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To Fight Inequality, America Needs to Rethink Its Economic Model

10 minute read
Chandler is an economist and philosopher based at the London School of Economics, and author or Free and Equal: A Manifesto for a Just Society

For decades, economic policy in most liberal democracies has been premised on two core beliefs: that free markets would maximize economic growth, and that we could address inequality through redistribution.

The recent revival of industrial policy, championed by President Biden, is a clear repudiation of the first of these beliefs. It reflects a growing recognition among economists that state intervention to shape markets and steer investment is crucial for fostering innovation, protecting strategically important sectors like semi-conductors, and tackling the climate emergency.

But we must also reassess the second belief—that taxes and transfers alone can address the vast inequalities that have brought American democracy to such a perilous juncture. Doing so will lead us towards a more fundamental rethink of our economic institutions, and the values that guide them.

This is partly a pragmatic response to economic reality. The massive increase in inequality since the 1980s in America was mostly driven not by a reduction in redistribution, but by the growing gap in earnings between low skill workers, whose wages have suffered an unprecedented period of stagnation, and college-educated professionals whose salaries have continued to soar. And while inequality has increased in most advanced economies, that it is so much higher in the U.S. compared to Europe is mostly the result of bigger gaps in earnings than lower levels of redistribution. In other words, even if America were to increase the generosity of the welfare state to European levels it would still be much more unequal.

But the need to look beyond redistribution is about more than economics, it is about resisting the narrow focus on money that dominates most debates about inequality, and the tendency to reduce our interests as citizens to those of consumers. While government transfers are essential for making sure that everyone can meet their basic needs, simply topping up people’s incomes fails to recognize the importance of work as a source of independence, identity, and community, and does nothing to address the insecurity faced by gig-economy workers, or the constant surveillance of employees in Amazon warehouses.

This is not purely a moral issue. According to a recent paper by economists at Columbia and Princeton, the Democratic Party’s shift towards a “compensate the losers” strategy in the 1970s and 1980s—taxing high earners to fund welfare payments to the poor—played a key role in driving away less educated voters, who disproportionately support “pre-redistributive” policies like higher minimum wages and stronger unions.

Things are moving in the right direction. President Biden has put “good jobs” at the centre of his economic agenda, claiming that “a job is about [a] lot more than a pay cheque. It’s about your dignity. It’s about respect.” Leading economists such as Dani Rodrik at Harvard and Daron Acemoglu at the Massachusetts Institute of Technology’s have started to challenge the prevailing orthodoxy that such jobs are an inevitable by-product of a well-functioning market economy. This shift of focus towards the production or supply side of the economy has been variously termed “productivism”, “modern supply-side economics” and “supply-side progressivism.”

Read More: Why Joe Biden is Running on the Economy

And yet, to grasp the full potential of these ideas we must look beyond economics to philosophy. Contemporary thinkers such as Michael Sandel and Elizabeth Anderson have done much to put questions about work back on the agenda. But for a systematic vision of a just society that recognizes the fundamental importance of work we should revisit the ideas of arguably the 20th-century’s greatest political philosopher, John Rawls—an early advocate for what we would now call “pre-distribution,” who argued that every citizen should have access to good jobs, a fair share of society’s wealth, and a say over how work is organized.

The publication of Rawls’s magnum opus A Theory of Justice in 1971 marks a watershed moment in the history of political thought, drawing favourable comparisons to the likes of John Stuart Mill, Immanuel Kant, even Plato. Rawls’s most famous idea is a thought experiment called the “original position.” If we want to know what a fair society would look like, he argued, we should imagine how we would choose to organize it if we didn’t know what our individual position would be—rich or poor, Black or white, Christian of Muslim— as if behind a “veil of ignorance.”

Our first priority would be to secure a set of “basic liberties,” such as free speech and the right to vote, that are the basis for individual freedom and civic equality.

When it comes to the economy, we would want “fair equality of opportunity,” and we would tolerate a degree of inequality so that people have incentives to work hard and innovate, making society richer overall. But rather than assuming that the benefits would trickle down to those at the bottom, Rawls argued that we would want to organize our economy so that the least well-off would be better off than under any alternative system—a concept he called the “difference principle.”

This principle has often been interpreted as justifying a fairly conventional strategy of taxing the rich and redistributing to the poor. But Rawls explicitly rejected “welfare state capitalism” in favour of what he called a “property-owning democracy.” Rather than simply topping up the incomes of the least well off, society should “put in the hands of citizens generally, and not only of a few, sufficient productive means for them to be fully cooperating members of society.”

Doing so is essential for individual dignity and self-respect, he argued, warning that “Lacking a sense of long-term security and the opportunity for meaningful work and occupation is not only destructive of citizens’ self-respect but of their sense that they are members of society and not simply caught in it. This leads to self-hatred, bitterness, and resentment” – feelings that could threaten the stability of liberal democracy itself. A focus on work is also necessary for maintaining a sense of reciprocity since every able citizen would be expected to contribute to society in return for a fair reward.

Rawls’s philosophy offers the kind of big picture vision that has been missing on the center-left for a generation—a unifying alternative to ‘identity politics’ grounded in the best of America’s political traditions. It also points towards a genuinely transformative economic programme that would address the concerns of long-neglected lower-income voters, not simply for higher incomes but for a chance to contribute to society and to be treated with respect.

At the heart of this vision is the idea that productive resources—both human capital (skills) and ownership of physical capital (like stocks and shares)—should be widely shared. People’s incomes would still depend on their individual effort and good fortune, but wages and profits would be more equal, and there would be less need for redistribution.

How might we bring this about?

First, we would need to ensure equal access to education, irrespective of family background. Sadly, the reality in America today is that children from the richest fifth of households are fivetimes more likely to get a college degree than those from the poorest fifth. Achieving true equality of opportunity is a generational challenge, but the direction should be towards universal early years education, school funding based on need rather than local wealth, and a higher education system where tuition subsidies and publicly-funded income-contingent loans guarantee access to all.

We also need to shift focus towards the more than half of the population who don’t get a four-year college degree. Our obsession with academic higher education—justified in part on the basis that this will generate growth, which in turn will benefit non-graduates—is simply the educational equivalent of trickle-down economics. At the very least, public subsidies should be made available on equal terms for those who want to follow a vocational route, as the U.K. is doing through the introduction of a Lifelong Learning Entitlement from 2025, providing every individual with financial support for four years of post-18 education, covering both long and short courses, and vocational and academic subjects.

Second, we must address the vastly unequal distribution of wealth. Thewealthiest 10 % of Americans have around 70 % of all personal wealth compared to roughly 2% the entire bottom half. Sensible policies like guaranteed minimum interest rates for small savers and tax breaks to encourage employee share ownership would encourage middle-class savings. But to shift the dial on wealth inequality we should be open to something more radical, like a universal minimum inheritance paid to each citizen at the age of eighteen, funded through progressive taxes on inheritance and wealth. If developments in AI push more income towards the owners of capital, something like this will become necessary.

Finally, we need to give workers real power to shape how companies are run. The idea that owners, or shareholders, should make these decisions is often treated as an immutable fact of economic life. But this “shareholder primacy” is neither natural nor inevitable about, and in most European countries employees have the right to elect representatives to company boards and to ‘works councils’ with a say over working conditions. This system of ‘co-management’ allows owners and worker to strike a balance between pursuing profit and all the other things we want from work – security, dignity, a sense of achievement, community – in a way that makes sense for a particular firm. The benefits of co-management appear to come at little or no cost in terms of profits or competitiveness, are popular with managers, and may even increase business investment and productivity.

Critics will no doubt denounce these ideas as “socialism.” But as we have seen, they have impeccable liberal credentials, and are perfectly compatible with the dynamic market economy that is so vital both for individual freedom and economic prosperity. Neither are they somehow “un-American.” As Elizabeth Anderson has reminded us, America was the great hope of free market egalitarians from Adam Smith through to Abraham Lincoln, whose dreams of a society of small-scale independent producers were dashed by the industrial revolution, and would have been horrified by the hierarchy and subservience of contemporary capitalism. Rawls’s ideal of property-owning democracy can help us revive this vision for the 21st century.

Still, even sympathetic readers might wonder whether there is any point talking about a new economic paradigm when the U.S. has failed even to raise the Federal minimum wage since 2009. But this would be to ignore the lessons of history. As the neoliberal era comes to an end, we should learn from its leading architects Milton Friedman and Friedrich Hayek, who were nothing if not bold, and saw their ideas go from heresy to orthodoxy in a single generation. As Friedman put it “Only a crisis — actual or perceived — produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around."

It often takes a generation or two before the ideas of truly great thinkers start to shape real politics. Now, for the first time since the publication of A Theory of Justice just over half a century ago, there is an urgent need and appetite for systematic political thinking on a scale that only a philosopher like Rawls can provide. In the face of widespread cynicism, even despair about the American project, his ideas offer a hopeful vision of the future whose time has come.

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