Yes, inequality matters

The IFS reported this week that income inequality, as measured by the Gini coefficient, hasn’t much changed since the early 1990s. This does not, however, mean that it is not a problem. There are several reasons why it is.

One is purely statistical. Survey-based measures of income might understate top incomes and hence inequality. Stephen Jenkins and colleagues point out that tax-based measure of inequality show a bigger increase since the late 90s than survey-based ones.

That, though, isn’t my main point. 

First, a stable Gini coefficient is consistent with very different types of society. A big reason why the Gini coefficient hasn’t changed much since the early 90s is that a rising share of income going to the top 1% has been offset by a decline in the relative incomes of the 90^th percentile – and recent years, the latter’s absolute incomes have fallen. This means that the UK shifted from being a “bourgeois society” – with a big middle class, to a “winner take all” society in which there are high top incomes but increased support for the worst off.

This is not obviously a healthy development. It might be a symptom of the degradation of erstwhile “middle-class” jobs, which might generate increasing discontent in future among people who have incurred massive student debt in an effort to get such jobs. And if you believe Deidre McCloskey’s work showing that a big middle-class has healthy cultural effects – by promoting virtues such as prudence and honesty – it is potentially corrosive of a healthy society.

Which brings me to a another point. Even if inequality has stopped rising, the adverse effects of its earlier rise are still with us. To adapt Joseph Schumpter’s insightful if tasteless metaphor, if a man has been hit by a truck, he does not return to health when the truck stops. We have strong evidence that inequality generates distrust. The hostility to elites which contributed to Brexit – and to a debased political discourse – is in part a product of the rise in inequality (in the sense of higher top incomes and increasing social distance) we saw in the 90s and early 00s.

Also, it’s quite possible that higher inequality has other long-term cultural consequences – such as a Messiah complex, decreased job satisfaction or increased insecurity – which depress growth. Those who seek to defend inequality must answer the question: if increased inequality doesn’t help explain worsening macroeconomic performance since around 2000 – lower investment and slower growth in GDP and productivity – what does?

Focussing upon inequality statistics, however, misses an important point. What matters is not just the level of income inequality, but how that inequality arose. A free market society in which high incomes arise from the free choices of consenting adults – as in Robert Nozick’s Wilt Chamberlain parable – might have the same Gini coefficient as a crony capitalist society. But they are two different things. A good reason to be worried about current inequality – even if it hasn’t changed – is that it is a symptom of market failures such as corporate welfare, regulatory capture or the implicit subsidy to banks.

In this context, what matters is not just inequalities of income but inequalities of power. Top footballers and top bankers might be earning similar sums, but one’s salary is the product of market forces and the other of a tax-payer subsidy. The freelancer on £30,000 who’s worrying where his next contract is coming from has similar income to the bullying middle managers who created intolerable working conditions at (for example) Sports Direct. But they have very different degrees of economic power. And the low income that results from having to take a lousy job where your wages are topped up by tax credits gives you much less power than the same income that would come from a basic income and the freer choice to take or leave a low wage job.

My point here is a simple one. There are very good reasons why we should worry about inequality – not just leftists but also rightists who want freer markets and “bourgeois” virtues. Focusing only upon the stability of the Gini coefficient is a form of statistical fetishism which overlooks important questions.

Comments

[TickyW]

Yes. It was gobsmacking to read Tim Harford in the FT wherein he dismisses inequality as a possible cause of the Brexit vote on the basis that inequality is no longer rising. In the same piece, he admits that inequality "soared" in the 1980s.

A graph of the Gini coefficient shows that the massive increase in inequality occurring in the 1980s has not reversed and that this "soaring" inequality remains today.

It's absurd to assert, as Mr Harford does, that only increasing inequality is painful to those in the lower income deciles. Those struggling, especially when incomes are stagnant, may well look at those who are considerably richer than themselves and feel resentment, particularly when the questionable sources of those high incomes is noted.

According to Mr Harford's logic, a seriously ill patient does not feel pain or discomfort because their condition is not deteriorating!
In making this kind of assertion - that only increasing inequality matters, Tim is either displaying his political colour or he is not as smart as he should be given his credentials.

[PaulB]

The very high salaries of top footballers are a product not of market forces in isolation but of the IP laws which make it possible to charge a lot of money to watch them on television.

[ChrisA]

If the problem of the bankers is not that they are rich, but that they get a subsidy from the tax payer, then why not argue against the subsidy? I am sure that you would get a lot more people in favor of this.

The problem with arguing that income inequality should be mitigated is that income is the price of labor and if you mute that price signal bad things happen (as we know when people tried to control other prices). There are many more inequalities that don't have those problems that arguably cause a lot more psychic distress than income inequality. Like there is a small number of attractive people while the rest of us are pretty ugly, so they get invited to many parties and get to hang our with other pretty people and have lots of sex while we don't. I think I would rather be pretty and popular than rich and ugly. Also ill vs healthy people, smart vs stupid people, people who are automatically optimistic vs automatic pessimists and so on.

Why don't you ethically inclined people, desperate to solve the ills of the world, work on these issues first? After all we are not talking about survival matters on income inequality - just that some people feel bad they are poorer than others.

[ben]

I wonder what it would take for left leaning economists to mention land.

On a sliding scale between 1997 and a world in which the son of Blair owns every square inch of land, when would you look at this?

[Bill Wells]

The IFS report shows that there has been a generation-long decline in poverty and inequality (at the bottom). Much of this is due to the growth in employment over the past 25 years, with the biggest improvements amongst those that started off in the worst position.

Despite the fall in inequality at the bottom the Gini coefficient has drifted down rather than fallen decisively. This is largely because inequality has risen for the very richest households (although there have been below average falls since the recession).

[aragon]

http://www.truth-out.org/news/item/1505:there-is-no-such-thing-as-a-free-market

The URL says it all, the free market is a political construct and the article is an extract from Ha-Joon Changs book.

"A market looks free only because we so unconditionally accept its underlying restrictions that we fail to see them. How ‘free’ a market is cannot be objectively defined. It is a political definition."

As has already been pointed out (by PaulB) property and copyright (exclusive access), broadcast frequencies, the TV industry etc determines the rewards of footballers, remove these restrictions and we would have more of a free-market for watching football. No less a consequence of Government action (Intellectual Property) than the implicit subsidy to bankers.

Distribute Football matches without cost or restriction on the Internet.You still have revenue from attending matches.

Inequality especially, large inequalities is a prima-facie evidence of distortion (Human variation is limited) of the market through inheritance, control of resources or other restricting factors.

Some variation may be dues to innate skills, or effort, but how much do we wish to privilege this variation, and how much is status or class, inheritance, luck etc?

The freelance contractor pays employers NI and does not receive Sick Pay, Holiday Pay or continuous employment. The same pay rate is not the same pay (e.g. Zero Hours contracts). Management power is a product of position and control in a hierarchical organisation.

Rightists have a prima facie case that the status quo works for them or expect it to in the future, or is the natural order.

Free Markets and Statistics are both economists fetishes.

[An Alien Visitor]

"I think I would rather be pretty and popular than rich and ugly"

Rich people tend be popular just by being rich. Think of all those rich ugly old age men who have attractive 20 year old wives!!

I guess being pretty and rich is the best of both worlds!

"The problem with arguing that income inequality should be mitigated is that income is the price of labor and if you mute that price signal bad things happen"

This is so cretinous!

You may just as well have said "if you mute that price signal good things happen"

[Blissex]

«if increased inequality doesn’t help explain worsening macroeconomic performance since around 2000»

Every time I read this kind of statement I feel a bit nauseous, and also for the similar ones using the words "the economy" or "the country".

The critical issue is "for whom" there is «worsening macroeconomic performance», as aggregate numbers can hide quite different distributional impacts, and this really matters in a piece about inequality.

My impression is that the interest groups that can return or lead parliamentary majorities have done quite well since 2000. In which case what happened to the others does not matter a lot in politics: in a democracy election winners win, and election losers lose.

I find here the usual contradiction between our blogger's position on immigration and inequality: that immigration of people from low income countries is good because it reduces inequality across countries even if it increases inequality within the target country, and that inequality within the target country is bad.

But then our blogger has argued for giving both a good government paid wage to all residents, and for unrestricted immigration from anywhere for anybody willing to take that wage.

«lower investment and slower growth in GDP and productivity»

That is very arguable: as B Johnson once wrote the best performing investment in the UK for 30 years has been property speculation; unsurprisingly enormous investment in property has happened. Also property speculation seems to have fantastic productivity: 100% yearly profits on investment can come from nothing else :-).

Also there seems to be a colossal oversupply in the UK of cheap servants, as demonstrated by the millions of workers on zero hour contracts and their willingness to pay half or more of their wages in rent to share a room among 2-4 of them, and the desperation with which workers try to keep their jobs at SportsDirect and many other brutal sweatshops.

With that colossal oversupply of cheap servants there is little incentive to invest in plant, and as to productivity while physical output per hour may be stagnating, profit per pound of financial capital may be rising, and that's what really matters :-).

[Bob]

"With that colossal oversupply of cheap servants there is little incentive to invest in plant"

Right, which is why the UK needs a Job Guarantee to eliminate shut jobs in the private sector and prevent bailouts for private sector firms cos jobs.

[Bob]

"But then our blogger has argued for giving both a good government paid wage to all residents, and for unrestricted immigration from anywhere for anybody willing to take that wage."

Right. Here I disagree with Chris. I also don't think it is "anywhere" just the EU countries. The UK could limit open borders to the rest of the EU on condition of implementation of a similar scheme across the EU. That would encourage a move towards a fiscal union with job for all across the continent.

[Avraam Jack Dectis]

.
If you accept that promoting prudence and honesty are important attributes worthy of policy support, then you must accept that policy shapes culture and not just those attributes mentioned.

What other attributes are worthy of reinforcement and what mechanisms could provide that reinforcement?

Do you dare to even look down that path?
.

[Blissex]

«[ ... ] Chris. I also don't think it is "anywhere" just the EU countries.»

I may be misunderstanding our blogger here, but to me he seems to think that that the current situation, where there is unconditional freedom of immigration within the EU, but not from the rest of the world, is "objectively" racist: because the EU is overwhelmingly white, and the rest of the world is overwhelmingly not white.

That was a popular argument among "leftist" brexiteers.

It is also almost the same argument that the UK is "objectively" racist because almost all its population is white, and therefore giving UK citizenship and all related privileges to someone just because they are born in Hull or Exeter instead of Harare or Vientiane is "objectively" racist.

[Bob]

"where there is unconditional freedom of immigration within the EU, but not from the rest of the world, is "objectively" racist: because the EU is overwhelmingly white, and the rest of the world is overwhelmingly not white."

A few articles for consideration.

The first one is pretty good, and due to the nature of where it was published reflects on the view of migration as a response to the conflicts between ‘worldwide’ Catholicism and ‘constrained’ Protestantism that created the Westphalian settlement in the first place.

http://www.firstthings.com/article/2015/12/two-theories-of-immigration

I’m particularly drawn by the argument:

‘We have a moral duty to care for refugees, but the communitarian insight identifies a concurrent obligation to maintain our own ­societies as stable and well-governed. That means political communities must regulate their borders. Drawing on Rawls, political theorist Stephen Macedo argues, “An immigration policy cannot be considered morally acceptable in justice unless its distributive impact is defensible from the standpoint of disadvantaged Americans.” This does not mean we should not assist foreigners or promote generous immigration policies. Rather, it requires that we give priority to the needs of the most vulnerable in our political community, which today means unskilled American workers. They are the most likely to suffer economically as a result of a larger influx of low-wage immigrants.’

So to create a social differential between one nation and the others in any reasonable timeframe and to better the life of the poor above the lowest common denominator (i.e. the Job Guarantee), you have to have some sort of flow control system between your political control area and others – simply because you don’t have political power over those other areas.

The two theories seem to be based around the notion of nations vs no-nations. However to have a currency area, you have to have one nation driving it (as we can see with the disaster that is the Eurozone). That leads, logically, to the communitarian viewpoint which is the only one that embraces nations as a positive force.

The second is a call for net-zero migration as a policy:

http://www.thesocialcontract.com/artman2/publish/tsc1501/article_1268.shtml

This adds in the ecological viewpoint. You have to stabilise the population at the footprint, or all you are doing is taking the footprint from some other nation.

The third is one of the reviews of the Dummett book which states:

”
However, Dummett makes no attempt to counter the claims of those such as those of the University of Oxford’s Centre on Migration Policy and Strategy (Compas) that immigration is harmful to the poor; consider the following conclusion concerning the emigration of Zimbabwe’s healthcare professionals (often encouraged by receiving countries): “The migration of skilled health workers from the country needs to be addressed as a matter of urgency because it has reached critical levels. There has to be a political will to address the grievances of health workers without confrontations. Arresting the current brain drain from public health institutions should be one of the government’s major goals. It needs to be appreciated that a healthy health sector is a prerequisite for economic growth and sustainable development because it ensures the availability of a healthy workforce. Thus, the research shows that there is a call to adopt and implement an integrated policy that will retain skilled health professionals in the country for the benefit of the main users of public health systems, the poor.”

IOW one nations’s skilled immigration is another nation’s brain drain.

We need principles that a nation state can engage with on its own without consultation with others, if we believe that a nation state is allowed to operate in any mode other than the ‘lowest common denominator’ within a ‘flat earth’ structure determined by global capital.

[Bob]

Here's my solution.

An immigration system that excludes EU immigrants that wouldn’t otherwise get a work visa instantly removes all those people who come here and compete with the working-class sub-median wage earners. These were the people who voted in the largest numbers for Brexit. These people have paid the heaviest price for EU membership.

Reintroducing a work visa system that is on same lines as every other civilised advanced nation outside the EU, solves that problem.

Then only higher waged, higher skilled individuals come into the country from all over the world, but they compete with a different class of people and compete less because they are in areas with genuine skill shortage.
From the point of view of the sub-median wage earner, immigration has ended. So they are happy.

And importantly in the long run you need to train and send out higher skilled individuals from this country to the rest of the world to balance those you take in. Otherwise you are stealing skills from other nations which they need to develop internally That is a ‘beggar-thy-neighbour’ attitude and morally unacceptable. Immigration should be more of an informal exchange process than a capitalist ‘free market’.

Current policy treats the culture and needs of other countries with disdain, and considers your own country just to be some sort of production unit of businesses of the world.

[aragon]

Bob
"Then only higher waged, higher skilled individuals come into the country from all over the world, but they compete with a different class of people and compete less because they are in areas with genuine skill shortage."

H-1B Visa in the USA
http://www.theatlantic.com/business/archive/2015/06/disney-h1b-visas-immigration-layoffs/396149/

"They would be replaced by IT workers from India, whom they would train to do their jobs in order to receive severance."

"One company importing tech workers has already been fined by the Justice Department for "systemic visa fraud": Infosys paid $34 million in a 2013 settlement. Using H1-B visas to improve the bottom line, though understandable from a corporate perspective, isn’t what the program is for, and the Labor Department recently announced it’s investigating firms they believe to be exploiting the H-1B visa in this way. The program’s purpose is to find and retain talent that’s lacking in the U.S. economy, not a cheap alternative to American workers."

One persons shortage is an others higher wages.

[Bob]

"One persons shortage is an others higher wages."

Agreed aragon. Too often 'skills shortage' is 'business investment and training shortage.'