Inequality: what can be done?

LSE International Inequalities Institute Working Paper 2

This Working Paper is based on the presentation of my book, Inequality: What can be done? at the LSE on 30 April, 2015. I am grateful to the discussants, Ruth Lister and Tom Clark for their insightful comments.

Introduction

Economic inequality is now in 2015 receiving more attention than at any time since I first started working on the subject in the 1960s. Following the publication of Thomas Piketty’s book Capital in the Twenty-First Century, there has been enormous media coverage and it has attracted the attention of world leaders. The United States President, Barack Obama, has described rising income inequality as the “defining challenge of our time.” The Pope has called for governments to redistribute wealth to the poor in a new spirit of generosity. Christine Lagarde, Head of the IMF, has declared reducing inequality to be at the top of her agenda, since she sees it as threatening the sustainability of the world economic system. But what world leaders have not said is what they would do about it. There are repeated calls for equitable growth but little clue as to how this is to be achieved. This is the main reason that I have written a book entitled Inequality- What can be done?

History of UK Inequality

To make the discussion now more concrete, what do I mean by “economic inequality”? As I discuss in the book, there are many dimensions. Here I shall talk simply about the inequality of income, but this too could refer to several different things. People may have in mind individual earnings: the gap between pay at the top and pay at the bottom. Others, as in the debate about the standard of living, may have in mind household disposable income. These are different concepts and Figure 1 shows the stages in going from one to the other. Income is not only pay but also income from investments and from transfers such as child benefit. We have to add all these up. Moreover, household income relates to the total for everyone who lives there. So a vicar may be low paid but well off if married to an investment banker. And we have to take account of the differing needs of different types of family. As one of my colleagues used to say, if you have 2 children then a penny bun costs four pence (his wife got one too).

Figure 1: Inequality of what among whom?
Figure 2: Inequality in the United Kingdom from 1945
Figure 3: Gini coefficient in different countries 2010

Understanding inequality

Inequality was reduced in the post-war decades, but it does not follow that the same kind of reduction can be achieved today. This brings me to the economics of inequality and the standard textbook story explaining rising inequality. Economists are often accused of being behind the curve, ignoring the way in which the world is changing before our eyes. But that is unfair in this case. Textbook writers have been quick to include discussion of increased inequality, and you will find in most introductory books a simple supply and demand explanation. Increased inequality is due to the demand for educated workers rising faster than the supply. Forty years ago, the Dutch economist Jan Tinbergen (1975) described a race between education increasing the supply and technological change biased towards demanding more skilled workers. Demand is growing faster and the wage differential has widened. Today’s story includes another factor shifting demand in this direction — globalization — which has seen the disappearance of many jobs for low-educated workers.

The welfare state and taxation

I begin with the welfare state and taxation. One of the factors contributing to the earlier decline in inequality in post-war Europe was the existence of a progressive income tax system and the expansion of the post-war welfare state. But since 1980, there has been an unwinding of redistributive policies in OECD countries, with adverse distributional consequences. The OECD Secretary-General in the 2011 report, Divided we stand, spelled out that, to quote “from the mid-1990s … the reduced redistributive capacity of tax-benefit systems was sometimes the main source of widening household-income gaps” (OECD, 2011, page 18).

Employment and wages

But it is not just taxes and spending. Nearly half the proposals made in the book are concerned with the market distribution of income. Indeed one of the key messages of the book is that it is not feasible to achieve a ten percentage point reduction in overall inequality just by taxes and spending. One could get half way, but the other half needs action on earnings and capital incomes. We cannot be intensely relaxed about what the market throws up in terms of rewards.

Figure 4: UK Unemployment rate 1921–2013

Wealth and capital

What about capital? Here I distinguish between capital and wealth — a distinction that I believe should have been drawn more clearly in the discussion of Piketty’s book, where capital appears in the title but much of the analysis is in fact about the wealth. Why does this matter? Put simply, wealth is now much more evenly spread than it was a century ago. But this does not imply that there has been a corresponding spread of the control over economic decisions associated with capital. A person with a defined contribution pension fund is indirectly the beneficiary from the dividends paid on shares in a company owned by that fund, but has no say in the decisions made by that company. That is why I explore the role of countervailing power, in terms of re-balancing power among stakeholders. To this end, there are many steps that could be taken, including introducing distributional considerations into competition policy, ensuring that negotiations about issues such as TTIP (Transatlantic Trade and Investment Partnership) involve workers and consumer representatives as well as corporations, and examining whether the legislative balance has in this country swung too far against trade unions.

Figure 5: Net worth of UK public sector 1957–2012

Meeting the objections

I fully recognize that the proposals made here are open to objections. I believe, however, that there are counter-arguments, to which I devote Part Three of the book, in the hope that reviewers will not simply repeat the objections, but rather engage with what I have written. Here I simply summarize in telegraphic fashion the three main objections and my responses.

Grounds for optimism?

Reviewers have accused me of being nostalgic for a bygone-era that never will be repeated. But much of the book is concerned with how the world has changed and how it will change in the future. I devote considerable space to the role of technology and robotisation; I stress how the labour market is changing so that we can no longer focus on “jobs”; I discuss the shifting relation between the ownership of wealth and the control of capital. These developments potentially have profound distributional implications. But they are not necessarily grounds for pessimism. The citizens of OECD countries today enjoy a standard of living that is much higher than that of their great-grand-parents. The achievement of a less unequal society in the period of the Second World War and subsequent post-war decades has not been fully overthrown. At a global level, the great divergence between countries associated with the Industrial Revolution is closing. It is true that since 1980 we have seen an “Inequality Turn” and that the 21st century brings challenges that I have not discussed — such as population ageing and climate change. But the solutions to these problems lie in our own hands. If we are willing to use today’s greater wealth to address these challenges, and — crucially — to accept that resources should be shared less unequally, there are indeed grounds for optimism.

References

  • Atkinson, A.B., (2015) Inequality: What can be done?, Harvard University Press, London
  • Atkinson, A. B. and Morelli, S. (2015) Chartbook of Economic Inequality. Available at: http://www.chartbookofeconomicinequality.com/
  • De Agostini, P. and Sutherland, H. (2014) “EUROMOD Country Report: UK 2009–2013”, EUROMOD, University of Essex.
  • Hendry, D. F., (2015) Macro-econometrics: An introduction, Timberlake Consultants, London.
  • Hills, J. (1989) “Counting the family silver: the public sector’s balance sheet 1957 to 1987”, Fiscal Studies, vol 10: 66–85.
  • Hills, J., Cunliffe, J., Obolenskaya, P. and Karagiannaki, E. (2015) Falling behind, getting ahead: The changing structure of inequality in the UK, 2007–2013, CASE Social Policy in a Cold Climate Report 5, CASE, London School of Economics. Available at: http://sticerd.lse.ac.uk/dps/case/spcc/rr05.pdf
  • Kenway, P., Aldridge, H. and Born, T. B. (2015) What happened to poverty under the Coalition?, New Policy Institute, London.
  • King, A. and Crewe, I. (2014) The blunders of our governments, Oneworld, London.
  • OECD (2011) Divided we stand, OECD, Paris.
  • Migration Advisory Committee (2014) Migrants in low-skilled work, Migration Advisory Committee, London.
  • Piketty, T. (2014) Capital in the twenty-first century, Harvard University Press, Cambridge, Mass.
  • Roe, A.R. (1971) The Financial Interdependence of the Economy 1957–1966, Chapman and Hall, Cambridge.
  • Tinbergen, J. (1975) Income distribution, North-Holland, Amsterdam.
  • Wren-Lewis, S. (2015) “Ready for take-off: the role of helicopter money in supporting wage growth in future recessions” in G Kelly and C D’Arcy, editors, Securing a pay rise, Resolution Foundation, London.

The International Inequalities Institute (III) was launched in 2015 and will provide co-ordination and strategic leadership on inequality research across LSE.

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