A world of difference: the global challege of rising inequality
Martin Wolf
Martin Wolf on the difficulties governments face in tackling the growing problem
Inequality: What Can be Done?, by Anthony Atkinson, Harvard University Press, RRP£19.95/$29.95, 304 pages
The Globalization of Inequality, by François Bourguignon, translated by Thomas Scott-Railton, Princeton University Press, RRP£19.95/$27.95, 200 pages
Inequality is back, as both a subject of inquiry and a focus of concern. The extraordinary response to Thomas Piketty’s Capital in the Twenty-First Century revealed that the ground for this renewed interest was already fertile. It merely required a seed. Other seeds are now being planted.
While the books are on the same topic, they are very different. Bourguignon presents a systematic account of the global and domestic trends, while Atkinson focuses on what is happening within advanced countries, particularly his own, the UK. Readers wanting a map of the terrain should read Bourguignon. Those who desire a thought-provoking guide to policy options in advanced countries should grapple with Atkinson’s work.
Bourguignon makes clear that this is a global concern. “After a significant decline in the mid-20th century, followed by a long period of stability, inequality has begun to rise over the last two or three decades in the large majority of developed countries.” he writes. “It has also risen in a number of developing countries for which we have long-term data. This phenomenon is therefore not isolated to a few cases, such as the oft-cited examples of the United States and China.”
Yet, while inequality in the distribution of incomes has risen in most high-income countries, the scale of that increase varies. Atkinson notes that the US and UK have experienced exceptionally large rises in inequality since 1980. Italy, the Netherlands, Canada, Japan and Germany have experienced far smaller rises. France has even experienced a small reduction. The forces driving the increase in inequality in the high-income countries are strong, but cannot be overwhelming. This conclusion is supported by the fact that levels of inequality are also divergent: relatively low in the Nordic countries, far higher in the UK and US, but also in Italy and Japan, with France and Germany in between.
On inequality of wealth, Atkinson underlines points made by his sometime collaborator Piketty, whose thesis in essence is that returns on capital normally exceed the rate of economic growth, so generating a tendency towards increasing inequality. First, Atkinson says, ratios of wealth to national income have risen sharply since the mid-1970s, largely because of appreciation in the value of a range of assets. Second, a significant part of this increase in wealth belongs to the middle and upper-middle classes, because of the rise in the proportion of the population that owns its own homes, many of which have appreciated greatly in value. Many of these people also own claims on corporate equity via pension funds and other institutional arrangements.
Experience in emerging and developing countries is complex. Inequality of incomes has risen greatly in China and also, suggests Bourguignon, in India, Indonesia and Bangladesh, but not in the rest of Asia. In Africa, Ghana, Kenya and Nigeria have experienced large increases in inequality. But Cameroon, Uganda and Senegal have not. In Latin America, a continent of historically high inequality, it grew substantially in the “lost decade” of the 1980s, then fell quite broadly in the 2000s, though levels generally remain high.
Yet, crucially, while inequality among households has been rising within many countries, it has been falling among households at a global level, albeit from extremely high levels. This is because the “great divergence” in the average incomes of today’s developed and developing countries that occurred during the 19th and early 20th centuries has been followed by, first, a period of postwar stability, and then by more than two decades of the opposite development — a “great convergence”.
For the global distribution of household incomes, the dominant forces are not changes in the distribution of income within countries, but rather changes in the relative average incomes of countries, weighted by population. The extraordinary growth of China and, to a lesser extent, of India, which contain almost two-fifths of the world’s population, largely explains the decline in global household inequality.
The improved performance of erstwhile laggard economies has also brought with it an impressive reduction in the proportion of the world’s population living in extreme poverty (judged to be an income below $1.25 a day at 2005 dollars adjusted for purchasing power). This has fallen from 32 per cent in 1990 to 16 per cent in 2010. Growth matters.
Underlying these complex trends, argue the authors, are complex economic forces: globalisation; technological change; the rise of winners-take-all markets; financial liberalisation; and a huge increase in rent extraction, shown in a big rise in the pay of the business executives who control a large part of the economy’s resources and in extraordinary earnings in the financial sector. Entwined with these are political factors, especially the pro-free-market turn across the world since about 1980, and, more broadly, a decline in the egalitarian ethos that held sway in many countries in the mid-20th century.
Both authors agree that something should be done about inequality. Atkinson provides a number of arguments for concern over rising inequality within rich countries. Some argue, for example, that only equality of opportunity matters. To this he responds that successful personal outcomes are often merely a matter of luck, that the structure of rewards is often grossly unfair and that, with sufficient inequality of outcome, equality of opportunity must be mirage.
Beyond this, argues Atkinson, unequal societies do not function well. The need to protect personal security or to incarcerate ever more people is likely to become a drag on economic performance and inimical to civilised life. If inequality becomes extreme, many will be unable to participate fully in their society. In any case, argues Atkinson, a pound in the hands of someone living on £10,000 a year must be worth more than it is to someone living on £1m. This does not justify complete equality, since the attempt to achieve it will impose costs. But it does mean that high inequality needs to be justified.
What about policy? At the global level, both authors recommend improved and more generous aid. Bourguignon adds that properly managed trade has much to offer developing countries. Within countries, both authors call for higher taxes on wealth and incomes, and for better regulation, particularly of finance. Also important, they agree, will be policies directly addressed at improving educational outcomes for the disadvantaged.
Atkinson goes far further, offering a programme of radical reform for the UK. It is not merely radical, but precise and (to the extent such a programme can be) costed. It starts from the argument that rising inequality “is not solely the product of forces outside our control. There are steps that can be taken by governments, acting individually or collectively, by firms, by trade union and consumer organisations, and by us as individuals to reduce the present levels of inequality.”
Thus policy makers should develop a national pay policy, including a statutory minimum wage set at the “living wage”, and should also offer guaranteed public employment at that rate. A “participation income” should be introduced at a national or even EU level, or — as an alternative to such a universal income — social insurance should be made more generous.
In addition, the UK should offer national savings bonds that guarantee a positive real return, and should create a capital endowment paid to all on reaching adulthood. On the tax front, it should return to far more progressive personal income taxes, up to a top rate of 65 per cent, and should turn inheritance taxes into progressive taxes on receipts. The tax on property should be proportional or progressive, not regressive, as it is now, largely because the main tax on property — the council tax — bears proportionately far more heavily on lower-value housing.
Yet history is not on Atkinson’s side. The egalitarianism of the mid-20th century occurred at a very particular time. The developed countries enjoyed a monopoly of industrial know-how. The two world wars and the Great Depression not only devastated private wealth, but also created a powerful sense that “we are all in it together”. Moreover, capital flows were controlled and capitalism was predominantly national.
None of these conditions holds. Thus, while Atkinson’s ideas are interesting, they will not be adopted, at least in the UK. Many of us do not share his nostalgia for the 1970s. The UK abandoned the corporatism of that era for rather good reasons. Moreover, the high taxes on incomes he proposes risk suppressing entrepreneurial risk-taking and increasing emigration of the talented.
Nevertheless, reforms that would render our societies both fairer and more efficient can be readily imagined. Among the most important is to concentrate resources on children, and particularly the children of the relatively disadvantaged. Also sensible, though politically difficult, is to tax ownership of land and other scarce natural resources more heavily.
Furthermore, a tax on lifetime receipts of gifts and bequests, plus wider spreading of educational opportunities, seems to the only way to limit the cascade of unearned advantages across generations.
Accelerating reliance on robots and “intelligent” software would reinforce the need to consider the implications of concentrated ownership of productive capital. It is also important to reduce rent extraction, including by corporate management, and to improve co-operation over the taxation of income, particularly income from capital. A situation in which the world’s wealthiest are among the least taxed is indefensible.
Yet much the biggest of all the related challenges is global: it is to eliminate extreme poverty. Globalisation is part of the answer. But it needs to be guided — by, for example, pushing developed countries to stop conniving with corruption and theft in developing countries. Targeted aid will also help.
Inequality is an important and complex subject. On the biggest issue of all — global inequality — the recent news has been good. The story on inequality within countries is less appealing, however.
These books tell this complex story well. Bourguignon’s provides an accessible overview, while Atkinson’s offers the social democratic response.
This debate is just beginning. It will become louder.
Martin Wolf is chief economics commentator at the FT
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