Financial Times Editorial Comment: Learning to swim in the modern economy

Financial Times Editorial Comment: Learning to swim in the modern economy
Copyright The Financial Times Limited 2007
Published: March 24 2007 02:00 | Last updated: March 24 2007 02:00



A rising tide lifts all boats, but that is not very comforting if you are staked out on the beach. If even central bankers such as Jean-Claude Trichet and Ben Bernanke are fretting about the divide between rich and poor, income inequality really has become the topic of the day.

Mr Trichet, president of the European Central Bank, focused on large pay-cheques for top executives, warning the European parliament this week that these "are not understood by the people in our democracies". He was being tactful; the trouble is rather that some of these packages are understood all too well.

There is nothing wrong with excellent pay for excellent performance, but too many pay deals are structured both to reward mediocrity and to obscure the levels of those awards. Calling for restraint is a triumph of hope over experience. Greater shareholder rights are a solution, and the US Congress should follow through with its plans to introduce an advisory vote for shareholders on executive pay, something that has worked well in the UK.

Although executive pay in the US is far higher than in Europe, Mr Bernanke cast his net rather wider in a speech last month. He addressed the question of income inequality in the US, and found plenty to concern him. Earnings in the middle of the income distribution rose by 11.5 per cent between 1979 and 2006; near the top, they rose by a third, and near the bottom, they rose by just 4 per cent in nearly three decades. The increase in inequality was particularly rapid during the 1980s but it continues today.

Some types of inequality are not worrying at all; for instance, medical students make very little while doctors make plenty. Yet some economists fear that income mobility has fallen since the 1970s, meaning that those whose heads are underwater are unlikely ever to make it to the deck of a yacht.

Equally worrying, at least for Mr Bernanke's fellow citizens, is that the children of poor parents are more likely to grow up poor themselves in the US - and also in the UK and France - than in countries such as Canada, Denmark or Germany. This is a puzzle and an embarrassment for those, like this newspaper, who celebrate the entrepreneurial systems of the US and the UK. It is one thing to tolerate in-equality of outcome, but as Mr Bernanke rightly observes, it is quite another to shrug our shoulders at in-equality of opportunity.

The whole issue is often labelled as the problem of dealing with the losers from globalisation. That is a mistake. Better to think about the problem of dealing with losers, full stop. Technological change seems to be responsible for more of the increase in inequality. It also puts many people out of work, even if those job losses go unlamented by protectionists all too keen to put the blame on China.

The political backlash against in-equality - from causes real and imagined - is growing. But politicians should resist the temptations of protectionism and focus instead on improving income mobility. The 21st century offers unprecedented opportunity to skilled, educated workers: our school system should enable everybody to join in. Too many schools in both the US and the UK are failing to do that.

We should not try to stop either globalisation or innovation. Both are immensely beneficial, and both do indeed offer us a rising tide. But we need to make sure that nobody is stranded on the beach.