Two authors wrestle with inequality and the allure of populism – The Economist

Jun 11th 2020

The Economics of Belonging. By Martin Sandbu. Princeton University Press; 296 pages; $24.95 and 20.

Economic Dignity. By Gene Sperling.Penguin; 384 pages; $28 and 23.99.

BEFORE COVID-19 struck, the rich worlds economies were in a paradoxical state. In many countries jobs were as plentiful as they had ever been. On many measures inequality had not risen much over the preceding decade, or had risen more slowly than in past economic expansions. And yet political systems were gripped by a populist backlash which, at least in part, reflected an indignant reaction against perceived economic injustice. The liberals who had constructed the old order were suffering a crisis of confidence.

The establishments ideas factories were whirring. How, exactly, should populists be disarmedand which of their complaints had merit? The results are now being rebranded as ways to rebuild economies after the pandemic. Two new books fall into this category. In The Economics of Belonging Martin Sandbu, a columnist at the Financial Times, excoriates policymakers for unforced errors over recent decades and sets out an agenda for correcting course. In Economic Dignity Gene Sperling, a former top economic adviser to Presidents Bill Clinton and Barack Obama, argues for a new value system to underpin American economic policy.

Mr Sandbus book is in some respects the more optimistic of the two. He rejects the fatalistic argument that populism is a straightforward revolt against immigration and progressive cultural attitudes. Economic insecurity always triggers angst about culture and suspicion of outsiders, he points out. Fixing the economy, in other words, will heal cultural divides. The key is to get the economic diagnosis right. Trade, immigration and globalisation more broadly are easy scapegoats for lost manufacturing jobs and growing geographical inequality. But it is technological change that has really caused the rise of a service- and knowledge-based economy. The solution, thinks Mr Sandbu, is for governments to forge social contracts fit for technologically advancing economies, not to try to turn back the clock.

Yet his policy proposals do not reflect the compensate the losers redistribution for which economists frequently reach. Instead, he favours increasing workers productivity and bargaining power so that they are never too dependent on a single employer. To that end, monetary policy must put greater emphasis on keeping labour markets running hot, so that firms compete for workers rather than workers for jobs. Tax-free earnings allowances should be replaced with a small universal basic income, to reinforce safety-nets without laying poverty traps. And governments should direct investments in the knowledge economy, such as publicly funded research, towards places that have been left behind.

Mr Sandbu claims this agenda is not left-wing, and does not require an increase in government spending as a share of GDP. But it does require a recognition that individuals must not completely lose control over their economic fate to market forces. Otherwise, as they endeavour to wrench it back, they may be swayed by extremists.

Mr Sperlings book isperhaps unsurprisinglymore partisan. For him, policy failures have been the fault of small-government fundamentalists, chiefly in the Republican Party, who have failed to appreciate that there is more to life than GDP and the free market. He argues for what political philosophers might call a sufficientarian approach to economic policymaking, whereby everyone is entitled to a basic minimum. This is not calibrated in dollars, as advocates of a universal basic income might recommend. Instead it is measured in economic dignity, which includes sufficiently high pay, time to spend with family members (or take care of them), and the peace of mind that comes from adequate health care and a strong safety-net.

The notion that some spheres of life should be beyond the reach of the economy or the state is a powerful one with a rich heritage. It motivates the concept of rights, which are usually considered immune both to utilitarian calculuswhat Mr Sperling calls aloof welfare economicsand even to some individual choices. Most people agree, for example, that no one should be able to sell themselves into slavery, or bargain away their right to a free trial. But Mr Sperling mostly dodges the hardest parts of establishing such a philosophy: defining its boundaries and proving that it is feasible to organise society in a way that protects the dignity of everyone simultaneously. Save for one inconclusive chapter on whether it is in fact possible for all work to have true meaning, Mr Sperling tends to intuit the answer to these questions, while pouring scorn on those who cast doubt.

As a result it can seem as if he has taken a Democratic wish-list of ideas and bolted on the dignity justification. Some of these ideas are sensible. He might have used any number of values, including fairness, justice and efficiency, to argue for reform of American health care, or to object to the exploitative practices of for-profit colleges. Others, such as a disdain for stock buy-backs and a desire for more barriers to entry for careworkers, are less appealingand not helped much by invoking dignity.

Mr Sandbu is more interested in justifying his proposals from several angles. Like Mr Sperling, he wants a higher minimum wage. But not just on distributive groundshe says it would spur firms to invest in training their workers (the sort of argument that sounds plausible but needs proof to be convincing). Sometimes his economic logic ties him in knots, as with his discussion of wealth taxes. Mr Sandbu supports them on grounds of efficiency as well as fairness, arguing that they will encourage the rich to take entrepreneurial risks. But he hurries over the fact that the paper he cites in support of this view imagines a world in which wealth taxes replace all other taxes on capitalincluding the corporate taxes which a few pages later he wants to raise, too.

On a fundamental level, these books are similar in attitude. Messrs Sandbu and Sperling both combine a basic support for free markets with a fear of their power. It is precisely because incentives are so potent that competitive forces must not be allowed to go haywire, as when firms gain an edge by reclassifying their workers as contractors, or by moving to tax havens. Such races-to-the-bottom define many of the policy failures of recent history.

And both books highlight the moral blind spots that many liberals and economists think have been exposed by the era of globalisation (and perhaps by the pandemic, too). Clarifying those problems, and finding solutions that avoid compromising too much on freedom and free markets, is crucial work.

This article appeared in the Books & arts section of the print edition under the headline "Free but fair"

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Two authors wrestle with inequality and the allure of populism - The Economist