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What types of policies should be directed at tackling inequality?

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12 June 2017

Patrick Heller

I think you need a combination of policies that level the political playing field. So, it gives those at the bottom of the distribution to be politically effective. But on the other hand, that invariably is tied to more conventional policies of redistribution and expanding opportunities. So, I do think that in the global economy today, classic redistributive policies are really difficult because of the mobility of capital globally and the difficulty states have in taxing capital. It means that other policies such as equalizing access to basic services, which don’t necessarily cost as much, but that require a lot of political will, may get more traction.

And when you look at this important difference between building human capabilities and capital accumulation in development, there are two policy dimensions. There is of course the straight trade off dimension, that is sometimes a zero sum equation: if you extract resources from the economy and you direct them towards certain activities that enhance human capability, you undermine growth. So you have to be sensitive, because you don't want to kill growth.

But on the other hand, there's sometimes a positive sum logic. Some social investment can actually enhance growth, so I think the key is trying to figure out which are the positive sum social investments, and avoiding the zero sum investments. There are some fairly 'no brainer' positives ones: like education, better urban infrastructure, because a competitive city grows more successfully. But there are some policies that can be counter-productive to growth, and zero sum.

 

Catherine Boone

On one hand it’s not that difficult to think of policies, the policies in the abstract work themselves. So obviously, we need to tax these vast fortunes, and redistribute that money in ways that sustain broader based livelihoods. We need to redesign the national and global institutions that create economies that channel money upwards at this radical pace and exclude others and chop off these huge sections of the economy as irrelevant to the fate and fortunes of the uber rich. Let me put it this way: from my perspective in political science, the problem is not what policy could be adopted, but under what conditions could any policies be adopted. Who controls the political institutions that produce these inequalities? Why do they work the way they do?  

For the past 30 years, we have focused a lot of our attention on African politics. It’s one aspect and one slice of reality but it’s representative of the issue of structural adjustment programmes. It’s radical externally because of structural shrinking of the state and opening of African economies to this highway of international competition in all domestic markets. This has been a huge driver of poverty and inequality in African countries. People have become, in fact, poorer than they were before. One of the reasons for this is because structural adjustment programmes are sweeping across huge range of policy areas. But the other thing is that the authors of these policies were institutions that are supposedly under the democratic control of the advanced industrial countries. So, these policies were undertaken by our institutions. The Americans were the primary drivers and in fact even within the World Bank and the IMF there is a lot of pushback from European institutions against the structural adjustment agenda.  

So when you ask "how do you get good policy?",  the better question is "how do you stop really bad and harmful policy from being made?" Why did we let this happen? It’s a problem of political control.

 

Timur Kuran

Where you have enforced inequality, the policies would involve removing the restrictions that prevent people from taking advantage of opportunities that deny opportunities to others. Where skills are missing, then there’s no short term fix. So for the example I gave in in the last question, you have to provide resources to make guidance counselors available. That will increase the yield, gradually the percentage of people who get college education in the poorer areas will increase. Some of the benefits will emerge in the long run when they provide better guidance to their own children, and the catch up will take many generations. So I think we need to distinguish between the cases that can be resolved quickly and easily, and those that involve policies that will yield results over many generations. 

 

Sam Hickey

We’ve got to think of it at different levels, and there might be some trade-offs here. So, what’s your biggest problem? Is it inequality between countries, or at the national level, or between groups? You need to know, because you can’t tackle them all at once through a coherent approach. Danny Rodrick wrote about this recently, where he talks about the types of things you would do to reduce global inequalities, for example, enabling migration to richer countries for a period before returning home, with a more regulated form of immigration. This would be great for reducing global inequalities, because we know that money flows from remittances, north to south, are much bigger than aid flows as we know. But that in itself would probably increase national inequalities, by bringing low paid workers in.

I think that the fact that the majority of poor people are in middle income countries now suggests that it’s more a problem that needs to be resolved at the national level, within countries. That being said, there are a number of measures that reduce both global and national inequalities. Obvious ones are taxing financial transactions, the token tax that has been talked about and that can be earmarked towards some form of universal basic income. Closing down tax loopholes is another one, where the global north and south link up a lot, with corrupt elites from developing countries rip off their countries and take their taxpayers money, hiding them in European tax havens, and elsewhere. And not just tax payers money, but also rents generated through natural resources, aid, and so on.

 

Salvatore Babones

People are proposing many creative approaches to reducing inequality, but I don't see any reason to be creative when reliable, well-tested policies are available off the shelf.  To reduce inequality, governments should collect taxes using strongly progressive income tax systems and governments should provide services universally on an equal basis to all citizens. 

Unfortunately, fiscal trends are currently running in the opposite direction on both the revenue and the spending fronts.  Governments increasingly rely on regressive revenue sources like sales taxes, value-added taxes, and user fees.  They increasingly spend money in "targeted" ways that may appear to be more efficient but that erode public support for high-quality government services.  Both progressive taxes and universal services have the double-impact that the reduce today's effective levels of inequality while at the same time reducing the intergenerational transmission of inequality: progressive taxes reduce the accumulation of savings that the rich are able to pass on to their children and universal services ensure that the children of the poor have similar opportunities to those of the rich. 

More broadly, proactive labor market policies that promote full employment and empower labor to seek higher wages can reduce inequality at the source, but these policies are much more contentious and much more difficult to get right.  I strongly support government policies that tilt the playing field toward labor and away from capital.  But from a scientific standpoint we can argue over these policies, and reasonable experts offer conflicting advice.  We can't really argue over progressive taxes and universal services, at least from a scientific perspective.  These are politically contentious but empirically obvious solutions. 

 

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