Fixing Inequality — Vexing, but Not Rocket Science

Fixing Inequality — Vexing, but Not Rocket Science
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Why you should care

Because the robots haven’t won yet!

The author is a senior fellow at the Center for Global Development.

Is it time to throw up our hands and admit defeat on the vexing issue of inequality?

Some thinkers seem to have concluded as much, as the rich get richer and average wages stagnate across the United States, Europe and China. The forces of technological change and globalization make reining in inequality impossible, goes the argument: The robots are taking the jobs, and the robots are owned by the rich, so if you try taxing the owners, they’ll simply move their robots someplace else.

The notion that inequality is inevitable is so pervasive that it has a name: the Transatlantic Consensus. The phrase came from Anthony Atkinson, a world expert on poverty and inequality, who used it to describe the widespread idea that there was nothing to stop growing wage gaps. In this view, the only solutions are drastic, dramatic, inhumane: Consider Guido Alfani at Bocconi University, who suggests that the only way to make a serious dent in inequality is a plague or a war. Both would reduce the number of workers, thus increasing their bargaining power.

But — as Atkinson was quick to point out — such views are too pessimistic. Inequality is not our destiny; we are not powerless to change it. Indeed, inequality is far lower in many other countries than it is in the U.S., and in some countries it is still falling. Those countries show what works to achieve greater income equality — and it isn’t that complicated.

In a new study of tax data, French economist Thomas Piketty and colleagues found rising income inequality in the U.S. between 1978 and today — no surprise there. But the study also found that over the same period, the bottom half and top 1 percent of French adults kept their share of total incomes almost exactly the same. Other countries have done even better: In 1999, the richest one-fifth of Brazilians took home 68 percent of the country’s disposable income — leaving less than one-third of the income for the other four-fifths of the population. By 2014, that had dropped to 55 percent. Over the same period, the income share of the poorest fifth more than doubled, to 4.3 percent.

What explains rising inequality in some countries even while it is declining elsewhere? One factor is tax rates: Research by the Organization for Economic Cooperation and Development — the think tank for rich countries — suggests that across its member countries, the top personal income tax rate fell from 66 percent in 1981 to 42 percent in 2010. Countries that have kept taxation more progressive have kept incomes more equal.

But it is also about how that tax is used: Brazil’s strong performance in reducing inequality is in part linked to its Bolsa Família program — a cash payment to poor families who keep their kids in school and get them health checkups.

More equitable provision of government services is another important part of the story. Across countries, the proportion of inequality that is “baked in” — dependent on how rich your parents were — varies considerably. One factor behind that variation is the education system: In the U.S., parental income is a strong predictor of test scores — and as higher test scores are associated with earning more later in life, that’s one way income inequalities persist through generations. But in Norway, parental wealth has no relationship to children’s test scores. The fact that every child has access to preschool and that the quality of schools across the country is fairly consistent are two reasons why.

Finally, it is not just about government fiscal policies — regulation matters too. A big factor behind growing inequality in the U.S. is that poor people are finding it harder and harder to move to places with better jobs because housing regulations price them out of buying a home close to those jobs.

That a large part of the inequality problem can be solved by raising taxes to spend on quality government services alongside cutting unnecessary regulation is why reducing inequality can be good for the economy: Recent work by the International Monetary Fund suggests that countries which redistribute more and have lower inequality actually grow faster. If the U.S. wants to get out of the rut of slow growth and a yawning rich-poor gap, we know the policies that will work. And it doesn’t need to take a war or a plague to enact them.

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