodore Roosevelts trust-busting to Lloyd
Georges Peoples Budget. Governments promoted competition, introduced
progressive taxation and wove the first threads of a social safety net. The aim of this
new Progressive era, as it was known in America, was to make society fairer
without reducing its entrepreneurial vim.

Modern politics needs to undergo a similar reinventionto come up with ways of

mitigating inequality without hurting economic growth. That dilemma is already at
the centre of political debate, but it mostly produces heat, not light. Thus, on
Americas campaign trail, the left attacks Mitt Romney as a robber baron and the right
derides Barack Obama as a class warrior. In some European countries politicians have
simply given in to the mob: witness Franois Hollandes proposed 75% income-tax
rate. In much of the emerging world leaders would rather sweep the issue of
inequality under the carpet: witness Chinas nervous embarrassment about the
excesses of Ferrari-driving princelings, or Indias refusal to tackle corruption.
In this section

True Progressivism

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Latin America

Economic Inequality

Ed Miliband

Francois Hollande

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At the core, there is a failure of ideas. The right is still not convinced that inequality
matters. The lefts default position is to raise income-tax rates for the wealthy and to
increase spending still furtherunwise when sluggish economies need to attract
entrepreneurs and when governments, already far bigger than Roosevelt or Lloyd
George could have imagined, are overburdened with promises of future largesse. A far
more dramatic rethink is needed: call it True Progressivism.
To have or to have not
Does inequality really need to be tackled? The twin forces of globalisation and
technical innovation have actually narrowed inequality globally, as poorer countries
catch up with richer ones. But within many countries income gaps have widened.
More than two-thirds of the worlds people live in countries where income disparities
have risen since 1980, often to a startling degree. In America the share of national

income going to the top 0.01% (some 16,000 families) has risen from just over 1% in
1980 to almost 5% nowan even bigger slice than the top 0.01% got in the Gilded
Age.
It is also true that some measure of inequality is good for an economy. It sharpens
incentives to work hard and take risks; it rewards the talented innovators who drive
economic progress. Free-traders have always accepted that the more global a market,
the greater the rewards will be for the winners. But as our special report this week
argues, inequality has reached a stage where it can be inefficient and bad for growth.
That is most obvious in the emerging world. In China credit is siphoned to stateowned enterprises and well-connected insiders; the elite also gain from a string of
monopolies. In Russia the oligarchs wealth has even less to do with
entrepreneurialism. In India, too often, the same is true.
In the rich world the cronyism is better-hidden. One reason why Wall Street accounts
for a disproportionate share of the wealthy is the implicit subsidy given to too-big-tofail banks. From doctors to lawyers, many high-paying professions are full of
unnecessary restrictive practices. And then there is the most unfair transfer of all
misdirected welfare spending. Social spending is often less about helping the poor
than giving goodies to the relatively wealthy. In America the housing subsidy to the
richest fifth (through mortgage-interest relief) is four times the amount spent on
public housing for the poorest fifth.
Even the sort of inequality produced by meritocracy can hurt growth. If income gaps
get wide enough, they can lead to less equality of opportunity, especially in education.
Social mobility in America, contrary to conventional wisdom, is lower than in most
European countries. The gap in test scores between rich and poor American children
is roughly 30-40% wider than it was 25 years ago. And by some measures class
mobility is even stickier in China than in America.
Some of those at the top of the pile will remain sceptical that inequality is a problem
in itself. But even they have an interest in mitigating it, for if it continues to rise,
momentum for change will build and may lead to a political outcome that serves
nobodys interests. Communism may be past reviving, but there are plenty of other
bad ideas out there.
Hence the need for a True Progressive agenda. Here is our suggestion, which steals
ideas from both left and right to tackle inequality in three ways that do not harm
growth.
Compete, target and reform
The priority should be a Rooseveltian attack on monopolies and vested interests, be
they state-owned enterprises in China or big banks on Wall Street. The emerging
world, in particular, needs to introduce greater transparency in government contracts
and effective anti-trust law. It is no coincidence that the worlds richest man, Carlos
Slim, made his money in Mexican telecoms, an industry where competitive pressures
were low and prices were sky-high. In the rich world there is also plenty of opening
up to do. Only a fraction of the European Unions economy is a genuine single

market. School reform and introducing choice is crucial: no Wall Street financier has
done as much damage to American social mobility as the teachers unions have.
Getting rid of distortions, such as labour laws in Europe or the remnants of Chinas
hukou system of household registration, would also make a huge difference.
Next, target government spending on the poor and the young. In the emerging world
too much cash goes to universal fuel subsidies that disproportionately favour the
wealthy (in Asia) and unaffordable pensions that favour the relatively affluent (in
Latin America). But the biggest target for reform is the welfare states of the rich
world. Given their ageing societies, governments cannot hope to spend less on the
elderly, but they can reduce the pace of increasefor instance, by raising retirement
ages more dramatically and means-testing the goodies on offer. Some of the cash
could go into education. The first Progressive era led to the introduction of publicly
financed secondary schools; this time round the target should be pre-school education,
as well as more retraining for the jobless.
Last, reform taxes: not to punish the rich but to raise money more efficiently and
progressively. In poorer economies, where tax avoidance is rife, the focus should be
on lower rates and better enforcement. In rich ones the main gains should come from
eliminating deductions that particularly benefit the wealthy (such as Americas
mortgage-interest deduction); narrowing the gap between tax rates on wages and
capital income; and relying more on efficient taxes that are paid disproportionately by
the rich, such as some property taxes.
Different parts of this agenda are already being embraced in different countries. Latin
America has invested in schools and pioneered conditional cash transfers for the very
poor; it is the only region where inequality in most countries has been falling. India
and Indonesia are considering scaling back fuel subsidies. More generally, as they
build their welfare states, Asian countries are determined to avoid the Wests
extravagance. In the rich world Scandinavia is the most inventive region. Sweden has
overhauled its admittedly huge welfare state and has a universal school-voucher
system. Britain too is reforming schools and simplifying welfare. In America Mr
Romney says he wants to means-test Medicare and cut tax deductions, though he is
short on details. Meanwhile, Mr Obama, a Democrat, has invoked Theodore
Roosevelt, and Ed Miliband, leader of Britains Labour Party, is now trying to wrap
himself in Benjamin Disraelis One Nation Tory cloak.
Such cross-dressing is a sign of change, but politicians have a long way to go. The
rights instinct is too often to make government smaller, rather than better. The
supposedly egalitarian lefts failure is more fundamental. Across the rich world,
welfare states are running out of money, growth is slowing and inequality is rising
and yet the lefts only answer is higher tax rates on wealth-creators. Messrs Obama,
Miliband and Hollande need to come up with something that promises both fairness
and progress. Otherwise, everyone will pay.
From the print edition: Leaders

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Mancur Oct 18th 2012, 02:04
The article mentions several causes for rising inequality, and does not mention
monetary policy. Central Banks have spent the last two decades printing money like
crazy, thanks to an inflation - and lower paid workers salaries - kept in check by the
China effect. So all that printed money inflated asset prices, and who own those
assets, other than the rich ? I have read dozens of articles in The Economist debating
whether Central Banks should burst asset bubbles, but never read any mention to a
connection between this process and inequality. Can anybody comment on this ?

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paul summerville Oct 16th 2012, 14:38
The new politics must marrying twin virtues, unequal outcomes and inequality of
opportunity. One very cold and snowy January day in Toronto during the 2006
Federal election I was knocking on doors with two loyal hard working volunteers. I
was campaigning as a star candidate for the quasi-socialist Canadian political party
the New Democratic Party. There was nothing particularly unusual in this except that
I had spent my professional life in investment banking for twenty years including
stints as the chief economist of countrys largest investment bank and as head of Asian
equity research for Lehman Brothers.
Accustomed to pigeon holes the media treated my candidacy as a `man bites dog` tale
of brand confusion. They weren`t the only ones; on this particular day the two
campaign workers trudging through the snow with me happened to be graduate
students at the London School of Economics and were confirmed socialists. This was
the first time I had campaigned with them and it wasnt long before they told me that
were both fundamentally opposed to my candidacy. They instructed me in no
uncertain terms that they were committed to social justice and since I had spent my

career in finance -- where outcomes were always unequal, unjust, and served no
purpose but to serve the rich -- they were convinced I could not simultaneously
believe that the market and social justice were in any way compatible. My candidacy
was therefore perverse but in Canada the NDP was the closest they could come to
ideological purity and so they always campaigned for their local candidate.
This incidentally wasn`t much different than some of my investment banking friends
but in reverse; since market outcomes were always fair the spoils going to the
smartest and hardest working, arguments for social justice and equality of opportunity
were simply a cover for the lazy and undisciplined.
What struck me then was how utterly convinced both sides were that the unequal
outcomes generated by the market and the equality of opportunity rooted in a
countrys attempt at social justice were incompatible, chalk and cheese.
However, far from being incompatible, the unequal outcomes created by a market
economy and equality of opportunity founded on key instruments of social justice are
in fact twin virtues to be embraced and celebrated. In fact, both the socialists and the
investment bankers are half right and make the case that unequal outcomes and
equality of opportunity are twin virtues the twin pillars of sustainable and competitive
countries to be embraced and celebrated. A new politics can change the language of
the debate and create a bridge between the seemingly incompatible arguments for
equality of opportunity and unequal outcomes.
A strong economy and social justice are two sides of the same coin and neither can
survive for long without the other.
With the fall of the Berlin Wall in 1989 the importance of unequal outcomes was
affirmed as proof that societies without market determined economic winners and
losers could not survive. Similarly, the financial crisis of 2007-2008, and the
repudiation of the Washington Consensus (the market is always right) demonstrated
that societies that ignored the importance of equality of opportunity expressed in best
in class justice, education, health and community outcomes were the least likely to be
able to compete in the new hyper-competitive global economy created over the past
quarter century. Communism failed because it was built on the flawed principle of
equality of outcomes while the economic collapse centred on the high income
countries in 2007-2008, and the painful recovery ever since, reminds us that
capitalism built on false promise of equality of opportunity is equally flawed and will
fail just the same.
The challenge is how to tax and regulate the economy in such way as to ensure
unequal economic outcomes provide the public revenue to invest in instruments of
social justice, namely equality under the law, world class public education, the science
of good health available to all citizens, and best in class public transportation.
Twinning unequal outcomes with equality of opportunity produces sustainable world
class community and economic outcomes that are the foundation for the next
generation of economic and social success. Successful societies ensure that peoples
lives are not simply dictated by the circumstances of their birth because societies will
fail where rich kids grow up to be rich adults and poor kids grow up to be poor adults.

'The Twin Virtues' view argues that the compatibility of unequal outcomes and
equality of opportunity is an important answer to many of the seemingly intractable
economic, political and social questions facing the world right now.

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