When coronavirus hit us, it seemed like the pandemic could trigger a politics of “we are all in this together” — that is what motivates the rhetoric of “building back better”. But such politics always came with the challenge that the economic forces unleashed by the pandemic risked having the contrary effect, of intensifying the inequalities that had grown in the preceding four decades. That at least, was what many observers feared, including me.
So what is happening to inequality? This week the latest issue of the World Inequality Report was published — a huge repository of information, drawing on the latest findings from the World Inequality Database (WID).
It notes the evidence that lockdowns affected low-paid workers worse than high earners and that while the rich could increase their savings, the poor often had to run down savings or indebt themselves. But it highlights that it is still early days. In part, this is because the data on income distributions take time to arrive. But it is also because governments of rich countries incurred enormous deficits to cushion the blow — and the overall outcome on inequality depends on how that new debt is handled in the future. Historical evidence shows that premature fiscal austerity worsens inequality.
There is much — much — more in the report about the current state of inequality, even if the impact of Covid-19 is elusive. Among the rich pickings, here are three findings that strike me as particularly interesting.
First, global inequality (between countries) was pretty constant in 2020 compared to the year before — but that stalled a trend of falling inequality since the early 2000s.
Second, global inequality of individual wealth took a jump last year, when the share of global wealth owned by the world’s billionaires increased by half (from 2.2 to 3.3 per cent) and that of the top 0.01 per cent wealthiest individuals increased by about a percentage point (from 10.3 to 11.1 per cent). At the same time, the wealth of the broader top 1 per cent group remained stable, both in the US and Europe, so the winners of greater wealth inequality were extremely concentrated at the very top.
Third, Europe is the most egalitarian continent, whether measured by income inequality, wealth inequality, or inequality of individual carbon emissions, the WID’s data on which are fascinating and important. (They show that middle-income people in rich countries emit less than the top 10 per cent in some poorer regions.)
What makes Europe more egalitarian than the US? Many think it is because European governments tax and redistribute more than Washington and the US states. But in a freshly published paper (with a good Twitter thread summary for those with no time to read), Thomas Blanchet, Lucas Chancel and Amory Gethin show that this is wrong. It is not redistribution that makes Europe the most egalitarian continent in the world, but “predistribution” — ie, its more equal distribution of rewards in the market itself, before governments transfer any money from higher to lower earners.
I have made this point about the Nordics in the past. It surprises people to realise that these economies do not owe their famed equality to redistribution — of which they do about the same as other west European countries — but because market earnings are more equal to begin with. I made this point by comparing income distributions before and after taxes and transfers.
It turns out that this holds more broadly for Europe, in comparison with the US. This is not immediately obvious by simply looking at pre- and post-tax incomes. Instead, Blanchet, Chancel and Gethin used a more sophisticated methodology called distributional national accounts. As the name suggests, it uses national income accounting concepts to allocate everything produced in the economy in a year — including that which does not feature on anyone’s payslip, such as undistributed profits in corporations — to some beneficiary. (It makes sense to attribute undistributed profits to shareholders, for example.)
Do this, and two things become clear. The pre-tax income distribution in the US is much more skewed than in European countries. That is perhaps not so surprising but the differences are starker than we may have thought. But the US tax system is in fact more progressive than Europe’s: “[A]fter accounting for all taxes and transfers, the US appears to redistribute a greater fraction of its national income to the poorest 50% than any European country,” the paper says. One reason is Europe’s greater use of indirect taxes such as VAT, which are less progressive than direct taxes.
Europe’s relative success in terms of extending prosperity to all is a result of creating an economy that is less unequal before taxes and transfers. That is not to say that government taxation and spending do not contribute to equality — what Europe proves is that creating an economy with opportunities for all takes work. Extensive public spending on services, for example, plays an important role even when it does not arithmetically reduce inequality (because they benefit everyone about the same). Conversely, mere redistribution does not make much of a dent to very skewed market opportunities. Prosperity for all requires fixing markets, not just compensating for their results.
Which brings us back to taxation, because public services need to be funded. Since one thing we do know is that overall wealth and wealth inequality seems to have increased in the pandemic, it is natural to think that high wealth is a good tax base. The Resolution Foundation, in a new report, points out that a £3tn windfall to UK homeowners from house price growth in the past 20 years (one-fifth of the country’s total private wealth) is “unequal, unearned and untaxed”, and explores options for taxing it. The World Inequality Report estimates that a modest net wealth tax on the global top 1 per cent wealth owners can raise 1.6 per cent of global income in revenue. The debate on wealth taxation is only likely to get hotter.
Other readables
The EU has launched its answer to China’s Belt and Road infrastructure megaproject. My take is that it’s a step in the right direction but more ambition is needed.
The signs are accumulating that, as we suggested last week, the German government is aiming to make both domestic and European fiscal rules allow more public investment.
We have also noted the new economic thinking in President Joe Biden’s White House, which I think of as progressive supply-side economics. This week, the US Treasury presented a new example with a speech on how wages have stagnated because of insufficient competition among employers, what economists call monopsony.
Numbers news
Can higher wages lead to productivity growth? A new survey of leading economists shows a majority think that in some cases, this can be true but are sceptical about the ability of governments to exploit such cases.
Source: Economy - ft.com
