How inequality persists

Increased inequality does not necessarily bring demands for redistribution.

I say this because of a recent paper by Elvire Guillaud and Michael Zemmour. They studied the political attitudes of the well-off but not super-rich in 19 developed countries between the 80s and 00s – those in the 80^th to 99^th percentile of the income distribution. Such people’s preferences matter because they might well have disproportionate political influence.

They found that increased inequality has ambiguous effects upon their demands for redistribution.

One the one hand, a growing gap between the top quintile and those immediately below them increases demands for equality. This is because a bigger gap tells the well-off that the cost of falling down the income scale is large, and people want insurance against this, such as a higher social wage - better health and education.

On the other hand, though, a bigger gap between the super-rich and the well-off actually reduces demand for equality. One reason for this might lie in something suggested (pdf) by Albert Hirschman in 1973: people tolerate rising inequality, at least initially, because they expect to join the super-rich – an expectation exacerbated by over-confidence. Alternatively, say Guillaud and Zemmour, it might be that the well-off know that the super-rich won’t pay their fair share of taxes and so fear it will be they who ’ll bear the burden of higher redistributive taxation.

The point here is that what matters is not something as simple as the Gini coefficient, but rather a more precise structure of inequality.

Does this help explain the UK’s odd political divide? I’m not sure. On the one hand, it does. Maybe Labour’s popularity among apparently “middle class” workers owes something to the fact that job polarization has destroyed middling jobs which has increased insecurity and so created an insurance demand for equality. Also, because many pensioners have securish incomes, they don’t fear a loss and so don’t have such insurance demand. Hence their Tory preferences.

On the other, though, pensioners have even less hope of joining the super-rich than do well-paid workers. This should dispose them towards more leftist preferences – which is not what we see.

Guillaud and Zemmour’s work is, however, consistent with laboratory evidence which shows that increased inequality does not call forth demands for redistribution. One reason for this, says Kris-Stella Trump, is a form of anchoring effect: our belief in what’s fair is shaped by the existing income distribution:

Public ideas of what constitutes fair income inequality are influenced by actual inequality: when inequality changes, opinions regarding what is acceptable change in the same direction.

Jimmy Charite, Raymond Fisman, and Ilyana Kuziemko have suggested (pdf) another mechanism – that inequality changes people’s expectations, their reference points:

If voters tend to respect others’ reference points, then if a country experiences a shock that increases income inequality, voters may be reluctant to tax away those gains.

Klaus Abbink, David Masclet and Daniel Mirza demonstrate a different mechanism – resignation. As inequality becomes extreme, they show, people simply give up fighting it*.

US politics is, I fear, consistent with all this; high inequality has given us a kleptocratic billionaire.

It’s also consistent with world history as described by Walter Scheidel. He shows that significant falls in inequality have generally been brought about not by gentle redistributive policies but by wars, revolution, disease and state collapse.

Perhaps there is no stabilizing negative feedback loop from increased inequality towards demands for redistribution. If so, a sustained** increase in equality is far harder to achieve than social democrats would like to believe.

* Plus, of course, there's the fact that the richer the rich are, the more they can spend on entrenching their position by buying the media and lobbying.

** How much could a one-term Corbyn government do to permanently increase equality?

Comments

[Phil]

If the anchoring argument is correct, then perhaps that provides a mechanism for sustained increase in equality?

An equalising government could recalibrate people's definitions of 'fair'(cf. european vs american views of fairness in healthcare provision)?

Is there a proposed counterfeedback where increased equality provokes increased demand for inequality?

[Michaël Zemmour]

Hi,
Thank you for the post.
By the way my coauthor's name is Guillaud (not Guillard) .

Best,

[Mark]

I believe a cognitive error has become commonplace in the past 25 years, particularly but not solely on the left: reducing inequality is assumed to require redistribution.

The alternative means of achieving the goal - improving labour markets so those toward the bottom of the distribution can sell their time for more, while also attacking rent-seeking professions and industries at the top - seems no longer to be a priority of politicians, though I believe it would be valued by many voters.

[chris]

@ Michael - thanks. Correction made (I can't read my own handwriting).
@ Mark - yes: full employment policies are greatly to be desired. But my previous post suggested that Tories will not support them.

[Blissex]

«The alternative means of achieving the goal - improving labour markets so those toward the bottom of the distribution can sell their time for more, while also attacking rent-seeking professions and industries at the top»

That is called nowadays "predistribution", and it amounts to changing institutional arrangements to influence the relative leverage of market participants.

It is indeed very popular, as many voters have consistently endorsed with their vote policies to:

* Greatly increase the leverage of property and business owners, boosting their ability to extract greater house prices and rents from workers and renters.

* Much reduce the leverage of workers and renters, for example by discouraging unions and labour rights and shrinking the supply of council housing and the creation of new jobs outside favoured areas.

Predistribution is not only nothing news, but also widely practiced already. You would like a change in the type of predistributional work by the government, but that's all about politics and democracy.

This could have been the manifesto of the Thatcher and Blair and Osborne governments:

«our aim is nothing less than to bring about 'a fundamental and irreversible shift in the balance of power and wealth in favour of [property and business rentiers] and their families'»

That was the central aim of the 1983 Labour manifesto, but with "working people" instead of "property and business rentiers".
Obviosuly at the time both left and right understood very well about "predistribution".

[Mark]

@Blissex, I agree that governments have pursued regressive policies in the past, but that doesn't mean they were popular or that an alternative approach would not be well received.

There are a great many people who can't buy property in today's market who want to, including those whose parents and grandparents could - the newly demoted middle class. They'd support a rebalancing of the property market that would drive down prices.

I don't see unions as a means of improving the price leverage of the lowest-paid workers. If they strike, customers take their business elsewhere. Rather, unions protect the rents of public sector workers who control services that enjoy natural monopolies. Meanwhile, government continues to support large-scale migration of labour from low-waged economies and corporate welfare such as tax credits, both of which undermine workers' pricing power.

[aragon]

In a previous post Chris sugested that increased support for the Nazis also ferflected increased support for the Communists i.e. Polarisation.

"There is no negative feedback loop from increased inequaility towards deands for redistribution." No positive feedback either but perhaps an inflection point.

Support for predistribution Blissex explained is reaching it's limit, the only way to afford housing is through the bank of mum and dad or inheritance in your sixities.

Therefore a single term Government could change the social contract. Build Social equaility and they will come after all, the NHS is a religion in the UK.

Show people another world is possible.

On the NHS: We can afford the NHS but not the Tories!

[kernel]

I'm skeptical of the conclusion that a steepening at the top end of the Gini INDEPENDENTLY causes the "well-off" to abandon compassion for the poor, chasing the hope of getting REALLY rich rather than fearing poverty.

I'd suggest that extreme concentration of wealth ( / income )creates also concentrates the "disproportionate political influence" which the upper-middle class previously enjoyed. The "filthy rich" (pardon the technical jargon) can not only purchase legislators, but they can - and have - purchased media empires to spread their political perspective. Exhibit A is Rupert Murdoch, who owns major media outlets in most Anglophonic countries.

Caveat - I haven't read the original work, only the abstract. I note their reference to Hirschman's Tunnel Effect; do they account for the time-lags which that effect would imply?

[Blissex]

«governments have pursued regressive policies in the past, but that doesn't mean they were popular»

35 years of parliamentary majorities for neoliberal governments pursuing aggressively and even boasting of those regressive policies says otherwise. It is not as if voters for Thatcher, Blair, Osborne have been totally unaware of their record and what kind of policy direction they were voting for.

«or that an alternative approach would not be well received»

Lets says the alternative was between socialdemocratic good safe jobs and pensions and social services and massive tax-free work-free capital gains on property.

There are two (un)fortunate circumstances that applied during the past 35 years:

* Many people especially in the north don't quite have a feel of how fantastically enormous have been property profits in the south: for someone with an after-tax income of around £17,000 (average) they have been around £10,000 tax-free work-free per year for 30 years. For many of the beneficiaries that beats the value of good jobs and salaries and social services.

* Anyhow a large number of (southern) voters, those who became middle aged and retired during thatcherism, got *both*: because the dismantling of the social-democratic system has been gradual, so many southern tory voters have kept at least for a substantial part of the past 35 years well paid safe jobs with final salary pensions, and at the same time got massive work-free tax-free capital gains on their semi-detacheds.

For some/many people rising inequality, especially inequality of wealth, especially betweeen north and south, has worked really well, and they support its rise wholeheartedly.

Sure if the alternative, like for many today, is between the prospect of small speculative gains or good socialdemocratic arrangements, many will choose the latter.

Thus the vast popularity of Corbyn among all those that have little prospect of massive speculative capital gains in the future and have lost all the advantages of socialdemocracy.

[Blissex]

«Support for predistribution Blissex explained is reaching it's limit, ... Show people another world is possible.»

We can hope, but there is the entirely plausible possibility that while reaching its limits, thatcherite redistribution will not be undone/unwound, but will simply stall, having reached a plateau rather than a peak.

That is, the low wage/high rent model is here to stay, even if southern house prices won't double every 7-10 years, and wages will continue to drop but more slowly.

But there are some signs that segments of the elite think that once the machine of doubling property prices has been running for a while it cannot be stopped easily, and a catastrophic collapse will happen.

That is my impression is that they reckon that:

* the economy of the south-east is almost entirely based on the debt-collateral spiral of higher debt and higher property prices, and when that breaks the economy of the south-east will go the way of that of Tyneside or Merseyside;

* when the thatcherite private debt bubble implodes for the last time, only the economy of the inner, not outer, M25 area can be saved, thanks to it becoming (even more of) an international money laundering centre and safe haven for foreign nasties, the "Dubai" option.

[rayward]

In The Captured Economy, Brink Lindsey and Steven Teles argue that regressive government regulations are responsible for the high level of inequality, and that regressive government regulations are responsible for the financialization of the economy which in turn contributes to inequality. Of course, the authors have it backwards: the high level of inequality contributes to the financialization of the economy (the concentration of wealth creates the need for more, and more complex, financial assets in the quest for a better return). Is it any wonder that ordinary people are ambivalent (and confused) about inequality when they are presented with such arguments.

[Stephen Haust]

Looks like we still need some one-armed
economists, don't we?

[Billikin]

Looking at history, there is no reason, as far as I can tell, that massively unequal, or caste societies cannot persist for centuries. On a large scale consider India, on a small scale consider the Natchez tribe in America, with four castes: Suns (the rulers), Nobles, Honorables, and Stinkers (the bottom half). That is why I fear that service economies may become servant economies. As cities become gentrified, where will the workers live? Downstairs?

The Democratic Zeitgeist of the last two centuries seems to be fragile. To many people, the rich are not only different from everybody else, they are better, perhaps genetically superior.