June 10, 2023

Should the U.S. Pursue “Common Prosperity”?

Philip Kotler

Most nations exhibit a high level of income inequality. Virtually every nation has a small rich, elite class and a large destitute class. The rich continue to grow richer. If there is a middle class, this class provides some stability to the economy. The middle class includes government functionaries, professionals (e.g., doctors, lawyers, health care specialists, educators), expatriates living in the country, and managers in small businesses.

This highly skewed income distribution can lead to political instability and citizen protests under certain conditions. Such conditions might be a natural or man-made disaster, a climate event that diminishes food supply, a government move to reduce or eliminate government subsidies for fuel, or butter, causing high inflation.

In a democratic country, there are likely to be liberal leaning and conservative leaning groups. Liberals favor candidates and policies that propose a fairer distribution of income. Conservatives generally favor smaller government, lower government spending, lower taxes, and protecting the interests of the rich. Liberal groups also have a class of elite and wealthy citizens who generally espouse more liberal policies.

What should be done to deliver a fairer distribution of income? The U.S., the 3rd most populated nation, is one of the richest countries in the world and still has a large number of its citizens earning less than an adequate wage. Many citizens are resorting to more and more debt to finance their minimal daily needs. This solution is unsustainable. The debt creates additional need for income to pay the interest on the growing burden. But if there was adequate income to begin with, the debt would have been unnecessary.

So why don’t we have an organized movement in the U.S. pressing for a fairer distribution of income and wealth. Smaller Socialist Democratic countries, to some extent, accomplish this with their broad safety net of social services to their relatively homogeneous ethnic and cultural populations.

What is China’s Solution to the Lopsided Distribution of Income?

China has high income and wealth inequality similar to the U.S. High income inequality is one of several problems that China is beginning to deal with. In 1953, the People’s Daily defined two alternative paths for China, either capitalism “a road of a few getting rich, while the vast majority are poor and destitute,” or socialism “the path of common prosperity.” A previous Chinese Communist Party (CCP) chairman, Deng Xiaoping, said “our policy is to let some people and some regions get rich first, in order to drive and help the backward regions, and it is an obligation for the advanced regions to help the backward regions.” That was 70 years ago, prior to China’s opening to the modern world in the late 20th century. Now that they have achieved a prosperous market economy, under their continued Communist government, they are pivoting to include “Common Prosperity” into their future goals.

China chose to adopt the best capitalist practices of the West. They used their vast unskilled labor to offer lower consumer prices to the West, while developing their own growing middle class through this economic system. After succeeding in manufacturing more and more complex forms, and building a competent class of engineers, managers, and technocrats, China moved to heavy manufacturing and invited technology transfer and foreign investment. For several years, their GDP grew at a rate of 10 percent, significantly higher than other nations. The Chinese economy was run by a one-party autocratic system. In China’s long history, the people were always ruled by an Emperor from dynasties that lasted centuries. This ruling mode is part of their culture, and is expected and accepted by their people. It should be kept in mind that other ethnicities and cultures around the world are comfortable with this very system too.

China managed in the last 25 years to bring millions of Chinese out of poverty. In the process, it also produced 607 billionaires, putting China second in the world, after the U.S. with 735 billionaires. China successfully transmuted into a full blown Market/Capitalist economy, in certain industries, and up to a certain size with high national growth rates. Certain industries vital for the safety, security, and technical advancement of the nation, however, remain government controlled.

Xi Jinping, the current Chairman of the Chinese Communist Party (CCP), observed that “the wealth gap and middle-class stagnation have aggravated social divisions, political polarization and populism. In a meeting in August 2021, Xi announced that China should promote “common prosperity” to guard against this fate. He saw common prosperity as “an essential requirement of socialism and a key feature of Chinese-style modernization” in contrast to Western modernization.

Xi defined “common prosperity” as prosperity for all, rather than the few. Yet he cautioned that common prosperity is not “uniform egalitarianism.” He emphasized that “not everyone will be wealthy at the same time”. He hoped that by 2035, China would make “substantial progress” in the realization of common prosperity. There will be “equitable access to basic public services.” By the middle of the 21st century, common prosperity will be “basically achieved,” in which the urban-rural income gap will be shrunk “to a reasonable range”. He vowed to “adjust excessive incomes,” but he also spoke out against “welfarism,” saying that too much welfare “encourages laziness”.

Xi’s hope was that people “who get rich first” would help others. It would be a mistake to “kill the rich to help the poor.” The aim is to avoid making everyone poor. The aim is to create an “olive-shaped” society with a large middle-class and fewer people in extreme wealth or poverty.

China used common prosperity in 2021 to pass large-scale regulations and crackdowns against perceived “excesses” of private industries, specifically the tech, property and the tutoring sectors. Several tech companies and billionaires obliged the new mission by pledging large investments and donations in common prosperity. The government got the large property sector to pledge to build 6.5 million low-cost rental houses from 2021 to 2025. The government also ordered large pay cuts for investment bankers. The CCP, during its 20th Congress, amended its constitution to include a goal of “gradually achieving common prosperity.”

Will China’s pursuing of “common prosperity” slow down economic development as measured by the Gross Domestic Product (GDP)? One group in China argues that everything should be done to “make the cake bigger” and then debate over how to share the benefits. Another group argues for first deciding how the benefits will be divided, even if this results in a smaller cake.

The main point is that China wants to reduce the income and wealth gap so that more Chinese citizens can lead a good life. This mission of “common prosperity“ has the potential to make China admired by citizens in many underdeveloped nations. The poor in these nations will press their leaders for “common prosperity.”

China and the U.S. are the two strongest world powers. Instead of working together to make the world better, each country is trying to prove that their system, American capitalism or Chinese socialism, is the best for most countries. Will the Chinese manage to convince the citizens of other counties, that China is more serious than the U.S. in improving the well-being of more people around the world?

What is the U. S. Message to other Countries about Why American Capitalism is the better System?

The U.S. does not pursue a mission of “common prosperity.” In American capitalism, the rich continue to get richer, the middle class continues to get smaller, and the huge number of poor people remain poor with huge debt. The U.S. government does provide assistance in the form of social security, food stamps, health insurance, aid to the poor and a large number of other social programs. In addition, many of the rich donate money to good causes to improve education, health and other services to the middle class and poor. At the same time, it can be argued that the great need is to get more money to flow into the hands of the working class. Today the rich only pay 37% of their top bracket income to the government’s needed revenue. Proposals include establishing a more progressive income tax system, adding a wealth tax, closing tax loopholes, and taxing capital gains income at the normal income tax rate.

The U.S. offers to the rest of the world a different message than China. The U.S. is the land of freedom and opportunity. For people living in countries with poor opportunities or with little freedom, the U.S. remains a hope for such people. They would rather move to the U.S. than move to China. They could hope to live a better life in the U.S. and even have a chance to become a millionaire. Many immigrants come to the U.S. and they, or at least their children, will end up living a better life and with more freedom. Migrants come for more opportunities and freedom that are not available in their countries.

Should the U.S. Strive to Make Everyone Prosperous?

Historically, the U.S. favors making the cake bigger and worries less about how the cake is sliced. Capitalists argue that the benefits of a bigger cake flow down to the working class gradually in the form of more jobs and possibly higher wages. More wealth will “trickle down” and “All boats will rise.” But the wealth never really “trickled down to the poor.” If anything, the wealth trickled up” to the rich. The rich used their lobbyists in Congress to write rules that create tax loopholes that benefit the already affluent. The rich put their money in stocks and bonds and they live on capital gains earnings that are taxed at a lower rate than labor earnings.

American Capitalism provides jobs but many are not receiving livable wages. The vast majority of Americans must use credit to achieve a livable standard of living. The ordinary credit card pays for their groceries, new clothing, doctor bills, college education and sundry other items. Credit has been the key to America’s economic growth! If we did not have credit, our economic growth would be limited to our actual incomes. People would buy far fewer cars, appliances, and vacations. Some people would be more likely to protest or rebel.

Credit is the miracle that allows Americans to live a good life beyond their actual income. The major cost is spending a significant part of their income to pay interest on the debt. If they fail to pay interest, they must give up their car or home or declare bankruptcy.

The business community benefits by achieving a much higher level of sales by extending credit. The business community benefits in another way. Businesses can continue to pay unlivable wages! If citizens couldn’t get credit, they would either live without the good things in life or protest or rebel. The availability of easy credit prevents a worker uprising. Credit makes it possible for poor people to have cake and eat it too. People can live a better life because the credit card is available. Credit makes it possible for consumers to have more than their income allows but at the cost of high indebtedness and high interest charges.

Americans today are living with 24.5 trillion dollars of debt. They won’t ever be able to liquidate this debt. Nor does business want the debt to go away. Businesses and banks depend on the steady flow of interest to keep moving into their accounts.

As workers see the growing debt and the gap between their lives and the lives of the rich, some might press for organizing unions and demanding higher pay. Some unions will strike for high wages. They will oppose CEOs being paid 320 times more than the average worker.

In the past, businesses would use legislation and the police to stop workers from organizing or striking. But today’s citizens and employees will press legislators to protect unionization. If workers organize and win higher wages, some companies will make lower profits unless their productivity increases or they move to lower cost areas. Some companies will have less money to invest in R&D and grow their business. Some companies will close down and unemployment might increase.

Hopefully, there might be a middle way. The basic remedy lies in tax policy. The taxes on the rich are too low. The rich in the U.S. pay 37% on the top bracket of their income. The rich in the Nordic countries pay 60–70% on the top bracket of their income. The Nordic countries use the higher tax revenue to make healthcare free, higher education free, and child and parent benefits freer, along with substantially longer vacations than the two-week vacations in the U.S. The remedy is straightforward: raise the income tax rate on the rich, pass a wealth tax and raise the estate tax. These measures would hardly affect the lives of the rich while at the same time would bring more education, healthcare and childcare to the vast majority of citizens.

Critics say that the Nordic countries are smaller and more homogenous and agree to these higher taxes because they can see the benefits that it brings to their countries. They argue that the U.S. is too multi-cultural and divided politically to pass Nordic level taxes.

The question is whether the Democratic party might want to embrace the goal of “common prosperity.” Clearly the left wing of the party with leaders such as Senators Bernie Sanders and Elizabeth Warren would be happy to announce the cause of “common prosperity.” Ray Dalio, an American billionaire and long-time supporter of the Chinese government, praised the common prosperity campaign and said that the US “needs more common prosperity” along with many other countries.

It is a fitting time to have a national discussion of the issues raised by pursuing “common prosperity.” Should the U.S. pursue common prosperity? What plan would it use? Would it slow down economic growth or would it increase economic growth? How would other nations view the U.S. if the U.S. had a plan to pursue common prosperity?