Year XXVI, 1984, Number 1 - Page 62

 

 

 

THUROW AND THE PROBLEM OF EQUITY
 
 
In a recent book L. Thurow emphasizes that «our society has reached a point where it must start to make explicit equity decisions if it is to advance».[1] In other words, not only there is no harsh trade-off between equity and efficiency, but economic growth itself requires an increased income equality.[2] If the equity goals that people find acceptable are not fulfilled, corporative degeneration of society is promoted and interest groups and lobbies are fostered. A power situation is thus brought about where an effective control of the economic process becomes impossible. The conflicts of interest, not solved through political decisions, are eventually mediated through inflation.[3]
An alternative must – and can – be found. In the United States the earnings of the top twenty per cent of the fully employed white males are five times as large as those of the bottom twenty per cent, but for the rest of the population the same ratio is twenty-seven to one. At the same time there is no disincentive to work for the white males; on the contrary, they are fully engaged in promoting economic growth, trying to raise their social status by strengthening the position on the market of the organization in which they work. But the existing inequalities bring about continuous efforts to catch up on the part of the other less advantaged sectors of the labour force. Large effects of wage drift follow, that feed inflation. Thus, the first conclusion that Thurow reaches is that «our general equity goal should be to establish a distribution of earnings for everyone that is no more unequal than that which now exists for fully employed white males» (p. 201), that is with a maximum spread of five to one.
A second point follows from this analysis, regarding taxation and in particular the progressive income tax. «The appropriate degree of vertical equity depends on how closely we come to achieving an equitable distribution of market earnings. If we reached a distribution of market earnings in accordance with that suggested above, a proportional tax system would be appropriate. To the extent that we have not achieved an equitable distribution of market earnings, the tax system should be structured to move whatever distribution of market earnings does exist toward an after-tax distribution of income that approaches our equitable distribution of market incomes» (p. 207). Thus, the progressive income tax finds its raison d’être in the divergence between the actual and the optimal distribution of income, and can be utilized to approach the latter in so far as the market fails to reach this goal by itself. But if an ex-ante incomes policy is able to correct the earnings inequalities that originate in the market, a proportional income tax with a flat rate or a very weakly progressive tax can be introduced because equity goals – as accepted by the majority of the people in the current phase of social development – are now realized through another policy instrument. Henceforth, direct taxation need only guarantee an optimal differential treatment of income according to its source – mainly labour or capital, given the different degree of sacrifice necessary to gain a wage or capital revenue –, or to the different uses (for instance, giving a preferential treatment to income saved and invested in selected sectors that public policy targets as a first priority).
Another point, that derives from Thurow’s analysis of the crisis facing modern industrial societies, relates to the problem of unemployment. The economy, as it is structured especially after the onset of the post-industrial revolution, can neither provide a job to everyone wanting to work through the free play of market forces, nor solve the problem by boosting effective demand directed towards industrial goods or other services. To realize a plan for guaranteeing full employment a political decision is needed. This must be mainly a responsibility of the government. «The only solution is to create a socialised sector of the economy designed to give work opportunities to everyone who wants them but cannot find them elsewhere» (p. 206). A guaranteed job programme must have several characteristics to achieve the objectives for which it is intended. First, it cannot be a programme of employment at minimum wage rates. The goal is to open to everyone a structure of economic work opportunities equivalent to those open to fully employed white males. Second, the programme must be open-ended, providing jobs to everyone who is able and willing to work, without any further condition. Third, the programme should not be viewed as a temporary antirecession measure, but as a permanent feature of a modern industrial society.
The policy suggestions emerging from this book would probably be considered unrealistic by someone tied to a solid pragmatism, especially in the present conjunctural phase of slow expansion after a three-year period of inflation combined with a deep recession. But stagflation is largely caused precisely by the inability of modern industrial societies to cope effectively with the problems of equity. Social groups, endowed with strong monopolistic power on the market, are fighting bitterly over the distribution of national income and the government is consequently losing control of the economic process. In the meantime, given the anarchic conditions prevailing at the international level, some regions and countries become richer and stronger, while others are hard hit by the slump. The problems of equity – both at the national and at the international level – are thus urgently on the agenda and economic recovery cannot be secured if they are not solved by achieving not only a fair distribution of national product among individuals, but also a less unequal level of per capita income among different regions and countries.
 
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The same target that Thurow suggests for income distribution among individuals – a ratio of five to one from the top to the bottom twenty per cent – should be pursued among the different countries at the international level. Given the income gap between the industrialized and the poor countries,[4] it is quite clear that this target can be attained only in the long run. But a suitable policy must be started at once through a European “Marshall Plan” for the Third World,[5] capable of making effective the potential demand existing in these countries. Actually, at the international level, the postulates of Keynesian policy are still well-grounded. If a more equal distribution is not achieved, a power situation is created which makes it impossible to manage the world economy or to secure the deep structural adjustment that the post-industrial revolution requires. The international anarchy thus removes the possibility of a balanced growth of the world economy.
In Europe too an economic policy must be pursued that is oriented towards stable growth and a fair distribution of resources inside the Community. Here an increase in the size of the Community budget is indispensable, so that the more redistributive policies, such as regional and social policy, can be strengthened and new policies implemented. But, at the same time, the need to finance a larger budget can be exploited to introduce more progressive sources of revenue. Income tax could be adopted for this goal, using a simple device. First, the total expenditure to be covered from this source would be distributed among the different member countries according to the share of each country’s national income in total EC income; then this share would be modified by applying a progressivity coefficient given by the ratio between the per capita income of that country and the European average. So the richest regions would pay more and the weakest less. What each country has to pay to the EC budget would be eventually distributed among its citizens according to the degree of progressivity of its own system of income taxation.
A strong incentive for redistribution would be embedded in the fiscal system of the Community with this scheme, since the more divergences in per capita income are reduced, the less the richest countries would have to contribute to the European budget. At the limit, if a perfect equalization is attained, the budget is financed by an income tax with a flat proportional rate together with the other “own resources”. Here a new point of contact with the analysis developed by Thurow can readily be identified. Within each country too, progressive income taxation is justified only by the existence of large inequalities in income distribution. If an effective incomes policy is pursued, this necessity lapses and proportional taxation or a weakly progressive rate can be adopted.
The main task, at the European level, is thus the management of a general economic policy, in order to guarantee a stable growth, and an adequate transfer of resources, in order to reduce the disadvantage of the less-favoured regions – the more so in the perspective of the enlargement.[6] Yet it is at the national level that an effective welfare policy must be pursued. If a fair regional distribution of resources – setting as a temporary goal a ratio of five to one between the richest and the poorest regions – provides a sufficient consensus supporting a real common European policy for economic stabilization and growth, the redistribution of resources among the individuals and other measures typical of the welfare state must be attributed to the lower levels of government, where a deeper degree of social solidarity can be found. Thus, each member country must choose the degree of progressivity for income tax best fitted to its social welfare function. And equally, an effective income policy, assisted by the necessary measures of price control,[7] should be implemented to get the desired distribution of individual incomes. In this way a real control of the economic process is given back to the collectivity, in a world heavily characterized by rivalries among powerful social groups, by fixing and adequate target for income distribution – for instance, by seeking a ratio of five to one.
In conclusion, it is necessary to favour an evolution of the political system at the world level towards a form of federal organization that provides, following Wheare’s classical definition, unity where it is needed, as much as variety and independence where uniformity is not essential, in order to achieve the targets of equity indicated by Thurow, whereby the take-off of a phase of balanced growth is eventually determined. Thus, at the world level, where the possible degree of unity is still very low, a policy supporting the growth of Third World countries must be fostered; and Europe can help towards this by launching immediately, in the framework of the Lomé Agreement, a Keynesian policy to make the potential demand of the associated countries effective. But Europe can help the evolution towards unity at the world level most by pressing to its federal conclusion the process of political unification, which in the Old Continent is more advanced than in other parts of the world.
In this way an effective distribution of the tasks relating to economic policy management could be secured, entrusting the European level with framing the general lines of economic policy and with ensuring the transfers of resources needed to reduce the disparity of income among the Community countries and thus guarantee the cohesion of the union; whereas the national and the lower levels of government would be charged with the fulfilment of the proper goals of the welfare state, through redistribution and social policies.
In a federation two sovereign levels would exist, and the European one would be preserved from the pressure of lobbies and interest groups. The corporative degeneration of the welfare state – unavoidable where consensus can be promoted through an increase in public expenditure, even if it is deficit-financed could be prevented and this real control of the economic process would become again possible. On the other hand the achievements of the welfare state could be protected against the attempt, hopeless though it may be, to regain control of the economic process at the national level.
Useful suggestions can be drawn from Thurow’s analysis also in the field of policy to reduce unemployment. A European Labour Agency with a multi-tier structure, from the local community to the European level, must be built-up,[8] with the main goal of providing a job for all those who want to work and do not find job opportunities on the market. In this way labour mobility can be organized efficiently at the Community level, taking into account the overall needs of the European economy and, in the meanwhile, regional conditions in the labour market. Of course, the functioning of this European Labour Agency must be strictly connected with the implementation of an effective incomes policy and with the redistribution of resources among regions, all being instruments of the same policy that aims to link equity with efficiency.
If Europe is really able to cope with these problems in an effective way, it can provide useful proof that social justice can be organized at the international level with a federal link that guarantees both unity, where that is necessary, and the independence of the member states, which retain their capacity to follow the policies best suited to the preferences of their citizens without interfering with the stability and growth of the overall economy.
 
Alberto Majocchi
 


[1] L.C. Thurow, The Zero-Sum Society. Distribution and the Possibilities for Economic Change, New York, Penguin Books, 1981, p. 194.
[2] On this point see also, by the same Author: «Equity, Efficiency, Social Justice and Redistribution», in OECD, The Welfare State in Crisis, Paris, 1981, pp. 137 ff.
[3] In our opinion Thurow’s analysis is based on this logical structure: a) efficiency = “economicity” (the state of being economic); b) the high or low degree of economicity appears as an economic issue, but has political reasons; c) control of the economic process = policy that optimizes the utilization of the available resources, i.e. permits the exploitation of all the economic potential; d) it is not sufficient to distinguish the policies, it is necessary to distinguish the power situations, since there, are power situations that make possible, or not, effective economic policies, that bring about necessarily, or not, an inefficient (uneconomic) utilization of the available resources; e) the power situations are different since they can approach, or depart from, the pole of the general will or the pole of the supremacy of the particular will; f) the absence of equity (of the degree of equity held as fair in the framework of a living culture) is one of the factors that shift the balance of power from the pole of the general will towards that of the particular will.
[4] Between the per capita income of the United States and the average income of many very poor African countries the existing ratio is twenty to one. Hence, even if it seems insufficient compared to a purely ideal standard, the attainment of the proposed target is rather difficult. Further, it must be stressed that it would produce a big progressive impact on the whole world economy.
[5] On this point see: G. Montani, «L’unità europea e l’emancipazione del Terzo mondo », Il Federalista, 1980, p. 128.
[6] Now the ratio between the richest and the poorest region’s per capita income within Europe is larger than 10 to 1. The poorest region has a per capita income only one fourth of the average Community income.
[7] Price control must not be intended in a bureaucratic sense, but as a policy intervention to guarantee a well-functioning market, thus overcoming the hindrances and the rigidities determined by the strong degree of monopoly that industrial firms largely enjoy. A real control of economic process thus requires not only an effective income policy, but also a check on the power of the firms to manipulate prices.
[8] See L. Levi, «Politica dell’occupazione e Agenzia europea del lavoro », Il Federalista, 1980, pp. 260 ff

 

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