The Danger in Today’s Good Economic News
Failure to stem the rise of inequality will fuel social tensions and already-resurgent nationalism, producing disruptions that will ultimately lead to losses for everyone. That is why today’s good growth news may not be as promising as many believe.
WASHINGTON, DC – As 2018 begins, things are looking up for the global economy. Over the last six months, growth projections by official institutions like the International Monetary Fund, matched or even exceeded by private forecasts, have been adjusted upward. But not all of the news is good.
To be sure, there are plenty of positive indicators to inspire optimism. The eurozone Purchasing Managers’ Index for manufacturing hit an all-time high last month, and even Greece’s economy is finally growing. In the United States, growth now appears likely to exceed the IMF’s October prediction of 2.3% for 2018.
In the emerging world, China seems to have staved off the risk of a sharp slowdown: while its economy is no longer achieving double-digit growth, its increased size implies that, in absolute terms, today’s 7% annual rate exceeds the 10% rates of the past. Turkey, for its part, posted 11% growth in the third quarter of 2017. Even Brazil, which experienced negative growth in 2016, is likely to exceed the IMF’s forecast of 1.5% growth in 2018.
As the real economy strengthens, equity values – which, for a time, seemed disconnected from fundamentals – are increasingly being validated. The Financial Times Stock Exchange All-World Index rose by nearly 22% in 2017 – its best performance since the post-crisis rebound of 2009.
As the growth pessimism of recent years fades, some of the warnings that have been made in recent years seem to have become outdated. Northwestern University’s Robert Gordon, for example, argued that the US economy was bound to slow down, because today’s technological innovations would not boost growth to the extent they had in the past. Harvard’s Lawrence H. Summers got a lot of attention for his argument that the world risked sliding toward “secular stagnation,” because the interest rate needed to bring desired investment in line with desired savings was below zero.
Yet, while the zero lower bound no longer seems to be a binding constraint, there are potential causes for concern, one of which relates to debt levels. With the advanced economies no longer needing to maintain extraordinary monetary policies, nominal interest rates are set to climb from their current historic lows. As that happens, high debt levels could become problematic, impeding growth by triggering disorderly deleveraging. That said, given low inflation, there is little reason to expect interest rates to rise sharply, and gradual monetary-policy normalization would not necessarily have negative effects on growth or inflation.
But there is another potential obstacle in the path of sustained recovery: the long-term decline in productivity growth has not yet been reversed. Instead, the current boom seems to be demand-led, with private consumption being the biggest driver, though private investment, too, is finally starting to rise. These trends have been accompanied by solid employment growth, which is welcome news, but cannot last forever.
In the longer run, economic performance and potential growth will depend on the supply side and, in particular, on a revival of productivity growth. Techno-optimists claim that technology will fuel the needed gains, as the lag between digital capabilities and their applications in the economy shortens. But it is too early to say, with any evidence-backed certainty, whether they or techno-pessimists like Gordon are right. There are convincing arguments on both sides, though we count ourselves as cautious techno-optimists.
What is not really up for debate is that inequality within countries is rising fast. While individual countries show different levels of inequality, its rise has been evident almost everywhere, with income and wealth increasingly concentrated at the very top. This trend will accelerate as new technologies, regardless of how much productivity growth they generate, continue to increase the skill premium, shift income to frontier firms, and allow new types of near-monopoly, “winner-take-all” positions to develop on a global scale.
Herein lies the biggest danger in today’s exuberant headlines about growth. Many believe that rapid growth can act as a virtual panacea for countries’ political and social woes, including the rise of populism and nationalism. But if the benefits of rapid growth accrue to the top 5% or 1%, social tensions are bound to rise. And the fact is that it will be difficult to develop policies that can reverse damaging political trends and promote more widely shared growth.
This is not to say that nothing can be done. On the contrary, devising solutions should be a high priority, with the policy debate centering on measures that would help to create truly inclusive economies.
One such measure would be broad-based access to affordable and quality education, including skills upgrading and retraining. The development of regulatory frameworks that encourage competition would also help, as would limiting tax-base erosion. Public research should be funded in a way that gives taxpayers a stake in profitable outcomes. Likewise, infrastructure investments should have explicit equity-related objectives. The goal should be to attack inequality on two fronts: ensuring that pre-tax incomes rise in a more inclusive fashion and strengthening the equalizing role of taxes and transfers.
Given the global nature of markets, many policies will require international cooperation to be effective. With issues concerning international trade, investment, competition, and intellectual property rights increasingly linked, global approaches that can address them in a holistic way have become vital.
Failure to achieve greater inclusiveness – a difficult but attainable goal – would stoke social tensions and fuel already-resurgent nationalism, producing disruptions that would ultimately lead to losses for everyone. Yet today’s good growth news risks obscuring that risk, as it threatens to weaken the will to make the needed changes, leaving economies to rely on trickle-down effects.
The Missing Ingredients of Growth
Several positive macroeconomic trends suggest that the global economy could finally be in a position to achieve sustained and inclusive growth. But whether that happens will depend on whether governments can muster a more forceful response to changing economic and technological conditions.
MILAN/NEW YORK – Most of the global economy is now subject to positive economic trends: unemployment is falling, output gaps are closing, growth is picking up, and, for reasons that are not yet clear, inflation remains below the major central banks’ targets. On the other hand, productivity growth remains weak, income inequality is increasing, and less educated workers are struggling to find attractive employment opportunities.
After eight years of aggressive stimulus, developed economies are emerging from an extended deleveraging phase that naturally suppressed growth from the demand side. As the level and composition of debt has been shifted, deleveraging pressures have been reduced, allowing for a synchronized global expansion.
Still, in time, the primary determinant of GDP growth – and the inclusivity of growth patterns – will be gains in productivity. Yet, as things stand, there is ample reason to doubt that productivity will pick up on its own. There are several important items missing from the policy mix that cast a shadow over the realization of both full-scale productivity growth and a shift to more inclusive growth patterns.
First, growth potential can’t be realized without sufficient human capital. This lesson is apparent in the experience of developing countries, but it applies to developed economies, too. Unfortunately, across most economies, skills and capabilities do not seem to be keeping pace with rapid structural shifts in labor markets. Governments have proved either unwilling or unable to act aggressively in terms of education and skills retraining or in redistributing income. And in countries like the United States, the distribution of income and wealth is so skewed that lower-income households cannot afford to invest in measures to adapt to rapidly changing employment conditions.
Second, most job markets have a large information gap that will need to be closed. Workers know that change is coming, but they do not know how skills requirements are evolving, and thus cannot base their choices on concrete data. Governments, educational institutions, and businesses have not come anywhere close to providing adequate guidance on this front.
Third, firms and individuals tend to go where opportunities are expanding, the costs of doing business are low, prospects for recruiting workers are good, and the quality of life is high. Environmental factors and infrastructure are critical for creating such dynamic, competitive conditions. Infrastructure, for example, lowers the cost and improves the quality of connectivity. Most arguments in favor of infrastructure investment focus on the negative: collapsing bridges, congested highways, second-rate air travel, and so forth. But policymakers should look beyond the need to catch up on deferred maintenance. The aspiration should be to invest in infrastructure that will create entirely new opportunities for private-sector investment and innovation.
Fourth, publicly funded research in science, technology, and biomedicine is vital for driving innovation over the long term. By contributing to public knowledge, basic research opens up new areas for private-sector innovation. And wherever research is conducted, it produces spillover effects within the surrounding local economy.
Almost none of these four considerations is a significant feature of the policy framework that currently prevails in most developed countries. In the US, for example, Congress has passed a tax-reform package that may produce an additional increment in private investment, but will do little to reduce inequality, restore and redeploy human capital, improve infrastructure, or expand scientific and technological knowledge. In other words, the package ignores the very ingredients needed to lay the groundwork for balanced and sustainable future growth patterns, characterized by high economic and social productivity trajectories supported by both the supply side and the demand side (including investment).
Ray Dalio describes a path featuring investment in human capital, infrastructure, and the scientific base of the economy as path A. The alternative is path B, characterized by a lack of investment in areas that will directly boost productivity, such as infrastructure and education. Though economies are currently favoring path B, it is path A that would produce higher, more inclusive, and more sustainable growth, while also ameliorating the lingering debt overhangs associated with large sovereign debt and non-debt liabilities in areas like pensions, social security, and publicly funded health care.
It may be wishful thinking, but our hope for the new year is that governments will make a more concerted effort to chart a new course from Dalio’s path B to path A.
Saving America from Trump’s Tax Reform
In principle, US President Donald Trump and his fellow Republicans were not wrong to pursue corporate-tax reform, with the goal of boosting US competitiveness. But, at the behest of the party's donors, the legislation they enacted will increase inequality, impede growth in the most productive states, and blow up the federal budget.
BERKELEY – US President Donald Trump and congressional Republicans had an opportunity – and a responsibility – to reform the US tax code to address three major economic challenges: slowing growth, rising inequality, and a looming fiscal crisis. Sadly, they shirked their responsibility by passing a bill that squandered this opportunity.
At a time when US public debt as a share of GDP is already at a post-war high, the legislation will add another $1.5-2.2 trillion to the deficit over the next decade. At a time when income and wealth inequality is soaring, an estimated 80% of the tax cuts will go to the top 1% by 2027. And at a time when the economy has been growing steadily for 33 quarters and is approaching full employment, the legislation will have only a modest effect on growth.
To be sure, a significant cut in the corporate tax rate was long overdue. The legislation will likely stimulate investment and encourage domestic and foreign companies to do business in the United States. But, by an overwhelming majority, economists predict that the increase in the growth rate will fall far short of the annual gain of one percentage point (or more) hyped by Trump and his economic advisers.
Moreover, there is no credible evidence to support the Trump administration’s declaration that the trickle-down benefits of faster growth will “increase average household income in the United States by, very conservatively, $4,000 annually.” A large body of economic research shows that, at most, 20-25% of the benefits of corporate tax cuts will accrue to labor; the rest will go to shareholders, about one-third of whom are foreign. The biggest beneficiaries will be the top 1% of domestic households which own about half of outstanding shares.
Nor is there evidence to support the administration’s claim that the legislation will pay for itself. As many of those who voted for it well know, the expected gains in growth will yield at most about one-third of lost revenues. But they are playing a cynical game. By reducing revenues now, they will be in a position to justify cuts to services benefiting lower- and middle-class Americans down the road – all in the name of “fiscal responsibility” and “entitlement reform.”
Worse yet, the tax legislation is riddled with provisions that will dramatically increase inequality and limit economic and social mobility. By cutting the top income-tax rate, doubling the threshold at which inheritances are taxed, and lowering taxes on pass-through businesses, the legislation amounts to a handout for the wealthy, paid for by the middle class and future generations.
The legislation also prioritizes investment in physical and financial capital over what the US really needs: more investment in human capital and lifelong learning to help workers and communities cope with the disruptive effects of automation and artificial intelligence. Instead of expanding the earned income tax credit to encourage work, the legislation will, for the first time in American history, impose a higher tax rate on employment income than on income earned by proprietors and partnerships.
In addition, the legislation is an unabashedly partisan attack on Democratic-leaning states and cities. For example, the bill imposes an across-the-board limit on mortgage deductions, which will have a disproportionately adverse effect on people living in high-cost Democratic strongholds such as New York and California. Currently, the median price for a home in San Francisco is $1.5 million; in Kansas, a reliably Republican state, it is $187,000.
And if that weren’t bad enough, the bill intentionally penalizes higher-tax states like California and New York, by capping the federal deduction for state and local income and property taxes. Ironically, this provision will hurt growth, by raising the marginal tax rate on millions of workers in the country’s most productive locales and industries. And it will make it harder for state and local governments to finance necessary investments in innovation, infrastructure, and higher education – investments that are largely the states’ responsibility but are pillars of overall US competitiveness.
A majority of Americans already recognize that the tax law is deeply flawed and full of false promises. After failing to repeal the Affordable Care Act (Obamacare), congressional Republicans rammed through a complicated tax package that will please their wealthy donors, but disappoint many of their voters. Given the tax law’s unpopularity, it will be interesting to see what happens in the midterm congressional elections this November.
In the meantime, progressive federalists in forward-looking states and cities must get to work picking up the pieces of the wreckage the federal government is leaving in its wake. Keep an eye out for the many ways states will re-orient their tax regimes away from income taxes, and toward property and sales taxes, including on services, which account for more than 70% of economic activity but have traditionally been taxed lightly at the state and local level.
In some states, there is even talk of reclassifying state taxes so that they qualify as tax-deductible charitable contributions. Similarly, some have proposed replacing state income taxes with payroll taxes that employers can deduct at the federal level. Keep an eye out as well for a sizeable increase in outcome-oriented state and local funding for efforts to reduce homelessness and reform the criminal-justice system.
Owing to its high marginal income tax rates and constraints on residential property taxes, California will likely be at the forefront of fiscal innovation. Already, multiple reform proposals are circulating, including a ballot initiative to amend Proposition 13 that would dramatically ease existing restrictions on commercial-property taxes. And with the Democrats in full control of the state’s government, measures to counteract the federal law are almost certain to be adopted.
California Governor Jerry Brown, for his part, has called the Republicans’ legislation a “tax monstrosity.” He’s right: it’s dreadful policy. Other countries that have reduced taxes on mobile corporate capital have paid for the cuts by increasing value-added taxes and taxes on carbon, dividends, capital gains, and inheritances. Trump and the Republicans, by contrast, chose to cut taxes on both businesses and their owners, while blowing an unsustainable hole in the federal budget, exacerbating inequality, and imposing new burdens on the most productive parts of the country.
Still, necessity is the mother of invention. For progressive federalists in US cities and states – the laboratories of democracy – it is now more necessary than ever to step up and start innovating.
Inequality and the Coming Storm
In recent decades, the wealth gap between a narrow upper class and the rest of the human population has become a gaping chasm, with far-reaching implications for most countries around the world. Rising inequality may be the greatest economic challenge of our time, but it’s not the first time human civilization has faced it.
- Walter Scheidel, The Great Leveler: Violence and the History of Inequality from the Stone Age to the Twenty-First Century, Princeton University Press, 2017
- Branko Milanovic, Global Inequality: A New Approach for the Age of Globalization, Harvard University Press, 2016
- Peter Temin, The Vanishing Middle Class: Prejudice and Power in a Dual Economy, MIT Press, 2017
- Keith Payne, The Broken Ladder: How Inequality Affects the Way We Think, Live, and Die, Viking, 2017
- Chrystia Freeland, Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else, Penguin Press, 2012
MILAN – The world is becoming increasingly unequal, and at an astonishing pace. According to Oxfam, in 2010, 388 billionaires owned as much private wealth as the poorer half of the global population. By 2016, a mere eight people did. The Great Recession that followed the 2008 financial crisis has hit the vulnerable especially hard, while many of the gamblers who triggered it have grown wealthier.
The accumulation of massive fortunes by a tiny coterie of plutocrats represents the tipping point in a more complex phenomenon. Although China’s meteoric rise to become the world’s second-largest economy (by GDP) has compressed inequality at the global level, the fact remains that disparities within most countries have been expanding rapidly.
In developing economies, the past three decades of globalization have produced a burgeoning urban middle class, but widened the gap between cities and rural regions. And in advanced economies, globalization and technological progress have conferred significant benefits on a small minority of highly qualified professionals, but squeezed the middle class. The standard of living for those not at the top of the income scale has stagnated, owing to the availability of cheap labor abroad and inadequate redistributive policies at home.
The five books under review shed light on different dimensions of this multifaceted phenomenon. The Great Leveler, by Stanford University historian Walter Scheidel, and Global Inequality, by CUNY economist Branko Milanovic, offer long-term historical perspectives. The Vanishing Middle Class, by MIT economist Peter Temin, The Broken Ladder, by University of North Carolina at Chapel Hill psychologist Keith Payne, and Plutocrats, by the former journalist and current Canadian Minister of Foreign Affairs Chrystia Freeland, highlight the diverging fates of those at various levels of the income scale. All of them propose thoughtful solutions for an ailment that has started to seem untreatable.
A Bloody Old Problem
For good reason, rising inequality is widely regarded as the defining economic challenge of our time. Yet Scheidel contends that, while today’s levels of inequality are alarming, they are hardly exceptional by historical standards. Income inequality in the United States is just as high now as it was in the years leading up to the 1929 stock-market crash. In the run-up to World War I, the richest tenth of British households held 92% of all private wealth, compared to around 50% today.
Scheidel shows that, from pharaonic Egypt to czarist Russia, Victorian England, the Ottoman Empire, and China under the Qing Dynasty, the pattern has always been the same: wealth tends to concentrate in the hands of a privileged elite. Most of the great temples, royal palaces, pyramids, castles, and other monuments of history are the lasting evidence of past wealth disparities. At the apogee of the Roman Empire, the richest aristocrat in Rome possessed a fortune that was 1.5 million times the average per capita income of that era. That is about the same as the wealth gap between Microsoft founder Bill Gates and the average American household.
But while inequality has been a persistent feature of civilization, it has not been constant. Scheidel chronicles long stretches of high inequality that were followed by bursts of violent compression, owing to cataclysmic historical events – his book’s titular “great levelers.” Specifically, Scheidel designates mass warfare, violent revolution, state collapse, and lethal pandemics as the “Four Horsemen of Leveling.” His most prominent examples are the twentieth-century world wars, the Russian and Chinese Revolutions, the fall of the Roman Empire, and the Black Death, respectively.
Scheidel traces the problem of inequality back to the First Agricultural Revolution more than 10,000 years ago. The Holocene epoch marked the beginning of the first interglacial warm period, and created a favorable environment for economic and social development. The domestication of plants and animals led to huge production surpluses, which the dominant members of society then accumulated as property and heritable wealth. Next came coercion, submission, and predation; with that, humanity’s Great Disequalization took off.
Over time, ownership rights became a source of political power or even spiritual authority. Social structures beyond the household started to form, giving rise to clans and tribes, and eventually empires and states. At the same time, disparities between the powerful and the helpless were enshrined in rigid sociopolitical hierarchies. Absent any external interference, like invasions or natural disasters, ruling elites enjoyed long periods of stability and rising economic prosperity, and offered little redistribution to the subordinate majority.
But, as Scheidel argues, all societies eventually reach a demographic, political, or technological limit to the level of inequality they can tolerate. Once this pain threshold is breached, peaceful democratic interventions have no purchase. Only carnage, chaos, and destruction can restore fairness in the system, by disrupting the established order, reassigning social roles, and destroying physical assets and other forms of accumulated wealth. When that happens, the rich and the powerful are suddenly nothing of the kind. Scheidel concludes that there can be no middle ground: extreme inequality yields only to extreme equalizers.
The Ebb and Flow of Inequality
Over the last 2,000 years, the world has reached two peaks of inequality: in late medieval Europe, on the eve of the Black Death, and in modern times, on the eve of World War I. The plague boosted the value of labor relative to landed wealth by decimating the fourteenth-century European workforce. The twentieth-century world wars, similarly, devastated the physical and financial assets of the wealthy, and led to higher taxes on property and income.
During the Great Compression of the 1940s, the modern welfare state emerged. But, since then, traditional economic theory has struggled to explain the persistence and recurrence of income inequality, particularly in advanced economies. In the 1960s, the Nobel laureate economist Simon Kuznets argued that wealth should be more broadly distributed in advanced economies. As Kuznets saw it, inequality should rise during the period of industrialization when workers are plentiful and wages are low, but then fall when the slack in the labor market is absorbed.
Needless to say, this picture is at odds with what has been happening in the West. In Global Inequality, a must-read, Milanovic updates mainstream theory by introducing the concept of “Kuznets waves” into the study of the subject. According to Milanovic, inequality is cyclical: it waxes and wanes continuously, owing to interconnected economic, demographic, and political forces. Inequality rises as a result of nominal GDP growth, technological progress, and special-interest lobbying activities, and falls as a result of wars, diseases, and redistributive policies.
In the pre-industrial era, according to Milanovic, these waves were governed by Malthusian (demographic) dynamics. Inequality would rise with population and income growth, then decline when wars or famines reduced the population and brought the economy back to subsistence levels. The difference in modern times is that, instead of population growth, technological change and globalization have been the main drivers of inequality.
The first modern Kuznets wave started at the end of the nineteenth century, when industrialization and economic integration created new wealth disparities. But by the 1970s, inequality had reached new lows, owing to the two world wars, the political upheavals of the 1960s, and the growth in the number of college graduates in Western countries. Since then, however, the world has been riding a new Kuznets wave, powered by advances in information and communication technologies (ICT) and Washington Consensus policies advocating capital-flow and trade liberation. And the technologies of the Fourth Industrial Revolution – artificial intelligence (AI), robotics, and so forth – are further widening the gap between the highly skilled and everyone else.
The similarity between the two inequality-increasing waves is striking – and appalling. Before the First Industrial Revolution in the late eighteenth century, a hereditary class structure was the main source of inequality around the world. Then, when GDP growth took off in the West, location replaced class, such that, 70 years ago, a poor person in Germany was rich by Indian standards. But now that other countries are catching up to the West, the income gaps associated with location are closing, and the centrality of social class has returned.
Separate and Unequal
To understand how a modern “classist” society functions, look no further than the US in 2017. Social status there has never been denoted by noble titles; prestigious academic degrees fill that role. Still, one’s origins, far more than merit, determine one’s chances for success in life. Being admitted to an Ivy League university depends largely on one’s family background. Wealthy, well-educated parents have the means to raise ideal college applicants, and to afford rising tuition costs. And, because the top employers seek recruits from the top universities, class privilege is perpetuated from generation to generation.
If this sounds to you like the end of the American Dream, then you will find much to agree with in Temin’s The Vanishing Middle Class, which describes the socioeconomic mechanisms that are preventing an ever-larger share of the American population from enjoying the benefits of economic growth. In Temin’s view, the US is regressing quickly toward the status of an emerging economy, where the system works well for a select few and poorly for everyone else.
In the US, a small, predominantly white upper class holds a disproportionate share of money, power, and political influence. Its members, who make up 20% of the American population, are highly educated, well-paid, tech-savvy professionals who work primarily in finance and technology. At the other end of the spectrum is the majority: low-skilled, low-wage workers whose economic situation – substandard education, dilapidated housing, precarious employment – resembles that of workers in developing countries.
As Temin reminds us, American’s class divide has a clear racial element. There is just one African-American on the Forbes list of the 400 wealthiest Americans for 2017. At the same time, African-Americans comprise nearly 40% of the US prison population, but less than 15% of the total population; among African-American men, one in three will serve jail time at some point in their lives.
Still, racial minorities are not the only Americans living as second-class citizens. A large chunk of the white population in the Rust Belt and elsewhere has also been marginalized – precisely the demographic segment that put US President Donald Trump in the White House.
According to Temin, inequality is now so entrenched in American society that it might never be uprooted. Only education can ensure that Americans will have a chance at employment in the high-paying, high-skill sectors of the twenty-first-century economy. But for the children of most low-wage families, there are simply too many obstacles. Public schools in low-income areas are too decrepit and underfunded to give their students the qualifications needed to join the elite. Temin, for his part, argues that such hindrances to social mobility are created deliberately by the ruling minority, whose primary concern is its own preservation and reproduction as a privileged class.
How the Other 80% Lives
As class divides widen, those on the bottom start to have radically different experiences of the world than those at the top. And as Payne shows in TheBroken Ladder, many of those experiences include psychological suffering. For an issue that is dominated by sociological and economic analyses of the factors behind wealth disparities, Payne’s is a brilliant and important contribution.
As a psychologist, Payne is interested in how inequality affects individuals. First, he explains, “Inequality is not the same as poverty,” because it “makes people feel poor and act poor, even when they’re not.” When people perceive vast economic disparities between themselves and others, their decision-making about savings and personal finances, political beliefs, and even their health changes.
More telling than one’s position on the income scale is the subjective process by which one establishes one’s own social status. According to Payne, those who feel poorer than their neighbors, their parents, or some other referent are more likely to suffer from depression, anxiety disorders, cardiovascular disease, obesity, and diabetes – regardless of their socioeconomic situation. Not surprisingly, people with these conditions tend to have a shorter life expectancy than the rest of the population.
In the US, that now describes many middle-aged whites. According to a landmark 2015 study by economists Anne Case and Angus Deaton, midlife mortality rates have improved for all US demographic groups except non-Hispanic whites. As Payne puts it, members of this group are not just “dying of cirrhosis of the liver, suicide … and overdoses of opiates and pain killers,” they are “dying of violated expectations.” Despite the fact that “high school-educated whites make more money on average than similarly educated blacks,” he writes, “the whites expect more because of their history of privilege.” They grew up believing – and constantly being told – that they would be better off than their parents. Instead, they have been condemned to low wages and unstable jobs.
The View From the Penthouse
At the other extreme, there is the top 1%, whose lived experience, and thus worldview, could not be more different from those at the bottom. Although it was published five years ago, Freeland’s Plutocrats is still the most incisive and intelligent account of how the world’s wealthiest think and behave. Few have observed the global elite in the wild so closely, and for so long.
The super-rich, as Freeland calls them, are essentially a tribe that lives in a separate world that has neither national boundaries nor time zones. Regardless of where they are from, they all attend the same elite universities in the United Kingdom and the US. After that, they all begin their careers in the same top consulting firms and investment banks, attend the same exclusive conferences in Davos and Dubai, and vacation in the same places in Switzerland and US coastal enclaves. They have no problem spending $3 million – equivalent to the combined average annual income of more than 50 Americans – on a birthday party. And they wash their hands by dabbling in philanthropy.
Of course, despite these similarities, the super-rich are not all the same. Some are entrepreneurs or entertainers who create real value for society. Others run hedge funds, private-equity firms, or other rent-seeking businesses and contribute little to nothing. In either case, most were actually not born rich. They built their fortunes through hard work, talent, and discipline. Starting in nursery school, they embraced the Darwinian classroom struggle to win entry into a top university. And as adults, they work long hours at the expense of their private lives. Having made it to the top, they live with a constant fear of falling from grace.
But even if merit brought many of the super-rich to where they are, they have become so powerful that they can deny meritocratic outcomes to everyone else. Freeland, for her part, points out that this is not unprecedented. The Republic of Venice unwittingly engineered its own downfall when Venetian elites in the fourteenth century created a “Book of Gold” to designate which families would belong to a permanent class of nobility, and thus the oligarchy. An economically dynamic commercial power quickly decayed into a sclerotic, closed city-state.
In Search of a Cure
The world is now in a state of limbo. Today’s levels of inequality, as all of these books show, can hardly be regarded as stable or under control. Moreover, as technological innovation accelerates, the casualties will mount. Yet, according to Milanovic, we are still waiting for the current Kuznets wave to crest. Inequality is high, but it is still not as high as in the peak periods just before the Black Death and the outbreak of World War I.
What can be done? Many commentators recommend improving the availability and quality of public education. Others have proposed more effective ways to tax wealth, such as a global tax on capital income, higher marginal tax rates, more aggressive estate taxes, or even a tax on robots. And still others are calling for a universal basic income (UBI).
But none of these will be a panacea. Educational policies take years to gain traction; taxing the global super-rich would require a level of international cooperation that does not exist today; and a UBI is simply unaffordable for most – if not all – governments.
Scheidel would remind us that political reforms usually are not up to the task of tackling inequality. Yet, even if democratic measures cannot reverse inequality, they may be able to keep it in check, and are thus worth pursuing.
The alternative, of course, could be a cataclysmic leveling in the not-too-distant future. Climate change is already wreaking havoc on some national economies and creating tensions over shrinking resources. Populism, nationalism, and xenophobia are threatening to consume liberal democracies from within. An increasingly ambitious China and a newly protectionist America could end up on a collision course over trade or territorial claims in Asia. And, at some point, self-learning robots might eliminate most jobs, and topple Western civilization itself.
How much more inequality can the world tolerate? Sooner or later, we will cross another historical threshold, on the far side of which await the Four Horsemen of Leveling, eager for another stampede, if we let them have it.
PS. In Theory: Economic Growth
Despite seemingly radical advances in digital and other technologies, average productivity growth has been almost stagnant across most economies and sectors for a decade. And with only a few exceptions, productivity growth in advanced economies has been consistently weak since 1973.
Here are several theories about why this is happening, and what it means for inequality.