Tuesday, 17 March 2015

How my views on inequality have evolved over the last year

I've been teaching about poverty and inequality for a number of years, but that teaching (at both undergraduate and graduate levels) focuses on the measurement of poverty and inequality, particularly using income as a metric (although my graduate class did cover multidimensional poverty approaches and classes at both levels were introduced to Sen's capabilities approach). The focus on measurement has meant that differences in the problems associated with poverty and inequality (as separate issues) are somewhat muddied. This isn't helped of course by one of the main tools used to reduce poverty - income redistribution through progressive taxation, transfers, etc. - also reduces inequality. Yesterday I did a guest lecture for a second-year social policy class, which gave me an opportunity to reflect on how I've changed my views on inequality over the last year or so, which I thought I would share here.

In the last year, my thinking about inequality has come almost full-circle. Initially I was of the opinion that greater inequality created problems of unequal access to basic needs such as healthcare, education, etc. and lower social cohesion (more crime, etc.), lower economic growth, and lower happiness (or subjective wellbeing, in economic parlance). These views were based on a range of research that I have read over the years.

Then I read the Max Rashbrooke-edited book "Inequality: A New Zealand Crisis". This book changed my views greatly, but not in the way that the contributing authors would have intended. Almost every chapter of the book described the 'problems of inequality' as pertaining to low-income households. As I read the book I realised they were often conflating 'problems of inequality' with 'problems of poverty'. Max Rashbrooke was clear in the introduction on the reason for this:
If incomes do matter, the question remains: why put so much stress on a relative issue, the difference in incomes between various groups? Why not focus simply on the fact that some people are too poor to get by, in a basic material sense?
The short answer is that poverty is not just a problem for the poor; it concerns and involves everyone, including the very well off. In these pages, we describe the levels of poverty now found in New Zealand as a crisis for the society as a whole.
Which would be great, if that's what the authors did. I didn't see anywhere in the book where they clearly made the case for why poverty is a problem for the well-off (other than through general concern for the wellbeing of others). Which brings me back to the difference between 'problems of poverty' and 'problems of inequality'. To understand the difference, consider the following thought experiment:

Let's say you rounded up all of the richest people in an area, took 10% of all of their wealth, and burned it. What would happen to poverty and inequality?

If we took this action, it would reduce the wealth of the rich, but it does nothing for the wealth of the poor. Clearly burning part of the rich people's wealth must reduce inequality as the wealth difference between rich and poor has narrowed. However, it wouldn't affect poverty at all, as it doesn't give the poor any more resources. So, if you're wondering whether a problem is primarily related to poverty or primary related to inequality, you need to ask: Would the problem be reduced by burning 10% of the wealth of all of the richest people?

If the answer is yes, then the problem probably stems primarily from inequality. Otherwise it is more likely to be primarily a problem of poverty. For example, say you are concerned about the large number of parents unable to feed their children a nutritious breakfast before school. It seems unlikely that burning wealth would reduce the problem, so it is more likely a poverty problem not an inequality problem.

The difference between problems of poverty and problems of inequality may appear to be semantic, but the policy prescriptions for reducing inequality and for reducing poverty need not be the same. For instance, an unconditional basic income is argued as a means of reducing absolute poverty, but would do little or nothing to reduce inequality as it simply shifts up the whole income distribution.

Anyway, reading the Rashbrooke book left me feeling a little bit unsettled and wondering a bit whether there were any problems associated with inequality that weren't inherently poverty issues, given the authors focused on poverty issues rather than inequality issues. So I followed it up by reading "The Spirit Level", by Richard Wilkinson and Kate Pickett. This book has been roundly criticised by economists and others (especially see Christopher Snowdon here), but I didn't think it was all that bad. I had two main takeaways from the book. One was negative, and I'll blog about that separately later. The other was summed up nicely by the following passage from the book:
We concluded that, rather than telling us about some previously unknown influence on health (or social problems), the scale of income differences in a society was telling us about the social hierarchy across which gradients in so many social outcomes occur. Because gradients in health and social problems reflect social status differences in culture and behaviour, it looks as if material inequality is probably central to those differences. (Wilkinson and Pickett, p.28).
In other words, the observed relationship between inequality and social problems reflects (in part) differences in social status between groups. Since inequality perpetuates differences in social status between groups (particularly when social mobility is low), this makes inequality self-reinforcing. This self-reinforcement of inequality relates to an argument that social distance makes us more accepting of inequality (as Wilkinson argues in his earlier book, "The Impact of Inequality", and incidentally is also raised in the chapter by Paul Barber in his chapter in the Rashbrooke book), and recent research that higher levels of inequality make us more accepting of inequality. So, because inequality is self-reinforcing this leads to increasing segregation by social class, reducing social cohesion. So, I felt a little better as I had re-discovered at least one problem that related to inequality but not necessarily to poverty.

Finally, at the start of this year I read the Robert Frank book "Falling Behind: How Rising Inequality Harms the Middle Class". I'm a big fan of Robert Frank and he brought a different perspective on inequality to the other two books. In this book, he highlights that the actions of high income individuals change what is deemed socially acceptable in terms of housing and other 'positional goods' (positional goods are goods that signal the owner's relative social standing - similar to conspicuous consumption that I have discussed before here). Frank makes the case that there is competition by middle class families for houses in desirable areas, close to good schools, where public safety is higher, and closer to work and amenities, etc. This competition drives the price of those positional goods higher, leaving less income for middle class families to spend on non-positional goods. As Frank describes:
Increased spending at the top of the income distribution has imposed not only psychological costs on families in the middle, but also more tangible costs. In particular, it has raised the cost of achieving goals that most middle-class families regard as basic.
The process starts when sharply higher incomes prompt top earners to build larger mansions. To the extent that middle-income families even notice these mansions, there is no evidence that they are offended by them. On the contrary, many seem to derive pleasure from seeing images of them in magazines and on television.
But for those just below the top, the new mansions alter the frame of reference that defines what kind of house is considered necessary or desirable. Perhaps it is now the custom to host one’s daughter’s wedding reception in the home, or to host larger dinner parties. And when the near rich, in turn, build larger houses, others just below them find their own 10,000-square-foot houses no longer adequate, and so on all the way down the income ladder.
People who live in less expensive houses not only feel relatively deprived (a psychological cost), but also miss out on good schools, safe neighbourhoods, and face more expensive and time-consuming commutes to work (also costs). So rational people trying to avoid these costs can't easily opt out of the battle for positional goods. All of which links inequality to relative deprivation, and to lower happiness.

So, in the end that short journey through three books has brought me back more-or-less to where I started the year. At least, in the sense that inequality is a problem because of lower social cohesion and lower happiness (and lower economic growth, see this OECD report (PDF) from late last year).

Of course, I reserve the right to change my position again, and I have a few more books on inequality that I'd like to read. But more on those later.

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