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The question of whether western economies’ rising inequalities of both income and wealth can be tackled by the usual reformist approach of piecemeal measures or something bolder emerged at a recent conference of economists in Washington, DC.
At the heart of the question lies the “growing consensus,” according to the participants, that the magnitude of the problems cannot be treated with the tools that would have been advocated two decades ago, i.e., less government intervention (“meddling” was the word more often used in those days) and policies favoring economic growth.
Inequalities have become a problem that with adverse economic consequences on its own. It hinders social mobility, destroys people’s confidence in the fairness of free market economies, and feeds the anger exploited by populist movements in Europe or America.
Income shares of the richest 1% in the United States have increased from around 8% in the 1970s and 1980s to 20% today, the conference heard. It rose from a similar 8% to 11% in Europe over the same period. In 1980, the income share of the bottom half stood at 20% on both sides of the Atlantic. This figure has dropped to 12.5% in the United States and 18% in Europe, according to numbers presented at the conference organized earlier this month by the Peterson Institute for International Economics.
There are many conceivable policies aimed at addressing inequalities, depending on their goal. They can aim at the lower-income population – with minimum wage or social policies – the middle class – with public spending on higher education or social insurance – . or hit at the top, with taxes on the rich or tougher business regulations. Some have been tried, others not.
But keeping policy within the confines of experience means discarding innovative policies. The dilemma was summarized after the PIIE conference in a paper by economist Olivier Blanchard, the former IMF chief economist who now teaches at the MIT, and Dani Rodrik, professor of international political economy at Harvard’s Kennedy School.
Buy definition, “policies that are fundamentally innovative are, well, untested,” they wrote.
That means politicians must take stands in the big debates about such possible tools as wealth taxes, the universal basic income or the need for major public investment spending. In other words they must take risks. The tools exist. But as Blanchard and Rodrik note, if Franklin D. Roosevelt hadn’t relied on revolutionary solutions to fight the great depression (some that even economist John Maynard Keynes called “crack-brained and queer,”) the New Deal wouldn’t have happened.
