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Why We Shouldn't Obsess Over Economic Inequality

Blog Post | Economic Growth

Why We Shouldn't Obsess Over Economic Inequality

Inequality can sometimes be a reflection of some social ills. But it can be a reflection of social progress too, and some purported cures for it are much worse than the disease.

When the Pope tweeted in 2014 that “Inequality is the root of social evil,” his stock rose with egalitarians. Former US president Barack Obama had described inequality as “the defining challenge of our time”. Jeremy Corbyn has since risen, demanding an economic policy to tackle Britain’s “grotesque inequality”. The assumption underpinning these views is that a concentrated distribution of income or wealth has negative economic and social consequences.

The idea that more inequality is a bad thing and less inequality a good thing permeates public debate. It is the moral foundation of Corbyn’s call for extensive government redistribution of income and wealth.

But according to Nobel Prize-winning economist Angus Deaton, worrying about whether inequality causes problems, such as slower growth or impaired democracies, looks at things through the wrong end of the telescope. “Inequality is not so much a cause of economic, political, and social processes as a consequence,” he concludes.

Inequality can sometimes be a reflection of some social ills. But it can be a reflection of social progress too, and some purported cures for it are much worse than the disease.

This makes sense. A given distribution of income or wealth does not fall manna from heaven, nor is it pre-determined by government. It is a reflection of millions of interactions, trades, decisions, inheritances and policies. A Gini coefficient, or a statistic of the income or wealth share for the top 1pc, is aggregate information, but tells us nothing about how it has arisen. Whether we consider the overall result “fair” or “unfair” depends, as Deaton acknowledges, on its causes.

High levels of inequality, as seen in countries such as South Africa, can be indicative of historical injustices. They can result from prejudice and oppression, past and present. They can arise from government capture by special interest groups, cronyism and corruption. Poor education, family breakdown, racial discrimination, long-term unemployment and social immobility might all lead to a concentration of income at the top.

On the other hand, there are some causes of inequality that are benign, such as lotteries, and others which are positively beneficial, such as technological advances, entrepreneurialism and free trade. Bill Gates and Steve Jobs got rich by providing services that enhanced our lives. In South Africa again, income inequality actually rose further post apartheid, because talented black people had opportunities opened to them for the first time. Few would suggest this was undesirable.

The Chinese Gini coefficient has risen from 0.16 in 1980 to 0.55 in 2014 — a sign of rising inequality — but this has gone hand in hand with huge poverty reduction as the country liberalized markets. In contrast, Britain saw a modest fall in inequality after a catastrophic financial crash in 2008. In Britain, greater equality was a symptom of a problem. In China, greater inequality was a symptom of success. It would take an extreme relativist to argue that Britain had become better and China had become worse.

Low levels of inequality can result from other undesirable trends too. In a magisterial work, Walter Scheidel’s book The Great Leveller shows that large reductions in economic inequality have only been achieved through pandemics, mass mobilization war, violent revolution and state failure. The Black Death in Europe wiped out a quarter of the population, leading to a shortage of labor relative to land, and a compression of incomes between laborers and landowners.

The Soviet Union, after the nationalization of banks, forcible redistribution of land, the gulags et al, had a Gini coefficient of just 0.26 by the Eighties — an egalitarian’s dream. In Japan, the top 1pc’s income share fell from 9.2pc to 1.9pc between 1938 and 1945, while the wealth of the largest 1pc of estates fell by 90pc. It should seem obvious that the price of lower inequality in all these cases — whether death, destruction or severe restrictions on freedom — were intolerably high.

The point here is not to say more inequality is a “good thing,” but that it cannot be generalized that less inequality is better. Corbyn’s position, that implies “reducing inequality” is desirable, seemingly countenances policies that by other metrics might be extremely harmful. We should bear this in mind when talking about the government “curbing inequality”. Affecting a distribution inevitably means interfering with human action. We could lower inequality (at least temporarily) by deporting or exterminating rich people. But would this benefit those who remained? It is difficult to see how.

Deaton is right to say then that current political trends are not so much a reflection of inequality, but perceived unfairness. He concludes: “Some of the processes that generate inequality are widely seen as fair. But others are deeply and obviously unfair, and have become a legitimate source of anger and disaffection.” No doubt there are steps the Government could take to make the economy fairer, which might also lower inequality. Liberalizing planning laws to allow more houses to be built, for example, would almost certainly narrow the wealth distribution but would improve the efficiency of the economy too.

Yet what Deaton’s argument really shows is that we should not care about inequality at all. Once one starts thinking about the need to eliminate “bad” causes of inequality, while leaving “good” causes alone, you are not really acting on inequality, but the justness or otherwise of other things that affect it. We should eliminate crony capitalism, prevent taxpayer bank bailouts, and ensure competitive markets that the public want for efficiency and fairness reasons, irrespective of their effect on inequality measures such as the Gini coefficient.

At best, inequality serves as an indicator of potential problems. At worst, obsessing about it distorts our priorities from what truly matters, such as the living standards of the least well-off. Inequality can sometimes be a reflection of some social ills. But it can be a reflection of social progress too, and some purported cures for it are much worse than the disease.

This first appeared in The Telegraph.

Blog Post | Income & Inequality

What Kamala Harris Gets Wrong about Inequality

When thinking about inequality, it is essential to remember that humanity was once almost universally poor, hungry, and miserable.

Summary: Vice President Kamala Harris claims that the world has seen a dramatic rise in inequality. But many indicators of human well-being, such as access to clean water, internet, and food, have improved significantly over time. Moreover, inequality is not necessarily a bad thing, as it reflects the uneven but positive progress of humanity.


Vice President Kamala Harris claimed, in the wake of the infrastructure bill’s recent passage, that the world has seen “a dramatic rise in inequality.”

She continued, “Why is it that 1 in 4 people in our world lack access to clean drinking water at home? Why is it that 1 in 3 women in the world experience sexual or physical violence during her lifetime? Why is it that only half of the world has access to the internet? Why have we allowed so many of the world’s children to go hungry when we know that we produce enough food to feed the entire world?”

With all due respect to the vice president, the answers to those questions reveal enormous progress.

Unsafe water, once a nearly universal hazard, is an increasingly rare misfortune. Today, over 90 percent of people have access to improved drinking water. As recently as 1990, that figure was 80 percent. Data from the University of Washington show that, back then, the death rate related to unsafe water sources was 42 per 100,000 people. Today, it is less than 18 per 100,000 people. Put differently, in 1990, almost 4 percent of global deaths could be attributed to unsafe water. That has since halved to less than 2 percent. If this positive trend continues, everyone on the planet could soon enjoy clean drinking water.

Reliable data about violence against women are sometimes difficult to come by. That said, laudable progress in the treatment of women has occurred. Tolerance of sexual harassment and violence has certainly decreased in the United States. There was a time when forced marriages at young ages were common worldwide, and marital rape was legal practically everywhere. As recently as the 1960s, women married, on average, at 16 in Mali and Burkina Faso and 17 in Ghana. Today, that has risen to 18, 20, and 23, respectively. Approval of wife-beating is now rare the world over.

Why is it that only half of the world has access to the Internet? Likely because the remarkable innovation is so young. It’s hard to imagine the world without the Internet, but information was once scarce, and inequality of information access was abominable. Today, anyone with a smartphone can read troves of wisdom that would make the scholars of ancient Alexandria mad with envy.

Given that the World Wide Web has only been publicly available since 1991, the explosive growth in global Internet access is wondrous. Less than 9 percent of people used the Internet in 2000, and less than 35 percent of people used it in 2010. Today, around half the world and three-quarters of Americans use the Internet, but that statistic may underestimate Internet availability. After all, some people have no desire to use the Internet — many elderly people fall into this category — but could easily gain access if they wanted.

In sub-Saharan Africa, the world’s poorest region, smartphones are rapidly falling in price. While today just over a third of sub-Saharan Africans have a smartphone, that number is predicted to rise to 67 percent by 2025, further equalizing access to knowledge.

Harris is correct that humanity produces enough food. Farmers produce enough to theoretically supply each person on the planet with nearly 3,000 calories each day, far more than the standard recommendation of around 2,000 calories. In the early 1950s, over 50 countries surveyed by the U.N. had a food supply of fewer than 2,000 calories per person per day. By 2017, only two countries met that definition.

Famines no longer occur except in cases of war, natural disaster, or other market-disrupting instability. The countries with some of the highest rates of childhood malnutrition are Burundi, Niger, and the Central African Republic (CAR). These countries are unstable and some of the least free places on Earth, particularly economically.

Burundi has seen a recent rise in torture by state agents, Niger is contending with waves of violence by radical militants, and the CAR is in such a state of violent chaos that their presidential guards recently opened fire on U.N. peacekeepers. But everywhere that markets can operate, hunger has become rarer, resulting in a global decline in childhood malnutrition.

Inequality has declined in many ways. But when thinking about inequality, it is essential to remember that humanity was once almost universally poor, hungry, and miserable. In a state of widespread deprivation, any progress can create inequality. But equality of misery isn’t desirable, making Harris’s claim about a rise in global inequality highly misleading.

This article was originally published in National Review.

Blog Post | Personal Income

Global Income Inequality Is Declining

In recent decade, global inequality has started to decline.

Global income inequality is declining

Barack Obama once referred to income inequality as “the defining challenge of our time.” And, to be fair to the former U.S. President, income inequality within countries has been increasing in recent decades. Some reasons for that increase, such as corrupt dealings between politicians and crony capitalists, are deplorable and should be stopped. Others are, probably, unavoidable. Increasingly, for example, men and women find their life partners in college or grad school. Their households tend to be richer and their children more fortunate. That leads to greater income and social stratification that, being voluntarily entered into, should not be interfered with by the state. Income inequality on a national level, in other words, is unlikely to go away. International or global inequality, in contrast, is declining.

Humanity is some 300,000 years old and while it is true that the material circumstances of our distant ancestors were much more equal than is the case today, almost everyone lived in extreme poverty. The wealth accumulation among nomadic hunter-gatherers, explains Steven Pinker in his book Enlightenment Now: The Case for Science, Humanism and Progress, was circumscribed by the weight and volume of the physical possessions that they could carry on their backs. Life among sedentary hunter-gatherers was more unequal. They “developed hereditary nobility who kept slaves … [and] hoarded luxuries.” Social stratification accelerated following the agricultural revolution some 12,000 years ago. As more people settled down, city states and, later, empires emerged. These early polities developed ruling classes (nobles, priests, bureaucrats, etc.) who tended to be much better off than the rest of the population. That said, even the richest and most powerful people of the past could not begin to imagine of the riches and conveniences enjoyed by ordinary people today.

Inequality, explains Princeton University economist Angus Deaton in his book The Great Escape: Health, Wealth, and the Origins of Inequality, is the handmaiden of progress. It is only when some people become better off that a higher standard of living becomes imaginable and, consequently, achievable. That is precisely what happened during the Industrial Revolution, when a pronounced income gap started to emerge between the countries of Western Europe and North America on the one hand and the rest of the world on the other hand. In 1775, for example, U.S. gross domestic product per person stood at $1,883. In 2016, it stood at $53,015 – a 27 fold increase in the real standard of living (figures are in 2011 U.S. dollars). The economic divergence between the West and the Rest, which took off during the 19th century, continued well into the 20th century. In recent decades, however, global inequality started to decline. That did not happen due to declining incomes in rich countries. Most of those have recovered from the Great Recession and are at an all-time high. Rather, it happened due to quicker growth in non-Western countries, which have benefited from internal economic reforms, including the end of central planning, and globalization of trade, services and financial flows.

Source: Branko Milanovic, City University of New York.

The most commonly used indicator of income inequality is the Gini coefficient, which measures income inequality on a scale from zero (i.e., all incomes are equal) to 1 (i.e., one person has all the income). One way to measure global income inequality, explains Branko Milanovic from City University of New York, is to calculate a population-adjusted average of Gini values for all individual countries. As can be seen, the decline in global income inequality started in the 1980s and is coterminous with a period of greater economic freedom and interconnectedness known as “globalization.” This measure of income inequality, let’s call it inequality between countries, is somewhat misleading, however, for it assumes that everyone within any given country earns the same income. To get a sense of inequality across the human race, income inequality between countries has to be adjusted by income inequality within countries. On that measure, global income inequality begins to decline somewhat later – after the beginning of the new millennium. Still, both measures of global income inequality show a downward trend. As such, Milanovic concludes, “We are witnessing the first decline in global inequality between world citizens since the Industrial Revolution.”

Some might feel that a decline in global income inequality is a good thing in and of itself. Others, myself included, celebrate better schooling, healthcare, sanitation and nutrition that globalization and rapid economic growth in developing countries made possible.

Video | Income & Inequality

Dead Wrong: Equal or Fair?

In a study, six-year-olds showed that they preferred to throw out rewards, rather than distribute them unequally. Even children know that inequality is unnatural. We humans just hate it. Dead Wrong.