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Nothing would do more to increase the incomes of all
citizens - poor, middle class and rich - than an increase in demand, which
would bring with it increases in incomes, living standards and confidence.
A more rapid recovery than now appears likely would reverse,
at least partially, a growing disillusionment with almost all institutions and
doubts about the future.
It would be, however, a serious mistake to suppose that our
only problems are cyclical or amenable to macroeconomic solutions. Just as
evolution from an agricultural to an industrial economy had far-reaching
implications for society, so too will the evolution from an industrial to a
knowledge economy.
Witness structural trends that predate the Great Recession
and will be with us long after recovery is achieved. The most important of
these is the strong shift in the market reward for a small minority of persons,
relative to the rewards available to everyone else.
In the United States, according to a recent CBO study, the
incomes of the top 1% of the population have, after adjusting for inflation,
risen by 275% from 1979 to 2007. At the same time, incomes for the middle class
(in the study, the middle 60% of the income scale) grew by only 40%.
Even this dismal figure overstates the fortunes of typical
Americans; the number unable to find work or who have abandoned the job search
has risen.
In 1965, only 1 in 20 men between ages 25 and 54 was not
working. By the end of this decade, it will likely be 1 in 6 - even if a full
cyclical recovery is achieved.
To highlight the disturbing trends in a different way, one
calculation suggests that if income distribution had remained constant in the
US over the 1979-2007 period, incomes of the top 1% would be 59% or $780 000
lower, and the incomes of the average member of the bottom 80% of the
population would be 21% or over $10 000 higher.
Those looking to remain serene in the face of these trends,
or who favour policies that would disproportionately cut taxes at the high end
and so exacerbate inequality, assert, for example, that what could be called
"snapshot inequality" is not a problem, as long as there is mobility
within people's lifetimes and across generations.
The reality is that there is too little of both. Inequality in lifetime incomes is already only marginally smaller than inequality in a single year.
And tragically, according to the best available information,
intergenerational mobility in the United States is now poor by international
standards, and, probably for the first time in US history, no longer improving.
To take just one statistic, the share of students in college
coming from families in the lowest quarter of the income distribution has
fallen over the last generation, while the share from the richest has actually
increased.
Given the pressures associated with recession, it appears
that more elite American colleges and universities have dropped need-blind
admissions than have adopted it in recent years.
Why has the top 1% of the population done so well relative
to the rest of the population? Probably the answer lies substantially in
changes in technology and in globalisation.
When George Eastman revolutionised photography he did very
well, and because he needed a large number of Americans to carry out his
vision, the city of Rochester had a thriving middle class for two generations.
When Steve Jobs revolutionised personal computing, he and
the shareholders in Apple (who are spread all over the world) did very well,
but a much smaller benefit flowed to middle class American workers, both
because production was outsourced and because the production of computers and
software was not terribly labour intensive.
In the same way, the moves from small independent bookstores to megastores like Barnes and Noble, and now to Amazon and e-books, have meant that more books at less cost are available to consumers, but also mean fewer jobs for middle class workers in retail, publishing and distribution, and greater rewards for superstar authors and entrepreneurs who are transforming the way content is delivered.
One other manifestation of progress is that increasingly
sophisticated financial markets have provided ever-greater opportunities for
those like Warren Buffett, with the ability to detect errors in prevailing
valuations, to profit handsomely.
There is no issue that will be more important to the
politics of the industrialised world over the next generation than its response
to a market system that distributes rewards increasingly inequitably, and
generates growing disaffection in the middle class.
To date, the dialogue has been distressingly polarised. On one side, the debate is framed in zero-sum terms and the disappointing lack of income growth for middle class workers is blamed on the success of the wealthy.
Those with this view should ask themselves whether it would be better if the US had more entrepreneurs like those who founded Apple, Google, Microsoft and Facebook, or fewer. Each did contribute significantly to rising inequality.
It is easy to resent the level and the extent of the increase in CEO salaries in the United States, but it bears emphasis that firms that have a single owner, such as private equity firms, often pay successful CEOs more than public companies do.
Slicing of the growth pie
And for all their problems, American global companies over
the last two decades have done very well compared to those headquartered in
more egalitarian societies. When great fortunes are earned by providing great
products or services that benefit large numbers of people, they should not be denigrated.
At the same time, those who are quick to label any
expression of concern about rising inequality as either misplaced or a product
of class warfare are even further off base.
The extent of the change in the income distribution is such
that it is no longer true that the overall growth rate of the economy is the
principal determinant of middle class income growth - how the growth pie is
sliced is at least equally important.
The observation that most of the increase in inequality
reflects gains for those at the very top - at the expense of everyone else -
further belies the idea that simply strengthening the economy will reduce
inequality.
Indeed, focusing on American competitiveness, as many urge,
could easily exacerbate inequality while doing little for most Americans, if
that focus is placed on measures like corporate tax cuts or the protection of
intellectual property for companies who are not primarily producing in the
United States.
What then, is the right response to rising inequality? There
are today too few good ideas in the political discourse, and the development of
better ones is crucial to our democracy. But here are several:
First, government must be careful to insure that it does not
facilitate increases in inequality by rewarding the wealthy with special
concessions.
Where governments dispose of assets or allocate licences, there is a compelling case for more use of auctions to which all have access.
Where government provides insurance - implicit or explicit -
it is important that premiums be set as much as possible on a market basis
rather than in consultation with the affected industry. A general posture for
government of standing up for capitalism rather than particular well-connected
capitalists would also help.
Second, there is scope for pro-fairness, pro-growth tax
reform. A time when more and more great fortunes are being created and
government has larger and larger deficits is hardly a time for the estate tax
to be eviscerated.
With smaller families and ever more bifurcation in the
investment opportunities open to the wealthy, there is a real risk that the old
idea of "shirt sleeves to shirt sleeves in three generations" will be
obsolete, and those with wealth will be able to endow dynasties.
There is no reason why tax changes in a period of sharply
rising inequality should reinforce the trends in pretax incomes produced by the
marketplace.
Third, the public sector must insure that there is greater
equity in areas of the most fundamental importance. It will always be the case
in a market economy that some will have mansions, art, and the ability to
travel in lavish fashion.
What is far more troubling is that the ability of children of middle class families to attend college has been seriously compromised by increasing tuitions and sharp cutbacks at public universities and colleges.
At the same time, in many parts of the country a gap has
opened between the quality of the private school education offered to the
children of the rich and the public school education enjoyed by everyone else.
Most alarming is the near doubling over the last generation,
in the gap between the life expectancy of the affluent and the ordinary.
Neither the politics of polarisation nor those of noblesse
oblige on the part of the fortunate will serve to protect the interests of the
middle class in the post-industrial economy. We will have to find ways to do
better.
- Reuters
* Lawrence H Summers is the Charles W Eliot University Professor at Harvard and former US Treasury Secretary.
