Mind the Gap?

My AFR op-ed today is on the economics and philosophy of inequality. Full text over the fold. I’ve hyperlinked the cited studies. Two others that I can also heartily recommend are a paper by Gary Burtless & Christopher Jencks, and another by Christopher Jencks in Daedalus.

Equality is a Just Cause, Australian Financial Review, 2 March 2010

Australian economic policymakers have a zippy self-confidence these days. Having dodged the 1997 Asian financial crisis, avoided the 2001 US tech-wreck, and emerged largely unscathed from the Global Financial Crisis, our economic growth seems remarkably robust. Adjusting for buying power, Australian incomes per person are 70 percent higher than they were in 1980.

Averages are handy, but can sometimes conceal more than they reveal (every time James Packer enters a bar, the average drinker becomes a millionaire). Since 1980, the top 10 percent of Australians have seen their incomes more than double, while the bottom 10 percent have experienced a 55 percent increase. Over the past thirty years, Australia has had a two-speed economy: with the gains from growth going disproportionately to the rich.

Most workers have enjoyed a pay rise, but at the top, earnings are shooting up spectacularly. Due to technological change, internationally mobile labour markets, and the decline of unions, Australian inequality is considerably higher than a generation ago.

Should we care about the earnings gap between city professionals and the men and women who clean their offices? Or is it enough to know that both groups are steadily getting richer?

The straightforward answer to this question is that policymakers ought to worry about inequality if it offends the typical person’s sense of justice. We all have different feelings about how much inequality is tolerable, but most people have a visceral sense that at a certain point, the income gap can grow too wide.

But over recent years, some scholars have argued that there are other arguments in favour of equality too. Among the contentions sometimes made are that inequality is bad for your health, increases crime, and slows the national growth rate.

The first wave of studies that looked at these issues compared results across countries, at a single point in time. In the case of health, it turns out that the worst health outcomes are found in the US (the most unequal country in the developed world), while some of the best health outcomes are found in the famously equal nations of Scandinavia.

But over time, researchers began to point out that these results might be biased by other factors. Perhaps the reason that Americans die younger than Norwegians is something to do with the two countries’ racial mix, political systems, or natural resources. So in a second wave of studies, researchers took a different tack. Instead of taking a snapshot in time, they examined how changes in inequality affected changes in health. Do big rises in inequality make you sick?

Answering the question this way, the case against inequality is considerably weaker. For the most part, studies that have looked at changes in inequality find no evidence that they are associated with increases in mortality. In a review chapter that I wrote with Christopher Jencks and Tim Smeeding, we concluded that ‘the relationship between inequality and health is either small or inconsistent’.

In the case of crime, the evidence against inequality is a smidgin stronger. But even here, high-quality studies point in differing directions. It is possible that widening the income gap may increase violent crime a little, but the evidence is fragile.

Perhaps inequality is bad for growth? If anything, the evidence seems to point in the opposite direction. In the post-war era, Dan Andrews, Christopher Jencks and I find that rises in inequality have been associated with small increases in the growth rate. Yet the magnitude is small – definitely a case of trickle-down rather than flow-through.

Those who believe in the ideal of a more equal Australia be disappointed to learn that the ‘instrumental’ case against inequality is so weak. But these were always the flimsiest arguments in favour of egalitarianism. A person who believes that the free market outcome is the morally just result is unlikely to have ever been swayed by the effect of inequality on health, crime or growth.

Dropping the instrumental arguments brings the debate about inequality back to one about justice. The strongest case in favour of more progressive school spending or reinstating inheritance taxes is a moral one: that such reforms accord with Australians’ fundamental beliefs about fairness. Politicians who want less inequality will be on firmer ground if they discard the instrumental arguments, and start talking ethics.

Andrew Leigh is a professor in the Research School of Economics at the Australian National University.

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8 Responses to Mind the Gap?

  1. Ilya says:

    Andrew, very interesting. Do you think however that inequality has indirect economic effects?

    For instance, there is a meme in play on the blogospehere currently according to which countries with higher levels of inequality will have lower levels of social cohesion (and ability to find consensus, and more crudely incentivising the higher income elites to misbehave) and will therefore be more prone to (a) financial and sovereign debt crises; (b) bad fiscal policy-making. What are your thoughts?

  2. Good piece.

    Fairness is indeed a popular argument, but surely the declining marginal utility of wealth also deserves an honourable mention as an argument for redistribution which is still standing?

  3. Russell says:

    There’s also a political argument – wealth often does equal power, it can buy influence, so it’s not good in a democracy to have a small group develop a disproportionate amount of influence. It makes the less wealthy feel relatively powerless and lose confidence in the political process.

  4. Rene says:

    To be totally pragmatic, surely the wealthy would appreciate that the cleaners, the lower paid professions that assist in maintaining law and order, teachers who teach their children, people who operate their supermarkets, restaurants etc should be able to afford to live, eat and recreate in a close enough proximity to them to prop up their own indulgences

  5. Hugh Worrall says:

    There is a mounting argument that greater inequality is worse for everyone in that particular society. A recent book, The Spirit Level, by Richard Wilkinson and Kate Pickett uses a range of international health and wellbeing statistics to show a pattern of worse health and well-being outcomes correlated with higher inequality regardless of the type of society. Their thesis is that lifting people out of poverty is not sufficient to improve health and wellbeing. Inequality is important regardless of the absolute levels of income.
    I think this has interesting implications for the idea of ‘equality of opportunity’ which has become a more powerful idea over the last few decades, as opposed to ‘equality’.
    I also wonder about the interconnection between the idea of ‘incentives’ as the dark side of inequality. It appears that in a society like the US, it requires a commitment to inequality to maintain adequate ‘incentives’.
    As a community worker I’m interested to see where this discussion can go and how it might link to new ways of organising work in relation to unemployment benefits. See http://www.equalitytrust.org.uk/ for more.

  6. Don says:

    If you support policies aimed at reducing limiting income inequality on ethical grounds are you more likely to be persuaded that income inequality has negative effects on health?

    Columbia University’s Robert Jervis would say yes.

    In Perception and Misperception in International Politics Jervis argued that human beings have a tendency to irrational consistency:

    “… people who favor a policy usually believe that it is supported by many logically independent reasons. When a person believes that a policy contributes to one value, he is likely to believe that it also contributes to several other values, even though there is no reason why the world should be constructed in such a neat and helpful manner” (p 128).

    Belief systems often display overkill, wrote Jervis:

    “People who favored a nuclear test-ban believed that testing created a serious medical danger, would not lead to major weapons improvements, and was a source of international tension. Those who opposed the treaty usually took the opposite position on all three issues. Yet neither logic nor experience indicates that there should be any such relationship.”

    There’s another reason people might be unwilling to embrace beliefs that pull in different directions and work through the trade offs. Beliefs have a number of functions and not all of them are best served by weighing up the evidence.

    According to psychologist Robert Abelson beliefs can have an expressive function. In his paper ‘Beliefs are Like Possessions’ he argues:

    “When expressive beliefs are stated, there is often the intent to imply that the belief-holder has good character and good judgment, or a highly developed moral or spiritual sense.”

    People can use expressive beliefs to signal their values and identity. And there can be social penalties for displaying the wrong beliefs. For example, in some conservative circles, expressing the belief that climate change is real, is caused by human activity, and is avoidable might be interpreted as “I hate capitalism”.

    I think there can be a social cost to taking each issue on its merits. On various blogs I’ve been denounced as left wing and as right wing. People look at my stand on a single issue and interpret it as if it were some kind of insignia.

  7. Pingback: Inequality and social outcomes « The Melbourne Urbanist

  8. Shane says:

    Interesting article. In addition to the recent book by Wilkinson and Pickett, the recent British Medical Journal article:
    ‘Income inequality, mortality, and self rated health: meta-
    analysis of multilevel studies’ by Kondo et al 2009 would suggest that the evidence for a link between inequality and health is stronger than this article suggests.

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