By Chrystia Freeland
WASHINGTON Nov 29 When Branko Milanovic, a
World Bank economist, published "The Haves and the Have-Nots," a
study of global income inequality last year, one of his most
striking observations was the extent to which the subject was
taboo in the United States.
As Milanovic explained, "I was once told by the head of a
prestigious think tank in Washington, D.C., that the think
tank's board was very unlikely to fund any work that had
'income' or 'wealth inequality' in its title. Yes, they would
finance anything to do with poverty alleviation, but inequality
was an altogether different matter."
"Why?" Milanovic asked. "Because 'my' concern with the
poverty of some people actually projects me in a very nice, warm
glow: I am ready to use my money to help them. Charity is a good
thing; a lot of egos are boosted by it, and many ethical points
earned even when only tiny amounts are given to the poor. But
inequality is different: Every mention of it raises, in fact,
the issue of the appropriateness or legitimacy of my income."
I recalled Milanovic's remarks this week when I found myself
on a panel at the Brookings Institution, one of those Washington
research groups, discussing income inequality, including the
research collected in a new book published by Brookings titled
"Inequality in America." In reply, Kemal Dervis, the vice
president of Brookings, who co-wrote the book and led the panel,
joked that if he turns up on the job market next month, we will
know he overstepped the mark.
It was a characteristically polished line - Dervis is a
former Turkish cabinet minister - but the truth is that the
Brookings event was a sign of the recent sea change in the U.S.
public discourse about income inequality.
As recently as this summer, it still seemed like Americans
were allergic to any explicit discussion of income inequality.
That was the reasoning of Republicans and of many previously
nonpartisan wealthy businessmen who responded to President
Barack Obama's call for higher taxes on millionaires and
billionaires with accusations of class war.
But at the polls in November, something surprising, at least
for the Romney strategists, happened. A very muted, democratic
version of class war was fought, and the lower classes won. As
Mitt Romney put it in a conference call with his donors after
the vote, a coalition of less well-off Americans re-elected
Obama because he promised to use government to improve their
Even the patriarch of American capitalists, Warren E.
Buffett, has decided it is OK to talk about income inequality.
In an op-ed in the New York Times and the International Herald
Tribune this week, Buffett pointed out that the wealth of the
400 richest Americans has increased more than fivefold over the
past 20 years. As Buffett put it, "My gang has been leaving the
middle class in the dust."
The Brookings panel confirmed that assessment and offered
three important takeaways about the causes and consequences of
rising income inequality. One was that government matters. Like
most students of the subject, the assembled economists agreed
that rising inequality was driven partly by economic forces like
the technology revolution and globalization.
But the state can choose to mute the impact of the invisible
hand. Paradoxically, in much of the Western world, and
particularly in the United States, even as the power of these
economic shifts has become more profound, government efforts to
mitigate them have become weaker. As Buffett pointed out, the
effective tax rate paid by the 400 top earners in 1992 was 26.4
percent. By 2009, it had fallen to 19.9 percent - even as the
pretax gap between the plutocrats and everyone else had widened.
A second theme of the Brookings discussion helps to explain
one reason that has happened: The economy has gone global, but
nation-states have not. Higher taxes on the rich may be a
logical response to rising income inequality, but actually
levying those taxes is getting harder in an age of global
capital flows. Buffett said it was "sickening" that rich people
and companies use the Cayman Islands to lower their tax bills,
but moral outrage is a weak weapon against international tax
If you are still not convinced that all this matters,
consider the third, and most striking, possibility raised at the
Brookings panel. Set aside any moral or political concerns you
may have about rising income inequality - worries about poverty,
justice, undue political influence or even social mobility.
According to Dervis, and the research collected in
"Inequality in America," a growing number of economists suspect
that once inequality passes a certain point, it may jeopardize
economic stability and economic growth.
As the book argues, "rebalancing of the distribution of
income may play a role in unlocking the U.S. economy's growth
potential in a sustainable way."
Now that is a truly radical thought, and it brings us back
to Milanovic's earlier view that income inequality was a
forbidden subject in the United States.
Worrying about the poor is one thing. To contend that
equality is necessary for growth is an altogether different and
more radical idea. Three decades later, trickle-down economics
has met its antithesis. We are set for one of the great battles
of ideas of our time.