THIS FINAL PART of the book looks at what can be done to reduce excess inequality and make Western societies more equal, while continuing to reduce poverty.
It starts with Chapter 11 ‘Elephants, camels and spitting cobras: what happens next?’, an impressionistic projection into the future, drawing attention to the likely trends in inequality over the next quarter century. Obviously any such projection must be subject to huge margins of error – the fact that I have a reasonable forecasting track record before is no guarantee that these particular highly impressionistic forecasts are correct!
Whereas the rise in inequality in the West was attributed in Part III largely to the impact of globalisation and financial capitalism, with an element from Piketty-type exploitation, it looks as though the rise in inequality over the next quarter century is more likely to be caused by different phenomena: the impact of technology, the impact of ‘superbabies’ and the global power of the tech monopolies. It is hard to tell how much these will affect inequality. The first industrial revolution reduced the relative wages of manual employees, particularly those with skills. But since then technological advance has largely been associated with growth and better employment opportunities. It is all too easy to see which jobs will disappear from technology; much less easy to see which jobs will be created. So, even if it seems likely that technological progress will increase inequality, the scale of this effect is uncertain.
After the projection into the future, I look at various policy options.
First, education (Chapter 12 ‘Education, education, education – and education’). Without a more even spread of education there is little chance of stopping inequality rising. Even with a successful spread of good education to all groups, preventing an increase in inequality will be tough and will require a range of other measures.
Second (Chapter 13 ‘Saving capitalism from itself’), the excesses of capitalism need to be brought under control. I’m reasonably optimistic that the market will start to deal with many of the excesses of financial capitalism that have been so prevalent over the past 40 years, but it will be important to keep an eye on the extent to which this is happening.
I would like to see bankers and other professional advisers who act in an unprofessional way, putting their own interests ahead of those of their clients, suffer rather more severe sanctions than happens at present, with firms losing their operating licences and people being banned from doing business or, in serious cases, jailed. But the bigger task over the next quarter century looks likely to be dealing with crony capitalism, mainly in countries outside Western control, and dealing with the tech giants. The chapter looks at all of these issues separately. Improving the effectiveness of competition policy is likely to be crucial.
Third (Chapter 14 ‘Attacking the law of unintended consequences’), we need to deal with some of the results of the law of unintended consequences where government has intervened with (probably) benign intent to deal with one problem and has ended up creating other problems. The four main subjects are high consumption taxes, the impact of planning laws, the impact of rent controls and the impact of quantitative easing on asset prices. In each case government has increased inequality through its actions and suggestions for unwinding the policies are put forward.
Fourth (Chapter 15 ‘Making poorer people richer by cutting the cost of living’) – and this is a bugbear from my time growing up in an emerging economy – I believe that we in the West and particularly in Europe have built up a high-cost lifestyle during the period when the world economy was making even relatively poor people in the West relatively rich by world standards. As pay globalises we are going to have to examine the components of the cost of living carefully. Three particular items which make up about two thirds of the cost of living of the poorest 10% in the US need to be looked at especially carefully – rents (impacted by planning policy and rent controls), food (impacted by agricultural policy) and mobile phones (impacted by licensed oligopolies). The section focusses on what can be done to bring down the cost of living in advanced economies including looking at the impact of indirect taxation.
The fifth solution (Chapter 16 ‘Can a universal basic income really work?’) looks at the concept of a universal basic income. The economist John Kay argues strongly against such a concept, making two points – that to make it affordable would mean a very large cut in benefit levels while to protect income levels of beneficiaries would make such a scheme unaffordable.1 Both points are clearly true at present. But looking forward to the world of a quarter of a century ahead, some of their force is likely to diminish, at least if my forecasts are roughly right.
Some may be surprised that I have not yet addressed the issue of taxation for distribution. This is addressed in Chapter 17. But although tax is part of the solution, both the UK and the US (though less so in the US since the Trump administration started to change tax rates) have fairly high top marginal rates of tax that will tend to limit the realistic possibilities of raising more income for redistribution from tax.
Chapter 18 (‘Neither Trump nor Corbyn – rejecting false solutions’) looks at what not to do. Populist movements on both sides of the Atlantic are queuing up to provide anti-capitalist and protectionist solutions as well as to restrict migration. There is a social case for limiting migration to a pace that a society can easily absorb but most of the economic analysis is strongly in favour of encouraging migration. To make migration more acceptable so that many of the indigenous workers don’t feel that they are losing out from it, it needs to be properly supported.
I argue against this worshipping of false gods and the Canute-like belief that the tide of globalisation can be turned back. A country, even one as large as the US, that tries to cut itself off from the rest of the world will eventually risk suffering the fate of China, which lost relative power and strength from the 15th to the 20th century while it hid in isolation from the rest of the world.
The conclusion looks again at how to deal with my worst economic nightmare, which is that technology drives an underlying increase in inequality so severe that the palliative measures I have put forward pale into insignificance. My fear then is that the reaction to the increase in inequality might cause protectionist, anti-globalisation and anti-capitalist policies that would send Western economies into absolute decline and make people a lot poorer. I try to sketch out some suggestions as to what to do to prevent this happening.