Home' Trinidad and Tobago Guardian : September 26th 2013 Contents SEPTEMBER 2013 • WEEK FOUR www.guardian.co.tt BUSINESS GUARDIAN
THE ECONOMIST | BG27
A barrage of new statistics on American living standards
offers some grounds for optimism. A typical American house-
hold s income has stopped falling, for the first time in five
years, and the poverty rate has stopped rising. At last, it seems,
the expansion is strong enough at least to stabilise ordinary
people s incomes.
The main message is a grim one, though. Most of the growth
is going to an extraordinarily small share of the population,
with 95 per cent of the gains from the recovery going to the
richest 1 per cent of people, whose share of overall income
is once again close to its highest level in a century. The most
unequal country in the developed world is becoming even
You do not have to be an egalitarian to worry about this
trend. Although some degree of inequality is good for an econ-
omy, creating incentives to work hard and take risks, the recent
concentration of income gains among the most affluent is
both politically dangerous and economically damaging.
The political worry is a descent into angry populism. Amer-
icans are not about to string up the wealthy, but there is
growing evidence of fury. Witness the Democratic left s vil-
ification of Larry Summers, a progressive economist who this
week felt compelled to withdraw his candidacy for the chair-
manship of the Federal Reserve, largely because he is seen as
too soft on Wall Street.
Inequality can be a symptom of inefficiency. The implicit
subsidy provided to banks that governments judge too big to
fail allows bankers to overpay themselves.
A highly skewed distribution can lower growth, if it translates
into less equality of opportunity for the next generation. This
seems to be happening. The gap in test scores between rich
and poor children is 30 per cent to 40 per cent wider than
it was 25 years ago. Given that the distribution of innate intel-
ligence is unlikely to have shifted so much in a generation,
that suggests that rich youngsters are benefiting more than
ever from their economic and social advantages.
Measures of social mobility between generations, already
lower than in much of Europe, have stagnated.
Many of the underlying causes of the growing gap between
rich and poor---fast technological change and the rapid glob-
alisation of the economy---are deep-seated and likely to persist.
Tyler Cowen of George Mason University in Fairfax, Va., thinks
that the population will soon be divided into two groups: those
who are good at working with intelligent machines and those
who can be replaced by said machines. The former will prosper,
while the latter will play a great many video games.
Plenty of American politicians worry about inequality, but
few offer constructive ways of dealing with it. Democrats tend
to turn to leftist bromides, whether a higher minimum wage
or another hike in tax rates on the rich. Too many Republicans
simply deny that there is a problem.
Inequality is not impervious to government policy, but higher
marginal tax rates are not the only or the best way to address
it. A two-part agenda drawing on ideas from both left and
right, aimed at reducing boondoggles for the affluent and
increasing investment in the young, could achieve a great deal.
The attack on favors for the wealthy ought to start with the
budget. America s tax code is riddled with distortions that
favor the rich, from the loopholes benefiting private equity to
the mortgage-interest deduction, an enormous subsidy for
those who buy big houses. A simpler, flatter code with no
exemptions would be more efficient and more progressive.
A blast of deregulation would help, too. Many of America s
most lucrative occupations, notably doctors and lawyers, are
shielded by pointlessly restrictive rules.
Investment in the young should focus on early education.
Preschool is a crucial first step to improving the lot of dis-
advantaged children, and America is an international laggard.
According to the Organisation for Economic Cooperation and
Development, it ranks only 28th out of 38 leading economies
in the proportion of 4-year-olds in education.
Obama has a plan to push universal preschool. The details
are imperfect, but it is a goal that Republicans should embrace.
Equality of outcome will always be a fantasy, but America
should do more to spread opportunity widely.
A society without helping hands won t have much hope.
@2013 Economist Newspaper Ltd. (Distributed by the New York
Half of the building outside Coventry, in England s
west midlands, looks like an aircraft hangar, the
other half like the offices of an investment bank
or legal firm. Businessmen in pinstripes, young
researchers in white coats, machinists in high-
visibility jackets and bearded academics stride along the
polished corridors. In the main halls they congregate around
3D printers, dummy manufacturing lines and laser-welding
devices. Some machines are boarded off for confidential exper-
iments by individual businesses.
The job of this "High-Value Manufacturing Catapult" is to
turn academic ideas into marketable products. Here academics
and entrepreneurs can test new methods and technologies
before making large-scale investments. Individually, chief
executive Dick Elsy says, they could not justify buying the
equipment needed to run such experiments. The catapult,
where government, firms and universities share the costs,
solves the problem.
Such fraternization is exotic in Britain. For the three decades
before the financial crisis, governments mostly refrained from
meddling in the economy. Painful memories of ham-handed
attempts to "pick winners"---throw state money at favored
firms, often for political reasons---by postwar governments
persuaded Prime Minister Margaret Thatcher and her successors
that attempts to shape the economy from Whitehall were best
Now that seems to be changing. The new interventionism
is partly the ideological legacy of the crash, which eroded faith
in markets, but the main explanation is more prosaic: Ministers
are grasping around for new ways to boost Britain s hobbling
economy. With a large deficit precluding a spending splurge
and monetary policy already at full throttle, ministers look
abroad for ideas. In places such as Germany and South Korea,
they observe, collaboration between the state and business
seems to work.
Starting in 2008 the Labour Party led the way. Peter Man-
delson, its business secretary, lent money to credit-starved
firms and set up the Automotive Council, a forum in which
carmakers and ministers meet to discuss the challenges facing
the industry. After the 2010 election the new coalition gov-
ernment canceled some of those loans. From last year, however,
spearheaded by Vince Cable, who has Mandelson s old job,
ministers---even enthusiastic small-statists like Chancellor of
the Exchequer George Osborne---learned to stop worrying and
embrace the idea.
On September 11, at a conference marking the first anniversary
of the new policy, Cable told a business audience at Warwick
University that the free-market "intellectual fashion" is fraying
and that industrial strategy is on the march.
Sure enough, Whitehall is awash with sector strategies. The
government s plan for agri-technology, for example, lists 14
"actions" for the government and firms. One involves setting
up a $144 million network of agricultural-innovation centers.
David Willetts, the universities minister, touts a short list of
"eight great technologies" ranging from energy-efficient com-
puters to regenerative medicine. These, his department claims,
"will propel the UK to future growth." The government has
committed 600 million pounds to them.
Ministers and business organisations reject comparisons to
the pre-Thatcher era, rolling their eyes at claims that they are
picking winners like their corporatist predecessors. Although
the government has committed 4 billion pounds, enough to
double capital investment in education, to its industrial strategy,
Cable vigorously defends the expense, stressing that the ben-
eficiaries of Leviathan s largesse are chosen by peer-reviewed
experts. John Cridland, director-general of the Confederation
of British Industry, agrees, but warns that the state should
intervene no more than is necessary to solve market failures.
Cable has a point. It is hard to fault measures, such as the
Automotive Council and the High-Value Manufacturing Cat-
apult, that correct what economists call "collective-action
problems," difficulties which firms can solve only by working
together to share costs and risks. By inviting joint bids for
funding, the government is encouraging businesses to form
such talking shops. On the same day that Cable gave his
speech, for example, a group of 242 employers in the creative
sector announced a proposal for a co-investment partnership.
However scientific the spending decisions, though, the risk
of faddishness or cronyism will exist so long as politicians are
the ultimate paymasters. Creating lists of priorities, even when
their purpose is to root out market failures, can generate new
distortions: If the government supports eight great technologies,
for example, what happens to the ninth? Why invest in specific
skills that fallible businesses think they need when Britain
suffers from a shortage of employees trained in general dis-
ciplines such as mathematics that can be applied across a
wide range of industries?
The new interventionism is one of the few areas on which
all three main parties agree, making these questions all the
more pressing. On September 18 Deputy Prime Minister Nick
Clegg told the Liberal Democrat conference that "businesses
across every region are being given billions to help them grow."
Such talk is worrying, and smacks of the age-old urge to throw
money at problems.
That is the thing with industrial activism: For politicians
elected to "do something," it is much harder to do the right
thing when inaction, not action, is the best policy.
@2013 Economist Newspaper Ltd. (Distributed by the New York
Laissez only fair:
Increasingly unequal, and not doing anything about it
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