Reducing inequality – where to start?

January 19, 2015

By Edward Hadas

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

All people are equal in dignity but all societies are unequal in the distribution of education, consumption goods, economic opportunities and social influence. Until about 1800, few moralists thought the equality postulated in principle was violated by the inequality found in reality. Today almost everyone accepts that economic inequality can be, and often is, excessive. Why then does progress in alleviating unequal outcomes seem so slow?

National debates about inequality may be serious and well meaning. But they cannot escape a sort of moral parochialism. If all people are truly equal, then it is wrong to worry primarily about equality within a small subset of humanity, for example the 4.5 percent of the world who are counted as American.

The realm of concern should be the whole human race. The news here is basically good. In comparison to a generation ago, the world has become far more economically equal by the most important philosophical standard. The proportion of the population that lacks access to the basic goods of industrial prosperity – adequate food, clean water and basic education – is steadily declining.

Of course, the news could and should have been much better. There are still far too many people denied such goods. The middle classes could be much larger than they are. The rich have appropriated a too-large share of additional prosperity created around the world.

Such universal reflections support the moral indignation of Pope Francis at the persistence of dreadful poverty, but modern politics is much more national than global. National politicians worry about domestic inequality, but their debates are framed around numbers which are often ambiguous. The data on incomes and wealth is incomplete and rarely comparable over time and across borders. Adjustments for inflation are imperfect. Comparisons can never capture the full reality of a shifting economy set in a shifting society.

All this uncertainty undercuts many anti-inequality campaigners’ claims. Is the American middle class really suffering? Raw numbers which say so miss many of the gains from technological developments and the expansion of healthcare. Are poor Americans doing less well? Probably, but low wages are only part of the problem. High unemployment rates, decreasing family support and inferior education may be more important factors.

Have such trends been built into modern capitalism everywhere, or are they distinctly American? Does immigration from poor countries exacerbate or reduce inequality? Did increasing inequality encourage the lending from the rich to the struggling middle classes that helped precipitate the financial crisis? For all these questions, the evidence is mixed.

The many doubtful claims can obscure the one clear fact about inequality. In the United States, the very rich – the top 1 percent and the top 0.1 percent of all earners – have enjoyed much faster increases in incomes than the rest of the population. Almost as clear are the sources of these gains: much higher pay for executives, capital gains from overcharged financial markets and the expansion of super-high pay in finance.

If something is to be done about inequality, these truths are the place to start. Policies should be aimed explicitly at the ridiculously high pay of the rich, particularly in the United States, and at the unnecessary suffering of the very poor, especially in developing nations.

However, policies come out of popular attitudes, not the injunctions of philosophers. Among voters, the intellectually strong case against excessive inequality has remarkably little popular resonance.

The resistance to President Barack Obama’s new proposal to increase slightly the taxes on the rich is typical. The people who earn the most are often more admired for their accomplishments than condemned for receiving unjustly large sums. At the other end of the income scale, sympathy for the poor is limited by a widespread unwillingness to make more than token sacrifices for the sake of reducing their misery.

In practice, it is always easier to reduce the wealth of the rich than to reduce the poverty of the poor. Boards and bosses can cut pay while politicians can increase tax rates on high incomes. It has happened before. As Thomas Piketty points out, all the developed economies pulled top incomes down as part of the development of the 20th century welfare states.

The remedies for poverty, both global and domestic, are more elusive, even when domestic leaders are committed. In poor countries, decades of significant investments in both infrastructure and education are needed. Existing social structures usually have to be overthrown. In rich countries, the elimination of poverty requires addressing some intractable social problems.

Still, some narrowly economic policies could help fairly quickly. Poor countries can try to improve the lot of the most wretched through direct grants, while rich countries can experiment with government-guaranteed jobs and higher minimum wages. It is sad to see the widespread unwillingness to try.

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