Edge of Chaos

Paper No. 5448                                     Dated 4-Apr-2013

By Kazi Anwarul Masud 

Intellectuals from the East, the West, the post-second world war financial institutions and the leaders of the world, singly and collectively, are now expressing their anxiety about increasing poverty afflicting many countries of the world.

Astounding information is now being revealed through studies by world renowned economists and statesmen. Economists from top US universities, Federal Reserve and the US Treasury Department have concluded that economic inequality is a permanent—not temporary—feature in the United States, based on an analysis of 350,000 federal income tax returns between 1987 and 2009.

 

Washington Post’s Ezra Klein wrote in his column: “The reason the permanent/transitory distinction matters is that lifetime earnings are much more important than a single year’s earnings. Its lifetime earnings that decide how you live in general, what sort of house you can afford, whether you can send a kid to college, whether you can retire comfortably.” Gaps in income, life time wealth and consumption are irreconcilable and already constitute class distinction between the rich and the poor—the haves and the have-nots.

Reviewing Paul Krugman’s book End this Depression Now and Timothy Noah’s The Great Divergence New York Times’ Felix Salmon wrote: an overwhelming majority of the population, the bottom 80 percent to 90 percent of the country, is struggling hard and has tasted none of the fruits that have been showered on the wealthy. For the period from 1980 to 2005, during which markets soared and America got indisputably richer fully 80 percent of the nation’s income gains went to just the top 1 percent.

Most Americans’ incomes stagnate with the middle class getting nowhere. Felix Salmon quotes Krugman’s demonstration that the same group suffered dreadfully in the financial crisis, and that its plight continues today. Both Krugman and Noah try to inject urgency back into the national debate, spelling out how unacceptable the status quo is, and calling on the government to do something about it as a matter of the highest priority. But Salmon fears that their pleas will fall on deaf ears, as long as the rich remain well fed and in charge of the levers of power in Washington.    

Till recent past the haves were residents in the West whom Harvard historian Niall Ferguson had advised to live within the confines of a gated prosperous economy to remove themselves  from the contagion of chaos and poverty of the developing nations. But Helen Clark’s 2013 UNDP report observed that the South as a whole was driving economic growth and societal change for the first time in centuries. By 2020, she added,  according to projections developed for this Human Development Report, the combined economic output in 1990 purchasing power parity dollars, of three key emerging economies alone– China, India, and Brazil – will surpass that of the United States, Germany, the United Kingdom, France, Italy, and Canada combined. Evidently such projections counter Ferguson’s advice on “gated economy” because poverty being extant in the developed countries with the certainty of being permanent the solution cannot be isolation from global trade and out sourcing of jobs to cheaper destinations as any entrepreneur would do to cut cost.

Is it possible to bring about the “Great Compression” of a decade of extra-ordinary wage compression in the US in early 1940s that continued till 1970 reflecting a period of tolerable income inequity between the rich and the poor?   Nobel laureate Paul Krugman who has been an ardent critic of inequality in the US in his piece (Conscience of a Liberal-NYT-SEPT 2007) observes: “The great divergence: Since the late 1970s the America I knew has unraveled. We’re no longer a middle-class society, in which the benefits of economic growth are widely shared: between 1979 and 2005 the real income of the median household rose only 13 percent, but the income of the richest 0.1% of Americans rose 296 percent. Most people assume that this rise in inequality was the result of impersonal forces, like technological change and globalization. But the great reduction of inequality that created middle-class America between 1935 and 1945 was driven by political change; I believe that politics has also played an important role in rising inequality since the 1970s.

It’s important to know that no other advanced economy has seen a comparable surge in inequality – even the rising inequality of Thatcherite Britain was a faint echo of trends here. On the political side, you might have expected rising inequality to produce a populist backlash. Instead, however, the era of rising inequality has also been the era of “movement conservatism,” the term both supporters and opponents use for the highly cohesive set of interlocking institutions that brought Ronald Reagan and Newt Gingrich to power, and reached its culmination, taking control of all three branches of the federal government, under George W. Bush”.  

The economic meltdown in the West has weakened the appeal of capitalism wedded with democracy that Francis Fukuyama saw, inadvertently ahead of time according to some, as “the end of history” after the fall of the Soviet Union. Though later revisiting his End of History and the Last Man Fukuyama gave the explanation that “Both Hegel and Marx believed that the evolution of human societies was not open-ended, but would end when mankind had achieved a form of society that satisfied its deepest and most fundamental longings.

Both thinkers thus posited an "end of history": for Hegel this was the liberal state, while for Marx it was a communist society.  This did not mean that the natural cycle of birth, life, and death would end, that important events would no longer happen, or that newspapers reporting them would cease to be published.

It meant, rather, that there would be no further progress in the development of underlying principles and institutions, because all of the really big questions had been settled”. Controversy around Fukuyama’s thesis apart the world is now faced with a choice between the China model and the Capitalist model which inherently embraces income inequality now established by many studies by unimpeachable  personalities of different disciplines.

The right insists that the difference is not because of dissimilar opportunities to the people but due to the difference in the ability of the people to take advantage of the opportunities. They oppose progressive taxation, increase in welfare expenditure, and on health, education and other areas of society that would give a leg up to the less advantaged sector of the society.

The left, if the progressives can be titled as such, would prefer more governmental attention to social sectors, particularly in education that will give requisite expertise to workers to stem the tide of outsourcing of jobs.  

Paul Krugman gives credit for the great compression not only to progressive income taxation but to other New Deal and World War II policies of President Franklin Roosevelt. From about 1937 to 1947 highly progressive taxation, the strengthening of unions of the New Deal, and the wage and price controls of the National War Labor Board during World War II, raised the income of the poor and working class and lowered that of top earners. The dilemma being faced by the policy framers is whether an equitable society is possible at all.

Professor Jerry Mueller quoted Edward Banfield in The Unheavenly City Revisited, "All education favors the middle- and upper-class child, because to be middle- or upper-class is to have qualities that make one particularly educable” (Capitalism and Inequality). This smacks of some sort of class distinction that speaks of  different ability among different people. But  Max Weber tried to explain the difference in achievement of people on religious diversity (protestants do better than Catholics and Calvinist better than Lutherans) while some others based the different levels of achievements on racial and cultural factors.

It has been said that in the US Indians and Chinese do better than the Whites who do better than the Latinos who in turn do better than African-Americans. Such explanation should not be taken as cast in stone but as an indicator for policy framers to fix their priorities while allotting tax payers’ money. Yet an explanation can be found in the racial trait of the Asian immigrants to de better than the “natives” so that silent discrimination, an unavoidable factor in the hiring process, can be overcome through merit.  

Can hard work, thrift and honesty—invincible principles of Protestants’ success—be a realizable phenomena in the future for developed countries? Felix Salmon (    Speaking to the Haves, in a Plea to Consider All the Have-Nots-June 12 2012) in a New York Times article lamented: “Rich people have more power than poor people, and they use that power to get what they want — which is, normally, more wealth and more power. Across America, politicians invariably reflect the views of their richest constituents. And the Federal Reserve, too, appears to have been captured by the rich: It seems much more worried about the specter of possible future inflation (which might be bad for the rich) than it is about the tragedy of present-day unemployment”.  Krugman’s disappointment is no less poignant. In the introduction of his book The Conscience of a Liberal he writes: “Like the rest of my generation, I took the America I grew up in for granted – in fact, like many in my generation I railed against the very real injustices of our society, marched against the bombing of Cambodia, went door to door for liberal candidates. It’s only in retrospect that the political and economic environment of my youth stands revealed as a paradise lost, an exceptional episode in our nation’s history………Since the late 1970s the America I knew has unraveled. We’re no longer a middle-class society, in which the benefits of economic growth are widely shared: between 1979 and 2005 the real income of the median household rose only 13 percent, but the income of the richest 0.1% of Americans rose 296 percent.”

If that is the picture of the richest country in the world one can well imagine what the real situation will be for a least developed country like ours. True our economy is   doing well and poverty is being reduced. But at the same time inequitable distribution of national wealth continues unabated. The children of the rich and the powerful are getting opportunities that the poor children cannot even dream of. Consequently the rich kids get better equipped to deal with a post-industrial world endowed with better physical and mental health that their parents’ money made available. In the words of economists Pedro Carneiro and James Heckman, "Differences in levels of cognitive and no cognitive skills by family income and family background emerge early and persist. If anything, schooling widens these early differences."

Are we then looking at a future where the poor and marginalized majority will take to the street because they are not getting the benefits of development that Bangladesh is achieving in the eyes of the Breton Wood institutions, UNDP and studies by famous universities? Would our journey to become a middle income country  also be accompanied by the children who have traditionally been left behind?

One hopes that in our haste we do not ignore what Nobel laureate Joseph Stieglitz has said “In short, the debate should not be centered on whether one is in favor of growth or against it. The question should be, are there policies that can promote what might be called moral growth — growth that is sustainable, that increases living standards not just today but for future generations as well, and that leads to a more tolerant, open society?

Also, what can be done to ensure that the benefits of growth are shared equitably, creating a society with more social justice and solidarity rather than one with deep rifts and cleavages”.

(The writer is a former Secreatary and Ambassador of Bangladesh)

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