The Economist
The priority should be a Rooseveltian attack on monopolies and vested interests, be they state-owned enterprises in China or big banks on Wall Street. The emerging world, in particular, needs to introduce greater transparency in government contracts and effective anti-trust law. It is no coincidence that the world’s richest man, Carlos Slim, made his money in Mexican telecoms, an industry where competitive pressures were low and prices were sky-high. In the rich world there is also plenty of opening up to do. Only a fraction of the European Union’s economy is a genuine single market. School reform and introducing choice is crucial: no Wall Street financier has done as much damage to American social mobility as the teachers’ unions have. Getting rid of distortions, such as labour laws in Europe or the remnants of China’s hukou system of household registration, would also make a huge difference.
Next, target government spending on the poor and the young. In the emerging world too much cash goes to universal fuel subsidies that disproportionately favour the wealthy (in Asia) and unaffordable pensions that favour the relatively affluent (in Latin America). But the biggest target for reform is the welfare states of the rich world. Given their ageing societies, governments cannot hope to spend less on the elderly, but they can reduce the pace of increase—for instance, by raising retirement ages more dramatically and means-testing the goodies on offer. Some of the cash could go into education. The first Progressive era led to the introduction of publicly financed secondary schools; this time round the target should be pre-school education, as well as more retraining for the jobless.
Last, reform taxes: not to punish the rich but to raise money more efficiently and progressively. In poorer economies, where tax avoidance is rife, the focus should be on lower rates and better enforcement. In rich ones the main gains should come from eliminating deductions that particularly benefit the wealthy (such as America’s mortgage-interest deduction); narrowing the gap between tax rates on wages and capital income; and relying more on efficient taxes that are paid disproportionately by the rich, such as some property taxes.
Different parts of this agenda are already being embraced in different countries. Latin America has invested in schools and pioneered conditional cash transfers for the very poor; it is the only region where inequality in most countries has been falling. India and Indonesia are considering scaling back fuel subsidies. More generally, as they build their welfare states, Asian countries are determined to avoid the West’s extravagance. In the rich world Scandinavia is the most inventive region. Sweden has overhauled its admittedly huge welfare state and has a universal school-voucher system. Britain too is reforming schools and simplifying welfare. In America Mr Romney says he wants to means-test Medicare and cut tax deductions, though he is short on details. Meanwhile, Mr Obama, a Democrat, has invoked Theodore Roosevelt, and Ed Miliband, leader of Britain’s Labour Party, is now trying to wrap himself in Benjamin Disraeli’s “One Nation” Tory cloak.
Such cross-dressing is a sign of change, but politicians have a long way to go. The right’s instinct is too often to make government smaller, rather than better. The supposedly egalitarian left’s failure is more fundamental. Across the rich world, welfare states are running out of money, growth is slowing and inequality is rising—and yet the left’s only answer is higher tax rates on wealth-creators. Messrs Obama, Miliband and Hollande need to come up with something that promises both fairness and progress. Otherwise, everyone will pay.
