It matters that some people can buy tickets for space travel when others are queuing for food banksby / April 9, 2015 / Leave a comment
As the economist Anthony Atkinson observes at the beginning of his new book, inequality is now at the “forefront of political debate.” But, he insisted when I met him in London a couple of weeks ago, “this isn’t a recent problem—it’s a change that has taken place over a generation in [the UK], and in the US, too.” Nor is this a new preoccupation for Atkinson. He has been thinking about the economics of inequality since he graduated as an economist in 1966.
What’s distinctive about this book, “Inequality,” is captured by the question posed in its subtitle: “What can be done?” As well as diagnosing the problem of economic inequality (especially inequality of income)—showing why it matters in advanced societies (“It does matter that some people can buy tickets for space travel when others are queuing for food banks”) and how it has changed over time—Atkinson presents a series of concrete policy proposals for doing something about it. He has, he says, written this book in a “spirit of optimism.” There is, in his view, nothing inevitable about the levels of inequality seen today in countries like Britain—on the contrary. “The world faces great problems,” Atkinson writes, “but collectively we are not helpless in the face of forces outside our control.”
Twenty-odd years ago, Atkinson delivered an address to the Royal Economic Society entitled “Bringing Income Distribution in from the Cold.” In it, he noted the way that, for much of the 20th century, distributional questions had been largely ignored by the economics profession. Why, I asked Atkinson, does he think that happened?
AA: That’s a good question. There are two elements in trying to answer it. One is the role that inequality plays in trying to understand the economy. And the other is the role that inequality itself plays as a subject. With the former, it would be a feeling that the class divisions classical economists were concerned with—landlords, capitalists and workers—had somehow broken down. And that we were now in a situation in which we were a lot more homogeneous. I think there was a feeling, probably, that in understanding the growth of the economy and other macroeconomic issues, you didn’t need to distinguish so much between different types of people.
JD: Distributional questions were much more important in the older tradition of political economy weren’t they?
I think they were more important when investment was carried out by a class of capitalists rather than by pension funds or something of that sort. So the nature of the economy has changed. Also the feeling that, postwar, with the welfare state, full employment and rising wages, the distributional question was less pressing. I came into economics in the mid-Sixties partly because I wasn’t persuaded that that was true. With things like, for example, [Brian Abel-Smith and Peter Townsend’s book] The Poor and the Poorest, which came out in 1965, people began to worry about issues like child poverty at the bottom of the scale. Then, in the 1970s, I began to become concerned with what was happening at the top.
In this book you tell a broad historical story about what happened to inequality from the Seventies onwards. I’m interested in the similarities and differences between the US and UK experiences during the period since 1979, which is roughly when what you call the “inequality turn” begins. The most striking difference, as far as I can see, looks to be that there was a much steeper rise in the Gini coefficient in the UK than in the US.
I think one should contrast, on the one hand, what happened to earnings and wages, where the rise in wage dispersion was greater in the US than in the UK, but where that wasn’t associated with the same rise in income inequality—it did go up, but at only half the rate in the UK.
What about the steep climb in the UK’s gini coefficient between 1979 and 1992?
That happened partly because of the cuts that were made at that time to the welfare state. If you look at what happened to pensions as a proportion of earnings—it fell substantially in the Eighties, and that was the result of successive cuts by Norman Fowler and others. We used to have earnings-related unemployment benefit to help people move between jobs—that was abandoned, too. So the cuts in the welfare state probably accounted for a substantial part of that [rise in the Gini number].
What role do you ascribe, in both the US and UK, to the decline in collective bargaining? It’s interesting that former US Treasury Secretary Larry Summers recently said that “giving collective bargaining a serious chance” should be an important part of any attempt to rebalance the share of GDP going to wages or labour as opposed to profits.
I was rather shocked when I looked at the whole sequence of legislation that took place in the 1980s—it was one bill after another reducing the powers and putting obstacles in the path of trade unions. Even in the 1950s, JK Galbraith was talking about the need for “countervailing power”. And it’s even more needed now.
You point out that returning to the levels of inequality last seen in the mid-1960s would require us to raise income tax by 16 per cent. From which you conclude that inequality cannot just be tackled by “fiscal means”. That reminded me of a brief interlude, two years ago or so, during which Ed Miliband talked about “pre-distribution” rather than “re-distribution”.
I think the word is awful! But not only will tax-and-spend face political difficulties, it’s not going to be the answer.
In the book, you cite Martin Feldstein’s view that we should concentrate on eliminating poverty rather than worrying about the overall income distribution. You’re sceptical about that view. Why?
One reason I wrote the book was that I felt that in [Thomas] Piketty there was too much emphasis on the top [of the income distribution]. So in a sense I was agreeing with Feldstein that our primary focus should be on what’s happening at the bottom. But I don’t think it’s the whole problem, because I think there are inter-dependencies. We can’t just say, “Let’s deal with this, and forget what happens there.” There are several reasons for that. One is a political economy reason, which is that one of the difficulties of dealing with poverty is the question whether the cost of that is going to be met by people just above the poverty line or by the people at the top. So what’s happening at the top is relevant to the possibility of financing the kind of extensions of social transfers that I discuss [in the book]. Things are inter-dependent in all sorts of ways. I think it was Tawney who said that what thoughtful poor people call the problem of poverty, thoughtful poor people call the problem of the rich.
We’ve talked about the top and the bottom. What about the middle, whose incomes are being squeezed?
One of the things going on is that real incomes are not rising. That’s partly because we have probably raised expectations about what’s going to happen to those incomes. [And] if we take climate change seriously, we’re going to need to spend a fair amount of our resources dealing with that. As a result, there are going to be times when GDP is rising but incomes are not rising as fast.
A question about methodology. There’s a section in the book on the sources of evidence for trends in inequality. Some of the criticisms made of Piketty, for example, were criticisms of the way he handled his data sets. How confident can researchers be about the quality of the data here?
I think that the right way to think about data is the way suggested by an American economist who said that all data are imperfect. It’s like trying to see what’s going on in a house when you can only look through certain windows. And different windows give you a different perspective. That’s the right way to look at things. All data are imperfect. The question you have to ask is, are they good enough for this purpose? For example, my own view is that something like the wealth and assets survey in Britain, which is a good innovation, can’t tell us about the very top of the wealth distribution, because [those] people aren’t going to take part in surveys. It was one of the pieces of data used by Chris Giles of the Financial Times to criticise Piketty, but it’s data that is useful but flawed. Similarly, looking at income tax data at the top is also flawed—for obvious reasons. In each case, what you’re getting is a partial picture.
And the window you choose to look through is household income, rather than, say, inequality of consumption. (You point out in the book that Bill Gates criticised Piketty for “neglecting consumption altogether”.)
There are good reasons for looking at consumption as well, but it misses some important things. I chose household income because I thought it was something meaningful to the general reader.
One of the trends or tendencies that you identify in the postwar period was what you call the “race” between expanding welfare provision, on the one hand, and burgeoning need, on the other. That’s a dilemma for policymakers that has got much sharper in recent decades isn’t it? With an ageing population and so on.
Yes, I think that’s right. Extending the working life has not happened as easily as it might have done. Also, one has to bear in mind that we’re in the somewhat unusual position of having now, since 1945, 70 years of almost uninterrupted history. And that has changed the way we think about the life-course and so on. Now the notion of people working much longer poses problems that previously weren’t confronted, when life was always interrupted by something.
What about the role that interruptions, “exogenous shocks,” like wars played in reducing inequality in the period 1913-1970? This is something Piketty emphasises in his book.
I’m not totally in agreement with him [on this]. The First World War, for example, had some effects on the UK, but it’s quite striking that [after the war] there was a lot of concern about war profiteering and so on. People in the early Twenties were assuming that war would make things more unequal. Whereas as the Second World War was different.
In the British case that has to do with the social solidarity engendered during the war which became the basis for the Attlee settlement.
One feature of the landscape since 1979 has been rising rates of unemployment across the developed world. What impact have they had on levels of inequality?
Remember the 1979 general election? There was this very successful Conservative poster: “Labour isn’t working.” It was then assumed that unemployment was a major political issue. But today? Unemployment is, what, 5 point something per cent and there’s no outcry about it. My own view is that the effect [of unemployment] on [the income] distribution is now somewhat moderated by two-earner couples, probably, and the fact that people have more assets than they did in the 1930s, say. So unemployment is a problem in itself, rather than because of any link with inequality. But, as Amartya Sen said, it’s amazing there’s so little outcry about unemployment.
I’d like to turn to what you call the “textbook economic story” about the impact that globalisation and technology have had on inequality. That textbook story seems to encourage a kind of fatalism about what we can do to mitigate inequality. Perhaps you could summarise what you take the textbook account to be and then say something about your reservations about it?
As a student, I was taught by people who were working on what they used to call “induced technological change”—the fact that firms were making decisions about what kind of technology to use and what kind of technology to improve. All of which makes it very much within our control. For example—it’s a fanciful case—if you could deliver meals on wheels by drone, you’d do away with the need for people. And it could well be that that would be the most cost-efficient way of doing it. But it also changes the nature of the service being provided, because an important part of the service is the human element. And I think that’s true in quite a lot of areas, where we see the product being changed. The Economist ran a piece recently about driverless taxis and how wonderful it’d be to be able to get into a taxi and not have to talk to the driver. I’d regard that as a loss of service, rather than a gain! I see that as an example where the question of what kind of products we have will then drive the kind of technological change we have, and the demand for labour. So if it was the case that government, in commissioning services, would specify that it’s important to have a person, that would affect the demand for labour and wages.
When you turn to the role played by “capital and monopoly power”, you say that it’s important to keep wealth and capital separate. Why is it important to do that? Does the answer have something to do with power or control?
Yes. In the old days, the mill owner owned the mill and decided what went on [there]. Today, you and I own the mill. But who decides what goes on? It’s not us. That’s the important difference. And it doesn’t really appear in Piketty’s book, which is actually more about wealth than it is about capital.
That leads us to the vexed question of what capital is, exactly. And that’s a question that has been explored in some of the responses to Piketty. What definition of capital are you assuming in this book?
Let’s leave aside the controversies about the Cambridge theory of capital, which I grew up with! It’s a question of who makes the decisions. My pension fund has its second-biggest holding in HSBC. Now, even Margaret Hodge would not, I think, regard me as responsible for what happens in Zurich. Capital is… who decides about the decisions on production which one associates with capital as a productive factor.
This is related, I think, to your worries about Piketty’s formula, on which his entire argument seems to turn, that r > g (where r is the rate of return on capital and g is economic growth).
It is in a sense. There are many different rs—the return to capital as a factor of production, the kind of thing that appears in the national accounts, which is on the whole fairly high, is very different from what a person with wealth gets from it. If you think about the pension fund example, then of course it [the return] is reduced by fees and so on. The financial services industry takes part of that return to capital for providing services and making these financial products available. Its profit is a sort of wedge between r and the interest rate. That’s why I’ve had letters from pensioners saying, “What’s this guy [Piketty] on about? My interest rate is 0.5 per cent and g is probably greater than that!”
This is an insight that you attribute to one of your teachers, the Nobel Prize-winning economist James Meade—that “the rate of return on property is much lower for small properties than for large properties”. As you put it in the book: “For financial assets in general, the wedge between the rate of return (Piketty’s r) and the return actually received by the small saver is the source of income for the financial-services industry…” Which leads you to pose the following question: “How can the return on their [small savers’] savings be brought closer to the return on capital?” I’m interested in Meade’s influence on your argument, particularly on your prescriptions for expanding asset ownership. Can we discern the influence of Meade’s notion of a “property-owning democracy” there?
Yes, very much so. He wrote a wonderful book [in 1964], which no one now reads, called Efficiency, Equality and the Ownership of Property. It was very far-sighted. He asked what would happen if automation meant there wasn’t the demand for labour. And he said it would therefore matter a great deal who owns the capital. It was reviewed by Paul Samuelson, in some ways quite positively, but also querying whether it was really going to happen.
Like Meade, you’re interested in widening capital ownership.
Yes. That’s why, for example, I propose a minimum inheritance (or capital endowment). Inheritance is not a bad thing, as such. It’s just very unequal. The other thing I definitely got from James—I can hear him saying it—is that it’s not just individuals that own wealth, it’s also the state. That’s why I think the whole discussion of debt and deficit is totally misleading. It fails to look at the full asset position of the government.
Let’s turn to another of your proposals—that we should return to a “more progressive rate structure” for personal income tax, with a top marginal rate of 65 per cent. Let’s set aside the objection that this would be politically impossible. There’s an economic objection which says that the revenue-maximising top rate is 40 per cent. What’s your response to that?
It’s been interesting the way that idea has come to be accepted. If you look at what lies behind it, you see that it comes from the Mirlees review of taxation published in 2012 by the Institute for Fiscal Studies, for whom I have great respect. They themselves say that, first of all, this number is very uncertain. When you look at the assumptions underlying it, it’s an extreme set of assumptions, which are that people are employed (they’re not self-employed and they’re not getting investment income), that they are spending all of their income on goods subject to the rate of VAT, which is not true—people spend their income on some goods which are and some which are not. If you take all those [assumptions] out, you get a range, which includes 65 per cent. Also, I think it takes a particular view of what determines the tax rate. Whereas I think that what people are concerned about with what is after all a marginal tax rate, not a total tax rate, is as much governed by notions of fairness as it is by questions about balancing possible gains and losses. And [it] is a very understandable concern that people should keep a reasonable share of what they make. That’s why I didn’t suggest, as Thomas [Piketty] does, 80 or 75 per cent.
Does it follow from that that we ought to be thinking much more seriously about taxing unearned income?
Again, the fairness arguments may well apply to both [earned and unearned income]. I’ve suggested an “earned income discount”, which is a way of giving some benefit for earned income. But the treatment of capital income probably requires more nuanced treatment than I gave it. But I was struck that Martin Weale [a member of the Bank of England’s Monetary Policy Committee] was raising the question of whether we should think again about the wealth tax, given that a lot of the accumulation has been through capital gains of various sorts.
We could do a lot more about housing and land couldn’t we?
It’s amazing to me that we accept council tax [set at such low levels]. Here we have people paying £2,500 on houses worth millions. American local government officials would regard this as amazing. And of course it’s also contributing to higher house prices.
One of your fundamental objections to inequality is that it offends against a basic conception of social justice. But I wanted to ask you about the relationship between equity and efficiency. As you point out, the textbooks would say that doing something about equity implies a trade-off of [economic] efficiency. But you’re not so sure about that. And the debate seems to be moving in your direction—think about recent reports by the IMF and the World Bank which show that high levels of inequality are bad for growth.
Just to think about it for a moment the way economists think about it—much of the discussion is based on a view of the world and of how the economy works in which that conflict [between equity and efficiency] is inevitable. They look at, for example, bringing in social security and assume a world in which you wouldn’t need things like unemployment benefit… I think we are now learning that we need to model or think about the economy in a way that takes account of all the warts there are—things like the existence of substantial monopoly power, involuntary unemployment—things that are very much at the frontier of modern economics. If you look at the citation for last year’s Nobel Prize, for example, it was about someone who works on, as they put it, limiting the power of corporations. Now that’s not something that appears in standard economic models!
There’s a theoretical dimension to what you’ve just been saying isn’t there? And it has to do with the tenability, or otherwise, of something called the “First Theorem of Welfare Economics”.
The First Theorem of Welfare Economics says that an economy will run efficiently and that any intervention like redistribution will make it less efficient, so there’s a trade-off. But it’s true of an economy where firms have no market power, where there is a full set of markets which work in a way that’s clear and everyone has perfect information. Well, the world isn’t like that. So if you start not there but with a world in which firms have monopoly power, supermarkets bargain with suppliers and drive down prices… In that less perfect world, it’s not clear that there is any such trade-off.
Despite all that, the book does end on what sounds to me like an optimistic note. Is it that old Gramsci thing about pessimism of the intellect and optimism of the will?
There have been times when we’ve been able to shift things. The postwar period, for example, was one in which many countries managed to significantly reduce inequality. The failure to change things is partly a failure of imagination. Quite a lot of people feel that the current state of inequality is excessive. I don’t think they’d necessarily agree how far to go [to change that], but there is a sense that we’re going to have to address that problem.
Jonathan Derbyshire will be speaking at How the Light Gets In, the world’s largest philosophy and music festival, running from 21st May to 31st May in association with Prospect Magazine.
“Inequality: What can be done” by Anthony B Atkinson is published by Harvard University Press (£19.95)