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January/February 2016 Issue on Inequality

Expert Poll: Does Inequality Matter?

This podcast has been edited and condensed. A rush transcript is below. Music credit: / The Stealing Orchestra & Rafael Dionisio, Podington Bear


ALLAWALA: Around the world, incomes and wealth for the majority have stagnated even as they have skyrocketed for those at the top. As public anxiety over growing inequality has intensified, policymakers and academics have started scrambling for some increasingly extreme solutions. India, for example, has launched massive programs to provide the poor with food and jobs, and the French economist Thomas Piketty has famously proposed a redistributive global wealth tax. 

Today on the podcast, we explore what works and what doesn’t, from Brazil’s Bolsa Familia, to new kinds of taxes, to Donald Trump’s and Bernie Sanders’ own economic proposals. 

First up is Jonathan Tepperman, Managing Editor of Foreign Affairs, whose recent article on Bolsa Familia, the poverty fighting program that Brazilian President Luiz Inacio Lula da Silva put in place shortly after his election in 2003, appeared in the most recent issue of the magazine.

TEPPERMAN: Bolsa Familia was revolutionary in that it gave the poor cash. Now that had been a very controversial idea both in Brazil and the international development community for many years before that because the assumption was that if you gave the poor money, they would squander it on booze and cigarettes and cheap baubles and things like that. Lula who had grown up poor and was very proud of his heritage thought that that was ridiculous and was very attracted to this idea that maybe it would work well if you gave money to the poor directly. And in fact, multiple studies have since borne out that such programs do work very well because it turns out the best people who know what the poor need are the poor.

ALLAWALA: What also made the program revolutionary, Tepperman says, is that it attracted support not only from the poor and middle classes, but also from wealthy thanks to the conditions Lula put on the aid. 

TEPPERMAN: The mothers or families to qualify for the program would have to have an income below a certain level. But to stay in the program, to keep getting their benefits, they would have to meet several contrapartidas, as they were known in Portuguese or counterpart responsibilities. And these included making sure that children under 16 were regularly immunized, that they went to school 85% of the time. There were also several prenatal and neonatal conditions as well. Now why those conditions in particular? Because Lula was very concerned that the program not just alleviate poverty now but alleviate poverty in the future as well

ALLAWALA:  Of course, it didn’t hurt that Bolsa Familia was incredibly cheap as well. 

TEPPERMAN: This program which has lifted something like 50 million Brazilian citizens out of poverty, effectively eradicated extreme poverty in Brazil in 10 years which is an unparalleled accomplishment in human history, costs about 0.5%, half of 1% of Brazil's GDP. That's compared to be about 12% of GDP that Brazil spends on pensions every year.

ALLAWALA:  For all this, Brazil has a fairly colorful figure to thank: Lula

TEPPERMAN: Lula's family was so poor that when he was virtually a toddler, he was sent out to polish shoes on the street. He taught himself to read and write, talked his way into a factory at the age of 14, lost a finger in that same factory when he was about 19, but while... By the time he was in his mid to late 20s, he had become the president of the... This huge Brazilian union of steel workers and that became his platform to enter politics. Lula's biography is also important to the development of Bolsa Familia in another sense, which is the very canny way that he constructed it so that it would be broadly politically appealing.

ALLAWALA:  Lula had learned that lesson the hard way. Before he became president, he had already run for office and lost three times. Lula was a founding member of the Worker’s party, a party of Marxists that emphasized classic socialist measures, and had proved too extreme for most Brazilians in his first attempts at power. By the time he ran for the presidency for a fourth time in 2002, he had dropped that rhetoric. 

TEPPERMAN: He was very careful to pair Bolsa Familia with a lot of very conservative macroeconomic measures: Slashing debt, slashing unnecessary spending, going beyond even what the IMF recommended, in terms of budgets. And then constructing Bolsa Familia so that it included elements that would appeal both to the left and to the right. This idea of counterpart responsibilities, of conditioning aid to the poor, not only did it ensure that the... That poor children would get a better leg up than their parents had, but it gave wealthier Brazilians the impression that Bolsa was not a handout, that it represented a social contract with the poor, under which the government would do its part but the poor would do their part as well, and if the poor didn't they would get bounced out of the program.

ALLAWALA:  Of course, good intentions didn’t always translate into action.

TEPPERMAN: A scandal erupted after a television program on the Globo, which is an infamously anti-Lula network, discovered that the government wasn't really following through on its implementation and monitoring measures, and the public outcry was enormous. Rather than responding defensively or trying to sweep it under the carpet, he acknowledged the mistakes and he launched a enormous new campaign with a whole slew of measures for monitoring the program, which would ensure that the abuses that had been occurring up 'til that point ended, and in fact they did.

ALLAWALA: In the end, Bolsa Familia persisted. The program has helped increase vaccination rates to 99 percent of the population, decreased malnutrition among children in Brazil’s poorest regions by 16 percent, and increased their chances of having a healthy weight-to-age ratio by 26 percent. Infant mortality has dropped by 40 percent in the last decade, with deaths from malnutrition down by 58 percent—one of the sharpest reductions ever seen anywhere. Meanwhile, the number of children forced to work instead of attending school has fallen by 14 percent. Overall, economists calculate that since its launch, Bolsa Família has increased Brazil’s GDP growth by 1.78 real for every one handed out.

TEPPERMAN: Given how successful Bolsa Familia has been in Brazil, it's probably no surprise that the program has been widely copied around the world. At this point, more than 40 countries have launched similar programs. At this point, almost every country in Latin America has a parallel program. And countries as far afield as Bangladesh and Turkey have started them as well. Most have proved very successful.

ALLAWALA:  As for whether similar programs could be exported to the United States or Europe, the outlook is mixed.

TEPPERMAN: The real test for Bolsa and for conditional cash transfer programs is whether they can work in the developed world or not. There are obvious reasons why it's more difficult to run a program like that there. The first is that the amount of money would have to be a lot higher. And that could possibly threaten what was one of Bolsa's key value propositions, which was its radical cheapness. The second is that people in the developed world tend to be more resistant to what are seen as the, understandably, the more paternalistic aspects of Bolsa. That doesn't mean that the program has not been tried. In fact, it's been tried in New York City. Under the Bloomberg administration, a trial program was launched in the middle 2000s called Opportunities NYC. And, while it had mixed results and was eventually terminated, it was successful enough that it did manage to improve, for example, education outcomes for families participating in the program and is now being tried again under the De Blasio administration. And one or two other cities in the United States are trying it as well.

ALLAWALA: We just heard Jonathan Tepperman on Bolsa Familia. With all the difficulties of implementing a similar cash transfer program in the United States or Europe, some prefer other solutions. Next, Foreign Affairs’ Stuart Reid talks to Anthony B. Atkinson, who is a professor at the London School of Economics and author of the recent Foreign Affairs article “How to Spread the Wealth.”

REID: You write that politicians have tended to focus on reducing inequality through things like more education and more training to the extent that they focus on inequality at all. Why are those things not sufficient to tackle the problem?

ATKINSON: I think that's for a number of reasons. One is that it's directed at what people earn in wages. Whereas an important part of income is that which comes from capital and that isn't being addressed. And then the second part is that it's not clear that improving people's education, which is what it usually means or training, is going to be enough to overcome the fact that pay isn't determined only by education. Pay is determined by many things and the explosion at the top of the pay scale has nothing much to do with human capital.

REID: And, you proposed a number of specific methods for dealing with inequality. One of them is a tax on all wealth received over one's lifetime in the form of bequests and gifts. Could you explain this a bit more?

ATKINSON: And I think you'll find most people on both sides of the American political spectrum agree that there should be a level playing field. And if you then ask, why is a playing field not level? It's not leveled for a number of reasons but one of the important reasons is that some people, a small number of people, start off with substantial amounts of inherited wealth and other people start off, or most people start off with relatively little. And so what I was proposing was that the amount that people's sort of start in life, which may come at various points in their life, should be added up and then as that sum adds up, so one should increase the amount of tax that's paid. And so it becomes a sort of lifetime accumulation of tax on inherited advantage.

REID: And that should be used to fund, you write, a minimum inheritance for everyone reaching the age of 18.

ATKINSON: One of the purposes of tax is to raise revenue to, as well, offset the advantage by giving a transfer to people who have no... Or to, in fact, give everyone a start in life based on a minimum inheritance, which wouldn't be very large, but at a time when people are, for example, facing difficultly funding their education or funding getting on the housing ladder or wanting set up a small business, then the kind of sum could be sufficient to be important.

REID:  Another proposal of yours that's received support before, although with a different name, is the, what you call a participation income, similar to what others including Milton Friedman have called, a negative income tax. Could you explain a bit about how this would work?

ATKINSON:Yes. Well if you don't want to make it appear very radical, then you say, as Milton Friedman did, what you're doing is essentially giving people the cash value of their tax allowance. And the tax allowances at the moment are worth something to people because it saves them paying tax and, of course, the advantage from that goes up the bigger your income. What he proposed and what I suggested is, we should in fact give people the cash value of that which then would be the same for everyone, it wouldn't be more for a person with a million than a person with nothing. And so that's the first element. The second element is, the conditions under which this is provided and I think that's where the participation income is a little different from, say, proposals for a citizen's income which some countries have been discussing in that it would be related to people taking part in society and in the economy.

REID: So the idea is to retain the incentives for contributing to society?

ATKINSON: Well I think it's really... It's to define who is participating and it's looking at the notion of a society as a mutually... A society which people are both contributing and benefiting.

REID: Another interesting proposal of yours involves a sovereign wealth fund and sort of grouping together assets into one of these funds. How would this help combat inequality?

ATKINSON: Well the thinking behind this reflects the fact that we're talking a lot about the government debt but we don't talk at all about the government's net wealth position. So, we don't look at the assets side of the account. And over the last 20 or 30 years, the asset side of the account, certainly in my own country, has deteriorated. So, whereas we used to have substantial assets owned by the State, the value of that now is probably no more than the national debt. And so what I was concerned with was, with the role that the net worth of the state can play in providing an alternative way of financing, for example, something like the participation in ____ transfers.

REID:  You've made these proposals seem both sensible, non-radical, and workable. All those things. But the question is, do politicians actually care enough about inequality to put these things in place? How optimistic are you that advice like this will get taken?

ATKINSON: Well I was really concerned with two things, one was to actually put them on the agenda, and I think that there has been a narrowing of the agenda. And the second thing is, if one likes, hold the feet of the politicians to the fire. And say, "If you're serious," and they've been making public statements that they are concerned about inequality whether of opportunity or of outcome, "Then if you're concerned, what are you going to do about it and I'm saying here are a list of things and if you don't like any of these, what are you going to do?"

ALLAWALA:  That was Stuart Reid talking to Anthony Atkinson. For a sense of how these questions are playing out in the ongoing U.S. presidential race, I spoke with Kimberly Morgan, a professor at George Washington University.

MORGAN: Yes, I think inequality is going to be a major political question. It already is, and as there are no signs of an abrupt reversal of inequality, I think it will continue to be a hot political question. 

ALLAWALA:  That’s Kimberly Morgan.

MORGAN: You see that very much in the campaign that's going on in the United States right now, that we have two sides, the far left and the far right, in essence the Sanders crowd versus the Trump crowd both of whom, I think, are embodying a backlash against current politics and policy, that has left a lot of people feeling left out of the economy and a lot of people are really struggling and unhappy with inequality.

ALLAWALA:  Do you think in the United States in particular, that it's economic inequality is the main issue or are there political and social inequalities that play into this as well.

MORGAN: I think economic inequality is very much linked with social and political inequality, so the three forms of it are hard to really disentangle. Just to give an example, you know, economic inequality seems very much tied with political participation, and really in turn who has power in politics? I think there's a good bit of political science research showing that those in power in Washington or in the various states around the country tend to listen more to the better off than they do to ordinary people, working class people, middle class people. One of the reasons why someone like Donald Trump or Bernie Sanders has gotten the support that they have, is because people feel like their voices are not being heard and they feel like they need to shout to be heard.

ALLAWALA:  If there is a Trump or a Sanders win, how would you see social welfare programs to address inequality, political or social or economic changing in the coming years?

MORGAN: Well, I think someone like Bernie Sanders has laid out a pretty clear agenda of reforms that would try to tackle something like economic inequality. Now whether any of that could ever pass is another question. But he does have a platform that looks very similar to a social-democratic platform that you would find in a lot of European countries, and that has been shown to successfully reduce inequality in a lot of those places. Somebody like Donald Trump on the other hand, it's less clear because he doesn't really hue to a clear platform of policy ideas other than things like closing the border to trade, closing the border to immigration. And if those things were to an effect on economic inequality, it would be something that would unfold very far in the future. 

ALLAWALA:   Compared to other countries where does the United States stand on social welfare?

MORGAN: Well, the United States is an interesting case in the sense that we spend an awful lot on social welfare programs, but we don't do a lot with those programs and the various subsidies and supports we give to people through the tax code, for instance. All of those don't amount too much in the way of reducing inequality. So if you look at our welfare system versus that of say France, Britain, the Netherlands, Australia, in those places social welfare policy is often much more progressive in its effects. It does a lot more to redistribute income from those in the upper tiers to middle class and working class people. In the US by contrast, our social welfare system does not redistribute much in that way. And in fact a lot of what we spend the money on through the Tax Code, for instance, the various subsidies that we deliver to people through the Tax Code, very much benefit the people in other upper tiers.

So if you look at how much we spend, for instance, in the home mortgage interest deduction, which is a huge budget item and a massive subsidy to home owners, that flows very much to people in the upper tiers of the income brackets. Whereas, in the other countries, the housing support system often is geared much more towards supporting renters.

ALLAWALA:  I'm curious to hear how the United States came to rely so heavily on tax breaks as the main form of social welfare.

MORGAN: I think there's a number of different arguments that people have put forward about that. One is that our political institutions are quite difficult to get any kind of legislation through. You have to have a very large majority in Congress, and usually control of both the Presidency and Congress. I think as a consequence of those very difficulties, it's been in a sense easier to go through what we might call the 'back door', the Tax Code and subsidize people in that way. In a sense, that can be viewed as simply giving people their money back, and in a sense, give people tax cuts which is a lot more popular than actually taxing people and then spending it.

ALLAWALA:  If you were brought on as an adviser to whoever the next president might be, what are the top one or two things that you would suggest that the United States should do to start addressing inequality?

MORGAN: I think we need to think about a massive investment program in families and children, in things like good quality child care, early childhood education, basic subsidies to families so that families are pulled up from poverty and children do not live in poverty at the high rates that they currently do. Things like paid parental leave, paid sick leave, all these things would make it much easier for working parents to work and earn incomes and support their own families, and I think could really make a big difference. This is really one of the areas where the US is most cross-nationally unique. There's a lot of ways our welfare system looks different from other countries, but we really differ from others in our willingness to tolerate an extremely high level of child poverty. And I think if you wanna start to tackle inequality, you have to start at the very youngest and think about investing in those people.

ALLAWALA:  That was Kimberly Morgan talking to me. She leaves off back where we started, with programs like the one in Brazil meant to address childhood poverty and inequality.

We’re curious to hear what you think about the topic—what would you like to see governments do or stop doing? You can reach us at [email protected]. And, as always, don’t forget to leave us a review or a rating on iTunes. It’s easy and it helps us a lot!