The Economist On Inequality

The bastion of free market thinking tackles inequality (excerpt):

Inequality and the world economy
True Progressivism

A new form of radical centrist politics is needed to tackle inequality without hurting economic growth

BY THE end of the 19th century, the first age of globalisation and a spate of new inventions had transformed the world economy. But the “Gilded Age” was also a famously unequal one, with America’s robber barons and Europe’s “Downton Abbey” classes amassing huge wealth: the concept of “conspicuous consumption” dates back to 1899.

The rising gap between rich and poor (and the fear of socialist revolution) spawned a wave of reforms, from Theodore Roosevelt’s trust-busting to Lloyd George’s People’s Budget. Governments promoted competition, introduced progressive taxation and wove the first threads of a social safety net. The aim of this new “Progressive era”, as it was known in America, was to make society fairer without reducing its entrepreneurial vim.

Modern politics needs to undergo a similar reinvention—to come up with ways of mitigating inequality without hurting economic growth. That dilemma is already at the centre of political debate, but it mostly produces heat, not light. Thus, on America’s campaign trail, the left attacks Mitt Romney as a robber baron and the right derides Barack Obama as a class warrior. In some European countries politicians have simply given in to the mob: witness François Hollande’s proposed 75% income-tax rate. In much of the emerging world leaders would rather sweep the issue of inequality under the carpet: witness China’s nervous embarrassment about the excesses of Ferrari-driving princelings, or India’s refusal to tackle corruption.

At the core, there is a failure of ideas. The right is still not convinced that inequality matters. The left’s default position is to raise income-tax rates for the wealthy and to increase spending still further—unwise when sluggish economies need to attract entrepreneurs and when governments, already far bigger than Roosevelt or Lloyd George could have imagined, are overburdened with promises of future largesse. A far more dramatic rethink is needed: call it True Progressivism...

I don’t know how long the link will last as the Economist usually restricts access to subscribers after a month or so, so get it while it lasts.

This special report delves into inequality, and more importantly, what can and should be done about it. I’m chuffed mainly because they’ve deigned to acknowledge it – not something you’d expect, given the Economist’s market leaning editorial bias.

Bearing that in mind however, you can see that bias in some of the remedies discussed, such as their first suggested priority being to bring down monopolies and vested interests. While I’d agree with that just on principle, I think that’s really peripheral to the issue.

The second and third thrusts resonate better with me: better targeting of subsidies and social spending, and more efficient and progressive taxation (e.g. higher property taxes). For the latter though, I do think that higher marginal taxes are called for – there is a link between lower tax rates and greater wage growth suppression.

One thing I do think the Economist has right though – we need a fundamental rethink in how we approach the problem of inequality. And one of the best ways to do that is to keep talking about it.