The Economist may rank among the world’s most prestigious publications, but it is easily among the most dishonest and deceptive newspapers in the English language. A classically liberal rag from the 1800s, it would more easily be classified as “libertarian” in American political terms. I know a good many of you admire this British magazine, so I will deconstruct a recent editorial (“leader”) on rising inequality in the world. They basically shrug the problem off and say it is perfectly natural and part of globalization and development. Their counterexamples also include many countries and leaders they have opposed editorially in the past. Let’s begin. First read the editorial “Inequality: The rich and the rest.” Below I will demonstrate their FOX News-for-the-global-elite-biases.
APART from being famous and influential, Hu Jintao, David Cameron, Warren Buffett and Dominique Strauss-Kahn do not obviously have a lot in common. So it tells you something about the breadth of global concerns about inequality that China’s president, Britain’s prime minister, America’s second-richest man and the head of the International Monetary Fund have all worried, loudly and publicly, about the dangers of a rising gap between the rich and the rest.
Mr Hu puts the reduction of income disparities, particularly between China’s urban elites and its rural poor, at the centre of his pledge to create a “harmonious society”. Mr Cameron has said that more unequal societies do worse “according to almost every quality-of-life indicator”. Mr Buffett has become a crusader for a higher inheritance tax, arguing that America risks an entrenched plutocracy without it. And Mr Strauss-Kahn argues for a new global growth model, claiming that gaping income gaps threaten social and economic stability. Many others seem to share their concerns. A new survey by the World Economic Forum, whose annual gathering of bigwigs in Davos begins on January 26th, says its members see widening economic disparities as one of the two main global risks over the next decade (alongside failings in global governance).
The debate about inequality is an old one. But in the wake of a financial crisis that is widely blamed on Wall Street fat cats, from which the richest have rebounded fastest, and ahead of public-spending cuts that will hit the poor hardest, its tone has changed. For much of the past two decades the prevailing view among the world’s policy elite—call it the Davos consensus—was that inequality itself was less important than ensuring that those at the bottom were becoming better-off. Tony Blair, a Labour predecessor of Mr Cameron’s, embodied that attitude. His New Labour party was famously said to be “intensely relaxed” about the millions earned by David Beckham (a footballer) provided that child poverty fell.
B.R. – This is interesting phrasing. Are they implying that the financial crisis was not due to Wall Street fat cats? Are public sector cuts not going to hurt the poorest? As for New Labour’s record on child poverty, the rate stagnated or increased the entire time Blair and Brown were in office.
Now the focus is on inequality itself, and its supposedly pernicious consequences. One strand of argument, epitomised by “The Spirit Level”, a book that caused a stir in Britain, suggests that countries with greater disparities of income fare worse on all manner of social indicators, from higher murder rates to lower life expectancy. A second thread revisits the macroeconomic consequences of income disparities. Several prominent economists now reckon that inequality was a root cause of the financial crisis: politicians tried to counter the growing gap between rich and poor by encouraging poorer folk to take on more credit (see article). A third argument is that inequality perverts politics, with Wall Street’s influence in Washington often cited as exhibit A of the unhealthy clout of a plutocratic elite.
If these arguments are right, there might be a case for some fairly radical responses, especially a greater focus on redistribution. In fact, much of the recent hand-wringing about widening inequality is based on sloppy thinking. The old Davos consensus of boosting growth and combating poverty is still a better guide to good policy. Rather than a sweeping assault on inequality itself, policymakers would do better to take on the market distortions that often lie behind the most galling income gaps, and which also impede economic growth.
B.R. – 1) is true but they try to disprove it. Within American counties, it has been shown that life expectancy depends on how equal the county you live in is. Low, middle and high class people all live longer in more equal counties. Public trust is higher in more equal American states and more equal nations.
2) inequality as a cause of the financial crisis is a huge issue. Too much money for the rich which they don’t know what to do with it. They speculate on it which causes crises for the rest of us. High taxation may suck and may be wasteful, but it doesn’t cause stock market implosions if the deficit is reasonable or gone. Ireland for that matter had a surplus every year until the crisis and it didn’t help at all. The idea of too much money in too few hands killing the economy was an idea of Mariner Eccles, the Fed chairman of the 1930s, and idea when he was just a small town banker in Utah.
3) Of course the plutocrats own Washington. And state capitals like Austin too (lobbyist seating is the state capitol referred to as the owner’s box). The Economist will never say whether that affects politics and poisons equality in democracy. Massive inequalities in wealth pervert democracy into plutocracy.
Begin with the facts about inequality. Globally, the gap between the rich and the poor has actually been narrowing, as poorer countries are growing faster. Nor is there a monolithic trend within countries (see article). In Latin America, long home to the world’s most unequal societies, many countries—including the biggest, Brazil—have become a bit more equal, as governments have boosted the incomes of the poor with fast growth and an overhaul of public spending to improve the social safety-net (but not by raising tax rates for the rich).
B.R. – but the rise of equality in South America is due to the rise of left governments (soft left to hard left). Governments which have policies of protectionism, anti-free trade, and political integration which the magazine always, always opposes. They laughed at the one time there was a regional integration conference on the lines of making a United States of South America, if they even bother to mention it. It is also funny to cite Brazil when the most free market nations in South America are disasters and have not seen much growth and worsening inequality (Mexico and Colombia). Neither had a left or liberal president anytime recently. Why would the Economist praise a coca leaf grower like Evo Morales in Bolivia? Or a union leader like Lula in Brazil? They wouldn’t and that’s the point.
Also as East Asia developed over the last fifty years (Japan, Singapore, Korea, Taiwan) they became more equal not less. India or China do not have to become more unequal to develop. Japanese-style capitalism actually has a strong state and protectionism.
The gap between rich and poor has risen in other emerging economies (notably China and India) as well as in many rich countries (especially America, but also in places with a reputation for being more egalitarian, such as Germany). But the reasons for this differ. In China inequality has a lot to do with the hukou system of residency permits, which limits internal migration to the towns; by some measures inequality has peaked as rural labour becomes more scarce. In America income inequality began to widen in the 1980s largely because the poor fell behind those in the middle. More recently, the shift has been overwhelmingly due to a rise in the share of income going to the very top—the highest 1% of earners and above—particularly those working in the financial sector. Many Americans are seeing their living standards stagnate, but the gap between most of them has not changed all that much.
The links between inequality and the ills attributed to it are often weak. For instance, some of the findings in “The Spirit Level” were distorted by outliers: strip out America’s high murder rate (which many would blame on guns, not inequality) or Japan’s longevity (diet, not equality), and flatter societies no longer look so much healthier. As for the mooted link to the financial crisis, the timing is dodgy: America’s poor fell behind in the 1980s, the credit bubble took off two decades later.
B.R. – The Economist wants everyone to move to the cities without permits in China? Well if you want Shanghai to become Bombay, be my guest. I think India could use this to prevent the concentration of economic might in a few metros and focus on developing second and third tier cities instead. I know it isn’t democratic, but it is good planning because people move to the cities in China only after a new planned suburb is made.
The American part is extremely dishonest. The top 1% has benefited since 1980, not recently. The middle is failing in America too and the median household income is the same or less than it was in the 1970s inflation adjusted. But in the 1970s most women weren’t working, and now most women are so people (especially men) are earning less. It’s a man-cession.
The line that the “credit bubble” for the poor began after 2000 is crap! Between 1980 and 2000, the percentage of people with negative net worth jumped up a lot. You don’t get negative net worth without credit. Bubble-mania in American economy is fueled by lots of excessive cash (dot-com boom and then housing). Of course middle class people got in on it, but only because Bank of America & Co approved the loans.
Message to Davos
These nuances suggest that rather than fretting about inequality itself, policymakers need to differentiate between its causes and focus on ways to increase social mobility. A global market offers far bigger returns to those at the top of their game, be they authors, lawyers or fund managers. Modern technology favours the skilled. These economic changes are themselves often reinforced by social ones: educated men now tend to marry educated women. The result of all this, as our special report this week shows, is the rise of a global elite.
B.R. – There is no question that a global CEO earns more than a purely American CEO. But why do they still get paid when they fail? Are they really worth the money? Is managing Medicare or Social Security less complex than a corporation? What about the spread of the CEO pay scales to the nonprofit sector (education, colleges, and Salvation Army outfits)? Is that the right mentality to have? IS there not “political” favoritism on corporate boards that gets the executives overpaid? If it was a government issue, it would be in the news. If it is Johnson and Johnson, no one bothers.
At heart, this is a meritocratic process; but not always. Rules and institutions are often rigged in ways that limit competition and favour insiders at the expense both of growth and equality. The rules can be blatantly unfair: witness China’s limits to migration, which keep the poor in the countryside. Or they can involve more subtle distortions: look at the way that powerful teachers’ unions have stopped poorer Americans getting a good education, or the implicit “too big to fail” system that encouraged bankers to be reckless and left the rest with the tab. These are very different problems, but they all lead to wider inequality, fewer rungs in the ladder and lower growth.
Viewed from this perspective, the right way to combat inequality and increase mobility is clear. First, governments need to keep their focus on pushing up the bottom and middle rather than dragging down the top: investing in (and removing barriers to) education, abolishing rules that prevent the able from getting ahead and refocusing government spending on those that need it most. Oddly, the urgency of these kinds of reform is greatest in rich countries, where prospects for the less-skilled are stagnant or falling. Second, governments should get rid of rigged rules and subsidies that favour specific industries or insiders. Forcing banks to hold more capital and pay for their implicit government safety-net is the best way to slim Wall Street’s chubbier felines. In the emerging world there should be a far more vigorous assault on monopolies and a renewed commitment to reducing global trade barriers—for nothing boosts competition and loosens social barriers better than freer commerce.
B.R. – I have no argument with improving education. But didn’t free trade destroy the lower middle class and the working class of America? Technology also eliminated many simple clerical jobs too. The neoliberal idea that putting everyone in college will cause a great economy is not true (it is addressed in this book). Not everyone is college-worthy. There needs to be good second-tier jobs too, and they need systems outside of colleges to get into them (the German apprentice program tradition comes to mind).
Social mobility is low in America and Britain which have high income inequality. The two are linked! They write rubbish. I say don’t destroy the rich and the rewards of being rich completely but limit it to something reasonable through government and non-governmental (cultural norms) means.
Such reforms would not narrow all income disparities: in a freer world skill and intellect would still be rewarded, in some cases magnificently well. But the reforms would strike at the most pernicious, unfair sorts of income disparity and allow more people to move upwards. They would also boost growth and leave the world economy more stable. If the Davos elites are worried about the gap between the rich and the rest, this is the route they should follow.
B.R. – the problem isn’t the money. Their existence is a crime. For more proof see this article on how high income inequality reduces growth.