Spirit of the age

http://www.economist.com/blogs/buttonwood/2010/09/economics_equality_and_finance_sector

Spirit of the age

Sep 1st 2010, 10:56 by Buttonwood

INEQUALITY is a fascinating subject, with plenty of moral, economic and political implications. So it was remiss of me to take so long to read The "Spirit Level: Why Equality is Better for Everyone", a thought-provoking book published last year by Richard Wilkinson and Kate Pickett. But at least I have the excuse that the debate is still current: the Policy Exchange thinktank recently published a rebuttal of its claims. My Bagehot colleague has also commented recently on the book.

"The Spirit Level" is really divided into three parts. The first is a statistical analysis of a number of social ills, from obesity through infant mortality to rates of imprisonment. These measures are then compared with income inequality in two ways; first across a range of industrialised countries and then against the individual US states. Time after time, it is shown that inequality makes these matters worse. Indeed, everyone suffers; even the better-off in unequal societies have more social problems than the better-off in more egalitarian ones.

The second part of the book suggests reasons for why the link exists. Here the statistical analysis is more sketchy; the authors cite some studies but a lot more work needs to be done. Broadly speaking, the authors suggest that man is a social animal whose self-respect is tied up with status; inequality has many practical implications (an inability to fund a desired lifestyle, a loss of control) that cause depression, and thus the adoption of bad behaviours such as overeating, drug use and criminality.

The third part of the book deals with the authors' solutions to the problem, which is a bit of a mish-mash of issues like global warming, worker-controlled companies, anti-consumerism and so on.

One can disagree with the authors' solutions but the book stands and falls on the quality of its data; if they are right, then there is a welfare case for much greater government efforts to redistribute wealth. This is where the Policy Exchange report mounts its attack. It states that the effects noted by Wilkinson and Pickett are largely the result of a few outliers (Japan for longevity, the US for murder rates, Scandinavia for most things) and that the relationship does not exist when these outliers are removed. Indeed, it does not exist if more countires are included. When it comes to the individual US states, Policy Exchange argues that the effects can be noted by the proportion of African-Americans within the population. In short, the effect is cultural, not economic.

    Sweden and Japan, for example, have the income distributions they have because of the kinds of societies they are. They are not cohesive societies because their incomes are equally distributed; their incomes are equally distributed because they evolved as remarkably cohesive societies.

Wilkinson and Pickett have responded to these attacks and there is a danger that we get bogged down in the minutiae of the data, about which outsiders find it difficult to comment.

But it did strike me on reading the book that culture must play a significant part. Read for example what the authors have to say about New England.

    Because Vermont and New Hampshire are neighbouring New England states, the contrast between them is particularly striking. Vermont has the highest tax burden of any state in the union, while New Hampshire has the second lowest - beaten only by Alaska. Yet New Hampshire has the best performance of any state in the union on our index of health and social problems and is closely followed by Vermont, which is third best. They both also do well on equality: despite their radically different taxation, they are the fourth and sixth most equal states respectively.

Both states are ethnically quite homogeneous with much lower proportions of minorities than the American average. Sweden and Japan are similar. There is an argument that social spending is seen as more "acceptable" when the recipients are "people like us". An alternative explanation is that ethnic minorities are unfairly excluded from economic opportunities by the majority population so that higher social ills may be associated with more diverse (less monocultural) populations.

A broader issue, to which Wilkinson and Pickett allude, is whether there is a "natural" level of inequality. Anyone who has studied history (or read Austen and Dickens) will note the vast gulf in wealth between the medieval aristocracy and the peasants or between the early industrialists and their workers. In that light, the period of the "Great compression" from the 1940s to the 1970s, when inequality fell sharply, seems an aberration. But our recorded history only spans a few thousand years, generally since the development of agriculture. For much of human existence, men were hunter-gatherers and such societies are much more equal. Wilkinson and Pickett argue that our brains developed in such conditions, explaining why inequality is so difficult to stomach.

As always with this issue, there will be some who think that any sympathetic treatment of the Wilkinson/Pickett arguments is "socialism" or a sign of The Economist abandoning its free market principles. But let me end this very long post with two final reasons why inequality should be a matter of general concern.

The first concerns the idea that we should focus on "equality of opportunity" not "equality of outcome". This seems a good principle to support. But unequal outcomes may lead to unequal opportunities; the US is a lot less socially mobile than it used to be, and a lot less mobile than individual Americans believe it to be. In particular, wealth can buy access to power and thus lock in the advantages of the wealthy via the political system; Simon Johnson's book, "13 Bankers", is an example of the thesis. Wealth also buys access to the best education, and education is the key to employment opportunities in a service-based economy.

The second issue is that the West is still democratic. Even if one thinks the unequal outcome of incomes is a fair reflection of individual talent and effort, the majority of the population is unlikely to feel that way. They may eventually reclaim that wealth by the ballot box, and possibly by electing some very unpleasant regimes.