from S. Bezruchka at UWashinton

Is Inequality Good for You? Financial Times Weekend December 7-8-2002 By
Michael Prowse and Amity Shlaes
http://news.ft.com/s01/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&c=StoryFT&cid=1037872634170&p=1012571727085

Amity Shlaes: More even distribution of wealth is key to growth,'read the
headline from this autumn's Latin American business summit in Brazil. The
speaker whose words it described was Felipe Gonzlez of Spain. The former
prime minister went on to say that this was not a moral issue but a
practical one. The developing world needed to become more 'equal', like
the developed one.
But the idea that growth is necessarily associated with economic equity is
a fallacy. And, despite the picture Gonzlez sought to project, all is not
entirely equal within each developed nation.
Indeed, the most developed of all developed nations, that growth
powerhouse, the US, is actually a veritable model of social and economic
inequity.
The inequity starts with the most obvious of measures, income: in New York
city today, live people who do not have $1.50 for a subway ride and people
who can order up a trip to the Turks and Caicos on the old Gulfstream with
their mobile. Then there are disparities in healthcare: the prosperous
cancer sufferer may survey the rooftops of the city from his blanketed
deathbed on Memorial Sloan-Kettering's marbled upper floors, whereas the
poor cancer sufferer may have trouble getting his foot in the door and on
to the grimy linoleum floor of a Brooklyn emergency room. Still, such
evidence, so often rehearsed by America's critics, begs an important
question: Is this inequality actually bad?
No, one can argue. In fact, US inequality has been good. That is to say
that inequality has benefited all of US society, first the fat cats and
then, eventually, the poorer members. One can even argue that American
inequality has benefited the rest of the world, including many of
America's habitual critics.
The line of reasoning here is a straightforward one. The US has been and
remains a society that is based on the very Jeffersonian notion of
equality of opportunity. The US is also genuinely committed to the
possibility of social mobility.
This, however, does not mean the country usually endorses or works to
generate equality of result, especially not for individuals. And the very
same features that make individual Americans' results so disturbingly
unequal are the ones that promote growth, which is the best social welfare
programme of all.
Inequality, for starters, means that somebody is on top. And the
opportunity to be on top, especially in a big way, especially in the
richest country in the world, is a powerful draw. Any talent that has the
poor luck not to be born in the US therefore considers, at least at one or
the other point in his life, the possibility of immigration to the States.
These talents are not always the sweetest and calmest of people. One of
the mottos of Andy Grove, the Hungarian-born immigrant who built Intel, is
'Only the Paranoid Survive'. This is not the motto of an egalitarian.
In addition to this draw, the raw meat of the opportunity to compete, we
can count a number of other advantages that attract the sharks of
innovation to the US. None of these advantages is linked, in the
international brain, with the ideal of economic equity throughout life.
Rather the reverse.
The first is the US tax regime. America's tax regime is seriously
progressive. The top 5 per cent of earners pay more than half of all the
income taxes in the States. The bottom 50 per cent of earners pay only 4
per cent of such taxes. Still, what matters here is relative position.
Overall, when you count every sort of tax, the US regime is simply less
confiscatory than that of Europe or neighbouring Canada. This has the
(highly unfair) consequence of allowing people who are rich to keep more
of their money. But it also makes the States an investors' destination.
And this ensures that growth tends to happen more in the US than
elsewhere.
The notion of relative tax competitiveness is not merely blithe Reaganite
theory. Indeed, the US in recent decades saw a rather dramatic
demonstration of the role tax rates play in growth. In the late 1980s, US
tax rates were high. Capital gains were taxed at an effective 49 per cent.
Venture capital was dead in the water. And the economic forecasters so
uniformly predicted Japan's future technology dominance that the Japanese
national image of a rising sun was a cliche of the business press.
But then the US cut tax rates - both the crucial capital gains tax, and
individual rates as well. The capital gains rate cut was followed by an
explosion of venture capital investment in high-tech Silicon Valley. The
individual rate cuts helped US businesses across the land. The technology
revolution happened in the States, and not in Japan.
Then there are America's regulatory and legal regimes, again not
necessarily the 'fairest' in the world, at least if you use the term
'fair' in the Continental sense. US patent and trademark law protect
private property fairly rigorously. This has had the 'unfair' consequence
of making many products expensive to poorer citizens. The most famous of
such products are the costly components of the Aids cocktail. Still,
America's opportunity for profit afforded by patents is why the great
share of Aids drugs were first invented and marketed in the US, and not
elsewhere.
Next comes the ineffable matter of culture. In Europe and Japan both, the
schools are openly and officially elitist: track systems ensure that the
best talents are concentrated together from an early age. In the US, by
contrast, the system for pre-university education is nominally
egalitarian. Tracking exists, but American schools are still more like UK
comprehensive schools than like a German gymnasium.
Still, US schools do have one highly inegalitarian feature that promotes
innovation. It is, oddly enough, neglect. Specifically, neglect that
permits play.
When, as in Europe or Japan, you have a rigorous elementary school system
with a 'rap on the knuckles' approach toward mistakes, you end up
producing more or less one kind of student: the cautious but uninspired
thinker. Everyone is somewhat well-trained - perhaps not as well trained
as in the past, regretfully. But, nonetheless, generally meeting a basic
cultural standard.
But what about when you have a system like America's, wildly uneven and
often outright neglectful? Then you generate, as America does, many
painfully uninformed idiots who cannot run a cash register. But you also
generate a few creative geniuses. That's because intelligent American
teenagers do not have to spend their teen years bent over books preparing
for a uniform national exam as they would in Europe, the UK or Japan.
Instead, they find their way by themselves, playing Nintendo games,
building fighter robots and generally getting up to mischief while their
inefficient schools and indifferent parents are not looking. This, as it
turns out, is the ideal preparation for software writing and other growth
fields. How very profitable for the economy, and how very unequal.
The growth that America's innovation-friendly environment generates
benefits innovators in the first order. But there are only so many TiVos
and Vail homes that a rich fellow in a free economy can accumulate. He
therefore uses the rest of his money to create jobs. The net effect
benefits all players in America's famously various society. In other
words, as hackneyed as it may sound, the old saying is true: in American
waters, a rising tide does lift all boats.
The lifting has been especially visible in the area of health. In 1968,
the average life expectancy for the 65-year-old American was 15 more
years: he would reach the age of 80. By 1970, that had risen to the age of
81, and by 1996 our old man could expect to live to 83. At the other end,
US infant mortality rates in 1970 hung at around 20 per 1,000 live births.
Thirty years later, that figure was closer to 10 per 1,000.
US teen drinking rates were as high as 50 per cent back in 1979; in 1997
they are 21 per cent. One in three US teens smoked 30 years ago; in 1997,
something like 20 per cent did. America's poor have a terrible problem,
but it is not- excepting some tragic pockets- having too little to eat. It
is obesity. As last month's lawsuit against McDonald's reflects, the
majority of poor Americans are too fat.
Great gains in personal wealth have accompanied these health gains. In
1947, the year wealthy America was putting together the Marshall Plan for
an impoverished Europe, the median US household income was $20,107. (These
figures are adjusted for inflation). In 1972, the median income for the
family was closing in on $40,000. By 1997, it had reached $44,568.
America, in other words, is not a petrified society, where income
striations are set for eternity. Mr or Ms Everyday has, quite simply, done
better.
US minorities, to be sure, are not as wealthy as whites. Again, we may
ask: does this really matter? The answer is 'yes', but not nearly so much
as another, more important question: how minorities are doing relative to
how they have done before.
And here the data are more than encouraging. Black homeownership rose to
47 per cent of households in 2000, from 42 per cent in 1990. Today, half
of black cancer patients survive five years or longer, compared with only
one-third of blacks in the early 1960s. Black infant mortality rates are
now around 20 per 1,000 live births, or half the 40 per 1,000 live births
rate of the 1960s.
There has also been astounding progress for black people in the area of
education. While in the 1940s blacks had on average about half the number
of school years behind them as whites, today the median number of school
years completed for 25 year olds of the two ethnicities is, at 13,
identical.
For women, there is a similar story of narrowing gaps.
The domestic benefits of US inequality are, of course, not the only
benefits. The innovations that the US generated are valuable to the rest
of the globe. We see a particularly spectacular demonstration of this in
the current battles over Aids drugs. At issue is whether the unfair old US
will release the patents to these drugs so that poorer nations may have
access to them to slow the wild spread of the disease. But it is important
to remember that the world would probably not have Aids drugs at all if US
healthcare did not have a large private-sector component and if the US did
not have secure patent and property rights. These drugs were mostly not
developed in Europe, the land of price controls and regulation; and they
were certainly not developed in India, where patent rights are so weak.
When it comes to drugs, the rest of the world is a free rider beneficiary
of America's notoriously unfair, selfish pharmaceutical industry.
But that, in a way, is merely the micro argument. The macro argument is
one that has only become indisputably clear since the mid-1980s, with the
recognition that the Soviet Union was not growing anywhere near as fast as
the official data suggested. What became clear in that period, and
afterwards, is that free markets are the only path to growth. A country
may strike compromises along the way, as the nations of Europe have done.
But this also means recognising that growth has been sacrificed in that
compromise.
What this means is that America's inegalitarian system of free markets has
been its greatest export. And that the very inequality that leaders such
as Mr Gonzlez complain of is due not to insufficient redistribution of
extant wealth, but to insufficient penetration of free market systems in
the developing world. Or, as the Danish author Johan Norberg put it
recently: 'The uneven distribution of wealth in this world is above all
due to uneven distribution of capitalism.'
In other words, Europeans and Japanese who desire to perpetuate their own
egalitarian cultures may also want to do what they can to support
America's very different one. And, from time to time, raise a glass to the
States - that land that is so arrogant, so rich, and so gloriously
unequal.

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