Big government & equality

Richard Exell poses the question: can fiscal conservatives reduce inequality?

Maybe.  For one thing, it is possible to make the tax system more progressive, for example through a progressive consumption tax, land taxes or inheritance tax. And we shouldn’t rule out the possibility of very high top tax rates. It’s also possible to both shrink the state and increase equality by cutting corporate welfare - handouts to the likes of BAe Systems, Serco, Capita, CSC and A4E.

There is, though, something else. My chart shows that the correlation between big government and equality is weak. Yes, countries with big government spending tend to be more equal, but there’s a lot of variation around this. For example, France and Norway have similar levels of equality, but France spends 13 percentage points more of GDP. And the UK has the same inequality as Australia or Japan, but spends 10 percentage points more of GDP.

In fact, it could be that the positive correlation between equality and public spending doesn’t reflect causality from the latter to the former at all, but rather an omitted variable. Countries that combine big government and equality tend to be high trust societies. It could be, then, that the same high trust that makes people supportive of redistribution - because they believe “welfare scroungers” aren’t ripping them off - also makes them support big government as they trust politicians not to waste money.

This possibility hints at another - that perhaps it’s possible to combine small government and equality if the right cultural or institutional factors are in place. I mean, for example:

- Strong trades unions. These not only raise the pay of the worst off, but also help restrain top pay.

- A collectivist culture. A society that believes that corporate performance depends upon the abilities of all its employees will be more egalitarian than one which believes that organizations can be transformed by star managers.

- Education. A highly educated workforce might be more equal, if only because it creates more competition for top jobs. There is a correlation between education levels (pdf) and equality - the egalitarian Nordics do better than the inegalitarian US and latin Americans. And the causality mightn’t be entirely from inequality to poor education. However, high educational standards are achieved not by increased spending, but by a culture which values schooling - and the UK lacks this.

Herein, I fear, lies the big challenge for the Left. Although it is technically possible to reconcile small government or fiscal conservatism with greater equality, the UK lacks the cultural underpinnings which would permit this happy combination.

Comments

[Jonathan]

Although your were somewhat disdainful of their efforts, Wilkinson and Pickett make similar points in 'The Spirit Level' - evidence from OECD countries and across US states indicates that there's more than one way to egalitarianism, including relatively small govt cases but with labour market institutions that produce relatively low wage inequality. Within living memory Britain was moderately egalitarian, so I'm not sure how deeply embedded in our culture current conditions really are.

[Strategist]

>>>Although it is technically possible to reconcile small government or fiscal conservatism with greater equality, the UK lacks the cultural underpinnings which would permit this happy combination.

>>>high educational standards are achieved not by increased spending, but by a culture which values schooling - and the UK lacks this.

What's really interesting about the Scots Nats is that they are making an argument that they do have these cultural underpinnings and so can have a bloody good go at becoming a high trust society - so long as they can get out of the UK.

I'm English born & bred and I don't know if it's true or not - but I certainly wish them all the best with it. An independent Scotland could be crony capitalism at its worst (think Sir Fred Goodwin), or it could be a rare experiment in applied idealism. Something worth fighting for, and capable of bringing out the best in the Scots.

[blissex]

I very much agree that things like equality and schooling come down mostly to values. Unfortunately many people have tribal or defeatist attitudes.

For the tribal attitudes to things like equality and social insurance, a link to a set of cartoons about the Irish from over a century ago:

http://irishstereotype.blogspot.com/2010/01/racism-anti-irish-cartoons.html

which could be republished today with just minimal caption changes. The cartoons were clearly elite propaganda, the usual technique to persuade the middle and working classes that they are being exploited by the underclasses, not by the upper classes, but they resonated.

[Matthew]

You should probably note those ginis are after the imapact of govt transfers (which is the correct measure). It would be useful to see how they correlate to changes in the gini between original and pre tax/spend income.

With Norway, a commonly used measure is 'mainland GDP', which is the GDP excluding oil/gas (and in which 99% of the population work). Public spending as a % of that is comparable (or perhaps higher) than France.

[aragon]

So Labour just need to fix the economy and grow social capital.

Simples!

Unless you are 'In the Black Labour' when it becomes impossible.

Oops...

[Tim Newman]

Strong trades unions. These not only raise the pay of the worst off, but also help restrain top pay.

This assumes the worst off are in employment and union members. Big assumption, that.

[Robert]

I don't know if you read this and forgot it or not. But I made the same point with OECD data in June 2010: http://robertvienneau.blogspot.com/2010/06/correlation-between-increased.html.

I find it cool that one can do this sort of analysis, given hardly anything more than a web browser.