The Economist UK - 30.11.2019

Leaders 15

E

ven in aworld 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 Books & arts section). 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 ex-
change). Meanwhile, the rusting away of old industries has con-
centrated 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 be-
come an almost universally held belief, it receives too little scru-
tiny. That is a mistake, because the four empiri-
cal 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, govern-
ment-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 peo-
ple 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 inno-

vation 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’sgdphas 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 la-

bour’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 la-

bour income), and in most countries labour

shares have not fallen. America since 2000 is an

exception. But that reflects a failure of regula-

tion, not a fundamental flaw in capitalism.

American antitrust regulators and courts have

been unforgivably lax, allowing some indus-

tries 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 Den-

mark, 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 pol-

iticians, 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

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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