It will be those of middle incomes, not the poorest, who will suffer most. The poor will continue to advance out of poverty, though at a slow rate. McWilliams forecasts (and he is an accomplished economic forecaster) that those between 35th and 70th centile of wealth distribution will see their incomes drop by up to 5% a year every year to 2040 in relation to a 2018 base. The poorest quarter of society will see their incomes rise by 2%-3% a year, while the richest 5% will see their incomes rise by 10%-12% a year to 2040. This forecast assumes a slow rise in inequality. But if, in another scenario, inequality rises at a faster rate, the richest will see incomes rising by 20%-25% a year (every year to 2040), the middle earners' incomes will shrink by up to 15% a year - but for the poorest, only the slightest improvement to their lot.
Not a happy picture then - inequality is destined to grow, and with it the attendant social and political problems. So - what are the correct policy responses?
Firstly - education. Education with a focus on primary and secondary - designed to empower children but also to support social cohesion. Education systems that create elites only serve to entrench those elites' sense of entitlement. What's needed from an education system that is inequality-proofed? According to McWilliams, it should "encourage people's inner resources to enable them to run their lives. These inner resources can include: curiosity; long-term memory; imagination... the ability to understand the world and other people and extract deeper meaning through metaphor - pattern matching; an observing self,the ability to empathise and connect with others; a rational mind both for its own sake and to cross-check emotional reactions." Having put both my children through the Polish school system (in the global Top Ten according to PISA), I would add that a stern dose of rote-learning would come in handy too.
The second target is capitalism. It is good, but it does need regulation. "Capitalism cannot operate in any real sense without strong governmental institutions... Without strong enforcement of property rights, accumulation of capital will not take place because the capitalist is has no incentive to accumulate them if there is no legal title to what he owns... A healthy capitalist sector and a healthy government sector go hand in hand." McWilliams makes a strong case for improved ethics among business owners and managers. "Every person running a business needs to see himself or herself as an ambassador for the system that helps them flourish and therefore needs to behave accordingly."
An aggressive approach to those who abuse capitalism is called for. Travel sanctions and asset freezes. And I would add, rigorous enforcement of Unexplained Wealth Orders, recently introduced in the UK, but as yet not put into everyday use.
The Law of Unintended Consequences, a third target, is a cracker. Whenever legislators intervene, regulate, ban or impose, even with the most benign of motives, some often completely unexpected side-effect crops up. The main ones that McWilliams explores are those that affect the cost of housing - rent controls and planning restrictions. He shows by case studies from Sweden and London just how poorly though through legislation can stoke inequality across the decades. Interventions, he says, should not be made "without thinking through the likely market effects on behaviour".
[I shall return in the next-post-but-one to the word 'behaviour', for I feel that understanding how people respond to changing economic, social and political stimuli]
The fourth policy answer is to make poor people richer by cutting the cost of living, in particular the costs of basics - food, clothing, housing, transport - and a new basic - information (mobile phone, laptop, internet access). "Cutting the costs of mobile telephony benefits the poor three times as it benefits the rich."
A fifth response is to introduce a universal basic income (UBI). If you've not come across this concept before, it's worth having a quick look at this Wikipedia article. UBI will be talked about more and more often in future. It is in essence "czy się stoi, czy się leży, dwa tysiące się należy" ("Whether you're standing [ie working] or lying down, you are entitled to 2,000 zlotys", a popular slogan critical of the Polish communist system). Everyone gets UBI, working or not. UBI is being tested at the moment on a micro scale. Several countries have toyed with the idea. UBI will come into its own when technology-driven mass redundancies start to kick in. Then, as Bill Gates suggested a few years ago, robots should start paying taxes - to fund a UBI.
The obvious response to inequality is to use taxation for redistribution. So many questions immediately spring to mind. "The trick with taxation is not to be greedy and to encourage compliance. It is important that the tax is seen to be legitimate and well-spent (i.e. not on the ruling party's propaganda, as in Poland) and the methods used by the fiscal authorities are not such as to encourage a dangerously adversarial attitude. It is also important that money used by the public sector is not obviously wasted or abused for political purposes." McWilliams suggests that an optimal top-rate income tax would be between 35% and 40%; anything above that is a disincentive to wealth-creation and prompts high earners to seek ways around it; anything lower and the government's tax-take goes down while wealth accumulates and inequality rises. Taxing wealth rather than income is seen by McWilliams as a better way of dealing with inequality.
The final chapter blasts away at false answers, as portrayed by Corbyn on one side of the political spectrum and Trump on the other. Populist solutions, be they anti-capitalism (nationalisation, punitive tax rates, increased regulations) or nativist (tariff walls, anti-migration, deregulation and tax cuts for the rich) are not the answer.
In conclusion, this book avoids dogmatic answers. The suggestions for limiting the harmful effects of inequality are pragmatic, and evidence-based. "The problems are essentially economic, not a Marxist conspiracy theory of the rich exploiting the poor... inequality and poverty don't automatically go together and it is important to avoid policies that might reduce inequality but worsen poverty."
This book is too important to just pass over in a review in one blog post. Having presented the book's key arguments, I shall respond with my own thoughts, jotted in pencil in the margins, in the next-post-but-one, but first a quick look at inequality in the context of Poland.
This time last year:
A Royal Visit to Warsaw
This time two years ago:
Transport news
This time three days ago:
Uneasy Sunny Day - smog
This time four years ago:
Public media? State media? Party media?
[yet another year of not watching a single second of TVP1]
This time five years ago:
Beer, consumer choice and the Meaning of Life
This time six years ago:
What's Cameron got against us Poles?
The time eight years ago:
Anyone still remember the Przybyl case?
This time nine years ago:
Wetlands midwinter meltdown
This time ten years ago:
Jeziorki rail scenes, winter
This time 11 years ago:
Winter drivetime, Jeziorki
This time 12 years ago:
Kraków, a bit of winter sunshine
There are some voices suggesting a tax on robots and computers used in production as substitutes for labour. Clearly a problem in the case of goods imported from say China but not beyond the possibility to charge import duty as a proxy.
ReplyDeleteClearly income tax will account for an ever smaller overall tax take (the poor and very rich don't pay it and as you state the middle earners will earn less and less).
And indeed punitive VAT rates on internet purchases. Why is the high street taxed to oblivion whilst the likes of Amazon deliveries create additional pollution and pay very litle property tax on their distribution centres.
And a yet another voice that the middle class are worse off.
ReplyDeleteBusiness ethics? I believe every person who has reached a certain level of weath should feel responsible for those worse off. In such sense each entreprenuer should take care of their employees, clients, suppliers and all other stakeholders. In practice, many businessmen keep on trying to fleece their stakeholders and grow richer at the expense of others, not thanks to their own virtues and building value added.
Whenever legislators intervene, regulate, ban or impose, even with the most benign of motives, some often completely unexpected side-effect crops up. - frequently a grey economy is the side effect - such was the case in Poland before 1989 when two exchange rates were observed - an official one and a grey-market one.
The UBI could prove useful in countries such as Scandinavia where living off someone else's bakc is considered a disgrace. In Poland where millions of people would take pride in being a parasite on hard-working compatriots, it is a no-go.
Whether to tax income or wealth? Those against taxing wealth claim the tax is paid twice. I would favour taxing wealth, as lower taxation of income would help those possessing little, but with drive and potential to come into wealth.
@Andrzej K
ReplyDeleteYes - ecommerce needs some scrutiny in terms of covering the costs of its adverse effects. My gripe is with Chinese e-tailers who sell stuff from Poland that avoids customs duties and VAT by writing 'gift from a friend - value below $50' on the packet. This harms Polish manufacturers who are paying taxes and VAT.
@Student SGH
Ethics should be taught at school, not catechism.
What about property taxes? I suspect those with power also have property, and so are a bit coy about even mentioning that possibility. An annual 1% flat tax on the value of your properties? Russian oligarchs in London would suddenly find paying £400,000 a year unpalatable. Me, I'd have to find 1,250 zł for Jeziorki, 500 zł for Jakubowizna and 300 zł for Łódź... doable. But how much would that cost to administer?
Ethics indeed ought to be complusory at school, but a sense of what is good and what evil actually should run in the genes / be instilled during upbringing by parents.
ReplyDelete1,250 zł for Jeziorki? You estimate your house to be worth 125,000 zł? 30,000 zł for your flat? Łódź I want to buy them both ;-) Annual bonus arrives in March!
Jokes aside, I am all for it, though in the UK where the property market is transparent levying such tax would be easier than in Poland. How a clerk in the town hall know whether my flat is worth 400,000 zł, 550,000 zł or 700,000 zł?
For many property investors whose activity pushes up property prices that could be hardly digestable and would benefit ordinary people.