Are we ready for tomorrow?

Certainly we are more ready today than we were yesterday. We finally seem to be on the verge of making real progress on climate change, despite current US setbacks. Discussions are starting about food and water supply. Discussions are getting more focused about what a post growth economy would look like. Several areas have emerged where changes will be required for the transition from a growth oriented economy to a post growth economy.

From page 21 of Enough is Enough, Ideas for a Sustainable Economy in a World of Finite Resources, The Report of the Steady State Economy Conference sponsored by CASSE (Center for the Advancement of the Steady State Economy), here are a some topics under discussion.

1. Limiting Resource Use and Waste Production

2. Stabilizing Population

3. Distributing Income and Wealth

4. Reforming the Monetary System

5. Changing the Way We Measure Progress

6. Securing Employment

7. Rethinking Business and Production

I would explicitly add stabilizing the financial system, though it may be included as part of reforming the monetary system.

One main issue with a post growth economic system is that it is a zero sum game. If I get richer, someone else must get poorer. If I consume more, someone else must consume less. This is a constraint but it needn’t be as gloomy as it sounds. We can still improve fulfillment through more connectedness, volunteering, hobbies, family time, education, etc. Most research (see Enough is Enough report pages 29 and 30 for example) shows that happiness increases with income up to a relatively low level, say about $20,000 per capita and then levels off. More income doesn’t bring more happiness, just more stuff. Most rich countries far exceed that per capita income. The Spirit Level primarily shows that many improved social measures are correlated with more equality. They make a good case that more equality causes these social improvements, but as always causality is more difficult to prove than correlation.

In this blog post, I am focusing on income and wealth distribution. Over the last few decades the blue collar workers have not fully participated in the increased income of economic growth. This was succinctly expressed by Walter Scheidel in his well-written and excellently researched book, The Great Leveler; “For about a generation, give or take a decade, income disparities have been growing in all countries for which we have reliable data…In a sample of twenty-six countries, top income shares grew by half between 1980 and 2010, whereas market income inequality rose by 6.5 Gini points — an increase that could only partly be absorbed by an almost universal expansion of redistributive transfers.” Blue collar workers rightly sensed that they were not getting their fair share. Both Bernie Sanders in the US and Jeremy Corbyn in Great Britain fought popular grassroots campaigns on the back of tackling inequality.

There is considerable research on various aspects of income and wealth inequality. One way to get a quick flavor of the research is review some TED talks on the subject. Here are some good ones that I have found. I tried to get slightly different takes on a theme but also different styles and presenters (gender, race, nationality). The theme is something like “the world is full and unequal — we can do better”.

1. How economic inequality harms societies(2011) Richard Wilkinson an author of The Spirit Level.

2. The Earth is Full(2012) Paul Gilding

3. An economic reality check(2010) Tim Jackson the author of Prosperity Without Growth.

4. How can we make the world a better place by 2030(2015) Michael Green

5. Climate change is happening. Here’s how we adapt(2015) Alice Bows-Larkin

6. The story we tell about poverty isn’t true(2015) Mia Birdsong

7. How equal do we want the world to be. You’d be surprised(2015) Dan Ariely

The Enough is Enough report (page 58) summarizes the benefits of more equal societies explored in The Spirit Level very well:

1. People enjoy better health and a higher life expectancy;

2. Fewer citizens have drug problems;

3. People are less victimised by violence;

4. Teenage birth rates are lower;

5. Children experience higher levels of well-being;

6. The rate of obesity is lower;

7. Mental illness is less common;

8. Many fewer people are imprisoned; and

9. Opportunities for social mobility are more widespread.

Another point made in The Spirit Level is that it doesn’t seem to matter how more equal societies are achieved. Denmark and Vermont achieve relatively high equality by taxation and redistribution. Japan and New Hampshire achieve relatively high equality with little taxation and redistribution, but with other institutions that encourage equality. In either case, the benefits of equality are accrued.

So, how much equality do we want? Certainly, we don’t want everyone to have the same income and wealth. That would eliminate incentives and we would all probably starve in the dark. However, there are severe penalties for societies that are too unequal. Fortunately, Dan Ariely in the last TED talk listed above presented the results of research on that question. Specifically, he looked at wealth distribution. The degree of equality that we want is based on the human sense of fairness. To do this he divided society into 5 equal parts and asked what percentage of wealth should go to each fifth. Here is what he found.

Group, Percent of wealth, desired USA wealth, Example

Bottom 20% 10.5% 0.1% 3%

Second 20% 14.1% 0.2% 5%

Third 20% 21.5% 3.9% 8%

Fourth 20% 22.0% 11.3% 19%

Top 20% 31.9% 84.4% 65%

So, is our desired wealth distribution something that is achievable or is it pie in the sky? One common measure of inequality is the GINI coefficient. The GINI coefficient varies from 0.000 where everyone has the same amount of wealth to essentially 1.000 where one person has all the wealth. The GINI coefficient can also be used with income, but here we are concerned with wealth. The distributions above have approximate GINI coefficients of 0.20 desired versus 0.77 for the USA data. How does this compare with the country with the lowest wealth GINI coefficient? Fortunately, data on country wealth GINI coefficients is available. The country with the lowest wealth GINI coefficient is Japan at 0.55. So, it looks like we are unlikely to achieve the desired distribution since no country comes anywhere close. The good news is that we don’t have to get all the way to the desired distribution to get the significant social benefit seen in countries like Japan and Denmark. The third distribution above labeled Example is one that gives an approximate GINI coefficient of 55, the same as Japan.

How do we move in that direction? One way is to improve economic mobility is by enacting a highly progressive estate tax. This is recommended in Thomas Piketty’s great book, Capital in the Twenty-First Century. As of 2016, the United States estate tax exemption amount is $5.45 million and the maximum rate is 40%. So, only 0.2% of estates pay any tax. The estate tax could be structured so there no effect on, say, 90% of the people. Then for the top 10%, the marginal tax rate could increase linearly (or similar steps) from 18 to 77%. With today’s estate value distribution, this results in any estate under $2.5 million not being taxed, and the top would apply to estates with values greater $14 million. Could the US ever pass such a law? From about 1940 to 1980 the US had a similar law (see 90 years and counting). In 1977 for example, the exemption was $120,000 and the maximum rate was achieved at $5 million. In today’s dollars, that is about $460,000 and $16.4 million. From about 1980 to the present, the tax has been gradually reduced to end up in today’s estate tax law.

How did that happen? For decades, the richest Americans have been systematically influencing politicians to reduce taxes including estate taxes. They funded political campaigns, think tanks and universities to advance their agenda. They convinced the 99% that their interests are the same as that of the 1% (See Dark Money by Jane Mayer). As long as unlimited money can be used to influence, no influence to weak a word, usurp our political system, there is practically no chance. What are our chances of enacting a highly progressive estate tax? This type of tax has been given the unfortunate derogatory moniker of “death tax”. I think a better name would be the “fairness tax”. Our way out starts with campaign finance reform (See Campaign Finance Reform and ). We need to let our political representative know that campaign finance reform and a highly progress estate tax leading to a more equal society is in everyone’s best interest. Only then can we breathe life back into the American Dream and pave the way for a post growth society.