A Penchant for Redistribution

I am taking the liberty of recycling the following article from my drafts bin from three years ago when the debate in America was raging over healthcare. This post could have been written yesterday given the way things have played out, which is why I am posting it here:

Many commentators have opined that America under Pres Obama is re-casting itself in the mould of European socialist regimes. As Alan Wolfe observes,

the covers of National Review ("OUR SOCIALIST FUTURE"), The Nation ("REINVENTING CAPITALISM, REIMAGINING SOCIALISM"), and Newsweek ("WE ARE ALL SOCIALISTS NOW") have--respectively--lamented, heralded, and observed the coming rise of socialism (Obama vs Marx, The New Republic, April 01, 2009).

From his statements, Richard W Stevenson surmises the intent of Obama to reshape capitalism by

diminishing the consumerism that has long been the main source of growth in the United States, and encouraging more savings and investment. He would redistribute wealth toward the middle class and make the rest of the world less dependent on the American market for its prosperity. And he would seek a consensus recognizing that an activist government is an acceptable and necessary partner for a stable, market-based economy (Redefining Capitalism After the Fall, New York Times, April 18, 2009).

A High Tolerance for Inequality

Politically the cover for undertaking redistributive policies in the US is being provided by the current crisis. According to Alberto Alesina and Paola Giuliano who have studied income and wealth inequality, Americans are less “inequality intolerant” by nature compared to the Europeans. This is due to the perception that prevails in the US that social mobility is possible (the World Values Survey found that 60%, compared to 40% in Europe, believed in the possibility of improving their standing income-wise).

Only during the “Great Compression” lasting from the mid-40s to the 70s has the US seen inequality decline continuously; that is apart from what seems now to be a blip that lasted from the mid-90s to the early 2000s. Franklin Foer and Noam Scheiber write in The New Republic that

(b)eginning in 2004, the data gradually began to undermine the Clintonites' central assumption: that the benefits of growth would accrue to the poor and middle class ... Workers' wages had once tracked productivity growth. Now workers were producing more, but only the wealthy were reaping the rewards; everyone else's income had basically flattened out.

Alesina and Giuliano tell us that by August 2008, inequality in the US had returned to its previous level in the 1920s. Following the crisis which is widely perceived to be the fault of financiers at the top of the income pyramid less tolerance for inequality will ensue as

voters (will) demand especially strong action to reduce inequality, even in a country like the US, where inequality is much more tolerated than in Europe.

While there is a greater appetite for social levelling, it is the extent of that levelling that will be determined soon. Alesina again:

(w)ill Americans turn into “inequality intolerant” Europeans? Probably not, but this crisis may imply a turning point towards more government intervention and towards redistribution.

Gross National Happiness, Tax Cuts and Income Inequality

It is going to cause grief and discomfort to the statisticians, but British PM David Cameron indicated this week that he was adamant at developing national indicators of happiness to guide public policy. So perhaps instead of bar charts and graphs, government ministers might issue smiley faces and frowny faces depending on what the mood of the citizenry might be.

In this age of austerity, this might not be such a good idea as many public services are going to be subject to the hatchet. On the other hand, if the science of happiness is anything to go by, increasing happiness might be a function of simply reducing inequality (meaning the absolute level of wealth is not what matters, but the relative level). If this is what will bring happiness to the greater number of people, then the last decade of growth that benefited the top tier of society may have had the adverse effect of reducing national happiness in America.

Paradoxically, the party that wants to extend tax cuts to this top tier has been restored to power in the lower house of Congress by the simple fact that many felt Obama gave a handout to the banks and the powerful lobbyists. Their theory of course is that tax cuts will bring growth which will lift all boats (increasing absolute wealth for all, never mind the way the wealth is distributed). That theory may come back to bite them if they repeal the health care measures passed by the last Congress which is aimed at ensuring a minimum threshold of income protection for millions (improving relative wealth). As in Britain, the threat of service cuts makes for a heroic posture, but time will tell if it really pays off in the end.

In The Pursuit of Happiness

The release of the report by the Commission on the Measurement of Economic Performance and Social Progress led by two Nobel Laureattes Joseph Stiglitz and Amartya Sen on 14 September has stimulated discussion on whether the "growth fetish" or the "GDP fetish" as Stiglitz puts it is somewhat misplaced.

The report notes that certain aspects of national income accounting could be responsible for providing misleading signals to us in our performance oriented world. These include the non-valuation of non-market activity and household related labour, the inclusion of environmentally destructive or socially undesireable activity, the undervaluation of quality improvements in products and the focus on inputs such as government expenditure rather than the efficiency and effectiveness of such inputs in providing desireable outcomes.

One of the more notable recommendations made by the commission had to do with incorporating other indicators of social wellbeing along with GDP to provide a more well-rounded picture of progress and development given the advances in econometric techniques that make such measurement possible.

The World Values Survey has been doing this for years. Measuring country results for both GDP per capita adjusted for purchasing power and a thing called the Subjective Well Being Index, the survey results has provided an "arc of happiness" that depicts the way in which economic well being contributes to overall well being. This arc suggests that past a certain level of income, say US$10 000 per annum, economic growth provides a diminishing marginal return on human happiness.

Back to the commission: one other important observation made was that reducing social inequality should be high up on the agenda of any government. As Stiglitz notes,

This means that there is increasing disparity between average (mean) income and the median income (that of the "typical" person, whose income lies in the middle of the distribution of all incomes).

Dealing with income inequality could mean addressing both sides of the distribution. At the top end, the compensation of corporate executives has to be governed properly, while on the opposite end, the need to improve access to education, healthcare and jobs for the most socially disadvantaged groups must be prioritised.