AMERICA FIRST?
The United States seems to be at an impasse. Forty years of promising that good things are just around the corner have created an environment where too many people trust no one, least of all the government.
The growing economic and political influence of the rich, the result of the pursuit of the elusive elixir of growth, has combined with anti-government sentiments the rich carefully have cultivated to head off any attempts to rein in their growing wealth. The government is chronically broke because it is politically impossible to raise taxes, and even the most socially minded of the young have become convinced that government is terminally uncool, and so head to private foundations if they do not actually give up and join an “impact” fund, or an unabashedly money-making venture. And yet the only possible way out involves a much expanded role for the government.It is possible this is also the shape of the future in many other countries. While the rise was less spectacular than in the United States, inequality has also increased in France. Between 1983 and 2014, the average income of the richest 1 percent has risen by 100 percent and that of the richest 0.1 percent by 150 percent. Since GDP growth has been slow, standards of living for most people except the rich have tended to stagnate: over the same period, income increased only by 25 percent (less than 1 percent per year) for the remaining 99 percent.28 This has fueled growing mistrust of the elite and the rise of the xenophobic Rassemblement National. The recent round of tax reforms undertaken by the centrist Macron government has made tax less progressive: the flat tax was raised, the wealth tax is gone, and taxes on capital have been pared back. The official justification is that this is necessary to make France able to attract capital away from other countries. It may well be true, but it runs the risk of forcing other countries in Europe to cut taxes as well, prompting a race to the bottom.
The American experience warns us this may be very hard to reverse. European countries need to cooperate to hold the line on their taxes.Developing-country governments raise even less money than the United States. The median low-income country raises less than 15 percent of GDP in taxes as compared to nearly 50 percent in Europe (and 34 percent in the OECD on average). To some extent, the underdevelopment of the tax system is a consequence of the nature of the economy; a large part of the economy is taken up by tiny firms or remote farms whose income is hard to verify. But to a large extent the low level of taxation is a political choice. India and China offer an interesting contrast. Historically, most citizens in both countries had too little income for it to be worth taxing them. But as incomes grew, India kept raising the threshold above which people had to pay income taxes—on budget day, when new tax rates are announced, the raised threshold is often headline news. As a result, the share of the population that paid any income tax remained stable around 2–3 percent. In China, where the thresholds were not adjusted, the fraction of the population subject to the income tax went up from less than 0.1 percent in 1986 to about 20 percent in 2008. Income tax revenues in China boomed, from less than 0.1 percent of GDP to 2.5 percent in 2008, while in India they have stagnated at around 0.5 percent of GDP. More generally, tax revenues as a share of GDP have been stable at about 15 percent of GDP in India for many years now, while they are above 20 percent in China, giving China the option to invest more and/or carry out more social spending.29 The new Goods and Services Tax in India is supposed to help by making it harder to evade taxes, but being a more or less proportional tax on purchases, it has very little redistributive effect.
Moreover, very much like the United States, India has not been very successful in using taxation to limit the ballooning of top-income pre-tax inequality.
According to the World Inequality Database, the share of the top 1 percent of income in India’s GDP increased from 7.3 percent in 1980 to more than 20 percent in 2015. In China, where there was a bit more effort, it still went up, but by less, from 6.4 percent to 13.9 percent.30The interesting counterexample here is Latin America, for many years the example everyone used for growth with exploding inequality (which then turned into inequality with no growth), where the recent decades have seen a significant reduction in inequality. This was partly driven by rising commodity prices, but also in part by policy interventions, higher minimum wages, and large-scale redistribution in particular.31
The way redistribution was expanded in those countries is instructive. The political opposition to transfer programs in Latin America is couched in terms of the moral and psychological consequences of giveaways, much like the US conversation about welfare is dominated by the fear of abuse and laziness. From the beginning, Santiago Levy, an economics professor who played a very important role in setting up Progresa, the transfer program in Mexico that provided the blueprint for many others, was very conscious of the need to get buy-in from the right.32 The program emphasized a social quid pro quo. The transfers were quite explicitly conditional: the families had to take their children to the doctor and send them to school to get the money. A randomized controlled trial proved that those given access to the program had better child outcomes.33 Probably as a result, these programs have proved durable. For decades, successive governments have sometimes changed the name of the program (Progresa became Oportunidades and then Prospera) but not much else. In 2019, the new left-wing Mexican government seems to be on the way to replace the program with a similarly generous program with fewer strings attached.
In the meantime, the conditional cash transfer program (CCT) had been imitated all over the region and beyond (all the way to New York City).
Originally, most of the programs adopted similar conditionalities, and often paired the programs with RCTs. These series of experiments had two impacts. First, they demonstrated nothing terrible happens when one gives cash to the poor. As we will see in the next chapter, they don’t drink it all and they don’t stop working. This was instrumental in shifting the public perception on redistribution all over the developing world. In the 2019 elections in India, both major parties, for the first time, made a cash transfer to the poor a central element of their platform. Second, as countries started to experiment with the model and try out variants of it, it became clear the poor don’t need as much handholding as the design of the original CCTs implied. There has been a complete turnaround in the public conversation on redistribution, and the Progresa experiment and its successors contributed a lot to it.The battle against growing inequality has not been permanently won even in Latin America. The top tax rates remain low and top incomes are not systematically going down (since 2000, in the World Inequality Database, they are completely flat in Chile, rising in Colombia, bouncing all over the place in Brazil).34 But the experience of Progresa highlights the notion that careful program design will be key to breaking open the seeming impasse in the United States and similar issues that might come down the pike elsewhere.
Figuring this out may be one of the greatest challenges of our time. Much greater than space travel, perhaps even than curing cancer. After all, what is at stake is the whole idea of the good life as we have known it. We have the resources. What we lack are ideas that will help us jump the wall of disagreement and distrust that divides us. If we can engage the world seriously in this quest, and the best minds in the world to work with governments and NGOs and others to redesign our social programs for effectiveness and political viability, there is a chance history will remember our era with gratitude.