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Thursday, July 27, 2006

The Virtue of Riches

The Virtue of Riches
How wealth makes us more moral.
Megan McArdle

The Moral Consequences of Economic Growth, Benjamin M. Friedman, New York: Knopf, 592 pages, $35

For many Americans, riches are so disreputable that taking them away is a goal in itself. The left used to offer the misery of the poor as a reason for redistribution, but these days an increase in inequality is just as likely to be the rallying cry for higher taxation. In a savage New York Times column this past March, the economist Paul Krugman turned rising inequality—a trend that has persisted for decades under both Republican and Democratic presidents—into a frontal assault on the hated Bush tax cuts. More generally, the chief plaint of Democrats about those cuts has been not that they are economically inefficient, or even that they are leaving wonderful programs starved for funds, but that they primarily went to “the rich.”

That same suspicion is often applied to the vast wealth we enjoy as a society. Spend time at an anti-globalization rally, and you’ll inevitably hear someone complain that Americans are less than 5 percent of the global population yet consume 25 percent of its output, as if we were somehow stealing the difference from the world’s poor. Such critics also cite the social, economic, and environmental dislocations caused by a vibrant free market. We’re too rich, the activists are basically saying, and our wealth has too high a cost; it’s time to stop thinking about making money and start thinking about all the suffering in the world.

Even those who think wealth is good (or at least harmless) often implicitly suggest that the pursuit of wealth and the pursuit of moral goals are separate questions. They would do well to read Benjamin Friedman’s The Moral Consequences of Economic Growth. The author, a professor of political economy at Harvard, has written an economic tome that is accessible to the average reader without failing to offer something new to specialists as well: a compelling argument that rising incomes make us not just richer people, but better ones.

Friedman’s definition of better will irritate libertarian-minded readers, who will quarrel with his decision to count support for generous government expenditures among the “moral consequences” of economic growth—or, at least, with his implication that such support is among the positive effects. But most of the consequences he discusses would impress nearly everyone. When earnings are growing, Friedman says, people are more tolerant of minorities, more welcoming to immigrants, more solicitous of their fellow citizens, more supportive of democratic institutions, and just plain better specimens of humanity.

This result is not surprising to anyone who has been around normally rapacious Wall Street bankers at bonus time, but Friedman provides historical evidence for the intuition. In painstaking detail, he outlines the economic history of the United States, Britain, France, and Germany since the industrial revolution. Over and over, he shows that during periods of economic stagnation, societies become more xenophobic, less tolerant of dissent, and more willing to embrace anti-democratic government actions. It is no accident, he argues, that communism and fascism were embraced by countries in economic crisis—or that the Palmer raids and the PATRIOT Act arrived during periods of rising financial insecurity for America’s vast bourgeoisie.

Economists have long known that what they call the “wealth effect” can stimulate spending: If people feel richer because the value of their home or stock portfolio has gone up, or because they think their income is likely to rise in the future, they will loosen up and spend more. Friedman suggests that people don’t merely become more willing to treat themselves to home entertainment systems and $4 cups of coffee as their wealth grows; they also become more generous to others. “With rising incomes,” he says, “more people become willing to donate time and money. And among those who do so, rising incomes also allow people to feel able to do more.”

But direct charity is only one of the ways we become more generous. Even more important is the tolerance that growing wealth brings for competition from others. There is a growing recognition that trade is a vastly more effective way to reduce global poverty than foreign aid; even Oxfam, a reliably left-wing nongovernmental organization, has jumped on the free trade bandwagon with a campaign against agricultural subsidies. Better still, trade benefits domestic consumers. Yet progress on that front is nearly impossible unless economic prosperity is rising fast enough to ease the fears of those who are threatened by a more open market.

The current global economic climate —economic stagnation in much of Europe and an economic recovery in America that has bypassed much of the middle class—gives us one way to test Friedman’s hypothesis. If he’s right, global trade should be much more threatened now than it was in the 1990s. Sure enough, the Bush administration has struggled to pass even a minor trade pact with Central America, while the European Union seems perfectly willing to scuttle the Doha round of World Trade Organization negotiations rather than expose its farmers to competition. That doesn’t prove Friedman is correct, of course, but it’s certainly suggestive.

Disturbingly, if Friedman is right, unless median incomes start rising soon, it won’t be long before Americans start taking a long, skeptical look at our neighbors. (Given the current uproar over immigration, it’s possible that we’ve already reached that point.) Nativist and racist movements are at least partly about the economic insecurity of their members; as August Bebel said, “anti-Semitism is the socialism of fools.”

Friedman musters an array of empirical evidence to connect the rise of the Ku Klux Klan in the 1920s to the growing economic anxieties of its members, who were frequently “farmers, skilled craftsmen, small business proprietors, blue collar workers…and low-end white collar workers of all kinds.” Those Klansmen faced new competition from Catholics and blacks at a time when economic advancement was already becoming more difficult thanks to structural changes in the economy: troubles in the farm sector, population shifts from the country to the city, increasing industrial consolidation, and structural shifts away from certain industries and regions. Friedman quotes historian Nancy McLean’s observation that those economic changes “cut short the climb of men on the make and defied their dreams of being their own bosses.…Class standing and economic insecurity created a potential among white men for openness to the Klan’s message.” If we can all agree that forestalling movements like the KKK is a worthy social goal, it suddenly becomes terribly important to make people feel wealthier.

This is not as simple as it sounds. People judge how well they are doing in two ways: against how well they think other people are doing and against their own (and their family’s) recent earnings. That’s why an American postal worker might not be particularly happy with his income, even though in terms of transportation, health care, and personal comfort he has a better standard of living than Cornelius Vanderbilt and other past plutocrats. Ironically, globalization therefore has made ordinary citizens in many countries unhappier with their lot, even as it has made them objectively better off. The more information people have about higher living standards elsewhere, the less content they are with their own lifestyles.

Unless we try to bring back communism, something vanishingly few crusaders against inequality would support, any social income distribution will always leave some on the top and some on the bottom. But nations can and do increase the size of the economic pie, allowing everyone to get a bigger piece even if their proportions stay the same, or even shrink. Friedman argues that governments everywhere should focus policy on creating the broad prosperity that will allow their societies to become more open, tolerant, and generous.

Friedman’s argument for what wealthy nations ought to be doing is the weakest part of the book. Translating analysis into policy is where many otherwise brilliant works on popular economics fall down: Economists know lots of ways an economy can go wrong, but they’re not completely clear on what makes one go right. The World Bank spends pretty much all its time analyzing developing economies, and yet in a recent Foreign Policy essay, Moisés Naím quotes François Bourguignon, the bank’s chief economist, as saying “We do not really know what causes economic growth…[w]e do have a good sense of what are the main obstacles to growth and what are the conditions without which an economy can’t grow. But we are far less sure about what are the other ingredients needed to create and sustain growth.” Even in those happy moments when economists have a pretty good idea of what should be done, they are generally at a loss to prescribe programs that can survive a political process that is usually controlled by the same group of people who are causing the problems.

So Friedman trots out some tired old standbys: Increase investment! Boost education! He might as well declare that we should all try harder to love one another. Investment and education are fine things; sometimes they even boost economic output. But those cases are limited, and government policy has proven incredibly inept at targeting those specific areas.

It is an economic truism that incentives matter, but people are often highly resistant to government programs waving carrots and sticks. Witness America’s appalling household savings—briefly: we don’t save—despite all the marvelous opportunities the government has afforded us to sock away cash for retirement. Compounding the problem, politicians are often attracted by things that sound like they work, rather than those that actually do, which is why we get job training programs instead of radical education reform.

Even things that we theoretically know how to do and are sure would improve economic performance—say, boosting basic reading and math skills—have proved devilishly hard to implement. Programs like Success for All, a highly structured reading curriculum, are showing that it is possible to teach disadvantaged children the skills they need. But putting those programs in place in a world full of intransigent teachers unions, inert administrations, and children whose homes and neighborhoods are scenes of indescribable chaos is very difficult.

But this book’s lackluster discussion of policy does not undermine its importance. The recovery from the 2001 recession has been disappointing in many ways; labor markets remain softer than we would expect at this point, and middle-class income growth has been stagnant. With all this economic anxiety, it seems likely that the 2008 election will feature more economic protectionism, more attacks on immigration, and probably more proposals for aggressive social programs that will have negative effects on economic growth. Whether or not he intended to do it, Friedman has provided powerful empirical evidence against any program aimed not at increasing the country’s wealth but at cutting wealth down to size.

Megan McArdle is the economics correspondent for The Economist’s Global Agenda section.


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