Poverty gives way to inequality and the Great Frustration

Former Chilean president Ricardo Lagos recently told me a story to explain why he, like a growing number of political leaders, has stopped viewing poverty as his primary problem.

The story involved a poor village in the foothills of the Andes. When Mr. Lagos was education minister in the early 1990s, he built its first school. Later in the decade, as minister of public works, he built the first modern road to the village. Then as president after 2000, his programs delivered the village’s first supplies of clean water, agricultural irrigation and electricity.

And then the presidential election came around. Mr. Lagos campaigned hard in the village he had so dramatically transformed, reminding voters that he had ended poverty there within a decade.

“My opponent? I am not sure he knew where that village was,” Mr. Lagos said. “But he got 60 per cent of the vote there, and I got 40 per cent. Why? After we gave them so many things? Well, what the villagers told me was that those things had made them less poor, but also gave them more stress and made them less happy.”

Water and electricity meant there were now bills to pay, and expensive TVs on which to watch the inaccessible lives of the country’s upper-middle class. With roads came car payments and trips to the city, and the growing discovery of just how poor these newly middle-class villagers really were – and how impossible it would be to bridge that gap.

Around the world, politicians are making the same discovery. Their constituents, who were satisfied simply not to be poor a generation ago, have now entered an era that might be called the Great Frustration. Those people on the lowest edge of the middle class – in both poor and rich countries – have discovered they have little chance of advancing further. In countries such as Canada, they may be starting to slip back.

That’s why inequality has replaced poverty as the great political theme of the moment. Once upon a time, we might have believed the two were related – but it turns out, as leaders from Beijing to Berlin to Bogota are discovering, they’re very different problems.

Five decades ago, Lyndon Johnson built his presidential election campaign around a “war on poverty,” a phrase that was to dominate his country’s politics for a generation. Today, Barack Obama is running a re-election campaign that makes far less mention of poverty, instead focusing on inequality and the frustrations of an American lower-middle class whose situation, financially and emotionally, looks a lot like those Chilean villagers.

In poor countries, the emerging almost middle classes are stuck. In countries such as Canada, the middle classes have seen their incomes and purchasing power stagnate, even slip back somewhat. Inequality has increased – and when that happens, economists have shown that there’s a corresponding collapse of social mobility, the ability to escape your income group for a higher one.

Yet, as much as we use the word “inequality” to describe this problem, we really don’t understand it. Politicians on both ends of the spectrum abuse the term, and suggest unrealistic solutions.

When those on the left discuss inequality, they too often fall for a “lump-of-money fallacy” – the belief there’s a fixed pile of cash, too much of it in the hands of the rich, that needs to be spread around more evenly.

But wealth doesn’t work that way: What the non-rich lack is not a share of the pot but a productive economic situation in which to generate wealth. The problem isn’t the 1 per cent. It’s the 60 per cent whose world of productivity and security is increasingly denied to the lower 40 per cent.

When politicians on the right discuss it, they too often fall for the “zero-sum fallacy”: the belief that fixing inequality through government action will kill wealth creation and, by extension, make everyone poorer. It’s true that less poverty usually equals more inequality – the policies that get people out of poverty (by creating growth) usually benefit the rich even more. When the rich get richer, the poor usually get less poor, too. But the converse isn’t true: Countries with strong redistributive systems and free economies are usually both wealthy and equal.

And it isn’t inevitable: Both Brazil and South Korea have seen lengthy periods where their citizens became both wealthier and more equal. The U.S. once did that, too, a century ago. Now that the fulcrum has swung from poverty back to equality, maybe it will again.

Original Article
Source: the globe and mail
Author: DOUG SAUNDERS