Unit 7 – Future and Income Inequality

Income Inequality Does Matter And It Makes Us Worse Off (18 minutes)

Richard Wilkinson is a British researcher who has spent his life studying income inequality and the consequences for societies.

Income Inequality Does Matter and It Makes Us Worse Off (alternate link if embedded video doesn’t work)

Here are some excerpts from the transcript:

You all know the truth of what I’m going to say. I think the intuition that inequality is divisive and socially corrosive has been around since before the French Revolution. What’s changed is we now can look at the evidence, we can compare societies, more and less equal societies, and see what inequality does. I’m going to take you through that data and then explain why the links I’m going to be showing you exist.

…I want to start though with a paradox. This shows you life expectancy against gross national income –how rich countries are on average. And you see the countries on the right, like Norway and the USA, are twice as rich as Israel, Greece, Portugal on the left.And it makes no difference to their life expectancy at all. There’s no suggestion of a relationship there.But if we look within our societies, there are extraordinary social gradients in health running right across society. This, again, is life expectancy.

…Now I’m going to show you what that does to our societies. We collected data on problems with social gradients, the kind of problems that are more common at the bottom of the social ladder.Internationally comparable data on life expectancy,on kids’ maths and literacy scores, on infant mortality rates, homicide rates, proportion of the population in prison, teenage birthrates, levels of trust, obesity, mental illness – which in standard diagnostic classification includes drug and alcohol addiction – and social mobility. We put them all in one index. They’re all weighted equally. Where a country is is a sort of average score on these things.And there, you see it in relation to the measure of inequality I’ve just shown you, which I shall use over and over again in the data. The more unequal countries are doing worse on all these kinds of social problems. It’s an extraordinarily close correlation. But if you look at that same index of health and social problems in relation to GNP per capita, gross national income, there’s nothing there,no correlation anymore.

…What all the data I’ve shown you so far says is the same thing. The average well-being of our societiesis not dependent any longer on national income and economic growth. That’s very important in poorer countries, but not in the rich developed world. But the differences between us and where we are in relation to each other now matter very much.

…This is mental illness.

…This is violence.

…This is social mobility. .

The other really important point I want to make on this graph is that, if you look at the bottom, Sweden and Japan, they’re very different countries in all sorts of ways. The position of women, how closely they keep to the nuclear family, are on opposite ends of the poles in terms of the rich developed world. But another really important difference is how they get their greater equality. Sweden has huge differences in earnings, and it narrows the gap through taxation, general welfare state, generous benefits and so on. Japan is rather different though.It starts off with much smaller differences in earnings before tax. It has lower taxes. It has a smaller welfare state. And in our analysis of the American states, we find rather the same contrast.There are some states that do well through redistribution, some states that do well because they have smaller income differences before tax. So we conclude that it doesn’t much matter how you get your greater equality, as long as you get there somehow.

I am not talking about perfect equality, I’m talking about what exists in rich developed market democracies. Another really surprising part of this picture is that it’s not just the poor who are affected by inequality. There seems to be some truth in John Donne’s ”No man is an island.”

…

I should say that to deal with this, we’ve got to deal with the post-tax things and the pre-tax things.We’ve got to constrain income, the bonus culture incomes at the top. I think we must make our bosses accountable to their employees in any way we can.I think the take-home message though is that we can improve the real quality of human life by reducing the differences in incomes between us.Suddenly we have a handle on the psychosocial well-being of whole societies, and that’s exciting.

Now, if we decide that income inequality is undesirable, what can or should be done?  To what extent can the existing economic system in the U.S. be “remedied” vs. having to switch to a very different system? In other words, is it possible to maintain a neo-liberal, corporate-capitalist system and then somehow remediate the harms of the unequal income distribution? Or is it necessary to change the fundamental underlying neo-liberal, private property, corporate-capitalist base?

To shed some possible light on this issue, it’s might be illuminating to compare the U.S. and Sweden and other strong-social welfare states in Europe. As this graph originally from the Luxembourg Income Study but coming to us via Vox shows, the U.S. has a similar inequality to other nations before taxes and government social support and transfers are taken into account. But, when incomes are compared after accounting for taxes and transfers, the US ends with less inequality than it started, but nowhere near as much improvement towards equality as the other nations. (note: economists measure inequality using a Gini coefficient – the higher the coefficient (between 0 and 1.0), the less equal incomes are):

Inequality is on the rise in most developed countries (and a number of developing ones, too), but the income distribution in the US still stands out as particularly uneven. And there’s one big reason why: we don’t redistribute as much money.

The US actually isn’t especially unequal if you look at income before taxes or government transfers like Social Security and food stamps. According to data compiled by Janet Gornick at the Luxembourg Income Study, a number of wealthy countries — Israel, the UK, Greece, Poland, Germany, Finland, and Ireland — have more pre-tax/transfer inequality than we do, measured in Gini terms. Spain, Norway, the Netherlands, and Sweden all have exactly the same level as the US.