Inequality: What Can Be Done?

"I’ve picked two books about inequality, partly because I care about it, but also because they’re nice books. One is by Tony Atkinson, who passed away recently. It’s called Inequality: What Can be Done? The other is by Thomas Piketty, Capital in the 21st Century , which was a big hit a few years ago. Atkinson has a traditional, public economics focus. He looks at what has happened in terms of inequality, how we measure it, what kinds of tax and welfare and other policies we could use to reduce inequality. Atkinson did a lot of the groundwork on this topic, because when he was first working on it in the 1990s it was quite controversial, just showing that the long increase in equality that had occurred throughout most of the 20th century was being reversed. That coincided with—and here I would say that it was a result of—the macropolicies of people like Thatcher and Reagan. So inequality, which had been declining steadily, started to rise in the 1980s and has kept on rising. The second point that comes out in the same literature is that contrary to the views often expressed in a “the Third Way” context, this isn’t a case of equal opportunity but more unequal prizes. What we see is that as inequality outcomes increase, so does inequality of opportunity. In the US in particular, not only has inequality gone up a lot, but if you’re born into the bottom part of the income distribution, your chance of getting out of it is has been diminishing over time. Atkinson had to do a lot of work just to show that inequality was in fact increasing, because these things can be measured in different ways: you can look at income, you can look at consumption, you can pick different starting and end dates. There was both a large world financial lobby that wanted to deny what he was showing and a bunch of people who sincerely didn’t believe that this was the story. That fight has, I think, been won. Similarly, the idea that equality of opportunity offsets the inequality outcome has largely disappeared, particularly in the case of the US which traditionally viewed itself as a land of opportunity. If you look at the political right, there’s no one with that optimistic view. In its rhetoric, the right is appealing to the so-called ‘left behinds’ and people like that. It’s not appealing to people who say, ‘Look, just get out the way, government, so I can get rich.’ It’s saying, ‘You’re poor, you’re miserable and it’s because of those bad people who are taking what you should have.’ It’s certainly much worse in the Anglo-Saxon countries and within that, oddly enough, Australia has actually come out comparatively well, because we had a relatively progressive version of the Third Way. What we saw was a big increase in inequality in most of the English-speaking countries when nothing much was happening, while the long-running trend towards equality was still increasing in social democratic countries in Europe. That turned around after the global financial crisis, when we see that movement towards inequality emerging in Europe as well. And indeed it wasn’t even immediately after crisis, but only with the sovereign debt crisis and austerity. Piketty finds evidence of it in France, his third country, but clearly the problems were much more severe in the UK and US. That coincides with the fact the US and the UK moved much faster and earlier towards the free-market policies that Friedman was advocating. I think it’s fair to say there’s now a dominant view within the economics literature which is way to the left of what is politically feasible. So, if you look at the kinds of estimates that people like Diamond, Saez and others have done, most of them suggest the top marginal tax rate, admittedly on very high incomes, should be around 70%. Now, in the US context, that’s the kind of view associated with the far left, people like Alexandria Ocasio-Cortez. So views are that on the extreme fringe of party politics are very widely held within the economics profession. It’s true there are economists who aren’t happy with these views, but they don’t have very powerful arguments. So there’s a bunch of stuff on the tax side. On the welfare side, he looks at things like universal basic income, which is the hot idea on the left at the moment. Possibly the idea I like best in the book is ‘participation income.’ This is not an unconditional payment like universal basic income, but if you’re doing something useful for society, you can be paid for it, whether or not it’s a market job generating market income. If you’re going to volunteer at the local school, for example, or raising kids, potentially—as long as you’re participating actively in society, you can get paid for it. It’s an attempt to get beyond the opposite trend, which has dominated social policy over the last 30 years, which is driving people harder and harder to find jobs that often don’t exist. The other thing I wanted to bring in is that there’s a nice term from an American political scientist, Jacob Hacker, which is ‘predistribution.’ So far we’ve talked about, ‘Well given the incomes people get out of the market, how can the tax and welfare system change?’ but there’s also a fair bit in Tony’s book, and more generally, about ‘what can we do to make the distribution of incomes coming out of the market more equal?’ These are things like reversing the decline of unionism. That’s easier to say than to do, but I think it’s very clear now, even to people like the International Monetary Fund, that the decline of unionism under the pressure of policies like Thatcher’s and Reagan’s—and reinforced in most cases by the Third Way—has significantly contributed to the growing inequality of market incomes, inequality within the wage distribution, and a decline in the relative share of labour. Changing that is the other part of the story. Yes. The other thing that has come out—and this has really developed as a theme more recently—is paying more attention to monopoly power and challenging that. This is the view that businesses that have monopoly power in their markets often also have ‘monopsony’—sole buyer power—over their workers. The world’s a long way from the free market with lots of employers bargaining with lots of workers that Milton Friedman implicitly envisages whenever he talks about these issues."