Rethinking ways of dealing with inequality

TODAYonline

27 January

An American philosopher, CL Stevenson, coined the term “persuasive definition” for attempts to smuggle in contentious views in the guise of defining terms. An example would be defining democracy in terms of universal franchise.

We now have a danger, not so much of persuasive definitions as of persuasive abstract nouns, the one most in vogue being “inequality”.

This has become a cliche subject in the social sciences. The assumption being smuggled in is that equality is a normal state of affairs, departures from which have to be justified.

In fact, this type of discussion actually harms those whom it is intended to benefit. For once it is realised that true equality is possible only in the grave (and not even there — Mozart was buried in a paupers’ cemetery), it is all too easy to divert attention from genuinely disturbing changes in the distribution of income and wealth.

Debating points against egalitarians are not hard to find. Whose income is meant to be equalised, the individual citizen or the family? Are those with limited capacity for satisfaction — whether for physical or psychological reasons — to be given more or less than the average?

RISING TIDE DOESN’T LIFT ALL BOATS

 

Non-egalitarians used to make great play with sums purporting to show how little the average citizen — or even those at the bottom of the income and wealth distribution — would gain if the better-off were deprived of their excess earnings or wealth. This led to the charge that egalitarians were motivated by jealousy and envy.

More positively, it was said that “a rising tide lifts all boats”. An unemployed labourer in the west has access to all manner of services, from television to modern medical treatments, unavailable to King Edward VII.

This line of defence is no longer available. Some estimates suggest, for instance, that there has been no rise in average United States real wages since 1970. In the United Kingdom, there has been similar stagnation or worse. Even in relatively egalitarian Scandinavian countries, there has been a squeeze on real earnings.

One can speculate forever on the forces behind these trends. One of the plausible candidates is the impact of new technology, which has put the squeeze on a mass of workers, white-collar as well as manual. But I doubt if this would have been enough without the impact of globalisation, which has brought billions of poorer workers from Asia into competition with their brethren in Europe and North America.

Some academics say that there has been an increase in inequality inside certain countries offset by greater equality between them. But that is only to redescribe the problem.

 

REMEDIES BETTER OR FOR WORSE?

 

Many of the remedies advanced by the left would only make things worse. And the right are inclined to copy them.

For instance, in Britain, we have had the strange spectacle of a conservative chancellor, who is not on the progressive wing of his party, urging a rise in the minimum wage. A medical acquaintance of mine, with no pretensions to economic expertise, immediately saw through this ploy: If earnings rose, more tax would be gathered. Even if many of those immediately affected were below the tax threshold, an increase at the bottom might raise the whole earning structure in nominal terms and thus benefit the exchequer.

There was a time when right-wing academics were quick to point out that an increase in the cost of labour would put more people out of work. In any case, tackling the problem by pushing up wages would increase costs and make matters worse.

This could be offset by devaluations. But what would then become of the inflation targets on which governments have set such store? And would real wages benefit? A devaluation is normally regarded as a way of cutting real wages by the back door.

Many of the other suggestions for easing the pressure on the mass of wage-earners belong to the list of worthy policies that have been espoused by most governments since the end of World War II, if not even earlier. Some of them echo the less successful aspects of Franklin Roosevelt’s New Deal, an example being the rebuilding of union strength.

I would look at much simpler ideas. Inequality on most conventional measures would be reduced if tax thresholds affecting the poor were raised and selected social security benefits increased. Whether the cash for these changes should come from more taxes on the middle and upper ranges or be paid out of budget deficits ought to depend on the economic conjuncture. How far one can use fiscal measures to distribute income and wealth more evenly depends in part on the geographical scale of the action. A government of a small or medium-sized country acting on its own does risk losing entrepreneurs to foreign lands where taxes are lower — but the more countries act in concert the less likely these bolt-holes are to be used. 

The Financial Times Limited

 

ABOUT THE AUTHOR:

Sir Samuel Brittan has been an economic commentator with the Financial Times since 1966.