Tuesday, November 20, 2012

An unfair and unnecessary comparison

A recent study by a renowned Swiss think tank (avenir suisse) showed that during the last 20 years real incomes of the middle class diminished relatively compared to those of people in the high or low income segments in Switzerland. The roots of this phenomena are identified by an increasing supply of workers from emerging markets, changes in technology and the corresponding higher demand for high-skilled workers. All these factors lead to pressure on average wages, namely of those from the middle class.
While still among the highest real incomes worldwide, the study argues that people in the Swiss middle class get increasingly dissatisfied as their opportunities to improve into the high income segment shrink and the differentiation from the lower income segment gets increasingly difficult. Therefore, people are somewhat trapped in the middle class. To counteract this development the study proposes to downsize and simplify the welfare state as all kind of social benefits for people in the lower income segment are primarily financed by the incomes of the middle class. Hence, taxes affecting the incomes of the middle class should be lowered.
In my opinion, this argumentation is problematic in at least two ways. First, a decrease in taxes for average incomes and a reduction of social benefits indeed allows the middle class to differentiate themselves from people in the lower income segment. But at what price? On the one hand, rising inequality by increasing the income of the middle class and making the poor poorer sounds not really fair to me, on the other hand it does not take into account people in the high income segment, who are completely ignored by the study I mentioned above. This brings me to my second point: the reduction of taxes for those having the highest incomes. During the last couple of years there has been a redistribution of income in Switzerland from the bottom to the top induced by various abolitions and reductions in the taxation of incomes in the highest segment. It is then again simply unfair to tell the middle class that their relative decrease in income is caused by social benefits, for example health care insurance or childcare for people in the lower income segment, when at the same time people in the higher income segment enjoy lower taxation.
The one-sided comparison of the middle class with people in the lower income segment is problematic because it diminishes solidarity in the whole society. In the US, for example, the incomes of both middle class and people in the lower income segment stagnated during the last 30 years, compared to those of the people in the higher income segment. Hence, the single comparison of incomes between the middle class and the people in lower income segment is not fair and, in my opinion, unnecessary. It leads to an increased discrimination among people and reduces the cooperative potentials in a society. Or in the words of Stiglitz (2012) “The other vision is of a society where the gap between the haves and the have-nots has been narrowed, where there is a sense of shared destiny, a common commitment to opportunity and fairness, […] which emphasizes the importance not just of civil rights but of economic rights, and not just the right for property but the economic rights of ordinary citizens.” (p.289).
Tom Schneider
Reference: Stiglitz, J.E. (2012). The Price of Inequality. New York: Norton.

Wednesday, November 7, 2012

Entitlement Cultures

Having recently been in Washington D.C., I was once again struck by the ever more extreme polarization of the political landscape in the United States. Everybody seems to be convinced of being “right” and “in the right” and deeply suspicious of the intentions and moral rectitude of the “others”.
Now, it is an inherent, most likely evolutionarily selected for human quality that we excel at “rationalizing” our morals, conduct and life-style. After all, fundamental self-critique hurts, and self-loathing and depression make for very poor survival strategies in the mating or professional marketplaces. Our brains are thus hard-wired and biased to avoid truths that are too uncomfortable (as long as they are not imminently life-threatening), thus keeping us feeling good about ourselves most of the time.

However, this lack of objectivity with respect to ourselves – if left unchecked - has various unsavory social, economic and political side-effects. One of these is that it engenders a culture entitlement, of which I will focus on entitlements in the form of money.
Now monetary entitlement comes in many guises: from benefiting from the modern welfare state – be it in form of assistance to families with children, the unemployed, disabled or elderly - to agricultural, defense industry and tertiary educational subsidies. Alternatively, entitlements can be in the form of generous tax breaks for home owners and investors, to simply the expected, lavish remunerations found in many professions, made possible by professional accreditation monopolies, lax economic regulations and “free market dynamics”. Now, it is hardly surprising that in all of these instances, the overwhelming majority of beneficiaries naturally feel that they are rightfully the recipients of such largesse: our incessant, narrowly targeted, interest driven political squabbling reflects this pervasive sense of having a legitimate claim upon them.

The rationalization, if we are among the losers of the current economic system, is that we were wronged by the lottery of life and/or society and are thus rightfully entitled to state support, especially in view of the great wealth amassed by the top percentiles of the socio-economic spectrum. Alternatively, if we are among the middle classes, we may consider ourselves as the “good citizen” par excellence and the hard working, solid backbone of the economy and thus reasonably entitled to various subsidies such as mortgage interest deductions, medical care benefits, early retirement and higher education. Lastly, if we are among the winners of the system and garnered considerable wealth, we are likely to attributing our success to our superior work ethic, risk taking or intelligence and thus naturally – oft also rationalized along the lines of Social Darwinism - entitled to have garnered this great wealth and consequently, for example, free to adroitly exploit the full panoply of tax loopholes.
The unfortunate corollaries of these self-assessments are however increasing suspicion towards the groups one does not belong to, resulting in rather dim views of the righteousness and fairness of their specific entitlements.

Now as long as the overall pie of wealth increased rapidly enough to sustain such entitlements, these diverse recipients – some political squabbling aside - can be kept largely quiet. Today, however, with increasing pressure on these entitlements, rising discontent and self-righteous polemics find their way into public discourse, political deliberations and increasingly also social unrest.
The question of the day now becomes as to how to best manage a social and political discourse that remains constructive, in spite of a pie that is no longer growing fast enough to sustain the status quo and keep everybody happy.

I think that a first step is the recognition that we are all recipients and that “privileges” should always be also connected with “duties”. It is to recognize and accept the fact that at the end of the day, we are not only participants, but stakeholders in a society and world that must be managed not just for our own short term benefit, but also for our collective long-term well being. It is, perhaps above all, to be willing and able to endure candid self-reflection and critique and to regain the humbleness incarnated by the expression of “privilege oblige”: of whatever sort this privilege may be. We need to recognize that we are all privileged today to have been born in an epoch in human history and a part of the world that has seen unprecedented material wealth. And that is not the doing of any one of us, but rather a historical luck of the straw.
Woody Allen, in a recent interview, impressed me with reflecting on his “successful life” with sincere modesty, highlighting not his superiority or even achievements, but his good fortune and thankfulness.

Manuel Heer Dawson