The Spirit Level, neo-liberalism and the retreat of government

A few weeks back, I wrote a post on how my views on inequality have changed over the last year. In that post, I noted I had read the Wilkinson and Pickett book The Spirit Level, and that I had one main objection to it that I felt hadn’t been addressed and where I think the book went wrong.

The challenge in this book is demonstrating that the effects of income inequality are causal, i.e. that income inequality causes the social problems they highlight in the book (violence, teenage births, obesity, drug abuse, etc.). In order to show that the relationship of one variable (the explanatory variable) on another variable (the dependent variable) is definitively causal and not simply correlation, you need (among other things) to be able to show that there isn’t a third variable that might be causing changes in both explanatory and dependent variables. In this case, the authors need to be able to demonstrate that there isn’t a third variable that might simultaneously affect both income inequality and social problems. Government ideological changes seem to fit the bill for me.

On page 190-191, in the chapter asserting the causality of the observed relationships between income inequality and social problems, the authors note that increasing neo-liberalism might explain changes in income inequality, but not social problems. They say:

“Another alternative approach is to suggest that the real cause is not income distribution but something more like changes in ideology, a shift perhaps to a more individualistic economic philosophy or view of society, such as the so-called ‘neo-liberal’ thinking. Different ideologies will of course affect not only government policies but also decisions taken in economic institutions throughout society. They are one of very many different factors which can affect the scale of income differences. But to say that a change in ideology can affect income distribution is not at all the same as saying that it can also affect all the health and social problems we have discussed – regardless of what happens to income distribution. Although it does look as if neo-liberal policies widened income differences (see Chapter 16) there was no government intention to lower social cohesion or increase violence, teenage births, obesity, drug abuse and everything else. So while changes in government ideology may sometimes be among the causes of changes in income distribution, this is not part of a package of policies intended to increase the prevalence of social problems. Their increase is, instead, an un-intended consequence of the changes in income distribution. Rather than challenging the causal role of inequality in increasing health and social problems, if governments understood the consequences of widening income differences they would be keener to prevent them.”

Simply asserting that the government didn't intend to increase social problems is not enough to allay concerns that ideological changes in government policy might simultaneously increase income inequality and social problems. Consider the retreat of government – the reductions in social support and income support that governments have provided over time. The foundation of the retreat of government is the neo-liberal view that the individual is best placed to make their own decisions about the allocation of financial resources, whether that be on health or whatever. So, this leads to a favouring of reductions in taxes and allowing the taxpayer to make choices of for-fee services that were previously provided by (or heavily subsidised by) government, like health care.

These tax reductions have decreased the progressivity of the tax system in most countries, which is naturally associated increasing (after-tax) income inequality. Meanwhile, increasing the costs of healthcare reduces the quantity demanded – this is simply the law of demand – and reductions in health care utilisation are naturally associated with worse health outcomes.

So it is not unreasonable to expect that increasing income inequality might be observed alongside worse health outcomes, even if income inequality doesn't directly cause worse health outcomes. The mechanism is government policy changes driven by ideology. This is particularly true given the countries (and U.S. states) that The Spirit Level uses in its comparisons – places where neo-liberal thinking has been on the rise.

We could tell a similar story about other social problems. So, while The Spirit Level provides us with some good evidence on the associations (or correlations) between income inequality and social problems, I think it falls short of definitively showing that income inequality is the root of all evil here.

The main problem with this is that it affects the policy prescription. If the cause of the increased social problems is income inequality, then tackling income inequality (through redistributive policies, for example) would simultaneously reduce the social problems. However, if neo-liberal policy is the cause of both increased income inequality and increased social problems, then tackling income inequality may reduce the inequality, while having little or no effect on the other social problems.