Raj Chetty gets it right
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Last week, a friend shared the video of a lecture by Raghuram Rajan at the G30 Forum in April 2017 (Populist Insurrections: Causes, Consequences, And Policy Reactions) and an article by Thomas L. Friedman in The New York Times published a few days ago (A Road Trip Through Rusting And Rising America). On top of these, I listened to a panel discussion on Friday at the Asian Monetary Policy Forum on the same topic.
It is a good sign that intellectuals, thought leaders and perceptive policymakers are beginning to grapple with the challenge posed by economic populism. That is indeed one of the most useful contributions made by populist-nationalists. They serve as a rallying cause. Humans and nations always need the “other”—an opposition/opposing force—to survive and focus minds. The “others” impart a sense of urgency to the problems that have festered for long and they help focus minds on the problem. Once we know that their answers are not the right answers, the rest of us are compelled to come up with solutions that are better than what they offer.
Some intellectuals express the concern that the world should not succumb to the pressures for redistribution and must continue to stress supply-side reforms, the benefits of free trade, productivity improvements, innovation and technology, labour reskilling and retraining, etc. Indeed, what is striking about all of these is that the language is normative. It is not easy to reject productivity and innovation. They are better than the ultra-loose monetary policies that are ostensibly aimed at boosting aggregate demand but end up boosting asset prices and, thus, inequality.
However, the narrative of globalization and technology since the 1980s has coincided with an extraordinary rise in corporate profits, in executive compensation, an extraordinary decline in labour share of national income in advanced nations, rising household debt and declining household savings rates. Hence, these normative prescriptions have been tainted by association with other undesirable trends. They are viewed with scepticism by the economically dispossessed and the disenfranchised and as code words for the perpetuation of the unbalanced status quo that preserves the elites’ income and wealth shares and their places at the high table. The elites need to do far better than repeat them. There is need for a sincere “mea culpa”.
Raj Chetty and his co-authors show the way in their recent paper, The Fading American Dream: Trends In Absolute Income Mobility Since 1940, published in Science on 24 April. They estimated rates of “absolute income mobility”—the fraction of children who earn more than their parents did. They found that rates of absolute mobility have fallen from approximately 90% for children born in 1940 to 50% for children born in the 1980s. Increasing gross domestic product (GDP) growth rates alone cannot restore absolute mobility to the rates experienced by children born in the 1940s. They conclude that reviving the American dream of absolute mobility would require economic growth to be shared more broadly across the income distribution. This is precise, bold and necessary.
People actually appreciate and feel better if the elites who committed mistakes own up to them. Admission of guilt heals. That is why we had the “Truth and Reconciliation Commission” in South Africa. That actually rebuilds trust, confidence and hope that pain will be shared because owning up mistakes signals that the guilty are open to sharing, mitigating and even reversing the pain that they had inflicted on others.
Globalization and technology helped accelerate the improvement in the material standard of living in some emerging economies. Advanced nations benefited too but the gains were garnered and cornered by the few. The rest were sold low interest rates and debt. For developing economies, along with jobs, policy, business and academic elites also exported financialization and credit booms. That is why the advanced countries’ debt/GDP ratio and that of the world are too high and there has been a sharp change in these parameters since the 1980s. Without the boost provided by debt, globalization and technology alone would not have made the difference to global growth and prosperity. The relative contributions of globalization, technology and debt to the global prosperity of the 1980s need an honest reassessment.
Daniel Kahneman wrote in Thinking Fast And Slow that humans are blessed with a disastrous inability to be guided by a healthy fear of bad consequences. That seems relevant to the oncoming age of robotics and Artificial Intelligence. Hence, workers need to be re-equipped with skills and finances to cope with emerging technologies. But we cannot and should not stop there. There must be a reversal of the redistribution that went the wrong way. In short, policymakers and intellectuals must not view supply-side responses and reversal of the wrong redistribution of the last three decades as mutually exclusive.
Importantly, it would help not to be dismissive of populists-nationalists as stupid because if they were, they would not be where they are now. Tilting at them is analogous to the symptomatic treatment that Western medicines offer without treating the underlying causes. Intellectuals can and should do a lot better.
V. Anantha Nageswaran is senior adjunct fellow (geoeconomics studies) at Gateway House: Indian Council on Global Relations, Mumbai. These are his personal views.
Read Anantha’s Mint columns at www.livemint.com/baretalk.Comments are welcome at firstname.lastname@example.org