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In part one of a two-part series on inequality, we delve into the rise of inequality, when and why it matters, and what to do about it. Featuring Gideon Rose, editor of Foreign Affairs; Allison Schrager, a New York–based economist and writer; and Ronald Inglehart, a professor at the University of Michigan.
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Inequality and Modernization by Ronald Inglehart
This podcast has been edited and condensed. A rush transcript is below. Music credit: FreeMusicArchive.org / The Stealing Orchestra & Rafael Dionisio, Podington Bear
ALLAWALA: This is Foreign Affairs Unedited, and I’m Katie Allawala. Today on the podcast, we’re tackling inequality, the topic of the January/February 2016 issue of the magazine. We’ll delve into the rise of inequality, when and why it matters, and what to do about it.
First, we go to Foreign Affairs Editor Gideon Rose.
ROSE: A rise in economic inequality is one of the defining features of our time.
ALLAWALA: It’s explained, he says, as the result of two trends.
ROSE: One is a rapid rise in the wealth of the very top of the economic distribution. So you have a thin slice at the very top of the income distribution that's seeing their incomes rise dramatically, much more so than in previous decades.
ALLAWALA: The second trend it what is happening to the other classes.
ROSE: For the entire rest of the population, not just the poor, but the poor, the middle class, even what used to be called the upper middle class, you're seeing, essentially, economic stagnation.
ALLAWALA: As to what is causing these trends, there’s a combination of three things.
ROSE: One, technology that is allowing lots of gains to accrue to very small numbers of people. Think of the giant technological firms that are dominating the economy today. They have a tiny fraction of the workers and a tiny fraction of the stakeholders that the mass industrial concerns of earlier generations did. So the profits that they generate go to a very small group of people and the benefits accrue there. Second, you have globalization, which is creating a global market, in which the poor and middle layers of society in the developed world are getting squeezed out because their work can be done by people in the developing world. So the global poor are rising, but the poor and middle classes in the advanced industrial world are being squeezed. Finally, the rich have created policies that essentially, allow them to perpetuate and keep more of their wealth. Taxes have been lowered, social benefits have been cut, and various policies favor the accumulation of wealth in the advanced industrial world rather than the spreading of wealth.
ALLAWALA: There’s some debate about whether inequality really matters. In fact, we recently asked a broad pool of experts for their opinions on whether, if left unaddressed, economic inequality will cause major political upheavals in the developed world over the next generation. Eight respondents disagreed and two were neutral. As Gideon explains.
ROSE: Some would say, "No," because if money is going to people who make it in legitimate ways, why should that bother anybody? Why should anybody begrudge Bill Gates his fortune, or Steve Jobs his fortune? If they're producing things that benefit everybody it doesn't hurt anybody else, so why does it matter if the rich are getting richer if they're doing so in legitimate ways? Well, and that's, to a certain extent, true. There's always gonna be inequality in a capitalist society, and that's both necessary as an incentive and legitimate as a reward for work for creativity, for productivity and so forth.
ALLAWALA: On the other hand, 20 of the experts we polled did expect inequality to cause major political upheaval.
ROSE: There is some reason to believe that some of the rise in economic inequality that we're seeing today is the product of politics, not just the normal workings of economics; that there are policies that essentially, have allowed the rich to game the system to take more of the share for themselves.
Second, there's good reason to believe that development is easier and better if society is more egalitarian. You're gonna get more talents and productivity out of a population that is relatively well off and that has a lot of opportunity, rather than one that's dramatically skewed. And finally, there's reason to believe that equality is necessary for a healthy functioning of a robust democracy.
ALLAWALA: That was Foreign Affairs editor Gideon Rose. In conducting our survey, we at the magazine were particularly intrigued by one of the respondents, Alison Schrager, a New York-based economist, who marked “neutral.” Foreign Affairs’ Rebecca Chao spoke to hear to learn more.
CHAO: In her full response to our survey, Schrager wrote that “Inequality needn’t be a big issue if there is sufficient economic mobility,” that is, if there are reasonable opportunities for people to change their economic class. Economic mobility can be measured in many ways, including income and total wealth, and over generations or individual lifespans. For Schrager, the most important thing is that people have expectations of a brighter future.
SCHRAGER: Yeah. I think really what matters is, in terms of society, everyone, sharing wealth, and seeing improvements in their quality of life and their standards of living. And if everyone... If high tide is really raising all boats, then really everyone's better off, and it matters less that the high tide's raising some boats a little bit more than others.
SCHRAGER: Like, for instance, you could argue that there was a lot less inequality in the 1950s, but you wouldn't wanna go back to the standard of living we had in the 1950s either in terms of life expectancy, in terms of comfort, in terms of a lot of things.
CHAO: What about in other countries? Can you give us some examples of societies where there is, perhaps, high inequality and high mobility or a combination of those?
SCHRAGER: Europe definitely has a lot more mobility in terms of getting the lower class into the middle class, but they also have a lot less inequality when it comes to the entire population. Of course, on the other hand, there is evidence that the very top one percent in European countries is a lot more entrenched, like you see a lot more old family money in the top one percent as opposed to in America. While it might be very hard to become lower class to middle class, almost everyone in the top one percent is self-made.
CHAO: I asked her about the policies that drive the differences between the United States and Europe.
SCHRAGER: Well, to some degree, it's tax policy. That's certainly important. What sort of taxes you have on inheritances, on taxing income versus taxing wealth. In Europe, they tend to tax income more than wealth, which might be why you have more persistent, very rich people at the very top as opposed to... And you get more mobility from the lower to the middle. And also, policies are on entrepreneurship. If in America, a lot of the top one percent are self-made people, then if you have a system that encourages more entrepreneurship and has less red tape, then you're gonna get a little bit more mobility.
CHAO: You recently wrote an article for us that inequality illusion, that a wealth tax is not the solution, and it's a bit counterintuitive. Can you explain to us why a wealth tax doesn't work?
SCHRAGER: Well, first of all, it's really hard to enforce. And when you start taxing wealth, not only is it really hard to implement, but it also discourages saving and capital accumulation which are really important to growth. There's much more efficient ways to collect revenue from high income or high wealthy people, including taxing capital income, so the returns on what you're earning from the stock market like dividends or capital gains. Or even better, taxing consumption, like taxing more very high end luxury goods.
CHAO: then apart from taxes, what are some other solutions that you see could address the inequality issues, either in wealth inequality or income inequality?
SCHRAGER: Well, I guess it depend. Do you just want to shrink the distribution? Do you just want more equal outcomes? In which case, yeah, you can just take away income from people. Or is the goal making sure that there's more equality of opportunity? Are you worried that the negative outcome with inequality is it sort of stacks the deck for certain people and leaves other people behind? In which case you would perhaps instead want to have more progressive taxation, probably more through a consumption tax than a wealth tax, and then you'd maybe want to channel those resources into improving education for lower income or disadvantaged people so they can have a better chance of getting ahead.
CHAO: To close things out, I asked Schrager what outcome she thought the United States was focused on. Unfortunately, she said, for the United States, it doesn’t seem like alleviating inequality is even a goal. In terms of whether other countries do better, it depends on what part of inequality you’re worried about.
SCHRAGER: A lot of people point to Scandinavian countries, 'cause they have decent mobility and fairly tight income distribution. So as I mentioned before, they also have really entrenched one percent of family dynasties. So if your concern is that the rich got richer and they stay rich, then Scandinavia's not a great example. But if your concern is more mobility and more equality throughout most of the population, they look like a great example.
ALLAWALA: That was Rebecca Chao talking to Alison Schrager. For a look at the history of inequality, we talked to University of Michigan Professor Ronald Inglehart. In a recent article for Foreign Affairs, he wrote that “during the past century, economic inequality in the developed world has traced a massive U-shaped curve.”
INGLEHART: The level of inequality was quite high at the end of the 19th century, start of the 20th century. During most of the 20th century, it descended in the US and in most other developed countries: Britain, France, Germany, Canada, etc. That was due, I argue, largely to the mobilization of the working class. In that period, labor unions and labor oriented political parties became increasingly powerful.
ALLAWALA: And so, in the United States, we eventually got the New Deal, Social Security, pensions, and the burden of taxation on the top earners increased. All in all, the policies pushed inequality down substantially. As Inglehart writes in his article, in 1915, the richest one percent of Americans earned roughly 18 percent of all national income. Their share plummeted in the 1930s and remained below ten percent through the 1970s. In Europe, he says, something comparable happened.
INGLEHART: Unfortunately, around 1970, the trend began to reverse itself for a number of reasons. One was changes in the structure of the workforce. The percentage of the workforce that consisted of industrial workers began to decline. There was a shift toward a service economy, and organized labor became a less and less important part of the workforce.
ALLAWALA: In turn, he says, the pressures that resulted in programs like the New Deal evaporated and new issues rose to the fore.
INGLEHART: There was a shift in the prominent issues. The one reason was that the extreme problems of poverty of many workers in the late 1930, 20th century, have been alleviated to some extent. Another was a change in basic values. There was a shift or a rise of new values and new issues like gender equality, abortion, divorce, equal rights for gays or emancipation in the case of lesbians.
ALLAWALA: With organized labor dwindling and economic equality a less salient issue, income inequality again started to rise.
INGLEHART: The United States has moved to the point where it's now cast an even higher level of economic inequality than it did in the 1890s, 1900, 1910, the era of the robber barons and so forth when labor unions were illegal, the workers were badly exploited. Income inequality in this country is very steep, much more so than in other countries.
ALLAWALA: The inequality trend is not limited to the United States. Around 1900, for example, Sweden had considerably more income inequality than the United States.
INGLEHART: The US was thought of as the land of opportunity, everybody had a chance to get ahead. As time went by, the rise of working class politics, the re-distributive issues, had an even greater impact in the Nordic countries, Sweden again in particular, than in the United States. All of these countries had declining income inequality until about 1970, but the degree to which there has been a snap back varies a lot. It reflects government policies to a great extent. US has been outstanding. We're really leading the world in the extent to which the top 1% have made practically all the economic gains in the last 30 years.
ALLAWALA: In fact, by 2007, the top one percent’s share of national income had risen to 24 percent. With that gain has come all sorts of political benefits that have only deepened inequality. Inglehart explains, though, that things may be reaching a tipping point.
INGLEHART: Basically, as I mentioned, the gains have gone almost entirely in the 1990s to the top 1%; 99% of the population is being left out of the progress of the last 25 years. This is a huge potential. It means that not just the old working class, the middle class, middle management, professionals, lawyers, doctors, all of them are being turned into commodities. They're being squeezed. For example, tenure, people used to go into academic life expecting they get tenure. Nowadays, about 75% of the teaching is done by part-time people on precarious jobs with reduced income. This is happening in the legal profession. Once had huge demand for young lawyers who would do research, now that's being done by computers. The medical profession has been taken over by big cartels that can squeeze. They can pretty much dictate the terms of employment to doctors who are being turned to employees with much less bargaining power than it used to be. In short, it is not just working class versus middle class now.
ALLAWALA: In fact, the confrontation is now between the vast majority – the 99 percent – and the top one percent.
INGLEHART: It's a matter of getting what Marx would have called "class consciousness". And there are signs that it's growing. I do surveys indicating concern over income inequality. In the last 30 years, it has risen quite a lot. I think it's a question of mobilization of the 99%. Obviously, in terms of elections, the 99% versus 1% is no contest. It's a question, however, of moving toward a new alignment where a large share of the 99% is aware they have a common interest that it's no longer the middle class, working class struggle that originally underlay the Republic and Democratic skew. I would say that the outlook is very promising. The 99% are clearly the majority, and you don't have to get all of them and would never possibly get all of them on one side, but it's a big enough constituency that it is the basis for a winning coalition. It's a question of awareness and consciousness of a common interest.
ALLAWALA: Inglehart had this to say about where the awareness might come from.
INGLEHART: I think just laying out the facts, the facts that 25 hedge fund managers make more than all the kindergarten teachers in America. It's a matter of pointing out that we are not investing in things we need to invest in. There was a massive shift in consciousness from the 1920s to the 1930s, and major changes were implemented by the political system. I think that a democracy has the advantage of that. If a majority of the electorate becomes aware of a new problem, which this is, Then inequality will rise. In Abraham Lincoln's terms, "You can fool all of the people some of the time and some of the people all the time." I don't think it can fool the 99% all of the time. A large enough share to take control of the political system are likely to recognize the simple fact that their interests are not being served by the present configuration.
ALLAWALA: When they do, the inequality that has plagued the developed world for so many decades might finally ease.
That’s all for this week. Join us in two weeks for part two of our series on inequality. In the meantime, please leave a review on iTunes to help others find the show!