What *is* the cost of inequality?

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Anybody who is concerned about the gap between top and bottom incomes in our society will enjoy reading Stewart Lansley’s [amazon_link id=”1908096292″ target=”_blank” ]The Cost of Inequality: Why Economic Equality is Essential for Recovery.[/amazon_link] The book does a good job of joining the dots between different pre-crisis trends – the divergence of incomes and the ‘disappearing middle’ in the jobs market, the growing debt burden as people borrowed to consume as well as buy houses, the housing bubble itself, banking deregulation, the worship of shareholder value, mega-bonuses. While little of this is wholly new, it is assembled here in a way that makes it obvious why the pre-crisis economy was unsustainable.

Along the way are some thoroughly attention-grabbing points. For example, I knew that income inequality in the US and UK had returned to close to 1920s or 30s levels. Lansley adds this has occurred: “….despite much more mature democracies and regulated economies.” (p22) He’s quite right to raise the implicit question about how on earth this was able to happen. The book is also strong on the links between the emergence of the global mega-rich and the bubbles in asset markets and dysfunctional financial sector activity, and on the feedback effects between inequality and finance – not least the growth in household debt that Raghuram Rajan put centre stage in [amazon_link id=”0691152632″ target=”_blank” ]Fault Lines[/amazon_link].

[amazon_image id=”0691152632″ link=”true” target=”_blank” size=”medium” ]Fault Lines: How Hidden Fractures Still Threaten the World Economy (New in Paper)[/amazon_image]

I would disagree with Lansley’s assertion (p27) that economic orthodoxy says inequality is essential for growth. Conventional economics says there are two countervailing effects of inequality. To quote myself (ahem) in my Joseph Rowntree Foundation Lecture of last year: “Inequality could imply a large pool of savings to finance investment, entrepreneurship or a tax system that is not too progressive and so does not discourage work effort. These would boost growth. Alternatively, inequality could reduce the incentive of poor people to acquire education, or might increase social and political instability, either of which will reduce growth.”

I was surprised to read that in 1998 there had been a City debate on inequality, with George Cox of LIFFE arguing that rich City workers were good for the economy because of their spending, and Andrew Winckler, former CEO of the Securities and Investment Board, arguing that the City had become “smug and complacent” and that “the current bonus system encourages a degree of speculation that is not warranted and is rewarding failure.” (p78) Winckler was proved right. As the book points out, the original ‘robber barons’ at least built businesses; the current lot speculate and consume. They are rentiers.

The book’s main theme is the deathly, damaging embrace of inequality and finance, and Lansley’s solutions lie in the realm of financial regulation. Without a prosperous middle class, he argues, the economy can not recover. He will surely welcome the EU’s bonus cap, even if bankers are shocked (as the caption on a Banx cartoon had one banker saying to another: “Cap our bonuses? After everything we’ve done for the world?”).

However, I think this book –  although far, far better argued than the famous/notorious [amazon_link id=”0241954290″ target=”_blank” ]The Spirit Level: Why Equality is Better for Everyone[/amazon_link] in terms of establishing causality from inequality to wider economic damage – will also speak mainly to readers who already believe that argument before they start reading. This is partly just style, as it’s written in a colourful, polemical way that’s bound to have the converted cheering in the aisles. But it is also partly that there is a more complicated story. Inequality has many interacting causes; capping bank bonuses alone won’t fix it, welcome and essential as the cap is (even Martin Wolf in the FT says so!)

I’m certain there is also a strong argument to be made about the way high incomes are parlayed into political power which rigs regulation in favour of incumbents; they are then able to block competition and entry, which, over time, reduces the economy’s potential growth. The financial sector plays a central role in this too, through both its own oligopoly power and its encouragement of M&A through the economy, but the power grab extends to other sectors too. I just haven’t seen the argument set out anywhere in exactly this way.

Having said that, [amazon_link id=”1908096292″ target=”_blank” ]The Cost of Inequality[/amazon_link] gives an excellent birds-eye view of the malign consequences of the financial sector-driven, unsustainable increase in inequality, and of the damage that has caused the US and UK economies. The book concludes: “Allowing the fruits of growth to be so unevenly shared is the real cause of this crisis. If the distribution of national income had been maintained at its level of three decades ago, idle surpluses would now be being spent, and we would be well on our way out of this economic deadlock.”

Public sector productivity – not an oxymoron

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Yesterday I attended a fascinating event at the LSE, the launch of [amazon_link id=”0857934988″ target=”_blank” ]Growing the Productivity of Government Services[/amazon_link] by Patrick Dunleavy and Leandro Carrera – the video is due to go online later. I’ve only read about half the book so this post is more about the event than a review. Even at this stage, though, it’s clearly an essential read for anybody concerned with the quality, efficacy and value for money of the public sector. That’s all of us, of course: 24% of UK GDP is accounted for by public services, so productivity growth here is vital for economic growth overall; and we are all consumers of public services, from defence and justice to schools and rubbish collection.

[amazon_image id=”0857934988″ link=”true” target=”_blank” size=”medium” ]Growing the Productivity of Government Services[/amazon_image]

In his introductory talk, Prof Dunleavy noted the variation between different public sector organisations in the measures of productivity they had been able to collect. Spending on ICT was positively correlated with improvements, despite the well-known IT disasters, because the technology is an important enabler of changed ways of working. Reorganisations are also linked to productivity improvements (although spending on external management consultants not at all). He concluded that the key steps for achieving productivity improvements are: the leaders of the organisation must engage with change; the agency must develop its own ideas for innovation; the leadership must engage with employees and ensure they don’t believe change is only about saving costs and cutting jobs; and intra-government and 3rd sector rivalry is helpful. The book includes many practical specific examples of change, successful and not, in different (national) government organisations, and also a really helpful table of suggestions with comparable private sector examples.

The terrific thing about the book – as one of the panellists, Barry Quirk, CE of Lewisham Council underlined – is that it fills the empty territory between the abstractions of ‘policy’ and the rough and tumble of politics by looking at organisations and the specifics of what they can do to improve. His main message was about needing ‘productivity with a purpose’ and never losing sight of what the public service purpose of the organisation is. As he pointed out, among the most borrowed titles from Lewisham’s libraries are a guide to pubs in South London, one to teenage sex, and 50 Shades of Grey – along with, thank goodness, Hilary Mantel’s [amazon_link id=”0007315090″ target=”_blank” ]Bring Up The Bodies[/amazon_link].

[amazon_image id=”0007315090″ link=”true” target=”_blank” size=”medium” ]Bring Up the Bodies[/amazon_image]

Joe Grice, chief economist at the Office for National Statistics said productivity improvements were imperative not so much because of public finances – although that obviously matters – but because people value public services so highly. He emphasised the need to link measures of productivity to activities so there is a feedback loop.

Edwin Lau, head of the OECD’s public sector productivity group, said Ministries of Finance tend to be most interested in the subject because they want to harvest the financial savings, but it is important for public agencies to appreciate the scope productivity improvements give them for internal reallocation of funding to serve their strategic aims; and that officials in different countries could learn more from each other.

This gave rise to one comment from a US member of the audience, noting that many of his compatriots would consider ‘public sector productivity’ an oxymoron, and the book would need to be retitled something like ‘Lifting the burden of the public sector on Americans’ in his country! The discussion left me feeling optimistic, however. As a senior official in the audience said to me afterwards, many people think improving public sector productivity is just too hard, but it can be done.

Educating economists

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How well are universities teaching their economics students? This is the question a number of academic and non-academic economists have been addressing since a conference this time last year held under the auspices of the Government Economic Service and Bank of England. The conference papers were published as [amazon_link id=”1907994041″ target=”_blank” ]What’s The Use of Economics: Teaching the Dismal Science After the Crisis[/amazon_link] – reviewed by Declan Jordan yesterday in the LSE Review of Books.

[amazon_image id=”1907994041″ link=”true” target=”_blank” size=”medium” ]What’s the Use of Economics?: Teaching the Dismal Science After the Crisis[/amazon_image]

The debate continued yesterday at a meeting of several dozen economists held at the Treasury, working towards a statement suggesting some directions for curriculum and teaching reform, although of course it will be for individual university departments to decide whether or not they think change is needed. The statement will be published after a bit of revision and discussion.

At the meeting Wendy Carlin presented an updated model from her [amazon_link id=”0198776225″ target=”_blank” ]macroeconomics text with David Soskice[/amazon_link], integrating a financial sector into the basic three equation model. Their new textbook will be published later this year and will obviously be well worth while. Wendy cited Claudio Borio’s excellent paper on what we’ve learnt about the financial cycle and macroeconomics, thanks to the crisis.

The unknown robber barons

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In today’s Financial Times, Edward Luce points out that the US – creator of the internet – has dropped from top in the late 1990s to 16th now in the OECD league for average internet speeds, and has some of the highest prices too. He notes that South Koreans speak of trips to the US as ‘internet holidays’, so unfavourably does the experience compare with online access back home. Given the rise of Samsung – which spends more than twice as much proportionately on R&D as Apple (5.7% vs 2.2% of revenues respectively) – it can only be a matter of time before online leadership migrates decisively to Asia.

The article is clear about the problem – the Comcast monopoly, and the donations the company makes to Barack Obama, along with its enormous lobbying effort. Comcast’s senior VP David Cohen is apparently one of the US President’s biggest fundraisers. Comcast spent more than $14m on lobbying in 2011, making it the ninth biggest spender in the US.

This only confirms the argument of Susan Crawford’s book [amazon_link id=”0300153139″ target=”_blank” ]Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age[/amazon_link], which directly compares Comcast to the giant trusts of the late 19th century, broken finally by the struggle to implement the 1890 Sherman Anti-Trust Act. I have to say the book isn’t the most exciting read in the world – not as enthralling as Tim Wu’s [amazon_link id=”1848879865″ target=”_blank” ]The Master Switch[/amazon_link] – but nevertheless it does a superb job of depicting Comcast’s strategy. It emerges as a superbly well-run business in strategic terms – although not, it seems, for customer service.

The company has been particularly astute about its engagement with Congress and regulators, and in judging the technological trajectory of the industry. However, the book also explains why and how the FCC made the decisions that now look mistaken, and is therefore a rare instance of insight into the complexities and compromises of the official and political world. This is much more useful than playing the blame game. So though there may be more US-centric detail than the general reader wants, this is an essential book for anyone interested in communications markets and digital convergence. I have to admit I’d heard of Comcast, but not at all of its controlling and founding family, the Roberts pere et fils, the unknown “robber barons” of the new gilded age.

[amazon_image id=”0300153139″ link=”true” target=”_blank” size=”medium” ]Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age[/amazon_image]

Apparently Susan Crawford is a candidate for the post of next head of the FCC, but the book attacking the Comcast monopoly is seen to have damaged her chances. On the other hand, President Obama doesn’t need re-electing, so maybe he will be brave and nominate a candidate with the interests of American consumers at heart – I was staggered to read in Crawford’s book that the average user pays $143 a month for their high-speed internet and cable bundles.

For here is another example of the way big business has bought political power, and therefore the freedom to make still more money and buy still more power, in America. That subversion of social welfare in the interests of the rich affects the rest of the west too, not to mention cementing the future economic and geo-political strength of Asia.

Rebooting feminism?

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It’s the 50th anniversary of the publication of Betty Friedan’s [amazon_link id=”0141192054″ target=”_blank” ]The Feminine Mystique[/amazon_link], which has led to some interesting reflections on the achievements or otherwise of feminism.Here’s The New York Times view, here is Salon, and here is the Guardian book club discussion.

[amazon_image id=”0141192054″ link=”true” target=”_blank” size=”medium” ]The Feminine Mystique (Penguin Modern Classics)[/amazon_image]

My goodness, what a timely anniversary reminder that there’s a long way to go still. Yesterday over breakfast I stumbled on this extraordinary ad for Microsoft software:

Women too stupid for computers, or just too busy doing the housework?

Today I read Maureen Dowd’s bitter review of the new book by Sheryl Sandberg of Facebook, [amazon_link id=”0753541629″ target=”_blank” ]Lean In: Women, Work and the Will to Lead[/amazon_link], apparently advising women on how to have it all, version 2.0 (version 1.0 being of course Helen Gurley Brown’s [amazon_link id=”0283989866″ target=”_blank” ]Having It All[/amazon_link]). And also a report in the Observer of the past progress of women in public life in the UK going into retreat.

[amazon_image id=”0753541629″ link=”true” target=”_blank” size=”medium” ]Lean In: Women, Work, and the Will to Lead[/amazon_image]

It makes me think that perhaps the gains made by the feminist movement of the late 1970s and early 1980s were one-off, that they helped one or two cohorts of women only. The economic evidence that the labour market is stacked against women is pretty strong – there is a large earnings penalty for having children, and then some. One of the most depressing books on the subject is Linda Babcock and Sara Laschever’s [amazon_link id=”069108940X” target=”_blank” ]Women Don’t Ask: Negotiation and the Gender Divide[/amazon_link] – the good news is that men do ask for more pay and women don’t, so a woman who does ask will earn more. The bad news is that her male colleagues will think her a ball-breaker for doing so.

I hope younger women will re-read Betty Friedan’s book, and some of the other classics – Germaine Greer’s [amazon_link id=”0007205015″ target=”_blank” ]The Female Eunuch[/amazon_link], Kate Millett’s [amazon_link id=”067170740X” target=”_blank” ]Sexual Politics[/amazon_link], Simone de Beauvoir’s [amazon_link id=”009974421X” target=”_blank” ]The Second Sex. [/amazon_link] And I hope women of all ages will roll up their sleeves, and reboot the struggle – when the washing up is done and the man has finished with the computer, of course (*irony*).