Paul Sweeney: There are many books and reports on inequality now. It has been the big social issue for some time, but it is finally recognised as very important in economics. At last!
TASC’s excellent annual report “Cherishing All Equally 2016” is the best in measuring Irish inequality comprehensively and there are important and informative books like Inequality by Tony Atkinson who spoke at TASC last year; Joe Stiglitz (“The Price of Inequality” and “The Great Divide:); “Chronicles: in Our Troubled Times; by Thomas Piketty who addressed the largest meeting on economics in Ireland – on inequality - in Dublin also promoted by TASC a few years ago.
Economists did not pay much attention to inequality because they thought it would go away. This was because the major study by leading economist (there are only a few lagging economists) Simon Kuznets proved inequality would go away once a country reached a certain level of prosperity. The data proved it. Or so it seemed. Indeed it was the case for America – but only for a time.
However, while Kuznets was correct for a time in the US, we know now that inequality does not automatically diminish as an economy prospers with market forces, as most economists had believed.
The evidence is now so overwhelming that inequality does not “automatically” diminish over time that mainstream economics has had to wake up and address it. This has yet to happen in the EU, and in most EU governments.
However IMF, and OECD have been addressing it – but in their social silos and not in the main economic or taxation departments – until recently. For example, it was seen that OECD has made a major change away from its usual mantra on “harmful taxes” and its ideological “hierarchy of taxes to address the issue. It appears to have woken up to the fact that tax has a key role in building and curbing inequality.
Milanovic’s book is based on hundreds of years of data which shows that inequality - while now rising within developed nations - has fallen quite dramatically among nations, with the rising middle-class in Asia and substantial poverty reduction in emerging countries.
This is good news but “also gives greater salience to inequalities within nations”.
He examines Kuznets work and finds that it wanting. Kuznets argued that inequality rises as countries develop and falls again at high income levels. But it does not stay down, as most economists had believed. Until the 1980s this appeared to happen, but for most developed countries inequality has risen since. It was the Thatcher Reagan revolution which boosted inequality from then on. Thus part of the problem is man made, ie by regressive policy. Until then more educated labour, unions and demand for re-distribution meant the return capital decreased. Sometimes there were malign mechanisms for re-distribution as Piketty argued too, such as wars and revolutions.
Milanovic proposes that there were Kuznets waves in the past 500 years of rising and falling inequality.
Milanovic argues that the case for Asia catching up with the West is very strong but not so for Africa. He says that the great middle-class squeeze, driven by automation and globalisation is not at an end. In the West we see a very successful and rich class at top and a much larger group who will be servicing the rich where human labour cannot be replaced by robots.
Education won’t have much influence on what happens because rich societies have already more or less reached the upper limits and quality that can be offered and many middle class people are already over-qualified for the service jobs which they do. The use the education premium is almost certain to cease in a society where so many are now well educated.
It is not merit, hard work, intelligence which matters, but family endowment, wealth and connections which will matter more.He argues that we are in the form of new capitalism which will be more unequal. Success will depend on the chance of being born well and having luck in life. He asserts that this new capitalism is like a big casino with one exception– those who have won a few rounds will be given much better odds to keep on winning.
Milanovic thinks that such an unequal society will not be stable. The emerging plutocracy have torn up the post-war Social Contract. Since he wrote this book, Trump has been elected on a platform of lower taxes for the rich and a smaller state ie social provisions.
He argues that as globalisation makes taxation a weaker tool in addressing inequality but, “as in the past, the role of government is crucial.” Progressive taxes will help but are not sufficient he says. He proposes a wider spread of ownership of capital, more state-funded and equalised education and other policies.
Published 2016, Belnap Harvard. £22.50 in UK.
Published 2016, Belnap Harvard. £22.50 in UK.
Paul Sweeney is chair of TASC’s Economists Network.