The Conscience of A Liberal

I didn’t pay attention to this book when it was first published in 2007. It’s probably the Nobel effect (The author Paul Krugman is the sole winner of this year’s Economic prize), his books are displayed at the entrance of the bookstore. I have not followed Paul Krugman’s writings since the late 90’s, when he published lots of articles about the Asian financial crisis. Perhaps under the same influence of a Nobel prize winner, I decided to buy this book and do some serious readings.

Over the past few years a question keeps haunting me. As a person born and raised in Hong Kong I feel very strongly about the growing inequality between different social classes there. Yes it’s true after the 80’s a new middle class has emerged. They have a much higher quality of living than their parents. Although they typically spend a significant portion of their income in making mortgage payments, they still have sizable disposable incomes. They enjoy the lifestyle of typical middle class around the world. Having said that, more than 40% of the population are still struggling with life’s daily necessities (1). Let’s call this group low-skill low-income working class. People in this working class are cleaners, waiters, taxi drivers, construction workers, or security guards. They are the losers in this capitalist game, i.e. they don’t have the right skills for the new economy, or they are too old to change. An objective measurement of income disparity in a society is the Gini Coefficient (2). Hong Kong has always been ranked one of the cities with the highest income disparity . Most developed countries around the world have a more equal society than Hong Kong. The US is probably an obvious exception.

This may also be the “deep social problems” Premier Wen referred to when he spoke about Hong Kong two years ago. Unfortunately we have not seen any ideas or actions from the Hong Kong Government. When there was a huge surplus in 2006 and 2007, the government just gave the money back to taxpayers, instead of creating new social programs to improve the situation. Perhaps they all believe in jungle capitalism.
Paul Krugman provides us some insights. US is the only developed country that has seen its income disparity grow over the past thirty years. When he analyzes the problem by taking a walk through the socio-political-economic history of the United States over the last 100 years, he concludes that the present situation is not the result of the invisible hand of economic force. It’s rather the direct result of government policies since the early 80’s when Ronald Reegan became the President. From the early 80’s up to this year the US was largely a Republican era, with an 8-year interruption of Bill Clinton. Paul Krugman’s argument is the Republican policies have greatly favored the upper class in the form of significant tax reduction, and continuous delay in implementation of social programs that benefit the poor. An obvious example is the lack of universal medical insurance program, resulting in a certain percentage of US citizens not covered by any medical insurance.

That’s quite a non-traditional view from an economist. As a primary student of economics myself, I always think today’s economists believe in market economy. The invisible hands of market force shape all aspects of a capitalist economy. Every person’s income will eventually be determined by the value of skills possessed by this person, as well as the demand of the market. Tax rate should be kept the lowest possible, so that people have sufficient incentives to work harder. Instead Paul Krugman suggests the government plays a big role in how the economy works. By using financial tools such as tax rate, the government can help create a fairer society, comprised largely of middle class.

As a business consultant, my company usually charges our client a daily rate of US$2-3K. Sometimes when I dine in a fast-food chain such as Café de Coral, I always wonder why those cleaning ladies or food servers only earn a monthly wage of HK$6K. We are talking about people who work non-stop at least 10 hours a day, with at most one day-off per week. That means my daily rate is equivalent to 3 or even 4 months of their monthly income, that in turn translating to a 20:1 earning discrepancy (assuming I have 6 or 7 billable days per month). Most economists would suggest that this disparity is decided by the supply and demand of different skills in the market. However, why the disparity ratio is 20:1, and not 10:1? Isn’t there any human intervention that can make income distribution of this society a bit more even? Now Paul Krugman seems to have an alternative. Governments can intervene by applying a higher tax rate both for individuals and corporations, and using those additional tax incomes to shape a ‘fairer’ society.

I know I know. You are now raising your fists and shouting at the computer. Is this guy suggesting a socialist system which has been proved non-functional? Isn’t the capitalist system a perfect system that is proved to create wealth for everyone that even those communist countries are modeling after? The discussion of which system is better is probably beyond my capacity. One thing I’d like to point out though is we should see various economic models as part of a spectrum, or various points along a scale. Communism and Capitalism are probably the two extremes of this scale. Most of modern society reside somewhere in between these two extremes. Countries in Northern Europe such as Sweden, Norway, or Denmark have a strong socialist style laden on top of capitalism. They levy heavy taxes, but that have not dented creativity or affected their ability to create wealth. Only they have a society with incomes that are more evenly distributed.

There are two or three more insights in “The Conscience of a Liberal”, such as the role of unions and efficiency gain from publicly run universal medical care system as compared to that based on private medical insurance and private medical organizations. As an economist (remember he just won a Nobel prize!), his arguments are all well supported by data and evidence. Although he only focuses on the United States, his arguments and conclusions have universal implications. This is a book well worth reading.

(1) According to a Legco briefing paper, the proportion of households at both the upper and lower ends of the income distribution increased over the decade from 1996 to 2006, whereas the proportion of middle-income households decreased.

(2) The Gini Coefficient were 0.518, 0.525 and 0.533 for 1996, 2001 and 2006 respectively, representing a rising trend. For comparison, Gini Coefficient for Singapore was 0.481, New Zealand 0.485 and Canada 0.51.