This post, written by recent HKS alum Anna Stansbury with assistance from current HKS student Nyasha Weinberg, recaps the inaugural meeting of a new UK discussion group among British students and anglophiles from across Harvard University and Massachusetts Institute of Technology. The group is convening in Spring 2016 on a weekly basis to discuss the most difficult and pressing issues facing the UK today–bridging disciplines to present viable policy solutions. The discussion below explored whether the current toolkit of policy options is sufficient to address the challenges of jobs and inequality, or do we need more radical options? The Ash Center is delighted to support student initiatives like the UK discussion group as well as other opportunities to contribute to public discourse on both the challenges to democratic governance and promising solutions. Read other posts in the UK discussion group series.
By Anna Stansbury with Nyasha Weinberg
When you hear inequality, what do you think of?
You might think of a number of things. Unequal distribution of income: 13% of national income goes to the top 1% of the population, twice the share in 1979. Widening gaps between the ‘haves’ and the ‘have nots’: over the last five decades, the incomes of households in the 90th percentile grew 1.5x as fast as the incomes of households in the 10th percentile. Child poverty: more than a quarter of British children live below the poverty line (defined as households with less than 60% of median income). Social mobility: the attainment gap between children in different socio-economic groups is high even before school starts, predetermining widening gaps in lifetime outcomes.
By inequality, then, we really can mean any number of different issues. To get to the heart of the debate, it’s necessary to get our hands on this slippery concept. What do we mean when we talk about inequality? And why does it matter?
Why do we care about inequality?
Many would agree that we have a moral obligation to alleviate poverty – and inequality demonstrates that we have the resources to do so. Is it a problem that mansions stand unoccupied on “billionaire’s row” Bishops Avenue, while 7,500 people sleep rough on the streets of London each year?
Another core concern is fairness: does a CEO deserve to be paid 183 times the salary of an average worker? Is Wayne Rooney 260 times better at his job than the women who play for the England football team? Or, on the other hand, does someone who worked hard and ended up in lucrative job, despite coming from a poor background with the odds stacked against them, deserve to be able to keep the financial rewards of that effort?
If we do consider that it is fair for someone to keep the rewards of their labour, should that extend to them passing on the rewards of their hard work to their children? The famous “Great Gatsby curve” shows higher levels of inequality in one generation reduce social mobility in the next, as richer parents pass on advantages through increased access to education, connections and opportunities.
Looking further into the long term, concentrations of wealth can easily turn into concentrations of power. Does democracy weigh each person equally, or each pound of political donations?
Wilkinson and Pickett’s book The Spirit Level made waves in 2009 by documenting inequality’s pervasive relationship with all sorts of measures of quality of life. More unequal societies, they claim, don’t just have unevenly distributed outcomes – even on average they are less happy, less healthy, and have lower social cohesion than more equal societies.
And finally, a growing body of macroeconomic research suggests that higher inequality may be associated with less sustained economic growth.
So – we care about all sorts of different types of inequality, and for all sorts of different reasons. Finding some kind of consensus on what we care about, and why, enables us to pave routes towards finding solutions. But even amongst reasonably homogenous, politically engaged, British students who turned up to a late-night discussion about inequality, the type of consensus that leads to meaningful political action remained elusive.
Most of us agreed that there was, indeed, too much inequality: stubborn poverty levels and stagnant social mobility were common concerns, and extreme concentrations of income wealth at the top were generally perceived either as unfair, immoral or, in some cases, as outright violations of the basic social contract (the example of tax avoidance was employed to illustrate this perspective).
Yet where there was little consensus about the present, there was much more agreement on the future and the need to address trends that over the coming decades could be troubling at best, severely disruptive at worst.
What comes next? Inequality, technology and the robots
Whatever we care about now, it seems very likely that income and wealth disparities will continue to rise. The steady advance of technology–in robotics, machine learning, artificial intelligence, nanotechnology–looks likely to change the nature and future of work. How? Economists, scientists, and futurists are engaged in heated debate, but opinion is coalescing around two broad scenarios.
Scenario one: “hollowing out”, as discussed by David Autor of MIT among others. Skill-biased technological change continues, raising the productivity and incomes of those at the top, but reducing demand for lower- and middle-skilled workers whose jobs can be efficiently done by machines. Low-skilled, low-paid service sector jobs remain; “good” middle-class jobs are eroded.
Scenario two: “robots eat the jobs”. The scenario forecast by Brynjolffson and McAfee’s Second Machine Age where a gradual process of automation, starting with lower-skilled labor but moving to middle- and high-skilled labor as artificial intelligence and machine learning, displaces all jobs even those of doctors, lawyers and professors. Without significant economic reform, owners of capital–the robots–control most of the income.
What should be done?
While globalization and technological change are forces pushing incomes in certain directions, their outcomes are not inevitable. As the Roosevelt Institute neatly illustrates with their “tip of the iceberg” diagram (below), our economic institutions determine how these underlying forces shape our daily experience of inequality. Our policy discussions therefore focus on the avenues for reform that would allow us to counteract the most destructive effects of increasing automation.
We framed our discussion between two poles: is our current policy toolkit sufficient to address these challenges, or do we need more radical options? It’s clear that the current policy toolkit could go a long way toward reducing inequality: we discussed a more progressive combination of tax and transfer policies, innovative policies to tackle wealth inequality through tax avoidance clampdowns and altered tax treatments of capital income and inheritance. Emphasis was also placed on improving education for all social groups and ages to improve equality of opportunity for children and reduce the disruption caused by unemployment as adults.
A chief concern of participants was how to increase redistribution without damaging entrepreneurial spirit or penalizing hard work. Raising top income tax rates, for example, would be an easy way to slow the divergence between the 1% and the rest-but at what cost to the employment and income creation? At some point, the peak of the Laffer curve is reached–but the empirical evidence is not clear as to where that is (Piketty, Saez and Stantcheva recently found an optimal top income tax rate of up to 80%, assuming tax avoidance loopholes are closed and tax evasion clamped down on). The global angle offers further problems: even if raising corporate or wealth tax was economically efficient, it might be practically impossible as corporations and individuals can move their headquarters and savings elsewhere. If the incentives to defect from a global wealth tax are too great, how can we guarantee international cooperation?
Aside from redistribution through the tax system, other more holistic policies shape the markets in which labor is transacted and–as a result–can have an impact on inequality before wages are earned rather than after. Coined predistribution by Yale political scientist Jacob Hacker–and partly adopted by Ed Miliband in the 2015 general election–the strategy involves reshaping the market environment by redirecting public investment in ways that boost the productivity and so the wages of the ordinary person: such as massive increases in public investment in digital communication, mass transit, and green energy.
But, in a world where inequality continues its inexorable rise, and employment itself may be threatened for many people, are these enough? Several participants presented proposals which would fundamentally alter our economic structure-with the intention of creating a society that could respond to an onslaught of technological change in a fairer way.
Redefining the social contract: a minimum basic income?
Gaining rapid traction in some parts of the world is the concept of an unconditional basic income, paid to all citizens irrespective of need or conditionality. Already appealing to many concerned with income inequality and poverty traps, in a world where long-term technological unemployment may be a real possibility for large numbers of people, a minimum basic income becomes extremely powerful.
Our core initial debate was over the efficiency aspect: how far incentives to work would fall, and whether this would be problematic; how far administrative costs would fall if benefits were no longer means-tested, and whether this would offset the additional costs; how it would be funded, and the deadweight losses resulting. Or whether, as some commentators have noted, it would improve work incentives, as the withdrawal of means-tested benefits wouldn’t result in lower effective marginal tax rates for the poor.
But, more radically, the concept challenges our notion of what it means to be a fully functioning member of society. We were split: some invoked Keynes’ vision of worklessness as “economic bliss”, with individuals freed from the obligation of mindless or backbreaking work; others worried about the purposelessness, mental health problems, and social and cultural breakdown that can follow long-term non-employment. And the fundamental notion of paying people not for their work effort or ability but as a basic citizens’ right could tip the labor market on its head: if you no longer have to be a garbage collector to feed your family, you will have to be paid a lot more to do it.
With Utrecht and other Dutch cities experimenting with unconditional benefit payments, we will soon know more about the possible consequences of a minimum basic income – empowering or otherwise.
As wealth and not just income inequality continues to deepen, many proposals – including Sir Tony Atkison’s recent book Inequality–suggest that a national wealth endowment be created, where individuals receive a proportion of the national wealth on birth or turning 18. Leveling the playing field of inheritance and asset ownership, this could be particularly important in a world where capital could represent an increasingly large share of income.
And–looking further into the future-if automation becomes as extensive as some predict it could, a majority of jobs will be eliminated altogether. In that case income arises wholly from capital ownership–and the degree of inequality depends quite simply on who owns the robots.
Anna Stansbury is a research associate at the Harvard Kennedy School Center for Business and Government. Her current research partly focuses on wage inequality and productivity in the US. Previously, she was a Kennedy Scholar on the Harvard Masters in Public Policy program and studied Economics at Cambridge.
Nyasha Weinberg is an MPP student and Kennedy Scholar at the Harvard Kennedy School on secondment from the UK Civil Service. She previously studied Human Sciences at Oxford University and worked in education.