Edward Hadas

Barack Obama and Mitt Romney put the economy at the top of their campaign agendas. They have both focused primarily on labour – the high rate of unemployment. The attention is deserved, but other parts of the economy should not be ignored. There is the worrying decay of the nation’s capital stock – the physical, social and financial infrastructure. There is also something wrong in the consumption side of the economy, but there is a heated debate on just what the problem is.

Many commentators believe that the middle class, which makes up the bulk of the population, has a big problem: a decline in living standards. After all, the Census Bureau reports that the $50,054 median household pre-tax income in 2011 was 9 percent below the all-time peak, adjusted for inflation, reached 12 years earlier. That decline in income is so large that it must have led to some erosion in the typical family’s consumption.

Even if purchasing power really had declined by a few percent, the slide was from such a high starting place that loud complaints about deteriorating lifestyles would be unseemly. In fact, though, the median income measure distorts consumption reality. It omits services received without cost, for example healthcare provided by the government and insurers. It excludes the effects of changing taxes and shrinking household sizes. It underestimates the value of technological improvements – think mobile phones and the internet – and of the vast expansion of new, now-cheaper housing during the bubble.

These adjustments are almost certainly large enough to offset the reported decline. So the middle class doesn’t need a lecture on the virtues of making do with less. The adjustments also explain the lack of massive political indignation, even if there is evidence of minor irritation, at declining incomes. The placidity is not a sign that the American middle class has found stoic fortitude in the face of adversity. Rather, it is a reasonable response to consumption which is not really falling.

On the left, the common view is that the rich, or more precisely the widening gap at the top of the income ladder, is the nation’s leading consumption problem. For the top 1 percent of earners, income – after taxes and government transfers and adjusted for inflation – has multiplied four-fold since 1980, while the median has not even doubled. The disparity might be reduced by statistical adjustments, but the trend is real. The rapid increases in pay for celebrities, top executives and financial professionals are typical.

President Obama sometimes criticises this increase in income inequality in favour of the rich. That may be politically astute, but it dodges the ethical question of whether, and why, this change is undesirable. For egalitarian purists, it is, on principle, but the gains of the wealthy do not necessarily imply that the less well-off have fewer economic opportunities. For those who worry that the country is becoming a plutocracy the increased concentration of wealth is clearly a step in the wrong direction, but the wealthy have always had a great deal of political power in the United States.

There are good reasons not to worry too much. The actual increase in consumption which comes with an increase from very great to awesome wealth adds almost nothing to an already high quality of life. Further, more people have joined what might be called the luxury class. In 2011, 4.2 percent of American households had a pre-tax income of more than $200,000. In 1968, the proportion above that threshold (in 2011 dollars) was a mere 0.7 percent.

Another increase in inequality – against the poor – receives much less attention. For four decades until 2000, poverty was waning; the proportion of households with an income under $15,000 dollars (at 2011 prices) fell steadily. In the new century, though, the trend has clearly reversed. That is a real problem, even though the typical consumption of America’s poorer families is high by global standards.

The median cash measure understates the poor families’ decline. They have also lost out on cost-free services. Compared to richer Americans, today’s poor receive worse health care, leave their free public schools earlier and have less effective police protection. It is also worrying that today’s poor are also socially needier than the poor of their parents’ generation; overall they are less able – or, as some Republicans would have it, less willing – to help themselves.

Only a major social commitment could address this problem, but fixing poverty is low on the agenda of both candidates. Their indifference is politically sound – the bottom of the economic heap will not win them the election – but morally regrettable. Complaints about the supposed income losses of the middle class sound self-serving. Whines about the gains of the rich are often tainted with envy. A serious commitment to the poor would show that generosity still thrives in the world’s richest country.

Revolution was not on the agenda when the Second Vatican Council of the Catholic Church opened on Oct. 11, 1962, almost exactly 50 years ago. However, the gathering marked the start of a new era, not only for the world’s largest centrally-run religion. During the following years, the hope for a better, freer world led to everything from the sexual revolution to the Prague Spring, from African independence to the hippie culture of Woodstock. A half-century on, it seems a good time for an economist to take stock.

The economy was not the top concern of the ’60s would-be revolutionaries, but calls for a new society had two revolutionary economic implications.

First, like so many other parts of the established order, the economic “system” was to be overthrown. The target was clear enough in Eastern Europe – the Communist planned economy. Elsewhere, the economic villain was harder to pin down, although it was often assumed that “capitalism” was intrinsically evil – heartless corporations and excessive materialism in the West and post-colonial exploitation in the Third World. It was time for radical change; if not a return to some imagined pre-industrial communal paradise then at least a massive refusal to become cogs in the machine. It hardly seemed to matter then that dissidents in the East were longing for what protesters in the West were loathing.

One of those 1960s dreams has come true. Communism is gone, save for Cuba and North Korea. Otherwise, the “system” appears well entrenched. Corporations, larger and more impersonal than ever, have extended their reach in a globalised world. Developing economies may be less in thrall to the former colonial masters, but indigenous entrepreneurs are just like their western exemplars. The communes are closed or have gone commercial. Alternative careers are rare, money and finance ubiquitous.

The second economic revolutionary demand was for the abolition of poverty in the midst of post-War plenty. This sentiment led to the foundation of the United Nations World Food Programme in 1961 and the U.S. government’s war on poverty in 1964. The post-Vatican II Catholic Church was one of the keenest promoters of global economic “Justice and Peace”.

That dream has come closer to reality. True, hunger still plagues a billion people, but abject poverty has diminished as GDPs have risen around the world, and safety nets have helped the needy in richer countries. Nonetheless, the 1960s’ revolutionary and religious fervour made only a minor direct contribution to these improvements. Developing countries primarily copied the practices of rich countries while the welfare state mostly expanded existing programmes.

It might sound like “the system”, which was not overthrown, has actually been good for the world. Was the rage against the machine all in vain, and the idealism unnecessary? I think not, and not only because of the collapse of the Soviet economic model.

While most of the children of the 1960s eventually signed up for work within the system, many did not completely abandon their higher aspirations. As a result, the counter-culture spirit has infiltrated the corporate world. Capitalism has proved flexible enough to change in response to its critics. In the 1960s, theory Y management – the idea that employees should be encouraged more than disciplined – looked original. It is now obvious. Corporate claims to “social responsibility” may often sound hypocritical, but executives would not even bother to pretend if they didn’t believe that companies should do more than merely provide profits for shareholders. “Don’t be evil”, as Google’s founders put it, is a 1960s-style slogan that most bosses would now endorse.

The 1960s commitment to the elimination of poverty has also borne fruit. Without it, companies would be less willing to offer better conditions for their employees in poor countries, or to demand better conditions for their suppliers’ employees. Without it, western politicians would be more hostile to the expanding power of China and former colonies. Without it, there would be even more hostility to economic immigrants struggling to earn a decent living in rich countries.

Of course, history does not repeat itself. Last year’s global Occupy Movement didn’t amount to much. In a way, that failure is a sign of the greater success. The decade’s economic idealism has had enough influence that calls for radical change now sound silly.

Nonetheless, idealistic dreamers are still valuable. They can remind the world that the ultimate purpose of a prosperous society is not wealth for its own sake, but something better. I would suggest three goals for the grandchildren of the 1960s. First, the battle against pollution is not yet won in rich countries and has only begun in the developing world. Second, there is an urgent need for a financial system which doesn’t have greed as its only engine. Finally, the gulf between rich and poor is still too wide. It is too often forgotten that a poor man’s rise from wretched poverty does more good for the world than a rich man’s latest bauble.

It is circa 1900. A young girl from a simple fishing village has been sold as a ’practice wife’ to the Bendoro, or local lord. When the Bendoro tires of her and expels her from his house, the girl retires from his presence the way peasants are supposed to: backwards, and on her knees.

The scene is from the novel “The Girl from the Coast”, and is based on the life of the grandmother of the Indonesian author, Pramoedya Ananta Toer. The girl suffered because the absolute authority of a petty local ruler and the accompanying indignities were considered normal. And this in a land which, by the standards of the age, was relatively refined. The Bendoro’s rules did not hold in the Netherlands, which ruled the land, but many Europeans would have shared his belief that sharp social stratification was part of the natural order of things. The Victorian author of All Things Bright and Beautiful, the childrens-favourite hymn, expressed the same sentiment a few decades earlier: “The rich man in his castle, the poor man at his gate, God made them, high or lowly, and ordered their estate.”

Times have changed. Pramoedya’s story comes from a vanished world, one in which the privileged elites were considered superior beings to the masses of ’ordinary people’. To the modern reader, the Javanese peasant bride’s humility looks demeaning and disgusting, not pre-ordained. The Bendoro’s worldview has been superseded by that of the Universal Declaration of Human Rights, which takes it as self-evident that, “all human beings are born free and equal in dignity and rights”. And the verse about “the rich man in his castle” is usually excluded from editions of modern hymnals.

Still, elitism is far from dead. Almost everywhere, a handful of people, or families, hold significant influence over politics, economics, and society. The yearning for equality that has brought about so much social and political change has put an end to the sort of bowing and scraping that Pramoedya described, but it has not prevented the rise of new ruling classes – albeit ones defined by class and profession rather than bloodlines.

Indeed, today’s elites are unlikely to have inherited a title such as Bendoro, king or prince. In Indonesia, the royal families have vestigial prestige but little political and economic influence. In their stead, a few current and former military leaders and a small group of business families – the latter almost all of Chinese origin (nine of the 10 richest, according to Forbes) – are in control. The wealth of this ruling caste is enhanced by the sort of state-granted monopolies and tribute payments that were once considered the normal privilege of aristocrats but are now often deemed corrupt.

For those who think that the desire for equality is inscribed in human nature, the new elite of China must be particularly depressing. Mao Zedong’s promise that his Chinese Communist Party would “abolish classes and enter a world of Great Harmony” is unfulfilled. The CCP has become the centre of privilege and a generator of self-enrichment. Worse, at least from an egalitarian perspective, is the exalted position of the so-called princelings, the descendents of revolutionary heroes, who hold postions of significant influence across the Middle Kingdom.

Even in the United States, the first country to be founded on egalitarian principles (slaves, women and Native Americans excluded, of course), there has always been an economic and cultural elite. Over the last few decades, it has become more powerful and grown more distant. Corruption is rare, but the law, the financial system and the accepted practices of corporate pay are all tilted in favour of the fortunate few. As in China, privilege is increasingly passed on from parents to children.

To a greater or lesser extent, elites continue to thrive. Is this persistence bad? The simple answer to that question is “yes”, since the fortunate few of the elite almost inevitably enjoy unjustly excessive privileges – more power, wealth and respect than their contributions merit. The Bendoro and other holders of inherited titles could once claim some sort of birthright, but such assertions now seem ludicrous.

Still, the elites’ persistence inspires caution. It clearly takes more than universal education in egalitarian ideology to keep them away. Excessive anti-elitism can be counterproductive. Indonesia’s post-independence regimes are far from the only examples of enforcers of rigorous egalitarianism which soon turned into new elites.

Perhaps the best hope is to tame the elites. Law and custom can be used to limit their power. Also, they can be expected to use their privileges for the benefit of all, through philanthropy, patronage of the arts and voluntary service. It might even be fair to ask the elite to find something like a common touch.

Around 100 BC, a Roman nobleman calculated that it took about 100,000 sesterces a year to live comfortably. That was roughly 200 times the amount of money a poor city dweller needed to eke out a living. If an American needed the same multiple of the subsistence income to join the upper middle class today, the threshold would be $3.5 million. The United States economy has become less equal lately, but it remains much more egalitarian than the ancient Roman Republic.

The modern news on economic inequality is much more good than bad. The good news is very good. The greatest moral problem caused by inequality – the unequal access to the most basic economic goods, those which support life – has become less severe. The portion of the total population that suffers from this bottom-inequality is probably the lowest ever in history.

True, we do not know how many ancient Romans were on the wrong side of the bottom-inequality, but statistics for the most recent decades are encouraging. In 1970, 26 percent of the world’s population suffered from hunger, according to the UN’s Food and Agriculture Organisation. The proportion is now 13 percent – still scandalously high, but the gain in food-equality is clear. Nor is food an isolated example. Electricity is a relative new development, but the Soviet dream of universal electrification has already nearly become a reality; more than 80 percent of the world’s population can plug in, according to the International Energy Agency. Health care and sanitary living conditions are now considered basic goods – and access to them has become more equal. The average life expectancy at birth is 65 or above in countries accounting for roughly 80 percent of the world’s population.

The bad news is on the other end of the income spectrum. There has been an increase in top-inequality – a widening gap between the elite and the rest – in the United States, the UK and a few other countries. The bottom 90 percent in the United States are not exactly suffering; they have been getting richer on average for the last few decades. But the rich, especially the very rich, have been getting richer much faster. The top 10 percent of earners took in 32 percent of the nation’s total income three decades ago. That has risen to 46 percent. The share taken by the top 1 percent has more than doubled, from 8 to 18 percent, according to the World Top Incomes Database. In the UK, the newly published report from the High Pay Commission points out that the top 0.1 percent’s portion has multiplied from 1.3 to 6.5 percent.

The increase in top-inequality is bad in principle. People are not different enough in their abilities or in their dedication to work to justify the recent increases in the gap between rich and relatively poor. The damage can be seen in practice. The commission makes a good case that top-inequality reduces social solidarity, making companies less efficient and slowing GDP growth. It also points out, along with the book The Spirit Level, that greater top-inequality is associated with societies which have more health and behavior problems.

Still, there are four mitigating factors:

First, the allocation of wealth within a society is usually best left to the collective judgement of that society. The people have not, not yet at least, definitively rejected the widening gap between rich and poor. That suggests the problem is not widely perceived as grave.

Second, the elite just might be able to do some good with their extra resources. The ancient Romans offered bread and circuses and renaissance princes sponsored artists. In modern industrial societies, the financially secure elite could be a helpful alternative to governments for cultural, social and economic initiatives.

Third, whatever the evil caused by top-inequality in rich societies, it is much less significant than the good news on bottom-equality. As the American and British masses get richer, it becomes harder to argue that they lose out in a morally significant way when the elite gain. Even the poverty which causes the social problems identified by The Spirit Level is arguably more spiritual and social than strictly material.

Finally, if the people do decide that the recent increase in top-inequality is unjust, the trend can be reversed with much less trouble than bottom-inequality. Major social changes are required to increase crop yields or trade in the remaining deprived parts of the world, but the rich can be curbed fairly easily in developed economies. Choose from the following list: shame, taxes, limits on the range of pay inside companies or income caps in the particularly lucrative financial sector. Even for the very rich, the sacrifices needed to reduce inequality would be mild. As Bill Gates pointed out, more money stops meaning much after the first few millions. In his words, “it’s the same hamburger”.