In his position as Chief Economist of KfW, Jörg Zeuner travelled to Stockholm in 2018 to meet Per Molander. He spoke with the mathematician and inequality researcher about the possibilities of keeping together a society that is drifting apart.
About Mr Zeuner
Jörg Zeuner was Chief Economist of KfW from September 2012 until April 2019. He regularly contributes to current debates in Germany and Europe with his commentaries on economic policy.
The utopia of equality has been a recurring theme throughout the history of humankind. It has always been the expression of a deep longing for social justice. How close are we to this utopia today?
JÖRG ZEUNER: The history of Europe has hardly seen an epoch in which we have come as close to the idea of equality as we are today. Look at the possibilities of self-realisation, look at the educational institutions and social systems. But if people are speaking so loudly about inequality and injustice, then we obviously have a problem with social participation. Only a balanced society is a stable, sustainable society. This also means that income and wealth should not be distributed all too unequally.
Are economically unequal societies sitting on a major social time bomb?
PER MOLANDER: Yes, and I see this as a danger. In most industrialised countries we saw these one hundred extraordinary years roughly from 1870 to 1970, during which groundbreaking social legislation was enacted. This phase is the opposite example to the proposition of Stanford historian Walter Scheidel, who said that only cataclysmic events can halt the process of wealth concentration. You can have both: economic growth and less inequality. But this situation is not permanent. The gap between rich and poor has been widening continuously since around 1970 – incidentally, in highly praised Sweden as well. After being a great exception in world history, we appear to have reverted to the old trend.
ZEUNER: In the 1970s a globalisation phase set in that raises new questions. In theory, all economies can benefit from free trade. But if the state does not intervene in how the pie is sliced up, there will be clear winners and losers within the countries. In industrialised countries, capital and highly qualified workers benefit disproportionately – and capital and education are distributed unequally. Besides, since capital is internationally more mobile than labour, employers have tended to improve their entrepreneurial room for manoeuvre.
About Mr Molander
Mr Per Molander is a world-renowned expert on distribution issues. He held a leading position on reform projects for the government of Sweden, including in welfare policy. Per Molander was a consultant for the World Bank, the International Monetary Fund and the European Commission In his 2017 book entitled ‘The Anatomy of Inequality’ the mathematician ignited the debate on sustainable social equality. The government of Sweden recently appointed Molander to chair an Equality Commission. Its final report is expected in May 2020.
Technological progress is also creating a considerable shockwave...
ZEUNER: Technological progress is shifting demands for skills and speeding up globalisation. Once again, this benefits highly skilled workers and owners of capital, while many routine activities will be replaced by software or robots in the future. For a long time it has been possible to meet growing skills demands by expanding education, and the growth of tertiary education has slowed down the rise in inequality in Germany as well. Artificial intelligence is currently providing new impetus to technological development. We must pick up the pace in education and training.
MOLANDER: Along with these external forces, such as globalisation, there are political developments pushing in this direction. It is a mystery to me how European social democracy, which has so profoundly transformed our societies, has been able to give up its traditional ideals in a couple of decades. The distribution of income and, in particular, wealth is currently shifting in a clear direction.
You believe there is a sort of natural law that underlies this trend, right?
MOLANDER: Yes. The mechanism is simple math. Let’s suppose two equally strong parties are negotiating about a pie. Each of them will then get half. But if one party is a bit stronger it will get more than half the pie. Someone who is richer can risk more or secure other advantages. They are rewarded for it in the form of higher profit. Now if the negotiation is repeated the slightly richer party will end up even richer. This applies not just to theoretical negotiation situations but has also been evidenced for modern market economies. Another example of this is the trend towards concentration of enterprises down to a few players such as Google or Microsoft.
A wealth statistic published annually by Oxfam has put it in pointed terms: The eight richest individuals on earth have exactly as much wealth as the poorer half of the world’s population, or 3.6 billion people. Let’s follow your negotiation mechanism further: In the end, will a single person own everything?
MOLANDER: That is theoretically the case, yes. But in reality this will not happen. Of course, this crucially depends on legislation and how poorer people are organised. It is not just that a richer group has more power than a poorer group but also that a larger group has more power than a smaller group – theoretically.
I believe the diagram lying in front of you illustrates this aspect well. Please explain it.
MOLANDER: Oh yes, it is a diagram that shows how real incomes have changed in various income groups in the US and in Sweden between 1970 and 2015. In the US, the top one per cent tripled their income during this period. At the same time the poorer 90 per cent gained nothing on average. In Sweden all population groups roughly doubled their income over the 45 years. This illustrates the hedging function of politics. When we look at such a diagram we must ask why 90 per cent of the population accepts a social compact that does not generate any gains for them throughout their whole working life. If the right is able to shape public opinion – as it does in the US – then it is possible to create stability even though the statistic shows such distortions. Politics is always about limiting the power of certain groups. When the state retreats, the gap between rich and poor quickly widens further.
ZEUNER: But we also need to consider that an immigration country must give people the chance to climb the social ladder. In the end, not all will remain on the lowest level permanently. This is also an important finding for developing countries. So the question what makes a society a balanced, sustainable society is about more than market regulation. My key question addresses every individual: Where do people have to fight unreasonably hard?
“Equality of opportunities is crucial to social cohesion.”
In your opinion, what is the most effective way to create more equity?
ZEUNER: First, you need to create conditions that enable people to realise their plans. You don’t have to redistribute a single euro to do that. Equality of opportunities is crucial to social cohesion. So education is the buzzword – and with very good reason. Broad access to education was one of the reasons for the success of Europe’s economies. Meanwhile, however, we are not doing so well anymore in this area. In particular, educational opportunities are unevenly distributed. They strongly depend on what kind of household you come from, what income and educational levels your parents have and whether you have an immigrant background. We need to create better conditions here. Public infrastructure would be another example. Poorer groups in particular need good public infrastructure.
MOLANDER: We generally distinguish between equal conditions and equal results. Most politicians generally have a positive attitude to equal conditions, to the liberal idea that all children should have the same chances in life regardless of their roots. But unless we later take corrective action on the results, conflicts build up. I agree with you that in the long term education is the most important factor for a balanced society – also beyond economic dimensions. And that was one of the ideas behind the Enlightenment: maturity as a fundamental prerequisite for evolvement. But if you neglect balancing results, balancing conditions will become very difficult, especially in the field of education. The reason is that rich people have the advantage of being able to send their children to better schools. That is where they form networks, where the child receives perfect support. In order to break through this cycle policymakers also need to address distribution results.
ZEUNER: True, even an optimal start with a perfect educational system does not replace a modern social state. Corrections always have to be made subsequently, simply because people sometimes have good luck and sometimes bad luck. Incidentally, the research literature provides no strong empirical evidence that economies that redistribute a lot grow more slowly.
“When the state retreats, the gap between rich and poor quickly widens further.”
Taking it from the top, how would you address educational conditions?
ZEUNER: Actually, at the very start of a person’s biography. In Germany, the expansion of day nurseries and child daycare centres is currently running a bit out of steam, but we are not finished yet, neither quantitatively nor qualitatively. The same applies to the expansion of genuine all-day schools. Both benefit disadvantaged children in particular. In very general terms: the weaker the educational background, the more crucial individual support becomes. Our three-tiered school system does not have a pronounced tradition of fostering educational progress. To put it bluntly, it is permeable in theory but not for everyone. More than anything else, a new culture of fostering progress simply requires more educators. For me that would be the pillars of a new educational expansion.
And how do we better account for globalisation and its losers?
MOLANDER: There is a conflict between global developments and politics that work only at national level. In my opinion, the national level remains the only one that has political legitimacy. I therefore believe it is necessary to defend the nation state. This needs to be done without drifting into nationalism. It is a fine line that separates the two.
ZEUNER: I believe globalisation is overstraining the nation state. For example, we must cooperate urgently in order to prevent an international race to the bottom in corporate taxation. In the end, everyone loses if the state lacks the resources for important investments. Besides, tax reductions are hard to sell in the light of enormous profit increases.
MOLANDER: Overall, too much of policy debate is about taxing mobile capital. National governments have greater control not just over their own educational system but also over social security systems and labour market policy.
ZEUNER: Alright then, another example of the need for international cooperation: You mentioned large Internet corporations like Google and Amazon. They have enormous market power that enables them to keep smaller competitors at bay. The European Union has resisted this by imposing billions in penalties. One country on its own would have little influence and would hardly dare to do it.
Very personally, what experience of inequality and injustice has moved or even frustrated you?
MOLANDER: I was lucky. My mother was a teacher and sparked my enthusiasm for learning. That has paid off. But I had mixed experiences during my career. Let me put it this way: liberal states such as ours should really be governed by a meritocracy. This means people should get ahead on the basis of their performance. I experienced inequality especially when less qualified people were recommended for a higher position for other reasons.
This article was published in the autumn/winter 2018 issue of Chancen magazine entitled ”A better world is possible.“To German edition
ZEUNER: Another phenomenon keeps making me sad. There are many people who take the initiative from a weak position and try to take a step forward. The often do this by seeking help. But it is often extremely complicated to gain access to support schemes, and this derails exactly those who are most dependent on start-up support. I get angry about situations like these! But they can be changed to make our society a bit more balanced and sustainable.
Published on KfW Stories: Friday, 26 October 2018
Last updated: Tuesday, 30 April 2019