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2012-10-15 12:23:57
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 America s robber barons and Europe s 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 Roosevelt s
trust-busting to Lloyd George s People s 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 reinvention to 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 America s 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 Fran ois
Hollande s proposed 75% income-tax rate. In much of the emerging world leaders
would rather sweep the issue of inequality under the carpet: witness China s
nervous embarrassment about the excesses of Ferrari-driving princelings, or
India s refusal to tackle corruption.
At the core, there is a failure of ideas. The right is still not convinced that
inequality matters. The left s default position is to raise income-tax rates
for the wealthy and to increase spending still further unwise 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 world s 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% now an 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
state-owned 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-to-fail 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 nobody s 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 world s 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 Union s 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 China s
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
increase for 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 America s 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 West s 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 Britain s Labour Party, is now trying to wrap himself in
Benjamin Disraeli s One Nation Tory cloak.
Such cross-dressing is a sign of change, but politicians have a long way to go.
The right s instinct is too often to make government smaller, rather than
better. The supposedly egalitarian left s 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 left s 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