"Fareed Zakaria GPS," Sundays at 10 a.m. and 1 p.m. ET on CNN
GPS Digital Producer Jason Miks speaks with Zanny Minton Beddoes, economics editor for 'The Economist,' and Canadian member of parliament Chrystia Freeland about rising inequality – and how the West should respond.
You were elected as a member of parliament in Canada last year. How do you think the big debate going on over inequality in the United States compares with how it is unfolding in Canada?
Freeland: Basically, these are global phenomenon that are driving the surge in inequality. It’s globalization. It’s technological change. And there’s a political aspect, a set of political changes – deregulation, weakening of unions, privatization, changes in taxes. So this is really something that is happening in all of the Western industrialized countries, and also in a lot of the emerging markets – you see income inequality surging in China, Russia, India. So it’s a big issue in Canada.
Interestingly, I think it’s becoming a truth universally acknowledged, which it wasn’t before the crisis. Things have changed. Income inequality is higher than it has been. So if you think back pre-2008, people were still debating that. Now, we all get that this is the new reality, and I think what you are starting to see is people focusing on what part of all this is bad, and what can we do about it. And I think the focus rightly is narrowing in on really the big problem of the hollowed out middle class, the stagnant middle class jobs and there not being enough middle class jobs.
I think what you’re going to see increasingly is people saying that this is the thing we need to focus on, and also how do we improve social mobility?
Minton Beddoes: I think on the inequality side, there is still a huge debate about whether it matters and whether government has any role in doing something about it. I think people now acknowledge the facts, which are that there has been a huge increase in the share going to the very top. And that’s partly because the share of income going to capital, which is held mainly by very wealthy people, has gone up so much. And it is partly because within wages, the share going to people with higher skills has gone up.
Inequality is kind of a snapshot of one particular point of time – and the share going to the very rich right now has risen enormously. When you think about why that has happened, when you divide up growth every year, more of it goes to capital and more of it goes to the higher educated worker, so the bit that is left for everybody else is being squeezed. We used to say, no matter, a rising tide lifts all boats, and if growth is high enough you can see living standards improving at the bottom, even with widening inequality.
This is kind of what is happening in China – China has had a massive rise in inequality, but it has grown fast enough that living standards have grown nonetheless at the bottom. But if you have aging, slower growing rich world economies, and you have 2 per cent growth, 3 percent growth…
Freeland: Or less…
Minton Beddoes: Or less. And you divide that up hugely to capital, which largely goes to the very top, then it means that living standards are either stagnant or even declining for lots of people. That’s the problem.
I’m much less worried about inequality in a fast growing economy, where living standards are rising. I don’t buy into the idea that it is a bad thing if people are successful at the top. But I do think it’s a social, political and economic problem if the bulk of people’s living standards are stagnant or declining, and so I completely agree with Chrystia that this is the policy focus. The question is what do you do about it? The motherhood and apple pie answer, which is true nonetheless, is that it’s education, it’s training, and completely rethinking what education is. It needs to start younger, it lasts all of your lifetime, to help people have the skills that mean they are more likely to be able to get the kind of jobs that new technology brings up.
But one thing is that you have to pay for it. So the other side of the coin is how do you raise tax revenues? In the U.S., the inequality debate quickly transforms into a redistribution debate, and there’s often the idea that if you care about inequality, obviously you want to soak the rich with high taxes. So we need to think about how do we raise the revenue we need, progressively and efficiently. The U.S. actually does very badly on that. It has quite a progressive tax code, and lots of people will tell you that the rich pay far and away the largest share of taxes. Which they do. But it’s on a very narrow base, and there are a huge number of exemptions, which cost a lot of money. I wouldn’t actually raise marginal tax rates. I think the first thing to do would be to broaden the base by getting rid of exemptions – particularly those that are taken mainly by the people at the top. Do that, and use that money to invest in education and pre-school, then you have a start.
How is this debate playing out in Canada? Is there a broader consensus?
Freeland: There are a few interesting, specific things about Canada. One is that social mobility in Canada is higher than in the United States. Now that’s an interesting point, because I think if you asked the average American about that, they would find it quite shocking. Americans still buy into, on a main street level, that they are the embodiment of the American Dream. The awkward truth is that we do that better in Canada – and actually lots of Western Europe does better than the United States on social mobility.
Part of the reason that this is the case is that Canadians invest more, and more effectively, in public education. Particularly in the provinces of Ontario and Alberta, they do really well on public education, starting in pre-K. My 4 year-old goes to all day kindergarten for free at a public school that is a block and a half way. And it’s excellent. Coming from New York back to Canada, I’m really struck by that. And I’m really happy about it – you can automatically see how it creates not only more social opportunities for all those kids. And sure, I live in a good neighborhood, and partly we live there because it’s a good school. But it creates a more calm and cohesive society where people know they can send their kids to a great school. And I think if you ask any parent, I think they would all say that the most important thing to them is that they want their kids to have a good life.
So education is important. Having said that, I don’t want to give the impression that Canada, or any rich industrialized country right now, can rest on its laurels. And when I think of the very sweeping set of social and political changes that happened on the crest of the Industrial Revolution, then I think we are living in a comparable time. I think the task of our generation is going to be to invent the new set of political and social institutions, and right now we are thinking of small things. And maybe that’s OK, that’s how you start. But I do think that all of us really have to get that the way the economy works is different, and that if we want the kind of society which, painting in very broad strokes, the Western world enjoyed in the post-war era – of widely shared growth, widely shared prosperity, a democracy that was growing and including more people – we are going to have to change the way we work.
Minton Beddoes: I completely agree. But there is I think one thing that makes it a lot harder than 100 years ago, and that’s that 100 years ago, you had very small government. And part of the change was that you introduced the income tax, you introduced more government spending.
Freeland: You invented government.
Minton Beddoes: We now have very big government. We just have big government spending on, in my view, the wrong things. Putting it crudely, we redistribute from young to old, and certainly in the U.S. much less well from rich to poor. So it’s thinking more about redirecting government spending, redirecting taxation, more than it is necessarily making everything bigger. So sometimes there is the reaction that you just need to jack up tax rates at the top. But I think that’s too simple. We give huge subsidies to middle and upper class rich people, and that’s the place to start – get rid of those boondoggles and use that money to invest more further down.
Freeland: I think Zanny’s point on government is really important. And the way Theda Skocpol, a very smart professor at Harvard, has put this in a book is that in the late 19th and early 20th century, government was a startup. And that poses its challenges – you have to have new ideas and get them right. But there is also the excitement around a new idea, the opportunity around a new idea. Now, the job that we have to do is in a brownfield site. And we need to partly reinvent, but our reinvention has to reform. I think that’s more difficult in terms of getting the actual ideas right, and it’s more difficult politically.
Minton Beddoes: Because there are losers – you have lots of vested interests in the existing system.
Freeland: There are losers, and there is fatigue. It’s one thing to propose a brand new program that hasn’t been discredited because it hasn’t happened yet. But it’s another to take the creaky machine of government, with all its failings, and a lot of people will say well actually, I know that machine and it’s not a great machine.
We’ve been painting in quite a negative light a lot of these changes that we have been talking about. But they are also wonderful in a lot of ways. And I think what has happened in a lot of ways is that your life as a consumer has gotten better. We make more stuff more cheaply, and we are getting better and better at treating consumers. But as a citizen, it has been sort of the same, and in some cases has gotten worse.
Minton Beddoes: One route through, and the one I want to feel optimistic about, is utilizing the kind of disruptive technology that has brought us iPads, which has brought us change, to achieve the things you’ve talked about. So for example MOOCs – mass online open courses – which are essentially about rethinking education, because you can distribute content and distribute learning for free online. I suspect in 10 years’ time we will have a very different way of delivering education. And it may mean that access can be increased dramatically – if you don’t have to have everyone go to the community college or training college to study, you can do a whole load of stuff online. As part of people getting unemployment insurance, for example, you could get them to go online and do a course. It doesn’t change things like pre-school – you need people teaching kids in classroom. But broadly, through peoples’ lifetimes, you can harness this technology and the opportunities are exploding.
So government is no longer a startup – government is kind of a sclerotic brown field. But the technology that is there – the digital revolution can sometimes hit people a lot harder if they don’t have the skills. But it can also be harnessed to really help this revolution along.