Did inequality cause the Visigoth invasion of Rome?
Whatever philosophical view you take about inequality, it seems extremely unlikely the Visigoths sacked Rome in 410 AD because of a high Gini coefficient; and the UK’s involvement in WW2 was much more about Germany invading Poland than the income gap. [Editor’s note: During the introduction, the claim was made that violent periods/events in history were often associated with high levels of inequality. The fall of the Roman Empire and the World Wars were mentioned.] Unfortunately, some assume inequality is inherently bad and so use motivated reasoning to blame it for all ills – social, political, economic, even war and global warming today – justifying the need for confiscatory taxation and state regulation to solve the ‘problem’.
I do not share this alarm. The picture is complex. On most measures – the Gini coefficient, the 90:10 ratio– income inequality has been flat as a pancake in the UK for 25 years after rising in the 1980s. Wealth inequality has been largely unchanged in the past three decades. Global inequality of income has fallen – primarily due to the huge rise in incomes in China and India. On global wealth net inequality, huge swathes of ordinary people in the UK and the US are ‘the 1%’. The striking thing is egalitarians have moving targets – as these trends have developed, they now focus on the 1% within countries.
It’s true pre-tax income and wealth of the top 1% within many countries has risen in the past decades (often at the expense of the next 9% – where many of the commentators and academics who are most vocal about inequality tend to reside). But this is no doubt partly down to ‘good’ trends – globalisation and technological change facilitate larger global markets, enabling some entrepreneurs or footballers or whoever to get huge returns for providing labour or services we want and need. These may not always be enhancing for measured incomes of everyone in developed countries, but they are welfare-enhancing.
So, few people think inequality or increased inequality is always necessarily a bad thing. If £1 million fell from the ceiling into this room, some might scramble for more than others causing inequality to rise, but few would say the drop was a negative. When inequality fell during the recession as the rich get poorer, few celebrated.
A distribution of income or wealth arises from millions and millions of choices, interactions and exchanges, endowments, policies etc – many good, some bad.
The logic of reducing inequality per se then would be to do things to stop people getting rich, even if this harms the poor. Instead we’d be much better focused on alleviating poverty at the low end and eliminating the causes of inequality which you might consider to be inherently ‘bad’.
The latter might include: ending government cronyism, corporate governance reform, eliminating protectionism and encouraging free trade, removing barriers to entry, fundamentally rethinking education, reducing immigration controls (at a global level), and unrigging the UK’s housing market through planning and tax reform.
We can do all of these things – reducing poverty and inequality – without the confiscatory taxation and greater government involvement many demand. Sadly though, academics, commentators and others have lost sight of what matters to help the poor and are obsessed with the top. And this is where the motivated reasoning comes in. Rather than just say they don’t like a big gap on principle, or that they resent the rich, they instead claim that inequality causes various bad outcomes.
1) They say higher inequality reduces growth and causes macroeconomic problems: though there is no robust evidence for the former. We hear that inequality and the financial sector go hand-in-hand. But the countries with the largest financial sectors to GDP ratios (the US, UK, Ireland, Australia, Korea and the Netherlands) are a mix of high, medium and low income inequality countries. We hear that there are macro effects from ‘over-saving’ – but does anyone seriously argue this has been an issue in the UK?
2) They say, like the Spirit Levellers, that higher inequality leads to a range of social ills: But this work often amounts to a bunch of correlations using hand-picked samples of countries and time periods. We hear that more equality enhances trust, for example. But if you exclude some outliers, the relationship is the other way. Furthermore, voluntary work and civil society participation tends to be inversely correlated with equality across countries. Even if some of the negative associations described by the Spirit Levellers were causal, it’s unclear what the policy conclusions are. Yes, Sweden has more equal incomes (though much less equal wealth) than the UK and good outcomes, but so it did in the 1930s before the welfare state. People of Swedish descent in the US do better, on average, than Americans, or Swedes in Sweden. The Spirit Levellers claim that observed consumption etc causes anxiety further down the income scale, but I thought we’d heard earlier the super-rich were over-saving?
3) Some say, as we’ve heard again today, that inequality leads to social unrest: But is this true? In both the US and UK, surveys show more people thought the countries was moving in the right direction by the end of the 1980s than at the start, even though inequality had increased. Crime rates are falling like a stone – despite the 1% getting richer. There does not, to me, appear to be a strong link.
4) Finally they claim that higher inequality is bad because it leads to political capture by the top 1%: But if the problem is rent-seeking, then why will more state activity cure it? Surely this will just provide more opportunity for cronyism and regulatory capture. Indeed, when we look around the world, it’s difficult to think of any countries who became less corrupt or more successful through high taxation and regulation.
To conclude – the tone of this debate here and among the public worries me. It worries me because the evidence on distributions is much more complex than the doomsayers claim. It worries me because we see lots of motivated reasoning about the consequences. It worries me because it’s taking focus away from poverty reduction, and obsessing about the rich. And finally, it worries me because the solutions are always the same – and they don’t work.
Ryan Bourne is the IEA’s Head of Public Policy.