Tuesday, October 18, 2011

On Inequality and Its Discontents

Greg Wahl Stevens / Associated Press

Nouriel Roubini has written an essay on a subject that I have wanted to write on for some time now: the impact of inequality on society. Recall the Elizabeth Warren post I wrote asking about the appeal of the populism in her stump speech. What I was interested in, and remain interested in, is how much the increasing inequality is really starting to capture the attention of the average middle-class members of society. Obviously economic crises bring problems like inequality to the fore and to me the Occupy Wall Street movement is about a general sense of deep unease with a system that has such unequal outcomes and seems to reward not the noble and true but the devious and cunning.

Here is Roubini:
This year has witnessed a global wave of social and political turmoil and instability, with masses of people pouring into the real and virtual streets: the Arab Spring; riots in London; Israel’s middle-class protests against high housing prices and an inflationary squeeze on living standards; protesting Chilean students; the destruction in Germany of the expensive cars of “fat cats”; India’s movement against corruption; mounting unhappiness with corruption and inequality in China; and now the “Occupy Wall Street” movement in New York and across the United States.

While these protests have no unified theme, they express in different ways the serious concerns of the world’s working and middle classes about their prospects in the face of the growing concentration of power among economic, financial, and political elites. The causes of their concern are clear enough: high unemployment and underemployment in advanced and emerging economies; inadequate skills and education for young people and workers to compete in a globalized world; resentment against corruption, including legalized forms like lobbying; and a sharp rise in income and wealth inequality in advanced and fast-growing emerging-market economies.
The question is whether this is just an artifact of the economic crisis or is this really a theme that will start to change our view of government and markets?  Has history really ended or are will still living history?

Roubini points out the European approach that was more balanced perhaps between the market and the society:
Even before the Great Depression, Europe’s enlightened “bourgeois” classes recognized that, to avoid revolution, workers’ rights needed to be protected, wage and labor conditions improved, and a welfare state created to redistribute wealth and finance public goods – education, health care, and a social safety net. The push towards a modern welfare state accelerated after the Great Depression, when the state took on the responsibility for macroeconomic stabilization – a role that required the maintenance of a large middle class by widening the provision of public goods through progressive taxation of incomes and wealth and fostering economic opportunity for all.

Thus, the rise of the social-welfare state was a response (often of market-oriented liberal democracies) to the threat of popular revolutions, socialism, and communism as the frequency and severity of economic and financial crises increased. Three decades of relative social and economic stability then ensued, from the late 1940’s until the mid-1970’s, a period when inequality fell sharply and median incomes grew rapidly.
But we all know of the malaise of the 1970s and 80s and the ensuing Thatcher revolution in the UK which dramatically scaled back the roll of the state in the economy, which did usher in a period of growth and prosperity in the UK that had been largely absent since the industrial revolution.  This experience is something, no doubt, that the Cameron government has been very successful in using to justify the recent austerity measures.

But Roubini has reservations about the dismantling of the welfare state in Europe:
Any economic model that does not properly address inequality will eventually face a crisis of legitimacy. Unless the relative economic roles of the market and the state are rebalanced, the protests of 2011 will become more severe, with social and political instability eventually harming long-term economic growth and welfare.
This is precisely what I am unsure of. Are these protests really going to last and grow until there is fundamental change? And if so, will it be for the better or worse? What exactly is the causal link between our very free-market approach and the amazingly innovative, creative, transformative economy we have developed?

I don't know the answers, but I have this sense that tectonic shifts are taking place that is going to rearrange the landscape if for no other reason but that we cannot sustain the entitlements we have and change is inevitable - the question is in which direction will we move?


Cameron Mulder said...

I find the whole occupy movement fascinating since i have wondered for years why we have not seen some type of protest against the high levels of inequality and poverty we have in the US.

Right now i would say things could shift in just about any which way. The Occupy movement doesn't have a coherent enough platform to really really make much of a statement on what effects it might have.

I have no idea what is going to happen, but i am much happier watching this than i was watching the tea party.

BJCefola said...

Why do you say entitlements cannot be sustained? Taking that at face value kind of limits which way we can go.

Jeff Alworth said...

Patrick, what makes you think more progressive taxation and a more robustly-supported safety net would cripple innovation? (Leaving aside the fact that the drain on the country through our totally market-based health care system is twice as great as any other country's.)

There's nothing about obscene wealth that benefits society, nor is there any particular danger in a strong safety net. (Priorities, after all, are the only thing that dictate we spend so much on defense.) As that wealth begins to coagulate in a hereditary aristocracy, the opposite will happen, as heirs do little to contribute to society but instead hoard their wealth.

Most of the revolutionary, transformative inventions didn't come thanks to the largesse of the extremely rich. Would a modern day Steve Jobs have the freedom to drop out of Reed and start Apple? Maybe, but it's surely the case that the stagnant economy of the late 70s and a robust labor movement did nothing to stop him.

I hope we're at the moment of change, but there are amazingly entrenched powers that protect the system (not the least of which are the Supreme Court). I think we're in for something far slower and far more painful.

AIEEE said...

I hope we're at the moment of change, but there are amazingly entrenched powers that protect the system (not the least of which are the Supreme Court). I think we're in for something far slower and far more painful. GATE Exam

Patrick Emerson said...

BJ: Even the most progressive of economists recognizes that social security will have to be tweaked and that something has to be done to contain health care costs. THe SS fix is minor and easy - you can means test it, or raise the eligibility age - but the health care nut is very difficult to crack.

Jeff: I only meant to suggest that there are limits to the extent to which one could pursue redistributive policies and not create a significant drain on the economy. I certainly don't think we are there now.

JHowe said...

There are a lot of things that are unsustainable: medical spending, military spending, prison population, budget deficits, trade deficits, income inequality. We fought two wars without increasing taxes to pay for it. Who said that the only people that believe in infinite growth in a finite world are madmen and economists?

Serious spending cuts are going to be required to close the deficit and start repaying the debt. It is going to feel even worse considering there won’t be a social security surplus to use to continue to fund the deficit. Yet, there are a lot of politicians who are still looking to cut taxes on the richest Americans. The period from the end of WWII to the 70’s shows that a more equitable distribution of wealth and higher taxes are not some huge impediment to growth and innovation that some want us to believe. Innovation and productivity increases do not all come from 1% of the population.

The question is how will we resolve those issues? First, the GOP will get a shot with the next election. Things will either not get better or get worse (really, cut regulation and millions of Americans will go back to work?). After, I think people will tire of hearing that only a few people are responsible for job creation, that they need to be protected from the rest of us or they will take their ball and go to China. While I do not think the Occupy Wall Street movement will cause a sudden shift in American politics, I think their contribution to starting the discussion about the inequality in America will contribute to an eventual change.