Are we getting it wrong on inequality?

Concern about economic inequality is in the air almost everywhere. The issue is not inequality between countries, which is actually down in recent decades, thanks in large part to higher growth rates and longer lifespans in many emerging countries (especially China and India). Rather, the focus is on income disparity within countries. (http://forumblog.org/2014/08/inequality-tax-rich-upward-mobility/?utm_content=bufferd7c17&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer)

Richard N. Haass

One reason is that the problem of inequality is real – and growing worse in many places. In recent decades, wealth and income have become more concentrated at the top – the so-called 1% – while real incomes and standards of living for the poor and middle class in many developed countries have stagnated or declined.

This was true before the global financial crisis erupted in 2008, but the crisis and its aftermath (including prolonged high levels of unemployment) have made things worse. And, despite a few notable exceptions in northern Europe and parts of Latin America, the rise in inequality has affected the developed and developing worlds alike.

Prominent people are calling attention to the problem as never before. Pope Francis exhorts the world to say “‘thou shalt not to an economy of exclusion and inequality” because “such an economy kills”. US President Barack Obama speaks about an American economy that has become “profoundly unequal”. The mayor of New York City, Bill de Blasio, made the issue the centerpiece of his election campaign, repeatedly referring to a “tale of two cities” and an “inequality crisis”.

The emphasis is understandable, but there is a real danger in framing the problem as one of inequality. What should matter is not inequality per se – to paraphrase the gospel according to Matthew, the rich will always be with us – but rather whether citizens have a genuine opportunity to become rich, or at least become substantially better off. It is the lack of upward mobility, not inequality, that is the core problem.

Seeing inequality as the problem can lead to all sorts of counter-productive “remedies” that in fact would make the situation worse. The most obvious temptation is to try to reduce inequality by taxing the rich. The flaw in the politics of redistribution is that it emphasizes shifting wealth rather than creating it. Making the rich poorer will not make the poor richer.

There are of course exceptions to this principle. For example, in cases of extreme corruption and crony capitalism, the state’s resources are hijacked by the few. Many energy-rich countries fall into this category, which is why many observers speak of energy and mineral endowments as a “curse” rather than a benefit.

But, fortunately, such cases are exceptions. As a rule, smart policy consists not in bringing down the rich but in raising up the poor and middle class. Reducing (or, better yet, eliminating) discrimination on the basis of race, religion, gender and sexual orientation is one way to accomplish this, as is ensuring property rights, in part so that people can borrow money against their homes to start businesses.

Education is also vital. But this does not imply the need to spend much more on education; here (and elsewhere), how money is used is more important than how much is spent. The most critical variable affecting students’ performance is the quality of teaching. The resources that are required for additional teacher training and for paying more to talented people to become and remain teachers can be offset by a willingness to shed those teachers who are not up to the task. Even if some costs were to rise, it would be worth it if the result were better-educated and more productive citizens.

Reforming curricula is equally important. High schools and what are known in the United States as community colleges – post-secondary institutions that typically offer a two-year degree – need to provide courses tailored for jobs that exist or soon will. Close cooperation between employers and schools should be fostered, as is often done in countries like Germany. And education has to be made available inexpensively and efficiently to people throughout their lives, not just at the outset of their careers.

It is also important to be wary about some ideas often put forward as solutions, such as requiring large increases in the minimum wage paid to hourly workers. The danger is that it will discourage businesses from hiring. It would be better to keep wage increases modest so that people can get jobs, and to look for other ways to subsidize education and healthcare for those who need it.

Inequality is real. But it can be addressed effectively only with policies and programmes that foster growth and meaningful opportunities to benefit from it. The stakes are great, as economic growth and social cohesion depend on getting this right. But getting it right requires understanding that inequality is not so much the cause as it is the consequence of what ails us.


Published in collaboration with Project Syndicate

Author: Richard N. Haass, President of the Council on Foreign Relations, previously served as Director of Policy Planning for the US State Department (2001-2003), and was President George W. Bush’s special envoy to Northern Ireland and Coordinator for the Future of Afghanistan.