The Economics of Enough_ How to Run the Economy as if the Future Matters - Diane Coyle [131]
The third principle is decentralization, in the sense that the impact of massively cheaper information costs and the availability of information in the advanced economies make it highly unlikely that top-down decisions by governments will be the optimal way for solutions to the challenges of Enough to emerge. The implication of technology for governance structures will affect politics and the wider institutional shape of Western economies—a point picked up below.
How might these principles work in practice? Just in case anybody is underestimating the challenge, there’s a cautionary tale in the lesson of the financial crisis for the prospects of achieving changes in the policy framework. Every commentator agreed that it has been the most serious crisis and recession since the 1930s, and that policy reform is essential. But that reform has moved at a snail’s pace given the need to achieve international agreement on both the principles and the practical details of implementation. Two years from the collapse of Lehman Brothers, as I write, very little financial reform has yet been achieved, and indeed the financial crisis has moved into a new phase with the bailout of Greece and crisis of the euro. It will be another three or four years before relatively minor reforms are implemented.
With such difficulty on reforms about which there is such a consensus, but a powerful opposition lobby in the banking industry, how much harder will it be when it comes to far more divisive or political challenges? Chapter 4 of this book argued that the dramatic increase in inequality in some countries, notably the United States, would need to be reduced. The extremes of inequality prevailing today offend our innate moral sense of fairness and will not prove politically tolerable. But it is not just a question of morality but of practical consequences too. The chasms in society—and this is just as true of European and Asian countries as the United States—are corroding social capital to the point where it is undermining the foundations of future economic dynamism.
What will it take to start to narrow the extreme inequality of incomes and life chances? It would be easy to despair of the possibility of doing anything. Past experience suggests that governments can do quite a lot to redistribute incomes after tax and welfare benefits—and indeed they do. This postintervention distribution is less unequal than the pretax distribution of income. However, taxing the rich to give to the poor has its own practical limits, and the evidence suggests that a top marginal rate of income tax above about 50 percent is counterproductive. What’s more, it goes against the strong sense in some polities, including the United States, that if people work hard and earn money, the government shouldn’t take it away from them. This practical limit to redistribution sits on top of an underlying dispersion in earnings which, economists pretty much agree, comes from the impact of new technologies on the earnings potential of highly skilled people—the “superstar” or “winner takes all” effect described in chapter 4.
Yet it is too pessimistic to conclude that nothing can be done to reduce inequality, as a great deal could be done to change the prevailing social norms about income. And it’s linked to the essential reforms of the financial system that are slowly under way. Organized crime aside (a boom industry since 1989), the most ostentatious flaunting of wealth has emanated from the banking sector. As it turns out, these vast earnings and bonuses were undeserved. The bankers ran up large losses, ruined their shareholders, and left taxpayers with the bill. It will be extraordinary if they turn out to have fooled, scared, or bullied politicians around the world into stepping back from fundamental reform of the banking sector. There is as close to consensus as I’ve ever experienced in