January 12, 2013

The Economist

Green Army: Communications

Almost 100% of China’s rural population now have basic health insurance … and a majority have basic pensions. …
China’s minimum wage … rose by an average of 17% [in 2011.]
(Asia, Special Report: Inequality and Social Mobility, 13 October 2012, emphasis added)

A True Progressivism


Bold moves are needed to tackle inequality and boost growth …

  1. [Curbing] cronyism and [enhancing] competition …
    • [Freeing] monopoly sectors [such as mining and railways in China.]
    • [Freeing the] financial sector, with market-driven interest rates …
    • [Removing] subsidies for too-big-to-fail financial institutions …
    • [Increasing] competition in … education. …

  2. [More] targeted and progressive social spending.
    • [Replacing] expensive universal subsidies for energy with tailored social safety nets.
    • [Wider] use of conditional cash transfers [eg] tying social assistance to individuals’ investment in skills and education. …
    • [Shifting] government spending …
      • from transfers to education, and
      • from older and richer people to younger and poorer ones.
    [America] spends barely more than 0.1% of GDP on “active labour-market policies” to get the less skilled back to work, one-fifth of the OECD average.
    Only half of American children attend pre-school.
    China plans to have 70% of its children in three years of pre-school by 2020.

  3. [Tax reform.]
    Economists argue about the disincentive effects of higher tax rates.
    [Some analysis suggests] that the optimal top income-tax rate could be as high as 80%. …

    In countries where the state is already large, rebalancing government spending should take precedence over raising more revenue.
    [Given] the mess that public finances in most countries are in, more tax revenue is likely to be necessary, particularly in less highly taxed countries such as America. ..
    • Closing the] “carried-interest” loophole, which allows private-equity managers to pay (low) capital-gains rather than (higher) income tax on their earnings.
    • [Withdrawing tax deductibility] for charitable contributions [and] mortgage interest [which disproportionately benefit the wealthy].
    • [Reducing] corporate tax rates …
    • [Narrowing] the gap between individuals’ tax rates on capital and labour income would [lead to] richer people pay[ing] higher average tax rates.
    • Higher property taxes …
    • [Reforming inheritance tax] so that it falls on individual beneficiaries [to reduce the risk of a hereditary elite.]



Contents


Inequality

History

Mobility

Metrics

The United States

Fiscal policy

Asia

Latin America

Sweden

Equality versus Efficiency


The Economist

  • Special Report: Inequality and Social Mobility, 13 October 2012.
    Zanny Minton Beddoes (1967): Economics Editor.

    For Richer, For Poorer


    Growing inequality … is not inevitable …


    [The] share of national income going to the richest 1% of Americans has doubled since 1980, from 10% to 20%, roughly where it was a century ago.
    Even more striking, the share going to the top 0.01% — some 16,000 families with an average income of $24m — has quadrupled, from just over 1% to almost 5%.
    That is a bigger slice of the national pie than the top 0.01% received 100 years ago. …
    … Britain, Canada, China, India and even … Sweden, have [also] seen a rise in the share of national income taken by the top 1%. …

    The best-known way of measuring inequality is the Gini coefficient …
    If everyone in a group has the same income, the Gini coefficient is 0; if all income goes to one person, it is 1. …
    [A small] difference in the Gini ratio [translates as] a big difference in inequality. …)

    America’s Gini for disposable income is up by almost 30% since 1980, to 0.39.
    Sweden’s is up by a quarter, to 0.24.
    China’s has risen by around 50% to [0.42—0.48].
    The biggest exception … is Latin America, long the world’s most unequal continent, where Gini coefficients have fallen sharply over the past ten years.
    But the majority of the people on the planet live in countries where income disparities are bigger than they were a generation ago. …

    [On the other hand, global inequality] has begun to fall as poorer countries catch up with richer ones.


    From ∩ to N


    The widening of income gaps is a reversal of the pattern in much of the 20th century, when inequality narrowed in many countries. …

    [Before] the financial crisis, growing disparities [were masked by] asset bubbles and cheap credit …
    Financiers were growing fabulously wealthy in the early 2000s, but others could also borrow ever more against the value of their home.

    [After the crash] bank rescues shone a spotlight on the unfairness of a system in which affluent bankers were bailed out whereas ordinary folk lost their houses and jobs. …

    In theory, inequality … can boost growth, because richer folk save and invest more and because people work harder in response to incentives.
    But big income gaps can also … can bar talented poor people from access to education or feed resentment that results in growth-destroying populist policies.

    The mainstream consensus has long been that a growing economy raises all boats …
    [However, research by the IMF] suggests that income inequality slows growth, causes financial crises and weakens demand.
    [The] Asian Development Bank [estimates] that if … Asia’s income distribution had not worsened over the past 20 years … rapid growth would have lifted an extra 240m people out of extreme poverty. …

    In all sections of society, there is growing agreement that the world is becoming more unequal, and that today’s disparities and their likely trajectory are dangerous.


    Not so fast


    … Inequality, as measured by Gini coefficients, is simply a snapshot of outcomes.
    It does not tell you why those gaps have opened up or what the trend is over time. …
    Income gaps can arise for good reasons (such as when people are rewarded for productive work) or for bad ones (if poorer children do not get the same opportunities as richer ones).
    Equally, inequality of outcomes might be acceptable if the gaps are between young people and older folk, so may shrink over time.
    But in societies without this sort of mobility a high Gini is troubling. …

    The unstable history of Latin America … suggests that countries run by entrenched wealthy elites do not do very well.
    Yet … often high-tax welfare states [turn] out to be inefficient and unsustainable. …

    This special report … make three arguments[:]

    1. [Although] the modern global economy is leading to wider gaps between the more and the less educated, a big driver of [income distribution] is government policy.
    2. [Inequality] is inefficient, particularly in the most unequal countries.
      It reflects market and government failures that also reduce growth.
      And where this is happening, bigger income gaps themselves are likely to reduce both social mobility and future prosperity.
    3. [That is makes sense] to reduce income disparities [regardless of] your attitude towards fairness.
      It is not about higher taxes and more handouts.
      Both in rich and emerging economies, it is about attacking cronyism and investing in the young.


    As You Were


    After a period on the wane, inequality is waxing again


    Before the industrial revolution … income per person in the world’s ten richest countries was only six times higher than that in the ten poorest.
    But within each country the distribution of income was skewed.
    In most places a small elite lorded it over a mass of peasants.
    There was little social mobility except …
    Colonial America was an exception to this feudal sclerosis.
    [On] the eve of the American revolution incomes in the 13 colonies that formed the United States were more equal than in virtually “any other place on the planet”.

    The industrial revolution widened the gaps both between countries and within them. …
    The growth of the industrial workforce brought increasing political pressure for redistribution.
    In response first to the formation of workers’ unions and the rise of socialist parties and then to the Depression, politicians on both sides of the Atlantic introduced progressive taxes, government regulation and social protection.

    In Germany Bismarck pioneered pensions and unemployment insurance in the 1880s.
    In America Theodore Roosevelt’s Square Deal broke up monopolies (“trusts”) in the first decade of the 20th century.
    In the 1930s the New Deal introduced Social Security (pensions), disability and unemployment insurance.
    In Britain Lloyd George’s People’s Budget of 1909 raised income taxes and inheritance taxes at the top to fund basic pensions as well as unemployment and health insurance for workers.
    This … was transformed by the Labour government after 1945 with a National Health Service and a system of cradle-to-grave benefits.

    Of the three levers used to narrow inequality — taxation, government spending and regulation — the tax system changed the fastest. …
    • By the 1930s governments relied heavily on progressive income taxes …
      Britain’s tax take in 1860 was some 8% of GDP; by 1927 it had risen to almost 20%.
      America [introduced] income tax in 1913.
      In 1944 the top rate reached a peak of 94%.
      Punitive rates of taxation did not, by themselves, transform the income distribution.
      Many fortunes in the early 20th century were destroyed by wars, hyperinflation and the Depression [and] high tax rates made it much harder for fortunes to be built up again.
      In most countries the share of the top 1% fell persistently from the 1920s until the late 1970s. …
    • Starting around 1910, America made huge investments in public … universal secondary education.
      After the second world war the GI bill offered all returning soldiers the chance of higher education.
      Claudia Goldin and Larry Katz … at Harvard, see this dramatic boost to education as the main cause of the narrowing of inequality in America in the mid-20th century.
      It also boosted social mobility. …
      Governments in Europe were slower than in America to invest in mass education …
      [Instead, many] built even bigger welfare states than Britain, with generous jobless benefits, child subsidies and income support.
      [Such benefits became their] most important instruments for reducing inequality.
    • The third leg of the state’s response to inequality was regulation.
      Roosevelt’s trustbusting weakened America’s robber barons, and other legal changes protected workers’ rights to organize and, especially in Europe, to conclude binding national pay agreements.
      [Minimum] wages enshrined in law narrowed the gap between workers and managers.
      Banking … was heavily regulated …

    The Great Compression


    [For] decades incomes at the bottom and in the middle of the distribution grew faster than those at the top. …
    In most advanced economies the gap between rich and poor in the 1970s was a lot narrower than it had been in the 1920s. …

    Income gaps between countries, however, continued to widen as the advanced industrial economies pulled ever farther ahead of less developed ones …
    By the 1970s average income per person in the ten richest countries was around 40 times higher than that in the ten poorest. …

    [Around] 1980 both these trends went into reverse.
    Globally, poorer countries began to catch up with richer ones, and within countries richer people began to pull ahead.
    The surge in emerging markets began with Deng Xiaoping’s 1978 reforms in China. …
    [Globalisation,] deregulation, the information-technology revolution … narrowed income gaps between countries [while at the same time widening] them within them …

    The modern economy’s global reach hugely increased the size of markets and the rewards to the most successful.
    New technologies [boosted] the incomes of elite workers.
    The integration of some 1.5 billion emerging-country workers into the global market economy boosted returns to capital [while confronting] the rich world’s less educated [with low cost] competition.

    [Some studies] conclude that around 10-15% of the widening wage gap [in America] can be explained by trade [though] in manufacturing the impact of trade with China could be much bigger. …

    [On the other hand, the OECD has concluded] that “skill-biased technological change” is one of the main determinants of the rich world’s wage inequality.
    [And that, on average,] globalisation — as measured by a country’s trade exposure and financial openness — has no significant impact. …

    Whatever the exact breakdown, these two factors are increasingly hard to separate. …
    Technology accelerates globalisation, and globalisation accelerates technological progress. …

    [Technology] is undermining some of the 20th century’s equalising institutions [eg assembly-line manufacturing] was conducive to union organisation. …

    Many social transformations are also making inequality worse, particularly the rise of single parenthood and “assortative mating” …

    However, history suggests that] widening inequality is [not] inevitable …
    [Market] and social forces do not operate in a vacuum. …
    [Governments] can narrow inequality without large-scale redistribution or an ever growing state.
    The 20th century’s most dramatic reductions in income gaps took place when governments … were smaller than they are today.
    Large, rigid welfare states proved unsustainable.
    But there was also a successful progressive prescription for reducing income gaps and boosting mobility by
    • attacking crony capitalism,
    • investing in the young [— particularly] by broadening access to education[,] and
    • creating a safety net for the poorest [—] through unemployment insurance and pension schemes …

    Like A Piece Of String


    Sizing the gap


    In America … the income gap between blacks and whites, and men and women, has narrowed over the past 30 years, even as that between individuals has widened.
    Disparities in consumption are always smaller than those in income because people save and borrow to smooth their living standards.
    The distribution of wealth is usually less equal than that of annual incomes.
    Gaps in pre-tax income are larger than those in disposable income after taxes and government transfers. …

    Gini coefficients and the top income share can paint different pictures.
    Argentina’s Gini, for instance, has fallen sharply over the past decade even as the share of income going to the top 1% has risen.
    Germany’s Gini has risen by 32% since the early 1980s, but the share of income going to the very top has barely budged.
    One reason is that the statistics cover different people; another is arithmetic.
    The Gini aggregates all disparities, so it is a better summary measure, but it does not tell you where the gaps are growing.


    Like Father, Not Like Son


    Measuring social mobility


    [Economists] measure [social] mobility
    • over a lifetime (rags to riches, or the reverse),
    • between generations (how children do relative to their parents),
    • in absolute terms [—] whether children are richer or poorer than their parents [and]
    • in relative [terms —] whether children are higher or lower on the income ladder than their parents …

    When countries are growing fast … children almost invariably earn more than their parents.
    Even in America … 84% of adult Americans had higher real incomes than their parents. …

    [How] much parents’ position has influenced their adult children’s relative income or education [is measured by the] “inter-generational elasticity of income” [coefficient. …]

    In a society with broad equality of opportunity, the parents’ position on the income ladder should have little impact on that of their children. …

    [In Scandinavia] around 20% of parents’ relative wealth (or poverty) is passed on to their kids.
    [In China] 60% of income differences persist between generations.
    [And in the US] parental income explains around half of the differences in adult children’s income, much more than in Canada, and more than in any European country except Italy and Britain.
    According to this measure, social mobility in America now is lower than in most of Europe.

    Another way to measure economic opportunity is … what share of inequality can be explained by factors over which people have no control:
    • race,
    • gender,
    • birthplace,
    • parents’ education and occupation. …
    At one extreme lies Norway, where only 2% of the … inequality can be explained by accidents of birth.
    At the other extreme, in Brazil a third of the high income inequality is due to people’s background. …
    America is [~18%. …]

    Economists also gauge equality of opportunity by measuring disparities in children’s access to basic services … such as education or running water.
    The World Bank is developing indices which adjust overall access to such services by a measure of the inequality in that access.
    South Africa, for instance, has the same overall rate of access to sanitation as Nicaragua.
    But once you adjust for race disparities, its “Human Opportunity Index” for sanitation is much lower.


    The Rich And The Rest


    American inequality is a tale of two countries


    Between 1979 and 2007 … the real disposable income after taxes and transfers of the top 1% of Americans more than quadrupled, a cumulative rise of over 300%.
    Over the same period the bottom fifth’s income rose by only 40%. …
    [As for the middle class only] 40% of American neighbourhoods now have an average income within 20% of the national median, compared with 60% in the 1970s. …

    America’s wealthiest fared poorly in 2008 and 2009, largely because the tanking stockmarket ravaged their bonuses and share options.
    The government safety net prevented a collapse at the bottom.
    But [since the 'recovery' more] than 90% of all income gains … have gone to the top 1%. …

    High-school graduation rates stopped climbing in the 1970s, for the first time since 1890.
    College completion rates also slowed.


    College and/or bust


    In the 1970s a year’s tuition at a public university cost 4% of a typical household’s annual income; at a private university it took about 20%.
    By 2009 tuition fees had jumped to over 10% of median income for a public university and around 45% for a private one. …

    … America is one of only three advanced countries which spends less on the education of poorer children than richer ones.
    … America does not put better teachers in poorly performing schools, where teachers’ unions often obstruct reform efforts. …

    [Women] are better educated and earn more than they did 30 years ago.
    It is less skilled men who have fallen behind.
    … American men now aged between 25 and 34 are less likely than their fathers to have a college degree.
    The damage from this has been compounded by … the weakening of unions and … the erosion of the minimum wage. …

    High-school dropouts are disproportionately black or Hispanic.
    [Imprisoning] large numbers of young black men does not [improve] their employability. …
    Ever more low-skilled white [working class] men have left the labour force, many moving onto disability rolls. …

    This decline of work among less skilled white men [is having the same] social consequences [as the incarceration of black men …
    Marriage rates have fallen, divorce has increased and the share of children born to single mothers has soared.
    [Fewer] than 30% of children in the poorest third of white America live with both parents by the time their mother turns 40.
    Among the most affluent fifth, around 90% of children live in a household with both parents. …

    Most Americans below the median income level pay no federal income tax (and, thanks to the Earned Income Tax Credit, the working poor get substantial rebates).
    Poorer Americans are hit disproportionately by payroll taxes …
    Although America’s social spending has rocketed [to] some 16% of GDP … it is becoming less redistributive as Medicare, the universal health plan for the elderly, swallows up ever more …
    [In] 1979 over half of all federal social spending went to the poorest fifth of households.
    Now it is only 36%. …

    In 1960 American couples with two college-educated partners accounted for only 3% of the total.
    Today [due to assortative mating] that figure is 25% and in the top 5% of the income distribution it is 75%. …

    America’s top 0.1% are no better educated than the top 1%.
    Income gaps at this level have less to do with the skills-bias of the modern economy and more to do with its global reach. …

    Until the early 1980s American chief executives … earned 40% more than their next two lieutenants.
    By 2000 they earned two-and-a-half times as much. …

    This rise is widely put down to failures of corporate governance and a collapse in social norms …
    [Yet, while] it is not hard to find chief executives earning tens of millions of dollars despite lacklustre performance … CEO pay has fallen in recent years and [those] who perform badly get paid less and are fired more often than successful ones. …

    America is home to a lot of the world’s biggest companies, and globalisation has made many of them a lot bigger.
    In a global market for the best CEO talent where winner-takes-all economics prevails, the gap between the top and the rest is bound to be vast. …

    [The] share of investment bankers among the top 0.1% is larger than the share of senior executives. America’s top 25 hedge-fund managers make more than all the CEOs of the S&P 500 combined. …
    Capital markets have globalised [and scaled up] faster and more comprehensively than any other part of the economy …

    [Between] a third and half of Wall Street’s higher pay is unjustified, deriving from rents rather than productivity. …
    [The] implicit subsidy (through lower borrowing costs) that banks enjoy by being too big to fail … is worth some $30 billion a year …
    [Cronyism] between Wall Street and Washington over the past 30 years … has allowed financiers to tilt rules in their favour.
    The finance industry (along with property and insurance) employs … around four [lobbyists] per Congressman [almost as many as the fossil fuel industry]. …

    [While the] country’s top rate of income tax has been [slashed] from 70% to 35% [since 1980,] America’s richest have gained [the most] from reductions in the capital-gains tax, which is now only 15%.
    Private-equity moguls [are able] to classify their income as capital gains.


    Scratching each other’s backs


    [There is evidence that the wealthy] control the political system and rig it to their advantage.
    [Senators’] votes are influenced by the preferences of their rich citizens but not their poor ones. …

    [The] Supreme Court’s 2010 “Citizens United” decision lifted any restrictions on political spending by individuals or firms. …
    [Super-PACs] have now raised hundreds of millions of dollars [— 80%] from fewer than 200 donors. …

    [More] than 40% of the sons of the poorest 20% of Americans stay in that quintile, compared with around 25% in Nordic countries. …
    [It] is clear that there has been no improvement in mobility to compensate for widening inequality.

    Since disparities in income, education and social behaviour now strongly reinforce each other, future mobility might be a lot lower still.
    [The] gap in standardised test scores between schoolchildren from high- and low-income families is roughly 30-40% bigger today than it was 25 years ago.


    Makers And Takers


    America’s government redistributes, but not well


    Conservatives like to point out that 40% of all income taxes come from 1% of taxpayers.
    America’s government, they argue, redistributes far too much from a shrinking pool of “makers” to a vast number of loafers. …

    Because America relies mainly on (progressive) income taxes, whereas other rich countries raise a bigger share of their revenue from (regressive) consumption taxes, its tax system is … one of the most progressive in the rich world.
    But it is riddled with deductions and loopholes, most of which favour the wealthy …
    On the spending side of the budget, America allocates far less than other rich countries to cash transfers, such as unemployment insurance or income support.
    But it does spend a large and growing share of its budget on social services, particularly health care for the poor and the old.
    The result is a welfare state that is skewed rather than skimpy.
    America’s government raises revenues inefficiently and redistributes them oddly:
    • too much from young to old,
    • too much in the form of health care, and
    • ever less from rich to poor.

    [In] 2011 only 54% of Americans paid federal income taxes.
    That is partly because, since Ronald Reagan, the government’s main form of assistance for the working poor has been the Earned Income Tax Credit, a kind of negative income tax. …
    [However,] when you consider all taxes [— payroll, property and sales taxes —] the share paid by the wealthiest 1% falls to 21.6%, close to their share of pre-tax income, whereas the poorest quintile pay 2.1%, not much below their share of pre-tax income.
    [America] does hardly anything to redistribute income. …


    [Taxation]

    [Exemptions or "tax preferences",] which include interest paid on mortgages up to $1m and contributions to gold-plated health insurance, are now worth some $1.3 trillion, or 8% of GDP. …
    More than 60% … flow to the wealthiest 20% of Americans, with only 3% going to the bottom quintile.
    Successful professionals do not see themselves as beneficiaries of government largesse, but the government in effect subsidises their big houses, expensive health care and retirement savings. …


    [Expenditure]

    America spends less than half as much as the average OECD country on cash transfers for people of working age.
    [State] provision of education, health care and housing, gobble up a large and growing share of America’s budget.
    [Over] half of all entitlement spending flows to the elderly and around 40% is spent on health care. ….
    • Around 10% of the total goes to the richest fifth of Americans,
    • almost 60% to the middle three-fifths and
    • only 30% to the poorest fifth.
    The government lavishes more dollars overall on the top fifth of the income distribution than the bottom fifth.

    [The] federal government “spends” four times as much on subsidising housing for the richest 20% of Americans (via the mortgage-interest deduction) than it spends on public housing for the poorest fifth.
    [It] short-changes the young by spending far less on pre-school education and far more on old people’s health care …

    Governments are bound to spend more on the old as societies age.
    But America takes this to extremes …
    The combination is fiscally unsustainable, bad for growth and not very equitable.


    Crony Tigers, Divided Dragons


    Why Asia, too, is becoming increasingly unequal


    In little more than a generation Mao’s egalitarian dystopia has become a country with an income distribution more skewed than America’s.
    … India and Indonesia, have also seen disparities rise sharply, though less dramatically than China. …
    As people have left subsistence agriculture for more productive work in cities, inequality has risen along with prosperity. …

    [This contrasts with] Japan, Hong Kong, South Korea and Taiwan … in the 1960s and 1970s [where] income gaps shrank [as growth soared].
    [Unlike the present, that earlier model of growth managed to combine] prosperity with equity.


    Education, again


    One explanation [for this is that technological innovation and globalisation] benefit the skilled and educated in emerging markets much as they do in the rich world. …
    [The] offshoring of tasks that has hit mid-level workers in America and Europe often benefits people higher up the skills ladder in recipient countries. …

    [Another] is cronyism.
    [Capitalism] in today’s emerging markets involves close links between politicians and plutocrats. …
    … India has the second-largest number of billionaires relative to the size of its economy after Russia, mainly thanks to insider access to land, natural resources and government contracts. …

    In China [the] state has huge control over resources … through
    • state-owned enterprises …
    • monopoly control of industries from railways to mining [and]
    • the distorted financial system, where interest rates are artificially depressed and access to credit is influenced by politics.
    A lot of money is invested in property, where soaring prices have reinforced inequality. …
    [The] income of the richest 10% of urban Chinese is some 23 times that of the poorest 10%. …

    In India a big problem is the lack of job creation.
    Unlike China, where the surge in factories assembling goods for export brought millions of migrant workers into the formal urban labour force, India’s formal workforce has barely grown since 1991.
    More than 90% of Indians are still employed in the informal sector.
    [Most] people toil in one-room workshops rather than big factories.
    Productivity is lower, workers find it hard to improve their skills and their incomes rise more slowly.

    India’s failure to become a powerhouse of labour-intensive manufacturing owes much to its appalling infrastructure.
    Just-in-time delivery is hard to achieve when power supplies are so precarious.
    [The] country’s rigid labour laws … discourage the formation of big firms.
    … India has around 200 different laws … making it virtually impossible to fire people [and deterring] employers from hiring workers …


    We know where you live


    In China the regulations that contribute most to inequality are the remnants of the country’s hukou system of household registration. …
    To ensure a stable supply of workers in agriculture despite the appalling conditions, people [in Mao's time were] barred from leaving their province of origin.
    The restrictions on mobility were dismantled in the 1980s, permitting millions to become migrant workers.
    But they still retain the rural hukou of their birth, as do their children.
    From housing to schooling, this puts them at a big disadvantage compared with holders of urban hukou.

    Migrants’ children must take the gaokao [state college-entrance exam] in their place of origin [so many] migrants send their children home [— where the] schools tend to be less well-funded and of lower quality.
    Hebei has far worse schools than Beijing.
    In Shanghai municipality, spending per student in rural areas is only 50-60% that of urban areas.
    [The] education system [exacerbates rather than mitigates] income disparities …

    [Disparities] in infrastructure [and] the hukou system … explain about 45% of the country’s overall inequality. …

    [In other Asian economies] most social spending, from public housing to health insurance, has traditionally been confined to the formal, urban workforce.
    [A lot is spent] on universal subsidies, especially for energy [which] are highly regressive.
    Indonesia … lavished 3.4% of GDP on fuel and electricity subsidies last year, more than it spent on infrastructure.
    [40% of that] flowed to the richest 10% of Indonesian households and … 84% to the top half. …

    In China the “Great Western Development Strategy” has poured vast sums into infrastructure in the western provinces.
    More recently the government has made a big effort to improve rural social services. …
    Inequality between urban and rural areas has recently stabilised and that between regions has begun to fall slightly, but from an extraordinarily high level. …

    India’s NREGA scheme … guarantees 100 days’ work a year to the country’s rural households and now covers 41m people. …

    Thanks to remarkable economic growth, almost all Asians are rapidly becoming better off. …
    But widening income gaps threaten to harm future social mobility. …
    [In China, parents’] income and their type of employer explain about two-thirds of China’s inequality of opportunity, a much bigger share than is explained by parental education. …
    China’s inequality is now hurting its growth prospects.
    Sustained cronyism could turn Asia’s big economies into entrenched oligarchies rather than dynamic meritocracies.


    Gini Back In The Bottle


    An unequal continent is becoming less so


    Although Latin America saw only half the average GDP growth of emerging Asia over the past ten years, its poverty rate fell by 30%.
    Around a third of the decline is due to improvements in income distribution. …

    … Latin American governments, on average, now spend a larger share of GDP on education for the poorest 20% of children than does the United States. …
    Some countries have seen an increase of 20 percentage points in the share of children finishing secondary school.
    [The] gap between rich and poor in secondary-school enrolment has fallen in all countries except El Salvador, Honduras, Guatemala and Nicaragua.


    A nudge in the right direction


    Conditional cash transfers (CCTs) reinforce this focus on schooling.
    These [cost between] 0.2-0.8% of GDP …
    About a quarter of Brazil’s population now gets some money from Bolsa Família, the country’s CCT scheme. …
    State and local governments piggyback on top.
    [Rio de Janeiro] supplements Bolsa Família payments for 700,000 of its poorer families.
    If children do exceptionally well in exams, a bonus is paid.
    If they miss school, the payment stops. …

    In Peru … almost 70% of a child’s educational achievement can be predicted from its father’s schooling.
    And, like India’s poorest castes, disadvantaged indigenous people have made big gains. …

    Countries from Argentina to Bolivia have introduced non-contributory [aged] pension schemes …
    Minimum wages across the continent have soared.
    Brazil’s has risen by more than 50% in real terms since 2003.
    And since pension benefits are linked to the minimum wage, the two trends reinforce each other. …

    [Narrower] wage gaps explain most of the reduction in inequality throughout the region.
    [In Brazil] government transfers explain about one-third of the drop in inequality …

    [However,] most of the state schools are still much less good than their private equivalents. …

    Latin American states have traditionally … raised revenue from the more affluent, then spent it on generous public pensions for those same people.
    … 60% of transfer spending in Bolivia [still] goes to people who are not poor.

    Sustained growth [has] brought in enough tax revenue to boost both education spending and transfers at the bottom without pushing up tax rates.
    [It has also] allowed huge increases in minimum wages without [damaging] employment.
    But as growth slows and the real value of minimum wages rises …
    If the improvements in inequality are to be maintained, let alone continued, [middle-class] entitlements will need to be squeezed.


    The New Model


    A bit more unequal, a lot more efficient


    The most equal country in the world is becoming less so.
    Sweden’s Gini coefficient for disposable income is now 0.24, still a lot lower than the rich-world average of 0.31 but around 25% higher than it was a generation ago. …
    [The ruling centre-right party argues that Sweden] has gone from being a stagnant benefit-based society to a vibrant modern economy with [only a] small rise in inequality. …

    [Prior to tax and redistribution] the country’s Gini coefficient for the working-age population is 0.37, close to the OECD average …
    Wage disparities are narrower than in Anglo-Saxon countries [because] centralised bargaining … sets minimum wages in different sectors.
    Top CEO pay has not risen nearly as dramatically as in America. …

    The main source of egalitarianism in [Scandinavia] is redistribution by the state. …

    In the early 1990s Sweden introduced a … flat tax on capital with a higher, progressive income tax.
    The inheritance tax was eliminated in 2005, the wealth tax in 2007 and taxes on residential property in 2008.
    [Capital] income has soared, particularly at the top of Sweden’s income scale.
    [Residential property is now favoured] over more productive investment. …
    [Despite union membership no longer being tax deductible, 70% of workers remain union members.]
    Benefits … from jobless aid to disability benefits, have become less generous, more short-lived and harder to qualify for.

    The Earned Income Tax Credit … offers strong incentives for lower-skilled people to work …
    The Iraqis, Somalis and other low-skilled foreigners [can no longer count on] government support. …
    [This may be creating a] poverty trap [for low skilled workers, particularly] recent migrants who … are poorly educated and speak little Swedish. …

    [Despite the reduced spending] the Swedish state [still accounts for] 51% of GDP …
    [More] than 70% of the children of the poorest fifth of Swedes are in state-financed child-care and education schemes, compared with fewer than 30% in America. …

    Many schools are now independently run, and in health care private management is a growing trend.
    [Cuts in public services] were designed to protect the poor.
    Once you allow for the progressivity of public services … Sweden’s Gini drops [from 0.24] to 0.18.
    [Sweden remains] the world’s most equal place, as well as one of the fastest-growing and fiscally stable countries in the rich world. …

    A revival of America’s union movement would be likely to lead to growth-destroying rigidities.


    A place to look for ideas


    Sweden’s experience suggests that the welfare state can be trimmed by cutting transfers and maintaining progressive investment in social services, without allowing inequality to surge. …
    [Addressing inequality is not just about redistribution.]
    [Nor] is there a simple trade-off between efficiency and inequality.
    Sweden’s economy has become much more efficient while still keeping inequality low.


    Having Your Cake


    Less inequality does not need to mean less efficiency


    [In 2012 Republican presidential nominee Mitt Romney] dismissed concerns about inequality as … “class warfare” …


    [Efficient inequality]

    Milton Friedman argued that greater inequality would spur people to work harder and boost productivity.
    Gary Becker [University of Chicago] that inequality encourages people to invest in their education.
    Redistribution [—] higher taxes and government handouts [—] deter hard work.
    The bigger the state, the greater the distortion of private incentives. …
    Economic freedom and better incentives boosted growth in China, India and elsewhere.

    Sweden’s experience shows that deregulation, lower taxes and fewer benefits increase economic dynamism even as they reduce equality. …


    [Inefficient inequality]

    [In] countries with the biggest income gaps, increasing inequality is partly a function of rigidities and rent-seeking — be it labour laws in India, the hukou system and state monopolies in China or too-big-to-fail finance in America. …

    [Rising] inequality has not, by and large, been accompanied by a smaller … state.
    In many rich countries government spending has risen since the 1970s.
    [And] with more money spent on the health care of older, richer folk, and relatively less invested in poorer [kids, modern] transfers are both less progressive and less growth-promoting.

    [High] and growing levels of income inequality can translate into growing inequality of opportunity for the next generation and … declining social mobility.
    That link seems strongest in countries with low levels of public services and decentralised funding of education.
    Bigger gaps in opportunity … mean fewer people with skills and hence slower growth in the future. …


    [Recent evidence]

    • [Growth is] more persistent in more equal countries …
      [Income distribution matters] more for the length of growth spells than either the degree of trade liberalisation or the quality of a country’s political institutions. …
    • GDP growth [is] inversely correlated with … inequality of opportunity, but not with overall inequality.
    • [Countries] with lower educational equality … grow more slowly. …
    • [Countries] with higher Gini coefficients tend to have lower inter-generational social mobility.


    Perpetuating advantage


    The meritocratic assumption is that public provision of basic services, particularly education [gives] everyone a reasonable start.
    That was never true in poor countries with rudimentary social services.
    Increasingly, it does not seem to be true in rich ones either, particularly America. …
    In a devastating critique [of The Spirit Level, published by the Democracy Institute, Christopher Snowdon showed that Mr Wilkinson and Ms Pickett made highly selective use of statistics.
    Wikipedia:
    [Christopher Snowdon] an adjunct scholar at the Democracy Institute.

    Wikipedia:
    The [Democracy] Institute's founding Director, Patrick Basham, is an adjunct scholar with the Cato Institute

    Wikipedia:
    [The Cato Institute] was founded as the Charles Koch Foundation in 1974 …

    Would you like to know more?

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