Monday, August 18, 2014

Income inequality, growth and mobility.

Income inequality is a useful tool for encouraging competition and progress. But, with income inequality there comes privilege through access and opportunity (i.e. better education for children) and a tricky issue that wealth tends to gravitate towards wealth (i.e. the return on capital depends upon how much capital you have).

However, a fairly high range of income inequality appears supportable as long as there exists opportunity and such opportunity is expressed through social mobility. The thorny issue is that those who have amassed wealth tend to want to reduce social mobility i.e. they want to maintain it for them selves and their offspring. They don't say this directly, they believe in opportunity but they just don't seem willing to accept that such opportunity for everyone means that they or more importantly their children must also be exposed to failure. So wealth has a tendency throughout history of concentrating within a privileged elite.

From a competition perspective, some inequality is good as long as you have social mobility. You not only want to encourage people in a society but give them the opportunity. Governments have to play the role of rebalancing the desires of the elite with the overall interests of the nation and this is nominally achieved through taxation and investment. Of course, the elite would want you to reduce the state and taxation despite most innovation in a society being government funded. More often than not, the elite have the power to do this.

So, rather than ending up with the most able people, we tend to end up being run by those born into privilege. In the pursuit of maintaining privilege and wealth, we often reduce taxation and thereby innovation in our society. The masses are left watching a society where income inequality grows, growth stagnates and opportunity declines. Overall, the state of competitiveness in a society reduces and this process then continues until a death spiral causes societal collapse. Everyone loses, especially the elite.

This has happened numerous times in history. Decline of a nation is normally preceded by decline in social mobility and excessive concentration of wealth in an elite. On the other hand, the most prosperous times for a society, the points of 'growth' are usually associated with high levels of social mobility and somewhat more moderate income inequality.

Why do I mention this? Well, when I look at China (both inequality and mobility) and compare to the US then there's only one conclusion I can come to. The US is a train wreck about to happen. Ruled by an often inherited elite (an oligarchy) that is quite happy to run the society into the ground to maintain their own position? They probably don't even see it this way. Maybe they think it's just how the market works or maybe they just don't think? I know some are questioning the wisdom of this - the pitchforks are coming - but the inertia to change is building and becoming embedded. 

It can only be a matter of 10-15 years before this becomes generally apparent, that China will dominate technology and Silicon Valley will decline in importance. This isn't happening overnight, by my reckoning then 2025 - 2030 is when the wheels start coming off the tracks. There is almost nothing you can do about it or certainly will be allowed to do about it. In any case, the US and Silicon Valley have both had extremely good innings. Of course, for some it will be a great shock - they've become habituated to the idea that the US dominates as though this is some sort of steady state, alas competition and the role of nations is much more fluid over time.

Could the US fix the problem? Of course. Will it? Of course not. The very things you need, higher taxation and re-distribution through government investment are the very things the elite and their media machines are dead set against. Of course, everyone in a position of power is going to agree that we need competition and opportunity. They'll all agree that we eventually need to solve the problem of inequality. Magic thinking will abound 'lets make everyone rich' as if wealth was an absolute rather than a relative. The problem is self interest. With mobility what they need is a solution that doesn't effect them, alas they are the "problem".

So, the only real question for me is whether China gets the crown or whether we in Europe can nick it in time. Obviously I'm hoping for the latter and the next decade will be crucial for this.
Post a Comment