Should we want to do anything about inequality?

2. Should we want to do anything about inequality?

People care about inequality. Should we? Most of us would choose a rich economy over an equal one, and people prosper better living next to a rich man than next to the dole office. This is the argument: keep the economy growing, keep people busy, keep us richer than last year and we won’t worry about the guy better off than us.

People have unequal desires, drives, and aptitudes. This is a good thing, and life would be dull without it! There is no fixed amount of wealth, and in a free economy people don’t get rich by making others poor.

Equality may be unachievable, because successful businesses will always be the ones that make more profit, and it doesn’t take a big increase in pay to entice people to work for them.

Our freedom and range of choices are immeasurably higher as a result of prosperity. Look at the lifespan of today’s poorest citizens: about double that of Queen Victoria’s family.

The strongest argument is that the measures to reverse inequality bring disaster. Reversing the risk/reward ratio; incentivising parasitism; punishing risk-taking; confiscatory taxes; price controls; criminalisation of intimate financial decisions; coercive bureaucracy; the elevation of brute force over consent.

But equality is still an issue worth discussing.

First, people want it. And it is worthwhile to help people achieve what they want, if it harms no one.

The problem is that inequality can act as an excuse to take other people’s money for the sake of it. It is a pretext for ever-rising tax and spend, a process with no stopping point short of economic collapse. Democracy plus equality means an ever-expanding welfare state, until welfare collapses the state.

In the United States, the top 1% of earners pay 37% of Federal income taxes; the top 5% pay 59%; the top 10% pay 70%. The lower half of earners pay 2.25%, and 46% pay no income tax. On the other hand, half of US households receive government benefits. So elections become an exercise in spending other people’s money, and the only surprise is the restraint that ordinary voters bring to this game, in not killing the geese that lay the golden eggs.

In the United Kingdom, the figures are more oblique: the top 1% of earners pay 24% of income taxes; the top 10% pay 50%; and the top 50% pay 89%. But that is still a 9-to-1 ratio in favour of more spending. The simple numbers are against the defenders of inequality here. And inequality, along with human acquisitiveness and a coercive state, can lead to this ever-rising state spending. There is no obvious way to stop that process.

The main reason, and my reason, for wishing to reduce inequality, is that it leads to an uncompassionate society. Inequality creates a unfamiliarity; unfamiliarity creates division; division creates the aversion; aversion creates resentment; and resentment is the beginning of hatred and the enemy of compassion. It is wrong to hate someone for being richer than you, and economic hatred is by far the worst killer in history. But it is no less tempting for that.

Other, more skilful writers have pondered why we should be concerned about inequality, so I try to answer the question by reviewing the literature.

One thing that the books are strong on is the negative effect of inequality. The usual-cited causes of inequality are:

  • A fall in union power. Enabling senior managers to squeeze workers harder and then claim bigger pay from shareholders for doing so (see Jake Rosenfeld, and Joseph Stiglitz)
  • Globalisation, which forces rich-world workers to compete with workers in hugely poorer countries. (Paul Krugman, and Max Roser)
  • Technology. Which has put a raised the value of skilled workers who can use it, and reduced the value of those who can’t.
  • “Superstars”. The tendency of modern technology, especially communications, to enable fewer people to clean up, especially in entertainments. (Sherwin Rosen).
  • Financialization. The tendency to leverage the value of assets and income streams through loose monetary policy. Printing money makes more of it; that money has to go somewhere; it goes into income producing assets; the price of those income producing assets; individuals who can raise those asset prices marginally more are able to demand more pay. This is one point where conservatives and progressives temporarily agree (Kevin J Murphy, Dominic Frisby, Daniel Oliver)
  • Immigration. Keeping up the supply of workers so as to keep labour costs down (George Borjas).
  • Government policies. Tax law, labour laws, welfare limits, attitudes to executive pay. Another point of grudging agreement between left and right.

The current accepted conclusion is probably the one from the Congressional Budget Office of the United States:

“The precise reasons for the rapid growth in income at the top are not well understood, though researchers have offered several potential rationales, including technical innovations that have changed the labor market for superstars (such as actors, athletes, and musicians), changes in the governance and structure of executive compensation, increases in firms’ size and complexity, and the increasing scale of financial-sector activities”.

Thomas Piketty – Capital in the 21st-Century (2013)

This is probably the best known economics book of the last few years, with a focus squarely on inequality. Piketty’s case is that low economic growth, and wealth inequality, have been the natural state of things for the last 2000 years, especially during the 18th and 19th Centuries. He writes that the mid-20th-Century growth rate was an anomaly. As is the propertied middle class that grew up as a result of the economic shake out from two World Wars, rising taxation, and a Great Depression. Those economic shocks created conditions for relatively greater equality, by making skilled work more profitable than investment.

But, he argues, we are returning to a more natural period of low growth, where the profit on capital is higher than the rate of economic growth, and greater than the profit on labour. Put simply, investing money makes more profit than employing people, so that’s where the money goes. So money is staying, and increasing, in the hands of investors, and reducing in the hands of employees. In Piketty’s terms, the return on capital is becoming greater than the rate of economic growth (“r > g”) and inequality is growing because the rich can increase their wealth faster than workers do.

Piketty uses a data gathered over a decade of research, to argue that this process is accelerating: inequality is going to get worse, faster. His wealth of evidence is hard to refute – plausible at least – if, like most of us, you are not in a position to do a decade of your own research.

Piketty goes into little detail as to why inequality is bad, but assumes – probably rightly – that most readers will agree that it is. As regards remedying inequality, Part Four (“Regulating Capital in the 21st-Century”) of Piketty’s book looks to government and intergovernmental solutions: “political institutions”, to “regulate today’s global patrimonial capitalism justly as well as efficiently”. This really seems to mean very high taxes (80% being “optimal”), regional and global taxation to reduce public debt, “seats for workers on the company’s board of directors”. He is thin on detail about who would gather global taxes, and how, and seems to admit this by describing it as “a utopian idea”.

In short, Piketty’s solution is more tax, government and welfare, with an internationalist twist. “Utopian” is the right word for it, since it contain more wishful thinking than practical understanding of “political institutions”.

The effect of Piketty’s analysis is to increase the sense of urgency about inequality among thinkers, economists and sociologists – a significant, if tainted, achievement. The effect of his proposals is to increase the already excessive reliance on government to solve social problems. This is not new, to put it politely, and neutralises the benefit of his analysis.

Joseph Stiglitz – The Price of Inequality (2012)

The same reliance on the state pervades Joseph Stiglitz’s book, written as a counter to the laissez-faire capitalism that he associates with the two main political Parties in the US.

Stiglitz talks of inequality, but focuses mainly on lack of social mobility – which is a different thing – despite most Americans’ belief that there is a ladder of opportunity. Unlike Piketty, Stiglitz sees nothing inevitable about that, or about inequality. He is harder on inequality than most Americans: he says 70% of them believe that anyone can make it but that most Americans born poor will stay poor. And he writes convincingly of the things associated with – he would say caused by – inequality: low growth, reduced efficiency, ill-health, social division, and unfairness.

In “The Price of Inequality, and “The Great Divide”, his choice of remedies is simple: a stronger public sector to generate full employment, and government-mandated investment in public infrastructure, technology and education. And he wants closer regulation of the banking sector and of employment practices. Like Piketty, this is where he is weakest. These methods have been tried before and abandoned before. Lip service is still paid to some of them. He gives little reason as to why those remedies would work this time.

Again: more taxation; more public spending; government “investment” in research, education and roads; more regulation. The strength of his book such as it is – the condemnation of inequality and lack of social mobility – is undermined by lack of thought about methods for countering these evils.

François Bourguignon – The Globalization of Inequality (2015)

This thoughtful book looks at the general decrease in inequality between western nations and other countries, and the increase in inequality within some western countries. He says that globalisation is the cause because it has disproportionately benefited capital over nationality. But he says that globalisation’s tendency to increase inequality within nations isn’t inevitable, and depends on national government policies.

This is where Bourguignon’s careful work is weakest in discussing what to do about it: higher (“less regressive”) taxation; education policy designed to increase equality; more tax on capital and less on earnings; and social programmes. His aim is to increase equality in a way that promotes “efficiency” instead of reducing it.

Again, Bourguignon relies on government policy – policies that have been tried before and have seldom achieved both equality and prosperity.

Anthony Atkinson – Inequality (2015)

The strength of this book is the clarity of its structure. Section 1 asks why inequality matters. Section 2 asks what can be done about it. Section 3 asks how it can be done.

Section 1 – inequality matters because it is unjust. And because of “utility”, i.e. that a pound is more useful to a poor man than an already rich man. This is the weakest part of this Section of the book. Inequality is not unjust simply because Atkinson perceives that it is. And his utility argument means that governments should put 100% tax rates in place. I don’t need to comment on this, beyond pointing to the societies – Stalin’s Russia, Mao’s China – where this has been tried.

Atkinson is also concerned that inequality leads to ills such as a lack of social cohesion, increased crime, ill-health, mortality, and violence. His arguments make more sense here, but his evidence is thin. His assumptions are still too hotly debated for Atkinson to repeat them as straightforwardly as he does.

Like the above two authors, Atkinson is keen to show how inequality has grown since the World War II. He blames the retreat of institutions of social solidarity, since the Thatcher and Reagan governments, such as trade unions and state-owned housing.

Section 2 – Atkinson puts forward fifteen proposals. These all relate to government policy: state investment in research and technology; full employment; state-funded capital endowments for citizens; higher minimum wages. None of this is new, and most has been tried before. It is depressing that someone so concerned about inequality can’t think more realistically about practical ways to reduce it.

Section 3 – how to implement these nice ideas. This Section is weaker still, and not well written. He doesn’t examine why governments haven’t increased equality despite adopting some of his measures, or how to avoid their more obvious side effects. It is hard to believe that he didn’t anticipate the response “That’s very nice, but…” If he did, he doesn’t answer it.

Once again, a writer analyses why inequality is a bad thing, but then resorts to the tired old state remedies: government policies for technology; government policies to increase employment; government policies to guarantee higher (“living”) wages. Each of these ideas has been implemented by a western government somewhere, at some time, most of the time, and the march of inequality has continued unabated. Is it intellectual laziness, wilful blindness, or a hostility to the free market, which prevents talented writers addressing the obvious objection: “Why should that work this time”?

Erik von Kuehnelt-Leddihn – Liberty or Equality: The Challenge of Our Times (1952)

This book is a welcome break from the consensus that inequality is a bad thing, or at least that it is to be combated. Leddihn argues, rightly, that the pursuit of equality has usually reduced freedom, and sometimes to its extinction under the total state. He goes too far in attributing this to democratic equality, since democracy involves an element of freedom and, left to themselves, individuals will nearly always choose higher paying jobs over more egalitarian ones.

Leddihn also goes too far in his attempt to boil things down to one dangerous idea, the ideal of equal political power within democracy. But there is no doubt that the most powerful killer in history is not war, or racial or religious hatred, but economic hatred. Especially when combined with a state committed to stamping out inequality: Stalin’s Collectivisation, Mao’s Great Leap Forward, Pol Pot’s Year Zero. The most vicious crime in history, Hitler’s genocide of the Jews, was put forward, in public at least, on economic grounds.

He argues for the old liberal notion of government restrained by law. He argues, perhaps provocatively, that aristocracy gave this to us through its need to restrain monarchical power. He doesn’t call for the reinstatement of feudal aristocracy, and he doesn’t need to. His work has been too much ignored since the 1950’s. it is a rational warning against the power of the state with the moral authority to pursue equality without legal restraint.

In the same way that people on the right should not dismiss the problems of inequality, people on the left should remember that a focus on inequality can lead to absolutism – perhaps after another financial crash, and the continued decline of politicians’ moral authority.

Danny Dorling – Inequality and the 1% (2014)

This book, is simply – even simplistically – written, and sums up the state of the debate on inequality. It is significant that the least well-written book on the subject is the most representative.

The sterility of the inequality debate is illustrated by the fact that Dorling can lay out the detail of inequality so thoroughly in about 2 or 3 pages. His book would be more impressive if it ended there: short, sweet, and to the point. Unfortunately he doesn’t follow up with effective analysis of causes, let alone solutions.

His position is that the poor are poor, the rich are rich, and each group disagrees as to whether the rich deserve to be rich. It isn’t hard to sense which side he is on, e.g. his apparent belief that the rich get richer than others partly through avarice. Something, perhaps anything, must be done if the rich are not to get richer, and the poor poorer. And that most people agree with him. He repeats these points throughout the book.

The sparseness Dorling’s evidence is symptomatic of the state of the debate. Books about inequality repeatedly display the attitude that there is no need provide evidence because everyone agrees so strongly. Is inequality really worse than the remedies to counter it? What will be the side effect of those remedies? How can you be sure they will work? What about the ones that have already been tried and failed? These questions come across as being more irrelevant than awkward.

For example, do the rich really pay for private education for their children because they want them to have an unfair advantage over other children as Dorling says? And why is it a “nasty lie” that higher taxes yield less revenue?

Such assumptions, and the anger that accompanies them, are dangerous. Economic hatred may not be the most vicious killer in history, but it is probably the biggest.

That doesn’t mean inequality should be ignored. Dorling is not a freak. Many think like him. And that is all the more reason to think through, and perhaps try to solve, the riddle of inequality.

This book is a good summary of the current state of thinking about inequality. That is not high praise. I’m not sure Dorling would take it as criticism to say that there is anger in his book. That anger, and the thinness of the remedies (“Towards a Fairer Society”), make the book more honest and direct than others on the subject. He is indignant and wants something to be done, which sums up the tide of opinion.

Authors and academics seem to feel that all they have to do is to show that inequality exists (the easy part) and that it’s a bad thing (still easy enough), and that the powers that be should do something about it. There are two problems here: first, the limits, the ham-fistedness, the sheer counter-productiveness, of government; and second, that pretty much every type of government intervention to reduce inequality has already been tried somewhere. All of the authors seem to ignore both problems, especially the problem of finding a method that hasn’t been tried and discarded before.

This familiar call for government coercion mutates into simple nostalgia with the next writer.

Owen Jones – Chavs (2011)

The most popular book on inequality probably does the least work looking for new methods to reduce it. It suggests methods, but none that politicians don’t already have at their fingertips. And few that weren’t around before Margaret Thatcher, Jones’s favourite bad-guy.

The book’s popularity seems to me to rest on the clarity, even simplicity, with which Jones describes the problem of inequality. He is strongest in pointing out the contempt that has arisen for the white working class – “ridicule”, “powerlessness”, “chavs”. And his offence at the meanness and snobbery rings true. Most of us will have heard contempt for poor white people pass as humour, in a way that would not pass were it directed at non-whites or middle class people.

But his analysis of causes is atavistic, and he has been justifiably accused of romanticising the 1970’s. “Jobs for life” in “working class industries” were dismantled by cheaper and better alternatives as much as by government. Nor is his nostalgia appropriate for pre-Thatcher trade unions, Council housing, and the Rent Acts.

Owen Jones is weaker still on remedies. He laments the passing of “Jobs for life passed from generation to generation”. This sounds nice, but how is it accomplished without government subsidy, to keep jobs open that no longer pay their way?

He describes working class people as “cogs in the machine”, but what does this mean? Such rhetoric is an example of the way writers on inequality use appeals to indignation in the place of action.

He wants renewed pride and sense of self worth. Again, it is hard to see anyone arguing for humiliation and reduced self esteem for working people. But there is no recommendation for specific action.

He would like to see renewed Council house building – something specific! But, again, a writer resorts to state coercion and subsidy to solve a shortage that the state coercion has created.

He argues for trade union solidarity. Again, this sounds nice, but requires the force of the state to bolster trade union powers, so as to attract people to them.

Each of these ideas was in the Labour Party’s 1983 election manifesto, and each proposal has been repeated at some time. A fresh and well analysed justification of old policies might be valuable, but Owen Jones hasn’t done that. If his condemnation of the psychological oppression and disdain for working class people carries weight, his prescriptions don’t.

Once again, we see the condemnation of inequality substituting for thought about how to address it. This is dismally common throughout the literature, and slur on the motives of the authors. Owen Jones’s compassion is less convincing for the lack of effort he devotes to thinking through effective methods.

Richard Wilkinson and Kate Pickett – The Spirit Level: Why Equality is Better for Everyone (2009)

This book draws together substantial evidence – much of it contested for being out of date, mishandled or misinterpreted – to show the depth and range of the evils of inequality. The findings can’t be ignored and seem to contain some reasonable, if exaggerated, merit. But they should not be accepted without question.

The book’s strength is its unifying effect: it examines the underlying cause (if it is valid) of social problems rather than those problems individually.

The Spirit Level proposes more tax, more generous state benefits, higher salaries for lower paid public sector workers, more money for the charitable and public sector, “economic democracy”, and more influence for “stakeholders”. Mentioning the Basque Mondragon co-operatives adds a pro-entrepreneur touch, but no analysis.

The issue is, yet again, the inadequacy of the remedies. Solutions always seem to be a postscript to condemnation.

But this accusation does not apply to the next book.

Charles Murray – Coming Apart: The State of White America, 1960-2010 (2012)

In this 2012 book, Charles Murray describes an economic divide that has been both cause and effect of a moral decline since 1960.

He focuses on white Americans in order to make it clear that the decline was not experienced solely by minorities, whom he brings into his argument in the last few chapters.

Murray sees two emerging classes: the New Upper Class and the New Lower Class. He attributes this divide to differing social traits: levels of religiousness, work ethic, industry, and family cohesion, among other things. I.e. the New Upper Class are more religious, more industrious, and have a stronger work ethic and family ties – values that have reduced little among this Class since the 1960’s. But they have reduced a lot among the New Lower Class since then.

Murray states that IQ (“cognitive ability”) became a strong predictor of success from the 1960’s, which led high IQ people to marry, live near, and make friends with, other high IQ people. And this has increased economic inequality and, more significantly, a divide in culture and values which didn’t exist before. For example, in the 1950’s everyone knew what “American values” meant, and subscribed to them. The rise in agnosticism/atheism, worklessness, and family breakdown among the white working class has led to a hardening inequality between working stiffs and the elite.

It is difficult to know how far this book complements or, as I suspect, seeks to ameliorate, the message from his previous two books. Losing Ground (1984) exposed him to accusations of meanness for blaming the welfare state’s perverse incentives for the falling behind of the poor. And The Bell Curve (1994) exposed him to accusations of racism by blaming inequality on the rise in importance of raw IQ (the “cognitive elite”).

Murray implies that differing IQ levels inevitably lead to inequality, but that this inequality can be limited by a unifying set of values. And that the decline of those values has hit poorer, lower IQ people hardest. His evidence is convincing. But he doesn’t examine whether the economic structure magnifies that inequality, which is a pity. We may still be able to reduce inequality even if we can’t or shouldn’t try to eliminate it completely.

Summary

For what it is worth, I think that Piketty’s conclusion, and Murray’s unifying values, combined with the “Financialisation” cause, are the best explanations. I.e. that inequality is, or has been, the natural order of things; that the turmoil of the mid 20th Century disrupted that process; that income inequality has gathered pace again in the stability following the 1970’s. And that loose monetary policy concentrates commerce in the hands of a few, bigger, corporations because they are best placed to deal with big banks, and finance expansion and takeovers through debt.

I don’t recommend reading all of these books. If you do, you’ll find a tendency to work backward from the view that inequality is bad. First, most appear to think that inequality causes harm that outweighs the benefits of prosperity. Second, there is laziness about finding solutions to inequality – usually plumping for old methods, as rider to the main point that inequality is bad. Third, a lack of inquiry as to how those methods will work, and whether they could do more harm than good. Most of these books suggest that they were written because the authors knew what people wanted to read: inequality is bad; something must be done about it.

None of these books seems interested in voluntary solutions – things that people might want to do as opposed to things people are forced to do by government. Tax policy, monetary policy, labour policy, union policy, welfare policy, executive pay policy, policies to promote “efficiency”, social policies, minimum wage policies, research and development policies, housing policies, industrial policies – all dependent on government to coerce people to do things they wouldn’t do without coercion.

These books contain nothing that people would want to do because it may make them richer. This book takes that as the key challenge: not how to force people into equality, but how to get them to promote it because it makes them better off. If you can do that, then equality will prevail, if not it won’t and all your government policy policemen will fight against the tide.

That is what the rest of this book focuses on – what to do and how to do it.