2018 United Way Roundtable on Philanthropy Banff, Alberta, Canada

2018 United Way Roundtable on Philanthropy Banff, Alberta, Canada Inequality and Philanthropy John B. Chambers, CFA October 3, 2018 The following article is a transcript of a speech given by John Chambers, chairman of Beyond Ratings’ Scientific Committee, to a conference of major donors to The United Way Worldwide, in Banff, Alberta, Canada, on October 3, 2018. This morning I’m going to speak about inequality. I will try to describe how income and wealth inequality have markedly grown within most countries since the 1980s. I will lay out some consequences. I will make the case that philanthropy can make an ameliorating difference. In doing so, I am going to draw from several well known authors, such as John Rawls, Thomas Piketty, Anthony Atkinson, Walter Scheidel, and Yuval Noah Hariri to name a few. As Tim Hartford, a columnist at the Financial Times reminds us, there are all sorts of inequality besides income and wealth inequality. Not all inequality requires state intervention. He reports that the gini coefficient of dispersion is much higher for frequency of sexual relations among married couples aged 25 to 54 than for income or wealth. I think we can agree that this is an issue best left unaddressed by public policy. Income and wealth however are different: for reasons of fairness, social stability, and economic efficiency. However the state can only do so much. There is a place for private initiative, known as philanthropy. Let’s start with fairness and John Rawls, a Harvard philosophy professor who died in 2002. He saw society as a self-sufficient association of persons who recognize and are bound by agreed-upon rules of conduct. The rules are designed to make members of society better off inside the society than outside. It is a cooperative venture for mutual advantage. Members have a common interest since social cooperation makes possible a better life for all than any single person would have if he were to live solely by his own efforts. There is a conflict of interest however, since persons care about how the greater benefits produced by the collaboration are distributed. Everyone prefers a larger piece of the pie. For Rawls, the just society is the society one would agree to join before one knew his station in life: Behind a veil of ignorance. In his mother’s womb. Not knowing if he would be born male or female, white or black, rich or poor, healthy or sick, of our or some other generation. Think for a moment, if you could have chosen your place of birth but not know anything else, where would you have picked? Banff? Kansas City, where I was born? Mogadishu? Probably not. Copenhagen? Rawls thought that a person behind this veil of ignorance would seek two things. The first are basic liberties. These include political liberty together with freedom of speech and assembly; liberty of conscience and freedom of thought; the right to hold personal property; and freedom from arbitrary arrest and seizure as defined by the rule of law. The second – again not knowing where he would land in the social pecking order – would be a society with inequalities of wealth and authority only to the extent that they result in compensating benefits for everyone, and in particular for the least advantaged members of society. Without some positive side effects for the poor from inequality, society will not remain as a co-operative venture between willing participants, Rawls thought. Without these two principles of freedom and fairness, political and economic power can become concentrated. The elite can capture the repressive power of the state and entrench their and their offspring’s positions in society. 2/15 So how do we stand on keeping the poorer segments of society on board in a cooperative society? The most well known recent author on inequality is the French academic Thomas Piketty, whose book “Capital in The Twenty First Century” will likely win him a Nobel Prize one day. I’ll be using his 2018 World Inequality Report for my graphics. Let’s start with income. Top earners capture a large amount of total income across the globe. This first set of figures is pre-tax. Here’s the Top 10% of National Income Share Across the Globe, 2016: Here’s the evolution of that share since 1980. 3/15 Here is the same data but for the top 1%. For both the top decile and the top centile, you’ll see that the rich have captured most of the gains from growth. 4/15 Although the high growth in China and India have checked the rise in income inequality across the globe – as opposed to within nations themselves – you’ll see that the top 1% earns significantly more than the bottom half of humanity. 5/15 These tables break out the pre and post tax thresholds for income in the United States. The first gives you the actual thresholds 6/15 And the growth of those earnings, adjusted for inflation 7/15 On the earnings side, a key driver has been the growth in pay of top managers and -- to a much lesser extent -- performers including athletes. It’s hard to argue that their marginal productivity has increased to the same extent. As Piketty notes, the explosion of very high salaries occurred in some developed countries but not in others. This suggests that institutional differences between countries enabled the rise rather than general causes such as technological change. On a personal level, everyone in this room knows some of these super managers who have been more skilled at co-opting their board’s compensation committee than in increasing the value of the products or services their firm sold. Equally troubling, social mobility has not increased in the past 40 years. Let’s look at some data for wealth. Walter Scheidel tells us that in 2015, the richest sixty-two persons on the planet owned as much private net wealth as the poorer half of humanity, more than 3.5 billion people. He joked that if they decided to go on a field trip together, they would comfortably fit into a large bus. We’ll come back to Scheidel in a moment. First here’s Piketty’s data. Wealth is substantially more concentrated than income. Looking at the extremes, we’ll see that the 1% own substantially more than the bottom 75% throughout most of the developed world. 8/15 For reasons we’ll discuss in a moment, here is how the 1% have fared since the eve of World War I. You’ll see there was a secular decline up until 1980 and has increased since then. 9/15 If you want to see how you stack up, here are the thresholds sorted a couple of ways for the US as of 2012: 10/15 Why does this matter? Piketty writes that our democratic societies rest on a meritocratic worldview, or at any rate a meritocratic hope, that our society is based more on merit and effort than on kinship and rents. For remember, in a low growth environment, which most economists, such as Robert Gordon, believe we have entered -- if for no other reason that simply demographics -- inherited wealth will represent an increasing share of one’s net worth. It is a simple matter of arithmetic. As for rents, these are returns on capital beyond normal profits, for example due to regulatory privilege, entrenched market position, or favorable position of land. This belief that society is based on meritocracy plays a crucial role: in a democracy, the professed equality of rights of all citizens contrasts sharply with the very real inequality of living conditions, and in order to overcome this contradiction it is vital to make sure that social inequalities derive from rational and universal principles rather than arbitrary contingencies. Inequalities must therefore be just and useful to all. So what to do about this? Well, Tony Atkinson, the doyen of inequality analysis, has laid out some proposals in his 2015 book on the subject. Atkinson is British and he’s angling to influence the Labour Party’s platform. On the structural side, he argues for technology and competition policies that have income redistribution as a goal. He would nationalize many industries under a sovereign wealth fund. On labor policy, he advocates strengthening of labor union rights and he would have the government offer employment at minumum wage to anyone who sought it. On the fiscal side, he would pay a high taxable child allowance to every minor and would give everyone a minimum inheritance at adulthood in the area of $75,000. He would raise the top marginal income tax rate to 65%. He’d increase property taxes. He 11/15 has other proposals, which, given our time constraints, I’ll pass over. Of course, such redistributive measures might prompt not only John Galt to take his productive capabilities elsewhere. I note the mass emigration from Venezuela under Maduro and Chávez. Let’s go back to Walter Scheidel, an Austrian who teaches ancient history at Stanford. He reminds us that two thousand years ago, the largest Roman private fortunes equaled about 1.5 million times the average annual per capita income in the empire. For all we can tell, the overall degree of Roman income inequality was not very different from that in the United States today. Yet by the time of Pope Gregory the Great, around 600 AD, the great estates had disappeared and what little was left of the Roman aristocracy relied on papal handouts to keep them afloat. Material inequality requires access to resources beyond the minimum that is needed to keep us all alive.

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