Undercover Economist

The truth about inequality

‘One myth is that inequality in the UK has risen since the financial crisis. In fact it has fallen quite sharply’

How serious a problem is inequality? And if it is serious, what can be done about it?

Myths abound. Many people seem to believe that Thomas Piketty’s Capital in the Twenty-First Century showed that wealth inequality is at an all-time high; instead, his data show that wealth inequality has risen only slowly since the 1970s, after falling during the 20th century. In Europe we are thankfully nowhere near the wealth inequality of the past.

Another common belief is that the richest 1 per cent of the world’s population own half the world’s wealth (almost true) and that their share is inexorably increasing (not true). The richest 1 per cent had 48.2 per cent of the world’s wealth in the year 2014, according to widely cited research from Credit Suisse, but that share has fallen and risen over the past 15 years. It is lower now than in 2000 and 2001.

Neither is it clear that global inequality is rising. Average incomes in China and India have risen much faster than those in richer countries; this is a powerful push towards equality of income. But inequality within many countries is rising. Research from Branko Milanović, author of The Haves and the Have-Nots, suggests that the two forces have tended to balance out roughly over the past generation.

One final myth is that inequality in the UK has risen since the financial crisis. In fact, it has fallen quite sharply. “Inequality remains significantly lower than in 2007-08,” said the Institute for Fiscal Studies last summer. That conclusion is based on data through April 2013. The IFS did add, though, that “there is good reason to think that the falls in income inequality since 2007-08 are currently being reversed.”

Given all this, why the sudden anxiety about inequality? The answer is partly political: incomes fell and then stagnated after the financial crisis, and the crisis also made it seem risible to claim that the entrepreneurial activities of the rich would indirectly help the poor. None of this is directly connected to rising inequality but it certainly changes the conversation.

Yet there is more going on than a change in the political wind. By most reasonable measures, inequality of incomes has risen substantially over the past 40 years in both the US and the UK, with a particular surge in the 1980s. That should clarify the issue: the problem is most clearly seen within boundaries of nation states rather than globally; in income rather than wealth; and over the past few decades rather than the past few years. And it is stark enough to need no exaggeration.

I recently attended the launch of Inequality: What Can Be Done?, a book by Anthony Atkinson. Professor Atkinson is the economist who set the stage for younger stars such as Piketty and Emmanuel Saez; his first major paper on the subject of inequality was published in 1970, before either of them was born.

One thing that can be done, says Atkinson, is to use the same old redistributive tools with more vigour. The UK already redistributes income extensively. As Gabriel Zucman of the London School of Economics points out, the UK’s richest fifth had 15 times the pre-tax income of the poorest fifth, but after taxes and benefits they had just four times as much.

For some people that will seem more than enough redistribution. Others will disagree, and Atkinson is one of them. He would like to see the current 45 per cent top rate of tax levied at a much lower level (about £65,000), a new 65 per cent top rate for those earning more than £200,000, a substantially higher minimum wage, a “minimum inheritance” paid to every 18-year-old, guaranteed public employment, more comprehensive taxation of inheritance and property and an expansion of universal benefits.

Like it or loathe it, this is ambitious stuff. I don’t know if a 65 per cent top rate of tax is likely to be counterproductively high and neither does Tony Atkinson. I suspect that it is, and the available evidence provides some support for that suspicion. However, there is a wide margin of uncertainty so Atkinson is right to say that the evidence doesn’t conclusively rule it out.

Atkinson also wants to make market incomes themselves more egalitarian, leaving the welfare state with less to do. Ed Miliband, the Labour leader, once talked of “pre-distribution”, which is an ugly word for the same idea. But neither Miliband nor Atkinson is entirely persuasive about how this might work. Atkinson suggests that competition policy, vetting mergers and breaking up or regulating monopolies, should be used to reduce inequality. Or possibly the state’s support for science and innovation — always important — could favour innovations that complement labour rather than replacing it? In theory all this is possible. But my imagination is not up to the task of figuring out what these labour-complementing innovations might be, nor how the government might help produce them.

The UK general election on May 7 might well produce a Labour-led government but it will be astonishing if that government embraces a redistributive agenda half as ambitious as Atkinson’s. The conversation about inequality has changed quickly — but what mainstream politicians are willing to countenance has not.

Written for and first published at ft.com.