The Economist - USA (2019-11-30)

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Leaders 13

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veninaworldofpolarisation,fakenewsandsocialmedia,
somebeliefsremainuniversal,andcentraltotoday’spolitics.
Noneismoreinfluentialthantheideathatinequalityhasrisen
intherichworld.Peoplereadaboutit innewspapers,hearabout
it fromtheirpoliticiansandfeelit intheirdailylives.Thisbelief
motivatespopulists,whosayselfishmetropolitaneliteshave
pulledtheladderofopportunityawayfromordinarypeople.It
hasgivensuccourtotheleft,whoproposeevermoreradical
waystoredistributewealth(seeBooks&artssection).Andit has
causedalarmamongbusinesspeople,manyofwhomnowclaim
topursuea highersocialpurpose,lesttheybeseentosubscribe
toa modelofcapitalismthateveryoneknowshasfailed.
Inmanywaysthefailureisreal.Opportunitiesarerestricted.
ThecostofuniversityeducationinAmericahasspiralledbeyond
thereachofmanyfamilies.Acrosstherichworld,asrentsand
housepriceshavesoared,it hasbecomehardertoaffordtolivein
thesuccessfulcitieswhichcontainthemostjobs(seeFreeex-
change).Meanwhile,therustingawayofoldindustrieshascon-
centratedpovertyinparticularcitiesandtowns,creatinghighly
visiblepocketsofdeprivation.Bysomemeasuresinequalitiesin
healthandlifeexpectancyaregettingworse.
Yetpreciselybecausetheideaofsoaringinequalityhasbe-
comeanalmostuniversallyheldbelief,it receivestoolittlescru-
tiny.Thatisa mistake,becausethefourempiri-
calpillarsuponwhichthetemplerests—which
arenotabouthousingorgeography,butincome
andwealth—arenotasfirmasyoumightthink.
Asourbriefingthisweekexplains,thesefour
pillarsarebeingshakenbynewresearch.
Consider,first,theclaimthatthetop1%of
earnershavebecomedetachedfromeveryone
elseinrecentdecades,whichtookholdafterthe
“OccupyWallStreet”movementin2011.Thiswasalwayshardto
proveoutsideAmerica.InBritaintheshareofincomeofthetop
1%isnohigherthaninthemid-1990s,afteradjustingfortaxes
andgovernmenttransfers.AndeveninAmerica,officialdata
suggestthatthesamemeasureroseuntil 2000 andsincethen
hasbeenvolatilearounda flattrend.Itiseasilyforgottenthat
Americahasputinplaceseveralpoliciesinrecentdecadesthat
havecutinequality,suchastheexpansionofMedicaid,govern-
ment-fundedhealthinsuranceforthepoor,in2014.
Nowsomeeconomistshavere-crunchedthenumbersand
concludedthattheincomeshareofthetop1%inAmericamay
havebeenlittlechangedsinceaslongagoas1960.Theyargue
thatearlierresearchersmishandledthetax-returndatathatyield
estimatesofinequality.Previousresultsmayalsohavefailedto
accountforfallingmarriageratesamongthepoor,whichdivide
incomearoundmorehouseholds—butnotmorepeople.Anda
biggerchunkofcorporateprofitsmayflowtomiddle-classpeo-
plethanpreviouslyrealised,becausetheyownsharesthrough
pensionfunds.In 1960 retirementaccountsownedjust4%of
Americanshares;by 2015 thefigurewas50%.
Thesecondwobblypillaristherelatedclaimthathousehold
incomesandwageshavestagnatedinthelongterm.Estimatesof
inflation-adjustedmedian-incomegrowthinAmericain1979-


2014 rangefroma fallof8%toanincreaseof51%,andpartisans
tendtocherry-picka figurethattellsa convenientstory.The
hugevariationreflectsdifferencesinhowyoutreatinflation,
governmenttransfersandthedefinitionofa household,butthe
lowestfiguresarehardtobelieve.Ifyouarguethatincomehas
shrunkyoualsohavetoclaimthatfourdecades’worthofinno-
vationingoodsandservices,frommobilephonesandvideo
streamingtocholesterol-loweringstatins,havenotimproved
middle-earners’lives.Thatissimplynotcredible.
Thirdisthenotionthatcapitalhastriumphedoverlabouras
ruthlessbusinesses,ownedbythe rich,haveexploitedtheir
workers,moved jobs offshore andautomated factories. The
claimthatinequalityisbeingdrivenbytherichaccumulating
capitalwasa centralthesisofThomasPiketty’sbook,“Capitalin
theTwenty-FirstCentury”,whichin 2014 madehimthefirst
rock-stareconomistsinceMiltonFriedmanimprobablyfilled
auditoriumsinthe1980s.NotallMrPiketty’stheoriescaughton
amongeconomists,butitiswidelyassumedthata fallingshare
oftherichworld’sgdphasbeengoingtoworkersanda rising
sharetoinvestors.Aftera decadeofsoaringstockprices,thishas
someresonancewiththepublic.
Recentresearch,however,suggeststhatthedeclineinla-
bour’sfortunesisexplainedinmostrichcountriesbyexorbitant
returnstohomeowners,nottycoons.Stripout
housingandtheearningsoftheself-employed
(whicharehardtodividebetweencapitalandla-
bour income), and in mostcountrieslabour
shareshavenotfallen.Americasince 2000 isan
exception.Butthatreflectsa failureofregula-
tion, not a fundamental flaw in capitalism.
Americanantitrustregulatorsandcourtshave
been unforgivablylax,allowing someindus-
triestobecometooconcentrated.Thishasenabledsomefirmsto
gougetheircustomersandbookabnormallyhighprofits.
Thelastpillaristhatinequalitiesofwealth—theassetspeople
own,minustheirliabilities—havebeensoaring.Again,thishas
alwaysbeenhardertoproveinEuropethanAmerica.InDen-
mark,oneofthefewplaceswithdetaileddata,thewealthshare
ofthetop1%hasnotrisenforthreedecades.Bycontrast,few
denythattherichestAmericanshavesprintedahead.Buteven
here,wealthisfiendishlydifficulttoestimate.

Notsorichpickings
ThecampaignofElizabethWarren,a Democraticpresidential
contender,reckonsthattheshareofwealthownedbytherichest
0.1%ofAmericansrosefrom7%in 1978 to22%in2012.Buta
plausiblerecentestimatesuggeststhattheriseisonlyhalfasbig
asthis.(Forconnoisseurs,thedifferencerestsonthefactorby
whichyouscaleupinvestors’wealthfromthecapitalincome
theyreporttothetaxman.)Thisimprecisionisa problemforpol-
iticians,includingMsWarrenandBernieSanders,whowant
wealthtaxes,sincetheymayraiselessrevenuethantheyexpect.
Thefactthatdubiousclaimsaremadeaboutinequalitydoes
notreducetheurgencyoftacklingeconomicinjustice.Butit
doescallforensuringthattheassumptionsonwhichpolicies

Inequality illusions


Gaps in wealth and income could be lower than you think. But there is still plenty to do to make economies fairer

Leaders

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