By Dani Rodrik
CAMBRIDGE, Mass. ( Project Syndicate ) — Inequality looms larger on policy makers’ agenda today than it has in a long time. With the political and social backlash against the established economic order fueling the rise of populist movements and street protests from Chile to France, politicians of all stripes have made the issue an urgent priority.
And whereas economists used to fret about the adverse effects of egalitarian policies on market incentives or the fiscal balance, now they worry that too much inequality fosters monopolistic behavior and undermines technological progress and economic growth.
No shortage of ideas
The good news is that we have no shortage of policy tools with which to respond to rising inequality. At a recent conference I organized with Olivier Blanchard, a former chief economist of the International Monetary Fund, a group of economists advanced a wide range of proposals , covering all three dimensions of an economy: pre-production, production, and post-production.
Our democracies can minimize the threats of social strife, nativism, and authoritarianism only by boosting the economic wellbeing and social status of middle- and lower-middle-class workers.
Important pre-production interventions are educational, health, and financial policies that shape the endowments with which individuals enter markets. Tax and transfer policies that redistribute market income fall within the post-production category.
The remaining category, production-stage interventions, includes perhaps the most pioneering ideas.
Policies in this category directly target firms’ employment, investment, and innovation decisions by shaping relative prices, the bargaining environment between claimants to output (workers and suppliers, in particular), and the regulatory context. Examples are minimum wages, labor-relations rules, employment-friendly innovation policies, place-based policies and other types of industrial policies, and anti-trust enforcement.
Some policies — such as early childhood interventions, workforce development programs, and public funding of tertiary education — are well tested, and there is evidence that they work.
Others, such as a wealth tax, remain controversial, or, as with place-based policies, are accompanied by considerable uncertainty regarding their optimal design. Nonetheless, there is a growing consensus that some policy experimentation is desirable and necessary.
What kind of inequality?
But a fundamental question has received relatively little attention: What type of inequality should these measures tackle? Policies to address inequality typically focus either on reducing incomes at the top, as with progressive income taxation, or on lifting the incomes of the poor through, say, cash grants to families below a poverty line.
Such policies should be expanded, especially in a country like the United States, where existing efforts are insufficient.
But today’s inequality also calls for a different approach that focuses on the economic insecurities and anxieties of groups at the middle of the income distribution. Our democracies can minimize the threats of social strife, nativism, and authoritarianism only by boosting the economic wellbeing and social status of middle- and lower-middle-class workers.
The need for such an approach is reflected in the fact that conventional indicators of inequality are a poor predictor of economic and political discontent in democracies.