Living the Questions: Who ate all the pie?

If you are expecting reflections on football chants aimed at over-indulgent players, do stay and read on.

In 2010, Dan Ariely and Michael Norton asked thousands of people in the US for their views on the distribution of wealth, from top to bottom. The vast majority imagined a far more equal nation than is actually the case. Dividing the population into five quintiles, the 20% wealthiest in the top quintile down to the 20% poorest in the bottom quintile, what percentage of the total wealth pie do you think the bottom 40% (two quintiles) and the top 20% have? The average guess was about 9% for the bottom and 59% for the top. The actual numbers were 0.3% and 84%.

In The Price of Inequality, published last summer, Joseph Stiglitz stacks up the evidence for growing inequality of US wages, total income and wealth, and the sharp acceleration during the Great Recession, since 2008. The bottom and middle are now worse off than in 2000, while income growth has been primarily at the top 1%.

He also, importantly, busts the great American myth of equality of opportunity (related to both income mobility and lifetime earnings), often used somehow to justify inequality.

Market forces have shaped inequality; government policies have shaped those market forces (much of the inequality that exists is the result of government policy); and the 1% have used their power to shape policy to their own ends. The wealthy often do not so much create wealth as take wealth away from others through rent-seeking – not just in the US. Recall, for example, HMRC’s waiver of Vodafone’s potential £7-billion tax bill.

The US, UK and other widely unequal countries are paying a high price for this inequality.

Richard Wilkinson and Kate Pickett, in 2010’s The Spirit Level, presented compelling evidence that more unequal countries have lower life expectancy and higher levels of violence, illiteracy and mental illness than more equal countries, and that more unequal societies are worse for everyone in them, including the well-off.

Stiglitz argues that their economies are inefficient in their use of resources, and are neither stable nor sustainable in the long term. The US is staring into the abyss of a breakdown in social cohesion and trust. Democracy itself is in peril, warped, as it has been, from one person, one vote, into one dollar, one vote.

Yet, despite everything, through its ownership of the media, the 1% has largely succeeded in shaping public perception in the US, and convinced the 99% that they are all in it together. Maybe they have been less successful in the UK, but there is still a long way to go politically.

Britain became more equal during the World Wars, as the Government saw that making people feel they were sharing the burden was a way to gain popular support for the war effort. During the mid-1980s and early ’90s, inequality grew rapidly, almost certainly reflecting the neo-liberal economic policies of the Thatcher and Major Governments. The gap narrowed slightly during New Labour, but the Coalition’s tax and expenditure policies are widening it again.

Wilkinson and Pickett make the point that it would not take a revolution to reduce income inequality. All the data in The Spirit Level come from rich developed market democracies, and their analysis is only of the differences between them.

But a transformation is still required, and they outline two direct ways of reducing income inequality: first, reduce differences in pay before tax (as happens in Japan) – for example, by minimum-pay policies, strong trade unions, employee representation on boards, and through a public ethic intolerant of the bonus culture; and, second, redistribution by taxes and benefits (as happens in Sweden, that notorious – in the US – socialist state), not least through more stringent action to prevent tax-avoidance.

Ariely and Norton also asked their US respondents to describe their ideal distribution of wealth. Here’s an image of all three sets of numbers.* The ideal is not far off the distribution in – Sweden.

Other government policies can have indirect influence, including education policies and the management of the national economy. There is a huge volume of evidence available to policy-makers, which they need to filter. The danger is that some evidence is played down, in order to avoid challenging the status quo. The gift of The Price of Inequality and The Spirit Level is to enable concentration on one area: reduce inequality, and see substantial improvements in economic efficiency, stability and sustainability, murder rates, mental illness, obesity, imprisonment, teenage births, and levels of trust. Moreover, more equal countries are more generous to developing countries.

We could evaluate all government policy in terms of the question: what effect would this policy have on income equality? This question would act as a common cause, and bring clarity to the engagement. As policy is so complex, often the indirect effects on inequality are not obvious. It is important, therefore, to enlist experts in each field and discuss, listen, and learn. But even without all the answers, we can still put the equality question to our representatives and policy-makers, and ask them to ensure that the aim of reducing income inequality underpins all policy discussions.

So, Iain Duncan Smith, what effect would changing the way in which child poverty is measured have on income equality? George Osborne, what effect will your next budget have on income equality? And, Barack Obama and your bicameral Congress, what effect will you all together have on income equality?

Oh, and we’re looking forward to welcoming Stewart Wallis from the New Economics Foundation and Tom Crompton from Common Cause to TEDxExeter 2013, and to hearing what they have to say about economics and values.

* I know, it’s not a pie, but it tells a clearer story than the pies in the Ariely article. Maybe I should have titled this post: Who ate all the (chocolate) bar?