Solutions to inequality

Inequality has become an important topic on the agendas of state policy makers. Political and social dissatisfaction with the existing economic order contributes to the strengthening of populist movements and causes street protests from Chile to France. Politicians of all colors are beginning to recognize inequality as one of the program's priorities. Until recently, economists talked only about the harmful effects of egalitarian policies on market incentives and the fiscal balance. Now they are more concerned that too much inequality encourages monopolistic behavior and threatens technological progress and economic growth.

The good news is that we have at our disposal a considerable number of tools with which we can respond to the challenge of growing inequality. At a recent conference I organized with Olivier Blanchard, former chief economist of the IMF, a group of our colleagues presented a wide range of proposals aimed at all three dimensions of economic life: pre-production, production and post-production.

Important pre-production interventions are possible in the field of education, health care and financial policies, which most directly affect the capacities with which individuals enter the labor market. In the post-production phase, we can use tax and social policies to redistribute market income.

In the category of interventions in the production phase, the offered ideas are perhaps the most interesting.

Policies in this area directly affect the decisions of companies in the field of employment, investment and innovation through shaping relative prices, adjusting the environment for negotiations between parties claiming the right to the product (primarily workers and suppliers) and building a regulatory context. Examples of such policies are the minimum price of labor, the regulation of labor relations, policies to encourage innovation that do not threaten employment, locally adapted industrial policies, as well as the application of antitrust laws. Some policies - such as early childhood interventions, workforce development programs and government funding of tertiary education - have already been tried, tested and proven to work. Others, such as a tax on total assets, are still up for debate. For some, such as adaptation to the local context, we do not yet know what their most optimal form would be. But there is a growing consensus that some degree of experimentation with economic policies is desirable and necessary.

However, the main question is still not given enough attention. That question is: what type of inequality should be targeted by the proposed measures? Policies in this area are usually aimed at reducing income at the top, for example through progressive taxation, or increasing income at the bottom of the ladder, for example by giving cash assistance to families below the poverty line.

Such policies must be expanded and supplemented, especially in a country like the USA, where current efforts in this direction are not sufficient. Also, today's inequality requires a different approach, which will focus on economic insecurity and anxieties in groups in the middle of the income distribution. Our democracies can eliminate the danger of social conflicts, nativism and authoritarianism only if they manage to improve the economic condition and social status of workers from the middle and lower middle classes.

The need for such an approach is indicated by the fact that conventional indicators of inequality are quite unreliable in predicting economic and political dissatisfaction in democracies. In France, for example, the extreme right has gained strength, and the "yellow vests" have demonstrated long and hard in the streets, even though inequality (as measured by the Gini coefficient or the share of income at the top) has not increased significantly, at least not compared to some other rich democracies. Likewise, demonstrations in the streets of Chile began after two decades of significant reductions in income inequality. Trump's victory in the 2016 election was not brought about by the poorest states, but by those where economic prospects and job creation lagged behind the rest of the country the most.

It is obvious that this dissatisfaction stems from inequality of a different kind, the one that most affects the middle part of the income distribution ladder. A key segment of our problem is the disappearance (and relative scarcity) of good and stable jobs.

Deindustrialization destroyed many once large production centers, which was also contributed to by economic globalization and competition from countries such as China. Technological change hits people in the middle of the skill distribution particularly hard, as shown by the millions of manufacturing, white-collar and retail workers.

The collapse of trade unions and the introduction of new policies to encourage "flexibility" in the labor market have further contributed to insecurity.

Another important part of the story that conventional measures of inequality do not capture is the growing geographic, social and cultural division of the working class and elites. This is most evident in the spatial division between prosperous, cosmopolitan urban centers and backward rural communities, smaller towns and remote urban areas.

Such spatial division is produced by deeper social divisions, to which it itself contributes. Urban professional elites are involved in global networks and are highly mobile. This increases their influence on the managers and at the same time distances them from the values ​​and priorities of less fortunate compatriots who feel only dissatisfaction and alienation in the face of a socio-political system that seemingly does not care about them and does nothing for them.

Inequality manifests itself as the experience of loss of dignity and social status in groups of less educated workers and other "outsiders".

Economists are beginning to realize that a successful fight against the resulting polarization depends largely on restoring the economy's ability to create good jobs. There is no shortage of ideas in this domain. Labor market institutions and global trade rules need to be reformed in order to strengthen the bargaining position of labor in relation to globally mobile employers. Companies themselves must accept more responsibility for local communities, employers and suppliers. State support for innovation must be explicitly focused on technologies that do not threaten jobs. We can imagine a completely different public-private partnership regime that will serve to create an economy of good jobs.

Many of these ideas have never been tested. But the problems are new and require new solutions. If we are not courageous and imaginative enough in the service of building an inclusive economy, the initiative will be taken by resellers of old and proven disastrous solutions.

(Project Syndicate; Peščanik, net; translation: Đ.TOMIĆ)