DISRUPTIONS!

Recurring protests and nationwide unrests are the new face of the beginning of 21st century. All it takes is a social injustice, a corruption scandal, to break the camel’s back.

Social scientists, in their quest of the exacerbating factors, pointed to the growing inequality in the recent decades.

Two economists, Thomas Piketty and Emmanuel Saez, have concluded that income inequality in the United States started a relentless climb since 1980 and reached an unprecedented level in 2017, 1% of the richest captured 24% of the national income.

In developing countries, where data are "obviously" nonexistent, one can assume the situation is worse, leading to consequences reminiscent of the Arab spring.

Pointing to the exact causes of inequality is not as easy as many politicians (of course!) claim. Abhijit Banerjee and Esther Duflo, the two winners of the 2019 Nobel Prize in Economics, spent many years parsing through the inequality conundrum, with no specific causes-effects conclusions. Yet, let’s recall what few commentators say about the causes. 

Liberals, like Paul Krugman, argue that there is an income distribution issue (the pie is unequally handed out!). The growth in productivity was “siphoned off” to high-income brackets, leaving little to the wages of unprotected blue collars (wages that have fallen 23 percent since 1973, for entry level jobs of high school graduates in the US). Based on these claims, taxing even more high-income earners (and their accumulated wealth too!) is the way out. 

Conservatives (market defenders), on the other hand, believe the income gap is more about the skills and their mobility in the labor market. Former Fed chairman Ben Bernanke declared that “the most important factor” in rising inequality “is the rising skill premium, the increased return to education.” 

In other words, few skilled workers find high earning jobs while less-skilled ones (the base of the pyramid) accept median wages (or see their jobs taken over by robots).

Growth is, for conservatives, the tide that lifts all the boats (even if it comes at the cost of some inequality!). Harvard Professor John Kenneth Galbraith described it in his famous trickle-down theory: “If you feed the horse enough oats, some will pass through to the road for the sparrows.”

To call the growth back, policies should rather motivate the innovators, the best skills, the high earners…with tax breaks.

Now, however good may be the arguments of each side, preventing disruptions, that hurt everyone, the rich and the poor, needs “good economics for hard times”. And what is good economics?

First, good economics is not always good politics and, hence, requires a strong leadership able to bring people together (rather than to divide them!).

Second, tax policies should make the fortunate high earners pick up some of the tab for the pain of the less fortunate, up to the level everyone still wants to stay in the room. Once growth (or what remained of it!) is gone, there will be no pie to cut.

Third, a sound social policy is the one that makes the play field level for everyone, i.e for all students, for all job-seekers, for the small business and the big company, in the rural areas and in the cities.