Public money and human purpose: the future of taxes.

• Author: Roodman, David Malin
• Position: Includes related article - Cover Story

Most countries use taxes and subsidies that undermine that well-being of both the taxpayers and the environment. But there are some positive - and now proven - alternatives.

For the first time since the Great Depression, the economies of industrialized countries arc in decline. This will come as a surprise to those who are accustomed to appraising economic performance in terms of growth. Indeed, production per person in rich countries has climbed 40 percent in the last 20 years. But that does not say what has happened to personal incomes, or to the natural capital that fuels this growth.

If economic performance is measured by what matters more, the signs of decline are clear enough. Most citizens of industrial countries do not report that they feel better off today than they were 20 years ago. In the recent French election, voters cited high unemployment as the social problem uppermost in their minds when they went to the polls. In the United States, for 15 years the news media have been carrying stories of massive corporate layoffs of factory workers, and, more recently, of professionals and middle managers.

In fact, for more and more people, it is actually getting harder to earn a living wage. Industrial economies are producing more wealth, but much of it is in the form of luxuries for the upper class - fancier cars, larger homes, more jet travel. The percentage of people who are holding down jobs and earning enough money - enough to pay for food, housing, clothes, and other necessities - is actually falling. In Western Europe, the ranks of the jobless have grown from 2.6 percent of the labor force in 1973 to 11.3 percent in 1994. In Ireland, unemployment reached a depression-like 16.2 percent in 1994, and in Spain, it hit 17.9 percent. Signs of potential trouble are emerging even in Japan, where last year's 3.1 percent unemployment was the country's highest rate in decades.

In the United States, though most people can still get jobs, the secure, well-paying positions they once expected are now harder to find. Many workers have to struggle just to stay afloat. The number of people working nights or holding down two jobs in the United States has climbed from 5.8 million to 8 million in the last 10 years, while the ranks of temporary workers have tripled. The portion of U.S. workers whose wages are so low that the government still classifies them as poor, even though they are not unemployed, rose by a third between 1973 and 1993, from 2.1 to 2.8 percent. Wages - especially for people who never went to college - have declined.

The declining prospects for large numbers of people in rich countries are a far cry from the outlook of 30 years ago. In the 1960s, the workers of Western Europe and North America were riding a tide of unprecedented economic growth and technological development. Incomes had doubled in a generation, vaulting millions into the middle class, and making the widespread economic despair of the 1930s but a bleak memory. Conventional wisdom said that by the 1990s paychecks would double again, so that young workers could make in a season what their grandparents had made in a year, and what little poverty still remained could be easily stamped out.

Yet, rather than looking like the first gyrations of an era of economic perpetual motion, the great boom now appears to have been no more than an extraordinary but passing growth spurt. Growth has slowed substantially since 1973, and more importantly, its significance has changed. In the 1950s and 1960s, economic growth for industrial countries as a whole always meant growth in the middle class as well. Today, that trend is moving in the opposite direction; there's more money being made than ever before, but it's going into fewer pockets. Even some people with college educations, who rarely had job worries a generation ago, now find themselves unable to secure the kinds of work they are cut out to do.

Economists disagree about why the bottom has slowly been falling out of the job market in industrialized countries, but they have some good guesses. Prime among them is that new technologies and management practices are thinning the ranks of whole job types. Increasingly automated factories and flattened office hierarchies appear to be making assembly-line workers and middle managers either less valuable (forcing down wages) or obsolete altogether (swelling the ranks of the unemployed).

What industrial countries are now experiencing, then, could be the beginning of a long-term economic transformation. And developing countries, which are replaying the economic history of rich countries in fast-forward, will sooner or later reach the same threshold. If so, it will not be the first time that such a thing has happened. Industrial innovation - whether technological, like the invention of the steam engine, or managerial, like the invention of the assembly line - has always been a revolutionary force. It has often disrupted the communities it has touched, and rendered whole ways of life obsolete.

Looking back on a technological revolution long after the technology has matured and been assimilated, it is easy to forget how long the transition took - and, for many, how unsettling it was. For example, starting in the late eighteenth century, English industrialists began using paddle wheel-driven and then steam engine-driven factories to crank out cheap goods, putting thousands of weavers, tailors, and other craftspeople out of business. Of course the manufactured goods were cheaper than the old hand-made ones, leaving the growing consumer class more money to spend on other products - and spend they did, on everything from bicycles to light bulbs. Whole new industries sprang up, creating enough new jobs to replace all the old ones. With machines amplifying their effort, workers in the new industries could produce more, and became more valuable.

Yet, not until 50 years after the take-off of the Industrial Revolution did wages and working conditions start to improve for the great majority of workers, and it was several decades more before those conditions could have been called anything but unconscionable. The decades of pain that spanned much of 19th-century England still echo down to us through the outraged voices of Charles Dickens and Karl Marx.

No one knows exactly how much the current economic transformation will resemble those of the past. Though millions of factory workers are losing their jobs or watching their paychecks shrink, social safety nets are making widespread poverty of Dickensian proportions a remote possibility in rich countries. On the other hand, there is a greater danger this time that a permanent underclass of capable but poorly paid workers could develop, particularly in the United States, where a college degree is becoming essential to finding a good job but is also becoming more expensive.

The challenge facing economic policymakers now is to alleviate that pain as much as possible by, on the one hand, minimizing the loss of good jobs, while on the other, helping people adapt to the inevitable cutbacks. In the short term, as current political discourse makes clear enough, they need to find ways to generate more jobs and higher wages. In the long run, they need to make it easier for more people to achieve the high education levels that make workers valuable in the modern economy, and to encourage the growth of the sorts of sunrise industries that will open their doors to these workers.

THE USES AND MISUSES OF TAXES

One of the most powerful tools that a government can use to guide its economy is its tax code. Taxes are often regarded simply as ways for the government to raise revenue to fund its programs. What is frequently forgotten is that levies can have powerful disincentive or incentive effects: they mostly discourage the very things they tax, and encourage untaxed alternatives. Taxing payrolls discourages hiring, but encourages automation. Taxing investment hampers the development of new industries, while encouraging the entrenchment of obsolete ones. In economic terms, taxes on productive activities distort the economy, depressing employment and incomes, and making today's economic problems worse. Economists call this the "deadweight burden" of taxation.

Throughout Western Europe, for example, high payroll taxes are thought to be exacerbating joblessness by making employees more expensive for employers. For every...