Friday, November 8, 2013

Escaping Income & Wealth Inequality

In a new book, The Great Escape: Health, Wealth and the Origins of Inequality (chapter 5 on the United States) the economist Professor Angus Deaton explains that most economists routinely overlook the fact that societies with highly unequal distributions of income and wealth may also capture the country’s systems of governance.

The ultra-rich may then use this power to rig market processes in their favor or to exploit taxpayers through what economists call rent seeking* --- that is, profit made on government contracts that is not matched by commensurate value delivered to society. That linkage can easily make the rest of society worse off.

* When a company, organization or individual uses their resources to obtain an economic gain from others without reciprocating any benefits back to society through wealth creation. An example of rent-seeking is when a company lobbies the government for loan subsidies, grants or tariff protection. These activities don't create any benefit for society, they just redistribute resources from the taxpayers to the special-interest group.

“There is a danger that the rapid growth in top incomes can become self-reinforcing through the political process that money can bring,” Professor Deaton warns — a process that can turn democracy into plutocracy. (In the Supreme Court's Citizens United decision, a few judges didn't agree with Professor Deaton.)

This causal flow from wealth to politics and this perpetuation of wealth has been noted by others, including the economist Luigi Zingales of the University of Chicago Booth School of Business, who contends that American capitalism has been slouching more and more toward crony capitalism.

The education system in the US also perpetuates inequality. The main reason for the inequity of schools is because schools in poor neighborhoods have less money than schools in rich neighborhoods, which are mostly funded by local property taxes. And the kids of well-connected parents also have the upper hand in employment after they graduate from (the much better) school.

The Great Escape is a story of how the creation of wealth, better health and longevity (the rich live longer) have marched forward hand in hand, although not evenly. There remains the mystery of why longevity and health still vary considerably among nations with roughly equal gross domestic product per capita and why the United States, for example, does not rank favorably among nations on that score, as the Institute of Medicine of the National Academy of Sciences noted in a report this year.

Professor Deaton notes that a great deal of foreign aid to poor countries derives from economic or political special interests in the donor countries, and has propped up corrupt governments in the poor countries. (Such as US judges allowing BIG OIL to corrupt foreign leaders). By providing revenue that frees the government from having to raise taxes, foreign aid hinders the development of the social and political institutions that are the sine qua non of economic growth.

A better approach, Professor Deaton says, is for donor countries to remove trade policies that obstruct economic development — for example, import quotas or high tariffs on commodities harvested or produced and exported by developing countries. And while the military-industrial complex in rich countries profits greatly from the arms sales to poor countries, it is hard to see how that helps the residents of poor countries escape the clutches of poverty.

Professor Deaton concludes by telling his students "to work on and within their own governments, persuading them to stop policies that hurt poor people. These are our best opportunities to promote the Great Escape for those who have yet to break free."

(*Excerpted and edited from the NYTimes)

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