The Optimist

The Accidental Capitalists

Occupy Wall Street's threat of class war could be good for everyone -- rich and poor alike.

As the Occupy Wall Street protests drag on into their ninth week, the movement has spawned global "occupations" from Rome to London, Toronto to Santiago, Hong Kong to Taipei. Meanwhile, the protesters continue their calls for "democracy not corporatocracy" -- revolutionary language, even if it falls just a bit short of "eat the rich." So perhaps it is no surprise that some of those more at home with the traditional occupants of Wall Street have been quick to complain that this is just one more sign of growing class warfare.

But is the threat of conflict between the rich and the rest a good thing once in a while? Talk of class warfare rears its head when more people start thinking that the rich are rich not because of their hard work or talent but because they are lucky or because the system is stacked in their favor. That view is becoming increasingly widespread -- 75 percent of Americans back a millionaires' tax, for example. And to an extent, it's right -- not just as a matter of fairness, but as a matter of economics. A bit of redistribution might actually help make everyone -- including the rich -- better off in the long term.

Behind the protests is a growing level of frustration over the yawning income gap. The top fifth of households in the United States earn 10 times what the poorest fifth makes and more than the rest of the country combined. The incomes of the richest 1 percent are 67 times those of the poorest 20 percent of households. And over time, that gap has widened. According to the Congressional Budget Office, between 1979 and 2007, the richest 1 percent saw their after-tax incomes climb 275 percent compared with an 18 percent rise for the poorest fifth. The story is similar, if less dramatic, in other rich economies.

In the United States, a number of prominent Republicans, including House Budget Committee Chairman Paul Ryan and House Majority Leader Eric Cantor, have responded to disquiet over this income gap by emphasizing the need for equality of opportunity for all Americans. That is surely the right focus: We want to reward both hard work and talent to ensure continued prosperity for everyone. But the evidence suggests we are a very long way from equality of opportunity in most countries, and in particular the United States. According to an analysis by economists Samuel Bowles and Herbert Gintis at the Santa Fe Institute, of children born to the poorest 10 percent of parents in the United States, more than half remain in the bottom fifth of incomes as adults.

This is a problem for everyone, rich and poor, because international evidence suggests that more equal economies grow faster. In fact, the historical evidence for the Americas, compiled in 2005 by economists Stanley Engerman and the late Kenneth Sokoloff of the National Bureau of Economic Research (NBER) suggests that an early source of wealth in the American Northeast was a colonial farming system based around small landholders that encouraged equality and the provision of public goods -- as opposed to the plantation model used in the South and the Caribbean, which favored a small elite uninterested in representative government or widespread education. Similarly, a number of East Asian countries such as South Korea started their path toward miracle growth with land reform and broad-based education, which leveled the economic playing field. More recently, New York University economist William Easterly and others have argued that a higher share of total income for the middle class is associated with improved outcomes in health, education, stability, and growth for all. Consider the economic burden of unequal opportunity on the United States today, with 9 percent unemployment, seven-tenths of a percent of the country in prison, and 28 percent of the population without a high school diploma.

Of course, actual class warfare itself usually doesn't turn out well for any of the classes involved. But the threat of class conflict is a different matter -- it can help galvanize reforms that benefit not just the poor but the whole of society. And when people in the middle start empathizing with the poor they fear becoming, rather than the rich they dream of joining, reform movements take hold. Take British Prime Minister Earl Grey, who took time away from tea-tasting to expand the right to vote in 1832, explaining, "The Principle of my reform is to prevent the necessity of revolution. … I am reforming to preserve, not to overthrow." Faced with the threat of violence in the streets during the Great Depression, Joseph P. Kennedy Sr., at the time a prominent businessman and later Franklin D. Roosevelt's Securities and Exchange Commission chairman, justified his support for the New Deal on similar grounds, writing after the fact, "[I]n those days I felt and said I would be willing to part with half of what I had if I could be sure of keeping, under law and order, the other half." He wanted Roosevelt in the White House, he suggested "for my own security, and for the security of our kids."

Kennedy was right -- Roosevelt's New Deal legislation laid the basis for recovery and sustained, equitable growth over the next 40 years. According to NBER economists Thomas Piketty and Emmanuel Saez, the top 10 percent of Americans' share of total national income dropped from around 45 percent in the 1930s to 32 percent in the postwar period and stayed there until the end of the 1970s. Since then, it has climbed back above 40 percent, while average income growth rates have moved in the other direction. The three decades from 1950 to 1980 saw annual per capita income grow at about 2.2 percent a year; the average rate in the 30 years since then has been nearer 1.8 percent.

If the threat of class war helps create pressure to deal with the unearned privileges of the rich and the unrealized potential of the poor, that would be a struggle of which not only Karl Marx but also Adam Smith could be proud. The unlikely class warriors of Occupy Wall Street are derided as a bunch of spoiled kids who should have better things do to than camp out in parks, and maybe that's the case. But they could also be a force for greater economic liberty and, however paradoxically, a wealthier America.

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The Optimist

Making Lemon-aid

Republican politicians in the United States are hellbent on axing international development assistance. But Congress's budget-cutting mania might actually improve it in other ways.

When the G-20 met in Cannes last week, protesters naked but for green Robin Hood caps gathered elsewhere on the French Riviera to demand a financial transactions tax -- a payment made on each bond or stock purchase, which in theory would tame the excesses of banks and hedge funds and claw back some of the costs of the mess they have made of the global economy. The protesters might have been surprised to hear that inside the G-20 meeting, a fully clothed Bill Gates was suggesting exactly the same thing.

In a break from their regularly scheduled hand-wringing over the state of global financial markets, world leaders listened to Gates's suggestions for public financing of global development in what Gates admitted was a tough environment for aid funding. He suggested that a financial transactions tax, alongside additional taxes on tobacco and carbon, could be used to help rich countries meet a global target of committing 0.7 percent of GDP to development aid. He suggested that aid "is a small investment that generates a huge return" and that such investments were precisely the ones that should be spared during cuts. Nevertheless, as the G-20 met, the charity group Oxfam was predicting that aid funding was likely to fall by nearly $10 billion in 2012, the biggest decline in 15 years.

The outlook is particularly grim in the United States, where traditional aid is on the congressional chopping block -- 165 House Republicans want to close down the U.S. Agency for International Development altogether -- and the new financing ideas Gates has proposed appear to be non-starters. U.S. representatives at the G-20 meeting balked at the idea of a financial transactions tax, arguing instead for a "financial crisis responsibility fee" that would tax liabilities of the largest financial institutions to repay the costs of the Troubled Assets Relief Program. Meanwhile, the new trade treaty the United States has signed with Colombia zeros out tariffs on U.S. tobacco imports -- not quite the fiscal direction Gates was proposing for tobacco taxes. And of course, the U.S. Environmental Protection Agency has yet to use its authority to regulate greenhouse gas emissions.

The good news is that the United States (and, for that matter, everyone else) could be doing a lot more for development without spending more money -- and in some cases even saving it. Congress could cut the aid cake but make what's left far more appetizing -- and the United States could take baby steps toward trade and immigration reform that would help poor people lift themselves out of poverty. There might even be the votes on Capitol Hill to do it.

As Gates emphasizes, focus and selectivity are key to improving development aid. A lot of aid goes to comparatively rich countries, and a lot of it is still tied to purchasing goods and services in the donor country. And the aid process can be immensely inefficient. Back in 2005, the club of donor countries called the Development Assistance Committee met in Paris to agree on five principles to make aid more effective, along with 13 targets to help meet those principles by 2010 -- things like making sure aid is actually part of the budget process in developing countries, rather than an uncoordinated add-on, and trying to focus donor efforts so that each ministry in a developing country isn't dealing with 40 different aid agencies each giving a sliver of cash. By 2010, donor countries had managed to meet only one of the 13 targets -- the one that involved talking to each other more. In times of strapped resources, one way rich countries could improve aid's bang for the buck would be to work on meeting some of the other 12. For the United States in particular, just two reforms -- ending the requirement that three-quarters of U.S. food aid must travel on U.S.-flagged ships and buying more food in local markets -- would considerably increase the impact of aid while saving around $400 million a year.

Beyond public and private finance, the Commitment to Development Index (CDI) compiled by the Center for Global Development (where I am a fellow) suggests that rich countries could do better by improving their policies in other areas that profoundly affect global development: trade and migration. Rich countries could help poor countries trade their way to wealth by cutting agricultural subsidies, which tip the playing field against farmers in the developing world. CDI estimates suggest these subsidies amount to a little over $100 billion a year in the United States and a similar amount in the European Union. Divert just four years' worth of EU agricultural subsidies to pay off pretty much all of Greece's public debt, and we could stave off a second global financial crisis while helping some of the world's poorest people all at the same time.

In the United States, this kind of subsidy trimming has long been a political taboo -- but in a season of obsessive budget-cutting, it may no longer be. During negotiations over the deficit in July, the While House and Congress were close to agreeing on agriculture subsidy cuts worth around $35 billion over 10 years, and nearly $5 billion in direct payments to farmers may be cut in the 2012 farm bill.

And then, of course, there's migration. The CDI reports that migration from poor countries to the United States each year amounts to one-third of 1 percent of the U.S. population -- that puts it in 15th place out of 22 rich countries. So much for "Give me your tired, your poor, your huddled masses." Yet it is increasingly clear that the movement of people is a considerable boon to the economies of both origin and destination countries. So more open borders are another area where rich countries including the United States could benefit considerably from greater generosity to the world's poorest. Even on this contentious issue, there are signs of some movement on Capitol Hill toward immigration reform, as members of Congress hear from farmers whose crops are rotting in fields as supplies of undocumented labor dry up and firms who can't find skilled applicants for their jobs. Republican Sen. Marco Rubio has suggested new visa programs for both high-skilled and agricultural workers, for example. And presidential candidate Mitt Romney has called for a green card to be stapled to the front of every college diploma awarded to a foreigner.

With the United States busy beating a retreat on global leadership in development finance, perhaps the rest of the world can use some of Gates's proposals to fill that hole. But for better or worse, cuts to farm subsidies and perhaps even progress on immigration -- however difficult to imagine -- are far more plausible policy aims in the current environment in Washington than an expansion of aid spending. Focusing on these things may not satisfy the naked protesters, but it would still help address some of the problems of the world's poor.