by Adam S. Posen, Peterson Institute for International Economics
Op-ed in the Financial Times
August 5, 2014
© Financial Times
Outrage about inequality is big these days, and for good reason. Despite this justified attention, the discussion has been much too polite and limited. We should care about injustice, and not all forms of inequality are unjust per se—some are far more unfair than others. We still should do something about insecurity, the now largely forgotten theme of the 2008 US presidential campaign. That remains the real threat to poor Americans from inequality, not the (sometimes vast) wealth of some other people.
And we should care about inclusion, which means recognizing that many individuals are still excluded from economic security—let alone wealth—because of race, region, ethnicity, or gender. In short, noticing who is actually hurt, and how, is left out of the current inequality furore. The consistent omission of insecurity and inclusion is a moral failure and one that results in policy mistakes. We obsess about the aggregate magnitude of economic disparities. But we cannot understand the risks of inequality, or identify the right policy response, unless we pay as much attention to the identity of those excluded from economic opportunity.
It is striking how the public discussion of inequality has been careful not to differentiate between citizens except by wealth or occasionally by the skill needed for their work. In most of the serious recent discussions on inequality, the idea that someone's economic fortunes might depend upon race, gender, or ethnicity is nodded to in passing, at best. Another blind spot is persistent regional backwardness—as besets West Virginia and Alabama, southern Italy and Portugal.
Instead of confronting these continuing harms of exclusion directly, commentators have fixated on the ways in which the rich become richer, and the fact that some have lost the opportunity to become rich. Popular resistance to high estate taxes may be puzzling to many. Yet, inequality due to inherited wealth is far less grave an injustice than an inequality that emerges because of inherited skin color, ethnic identity, or place of birth.
The gap between what black people and white people in the United States are paid has not closed at all in 50 years. In Europe, the social exclusion of young Muslims explains much of the disparity between their income levels and the national average and accounts for much of the inequality overall. Geographic mobility has been declining in the United States. Yet, in large part, local conditions continue to determine educational and employment opportunities, and even long-term health.
The identities of the disadvantaged should also matter to those who are concerned with inequality because they are worried the pitchforks will come for capitalism—either literally in terms of revolt or figuratively in terms of demanding much greater regulation and redistribution. Radicalism often does not result simply because of unequal riches. The relative status of groups sharing an identity and exclusion is a much better predictor of radicalism.
Consider how China has had continuing popular support for a regime that has stoked vast increases in inequality over decades but does so in a context where the 92 percent or more of Chinese citizens who can identify as Han Chinese receive some of the spoils. Yes, rapid income growth often seems enough to buy off dissent, but history gives us as many examples where rapid growth has provoked reaction and revolution because of pre-existing divisions in society. Meanwhile, highly unequal societies have maintained their arrangements for long periods of slow growth from Brazil to Spain, to India to South Africa.
The misleadingly narrow focus is exemplified by the avalanche of commentary by serious economists on Thomas Piketty's Capital in the Twenty-First Century (as well as by the book itself). These public intellectuals would say they are rightly focusing a parsimonious explanation of the continuing concentration of wealth across countries over recent decades. Such an approach is meant as a necessary simplification to allow for the kind of tractable mathematical modelling that current economists enjoy. The earlier Capital,by Karl Marx, actually shared this bias and dismissed ethnic or national identity as epiphenomena if not tactical distractions of the truly undifferentiated working class. Looking in abstract at the distribution of income and wealth—and ignoring the identities of the people found at each point on the spectrum—really does miss the point.
This abstraction sacrifices too much and has yielded unreality in the proposals to address inequality. The international differences between post-tax inequality in the United States or the United Kingdom versus the Nordic countries, for example, are quite sharp. This reflects the power of policies and institutions that mitigate inequality, and shows an ability to offset the seeming inevitability of ever-rising inequality. However, these cross-national differences also reveal the importance of social unity, which gives rise to those institutions that raise the poor where they exist. And if we ignore the fact that economic distribution today remains quite unequal along identifiable lines, and instead try to address inequality as a bloodless impersonal force, we will never attain that needed social unity. Understanding the few rich will lead us to ignore helping the differentiated poor.
Policy Brief 14-3: Income Inequality Developments in the Great Recession January 2014
Policy Brief 14-1: Making Labor Market Reforms Work for Everyone: Lessons from Germany January 2014