Wednesday, October 17, 2012

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 Fran├žois 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.


  1. Hi Hisham,

    Do you have any comments on this?

  2. @afiq,

    I have to be a little careful about my comments here, because I'm supposed to be giving a presentation to INCEIF in the next couple of months.

    Prof Mansor is right about one thing though - I consider household debt to be the biggest macro risk we're facing right now, even more than falling external demand or government debt.

    But he's also somewhat wrong on the data. Corporate borrowing hasn't really slowed, because they've been resorting to the bond market rather than through bank loans. From the banking system's perspective, it's really a change in the composition of assets, rather than a drop in corporate lending i.e. debt securities instead of loans.

    The other thing I would comment on is that the budget position of the government is partly a reflection of private sector saving or dis-saving, not something I would take in isolation.

    What happened during 1993-1997? We ran a budget surplus, but private sector demand was so high, we were also running a current account deficit and the private sector was over-borrowing and over-spending, with dire consequences later.

    You pick your poison.

  3. "At the core, there is a failure of ideas. The right is still not convinced that inequality matters."

    How true! This is the case with the Malays and UMNO. A lack of ideas and a failure of ideas.

    UMNO Presidents and council still dont understand why 1969 happens. Dont understand what merdeka means.

    They thought it is business as usual.

    The Star ran another article on the impact of inequality on society a few months back.

    The rise of communism and socialism in France is the rise in awareness of the unfairness of the distribution of wealth. Throughout history the system of government is for the benefit of the King or Monarchy.

    From the Romans to the British King, the masses are kept in place by fear and mythology of unquestioning acceptance of inequality.

    but as more became intelligent it becomes hard for the few to keep their status quo.

    Thus the revolution. Thus the Emperor was forced to be a farmer in China.

    The article is political but you fools try to cloak it in some gibberish financials talk.

    "From the banking system's perspective, it's really a change in the composition of assets, rather than a drop in corporate lending i.e. debt securities instead of loans."

    WTF. Talk about fools..

    1. @Economics fools..

      Did you know that in the beginning, the field of economics was actually called political economy?

      So I would say, arguing that the article is political and not economic, is like pointing to that bright spot in the sky and saying "that's not a star, it's the sun".

      Second, Afiq's link was actually off-topic and on the completely separate subject of Malaysian household debt. So my reply has nothing to do with this blog post on inequality, but quite relevant to his question. Hence the "financial gibberish".

  4. Abolishing Economic InequalitiesOctober 21, 2012 at 1:21 AM

    "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."

    Yes, I find this is a positive way to look at it. Keep talking about it because sometime it is the most obvious things that just need to adjusted to bring about equality.

    For example, the creation of Chinese and Indian multi millionaires and billionaires in Malaysia was done by one man. Tun Mahahtir was proud of it and said so in many instances. Tun Mahahtir was also quoted that the Malays are beggars in their own country which I assume he must be proud too at his success.

    But do we have to let his achievement in creating these obscene inequalities now that we are aware of it?

    It is actually not difficult to undo what Tun Mahathir had done. He created the Chinese and Indian billionaires by simply giving them licenses after licenses as he had done for Syed Bukahri and Ananda.

    Even natural asset with security implications like Satellite which was held by Telekom was allowed to be privatised to Ananda. How is that? Is no one in UMNO watching? Obviously not.

    But now you and I realised it, it can be undone. Talking about these Mahathir created inequalities and shaming the receivers is one way.

    If we dont talk about it and dont point it out, Ananda would be blisfully monopolised even national security.

    Good post!

    1. I don't know that reversing cronyism and breaking up monopolies would necessarily lead to lower inequality - the problem runs much deeper than that. It's not just about the top 1% of income earners, it's the structure of incomes throughout.

      Malaysia's Gini number has been constant but high since 1987, and the way it's being measured doesn't really capture the extreme outliers (such as billionaires).

      So we're really looking at something more fundamental in society driving inequality.

      But yes, I'm not going to stop talking about it.

    2. The Malays, 22 lost yearsOctober 22, 2012 at 7:11 PM

      To understand a problem that you dont understand is to first realise that you dont know much about it.

      Cronyism, monopoly, budget surplus are just human made up terms.

      But poverty, no food, heavy load are reality that the human can sense.

      To cloak your inability to solve the problem of wealth inequality with something more fundamental in society is a cop out.

      The late MIER economist who died just prove that in the long term we will be all be dead. He used to come up with all sorts of scenarios which are just as true as throwing the darts.

      What you term as Tun Dr Mahahtir cronyism is treachery to the Malays. When the label of cronyism was put to him, he said that everyone is his cronies. But he is not supposed to have Indian and Chinese cronies, he was elected by the Malays to fight for their interest.

      So in Tun Mahathir case it is just not cronyism but betrayal of the Malay cause.

      He hide the fact that his father was an Indian man from Kerala. He used Lingam as his lawyer, he has an Indian economic adviser, his father's friend.

      Nothing is more fundamentally wrong then being betrayed by your own supposedly leader.

      Who are the Robber Baron of Malaysia if not Tun Mahathir and his cronyism? Pak Lah and his Chinese crony? Najib and his brother crony?

      These are the people with access to Malaysia natural resources.

      The budget is the tool of the Robber Baron if you care to study it. Mitt Romney wanted to give tax cuts to the 1 percenters in the US.

      Najib give 100 percent tax cuts for 10 years to O and G companies owned by Ananda, Mahahtir's son, scomi etc.

      Najib reduce by 5 billion the income for the people from Petronas so that Petronas can pay these companies.

      My friend you must know where the source of capital to be billionaires. The robber barons steal from these sources.

      Of course, the banks are another source of wealth. The Chinese developers get their money up front from the banks. The banks in turn depends on the speculators to pay back.

      If the house buyers or speculators fail to pay who lose? The banks! The Chinese developers have already got their cash!

      What can you do with bricks and mortar? There are thousands of empty houses but the banks keep giving money to the developers. Why? Because some people own shares in these developers.

      The policy makers who make it possible are the ones responsible for these robbers to rob banks and Petronas.

      It is so easy to make the right decisions to tax Petronas higher and no GST. But because they have been bought they do the reverse. Petronas money is for the rich so lets tax everyone else..hehehe.

      The rich get richer, the wealth gap become larger and you will say there is something fundamentally wrong.

      You are right. And that fundamentally wrong thing is called GREED.

      And we can as a society stop greed. But first we must understand its simple and its greed.

      Paying lip service to High income and high technology nation is another camouflage.

      Does oilpalm deforestration of Borneo rainforests sound like high tech to you? Does RM600 per month labour sound like high income to you? Well this is actively promoted by PORIM a low tech low pay sector.

      Does PORIM knows about supply and demand? Obviously not that is why the Governement is working hard to increase the supply of oil palm by opening more acreage not only in Malaysia but in third countries! How stupid is that until you realise its greed that propel this.

      Greed by the people who supply fertilisers who supply the oil palm seed. Instead of controlling supply, these greedy group expand oil palm supply until now there is glut and these will kill the small holders the malays.

      When this happen the editors will say world price has come down due to China not buying when the truth is inventory has reached the capacity to store!

      So please add greed to be the main cause.

    3. I suggest you open your eyes and look further afield.

      Wealth and income inequality is a global phenomenon, not a local one, and has been going on for the last 30-40 years. It is not just Malaysians, but Singaporeans, Chinese, Americans, Italians, Koreans and more...even famously egalitarian Switzerland and Japan have been seeing inequality creeping up.

      Defining wealth and income inequality purely in terms of our culture of rent seeking is confusing the symptom with the disease. Just getting rid of cronyism, monopolies and so on - as attractive and desirable as they may be - won't ultimately resolve the problem. It would be like taking morphine to cure cancer, you feel good for a while but you haven't cured the disease.

      To clarify what I said in the previous comment: measured inequality is already high in Malaysia even without really taking into account the mega-rich, the "robber barons" and the cronies. That's inherent to the methodology used - the Gini coefficient is sensitive to changes in the middle of the income distribution, not the ends.

      Which means that even if we reverse the excesses of the Mahathir years, inequality will still be high and we will have fundamentally resolved nothing.

      The problem isn't the wealth and income difference between Ananda Krishnan and a padi farmer, it's really about the wealth and income difference between people like you and me with a padi farmer.

      And that's a much more complex problem to solve.

  5. The more I read the more I laugh. It just proves what this guy succinctly put down as “illusion of explanatory depth” I am eagerly waiting for his study and rubbing my palms in glee.

    In the meanwhile, I will put in my five cents to the guys' thoughts and take a nap before getting ready for the next laugh. Meanwhile happy reading the excerpt from the NYT to which I added my profound thoughts at RB...hahahaha:

    Excerpt:I am not a professor or some hoighty toity verbose intellectual or wannabe…but I do think that adding a subjective/ emotional laden vs objective/reason laden dimension to the suggestion below:

    “So what can be done to turn it into one? The answer implied by our research is not that we should all become policy wonks. Instead, we voters need to be more mindful that issues are complicated and challenge ourselves to break down the policy proposals on both sides into their component parts. We have to then imagine how these ideas would work in the real world — and then make a choice: to either moderate our positions on policies we don’t really understand, as research suggests we will, or try to improve our understanding. Either way, discourse would then be based on information, not illusion.”

    would further augment its compelling logic. Often, in Malaysian civil society discourse, I have observed the same phenomena of irrational behavior transmuting into rational understanding of an issue after the explanatory illusion is dispelled. Although, a novice, I postulate that the “illusion of explanatory depth” is attributable to the emotional associations underlying individual perceptions about an issue. Get them into an interactively open and informatively transactional explanatory mode where individuals can dissect, assess and analyse their viewpoints through non-intimidator or non-confrontational exchange of information to fill in the gaps and will have them changing their initial viewpoints in the blink of an eye just like crazy, wild-eyed Hyde/Hulk morphs back into his sane, dapper, civilized Jekyll/Dr Banner.

    Wonder whether BN campaign strategists have any inkling of this? Shouldn’t all campaign material be starting on the tack of challenging voters to explain (in a personal dialogic sort of way) their stance on an issue and see how its absurdity (when subjective/emotional predominates) is undressed by their very own objective analysis (when objective/rational kicks in).

    Read all about it here:

    as the NYT ended by saying:
    "We have a problem in American politics: an illusion of knowledge that leads to extremism. We can start to fix it by acknowledging that we know a lot less than we think."

    Sure rings a bell here and elsewhere, doesnt it?Talk about illusions of knowledgeability (if ever there is such a word!!)

    Selamat Hari Raya Aidil Adha.

    Warrior 231

  6. Sorry Hisham, the paper is indeed up. My mistake:

    Warrior 231

    1. A fascinating article, thanks.

      Salam Hari Raya warrior, hope you have a good holiday.

  7. Zuo De here,

    Indeed inequality is everywhere on earth and indeed Warrior 231 voters seem to have high "knowledgeability".

    i stumble upon a book recently in Singapore on the same subject called
    singapore perspective 2012 by institute of policy studies. i find it a good read on how policies are made and on what basis that may cause the inequality and what changes may rectify this although the verdict is still out, everyone is still arguing about it ...

  8. And i read your article on link that between lower tax rates and greater wage growth suppression. my thought is that lowering tax rate does not cause wage suppression per se but it is the globalization and import of cheaper foreign labour that is the main cause of wage growth suppression especially for the lower wage earner.
    Zuo De

    1. Zuo De,

      The link between globalisation and slowing wage growth is relatively new - for Malaysia, we're really only talking about the last ten years or so. However, the link between lower taxes and lower wages is decades old, dating back to the early 1980s, and contrasts sharply with the experience of the 1950s-60s in the West where taxation was high but wage growth was strong.

      The tax/wages link coincides with the growing emphasis on corporate strategy based on enhancing shareholder value, which partly involves cost efficiency management and control, of which wages is a major component. The globalisation of supply chains (which includes use of cheaper foreign labour) is a consequence of this shift, not a cause.

      Ironically, Malaysia was one of the initial beneficiaries in the late '80s and early '90s (outward investment by Japanese firms looking for cheaper manufacturing bases).