(Bloomberg View) — Last week, we reported the ungodly sums of money the top executives at Pimco made. We also noted the obsession we have with tracking other people’s wealth.
Perhaps I painted with too broad a brush when I described this as an American pastime; to be more accurate, it is a hobby of the moneyed classes in general and on Wall Street in particular. My apologies to the rest of America, onto whom I unfairly projected this unseemly preoccupation.
Still, endeavoring to understand how the current circumstances evolved is a worthwhile undertaking. Wealth, public policy and economic inequality developed along two very different paths in Europe and the U.S. That is where we begin our discussion this morning.
I’m going to overly generalize and exaggerate a bit here to make a point about how society evolved in the U.S. and on the Continent. Modern Europe had a 1,000-year head start on America. By the time the first European explorers were taking tentative steps on the shores here, Europe had become a well-developed feudal society. If you want to consider extreme levels of income inequality, consider the distribution curve of property ownership in that system.
Typically, the feudal lord or king owned, well, everything. Serfs were allowed to work the land, and most of the bounty went to the crown. They could hunt in the royal fields and forests, providing the appropriate tax was paid. The king provided some sort of justice as well as protection from marauding hordes. In exchange for these royal gifts, one only had to promise undying fealty, a willingness to be conscripted into the military for both needed defense and the occasional foreign involvement, or anything else at His Majesty’s or His Lordship’s discretion. Let’s not even discuss the right of primae noctis.
Hence, the Continent’s long and storied tradition of massive income inequality pre-dates that of America, and on a scale not seen anywhere else. Forget the 1 percent versus the 99 percent, this was a case “the 0ne” versus everyone else.
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In the U.S., things began with a somewhat opposite set of circumstances (at least for the relocated Europeans; I expect the native occupants might have a different perspective). The new arrivals began by largely throwing off their fealty to a central authority — and heading to a new world. Once here, they lived on their wits, skill and hard work. Taxes were viewed within the context of less in their pockets, as opposed to more services.
Perhaps this helps explain why Europeans seem generally less anti-tax than Americans. When your history is 10 centuries of being taxed at 100 percent, “only” having a 60-plus percent tax rate almost seems a good deal. And having a central authority in charge of administration and infrastructure such as transportation and communications and education and medical care doesn’t seem to be out of the ordinary. Things that are a huge debate on this side of the Atlantic are a given over there. Hence, the objective superiority of European train networks, cellular service, road quality, Internet bandwidth and other things. These things are more expensive, and less reliable as well, in the U.S. The trade-off is a much less regulated, and much more dynamic, economy here.
Exactly where the optimal settings for such trade-offs lie has been the subject of deep debates on both continents. One thing that is not a subject of debate is that neither area has it exactly right: The infrastructure of the U.S. is deeply wanting, as is the economic vigor of the eurozone. There have been signs that each region was moving incrementally toward the best aspects of the other, before the subprime financial crisis in the U.S. and the sovereign debt crisis in Europe forced both into economic calamity mode.
Ironically, it was the central bank of the U.S. that embraced a “By Any Means Necessary” response to its crisis, which looked much closer to what one might have imagined coming from a European centralized authority. This has worked out very well for America so far. Tales of hyperinflation, or even regular inflation, have been greatly exaggerated. Meanwhile, those European centralized authorities adopted a limited government response that seemed more American than Continental.
Central banks are getting some blame for widening economic inequality, but this overstates the situation. The trend was in place long before the extraordinary interventions of the Federal Reserve following the dot-com crash, the Sept. 11 attacks and the subprime crisis. Central bankers managed to exacerbate the issue, not create it.
However, this does not mean the debates about income inequality and its dangers are over. I have a suspicion they are just getting under way.