EVEN IN A world of polarisation, fake news and social media, some beliefs remain universal, and central to today’s politics. None is more influential than the idea that inequality has risen in the rich world. People read about it in newspapers, hear about it from their politicians and feel it in their daily lives. This belief motivates populists, who say selfish metropolitan elites have pulled the ladder of opportunity away from ordinary people. It has given succour to the left, who propose ever more radical ways to redistribute wealth (see article). And it has caused alarm among business people, many of whom now claim to pursue a higher social purpose, lest they be seen to subscribe to a model of capitalism that everyone knows has failed.
In many ways the failure is real. Opportunities are restricted. The cost of university education in America has spiralled beyond the reach of many families. Across the rich world, as rents and house prices have soared, it has become harder to afford to live in the successful cities which contain the most jobs (see Free exchange). Meanwhile, the rusting away of old industries has concentrated poverty in particular cities and towns, creating highly visible pockets of deprivation. By some measures inequalities in health and life expectancy are getting worse.
Yet precisely because the idea of soaring inequality has become an almost universally held belief, it receives too little scrutiny. That is a mistake, because the four empirical pillars upon which the temple rests—which are not about housing or geography, but income and wealth—are not as firm as you might think. As our briefing this week explains, these four pillars are being shaken by new research.
Consider, first, the claim that the top 1% of earners have become detached from everyone else in recent decades, which took hold after the “Occupy Wall Street” movement in 2011. This was always hard to prove outside America. In Britain the share of income of the top 1% is no higher than in the mid-1990s, after adjusting for taxes and government transfers. And even in America, official data suggest that the same measure rose until 2000 and since then has been volatile around a flat trend. It is easily forgotten that America has put in place several policies in recent decades that have cut inequality, such as the expansion of Medicaid, government-funded health insurance for the poor, in 2014.
Now some economists have re-crunched the numbers and concluded that the income share of the top 1% in America may have been little changed since as long ago as 1960. They argue that earlier researchers mishandled the tax-return data that yield estimates of inequality. Previous results may also have failed to account for falling marriage rates among the poor, which divide income around more households—but not more people. And a bigger chunk of corporate profits may flow to middle-class people than previously realised, because they own shares through pension funds. In 1960 retirement accounts owned just 4% of American shares; by 2015 the figure was 50%.
The second wobbly pillar is the related claim that household incomes and wages have stagnated in the long term. Estimates of inflation-adjusted median-income growth in America in 1979-2014 range from a fall of 8% to an increase of 51%, and partisans tend to cherry-pick a figure that tells a convenient story. The huge variation reflects differences in how you treat inflation, government transfers and the definition of a household, but the lowest figures are hard to believe. If you argue that income has shrunk you also have to claim that four decades’ worth of innovation in goods and services, from mobile phones and video streaming to cholesterol-lowering statins, have not improved middle-earners’ lives. That is simply not credible.
Third is the notion that capital has triumphed over labour as ruthless businesses, owned by the rich, have exploited their workers, moved jobs offshore and automated factories. The claim that inequality is being driven by the rich accumulating capital was a central thesis of Thomas Piketty’s book, “Capital in the Twenty-First Century”, which in 2014 made him the first rock-star economist since Milton Friedman improbably filled auditoriums in the 1980s. Not all Mr Piketty’s theories caught on among economists, but it is widely assumed that a falling share of the rich world’s GDP has been going to workers and a rising share to investors. After a decade of soaring stock prices, this has some resonance with the public.
Recent research, however, suggests that the decline in labour’s fortunes is explained in most rich countries by exorbitant returns to homeowners, not tycoons. Strip out housing and the earnings of the self-employed (which are hard to divide between capital and labour income), and in most countries labour shares have not fallen. America since 2000 is an exception. But that reflects a failure of regulation, not a fundamental flaw in capitalism. American antitrust regulators and courts have been unforgivably lax, allowing some industries to become too concentrated. This has enabled some firms to gouge their customers and book abnormally high profits.
The last pillar is that inequalities of wealth—the assets people own, minus their liabilities—have been soaring. Again, this has always been harder to prove in Europe than America. In Denmark, one of the few places with detailed data, the wealth share of the top 1% has not risen for three decades. By contrast, few deny that the richest Americans have sprinted ahead. But even here, wealth is fiendishly difficult to estimate.
Not so rich pickings
The campaign of Elizabeth Warren, a Democratic presidential contender, reckons that the share of wealth owned by the richest 0.1% of Americans rose from 7% in 1978 to 22% in 2012. But a plausible recent estimate suggests that the rise is only half as big as this. (For connoisseurs, the difference rests on the factor by which you scale up investors’ wealth from the capital income they report to the taxman.) This imprecision is a problem for politicians, including Ms Warren and Bernie Sanders, who want wealth taxes, since they may raise less revenue than they expect.
The fact that dubious claims are made about inequality does not reduce the urgency of tackling economic injustice. But it does call for ensuring that the assumptions on which policies are based are accurate. Those, like Britain’s Labour Party, who favour the radical redistribution of income and wealth ought to be sure that inequality is as high as they think it is—especially when their policies bring knock-on costs such as deterring risk-taking and investment. By one estimate, Ms Warren’s wealth tax would leave America’s economy 2% smaller after a decade.
Until these debates are resolved, it would be better for policymakers to stick to more solid ground. The rich world’s housing markets are starving young workers of cash and opportunity; more building is needed in the places that offer attractive jobs. America’s economy needs a revolution in antitrust enforcement to reinvigorate competition. And regardless of trends in inequality, too many high-income workers, including doctors, lawyers and bankers, are protected from competition by needless regulation and licensing, and senseless restrictions on high-skilled immigration, both of which should be loosened.
Such an agenda would require governments to take on NIMBYS and corporate lobbies. But it would reduce inequality and boost growth. And its benefits do not depend on a set of beliefs about income and wealth that could yet turn out to be wrong. ■
