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Changing the Conversation about Inequality

Changing the Conversation about Inequality

Pablo Beramendi, Duke University

Anthony B. ATKINSON. Inequality: What Can Be Done?, Cambridge, Massachussetts: Harvard University Press, 2015

In his Inequality: What Can Be Done? Anthony Atkinson takes issue with the dominant discourse on inequality and launches a masterful effort in politico-economic persuasion. A superficial read of the summary of proposals at the end of the book could lead to the conclusion that we are witnessing a romantic cry from the old left: more taxes, more state presence and regulation in banking and finances, more spending… a utopian re-statement of policies long gone. Yet, as one delves deeper into this normatively driven book, the picture emerging is rather different. Atkinson’s analysis brings to bear a rare combination of attention to the efficiency and distributional implications of policy, a rich knowledge of history, and a sense of pragmatism, both economic and political. The aim, explicitly stated, “is progressive reform rather than transcendental optimality” (p. 236). And that requires changing the conversation about both the drivers of inequality and the strategies to reduce it.

Grounded on decades of world-class research on the subject, the book seeks to address the seemingly unstoppable rise in inequality in income and wealth. The 15 proposals put forward are responses to changes in the drivers of inequality, carefully identified in the first half of the book.  They combine the thoughtful updating of old policy tools to new contexts (minimum wage or progressive taxation of income and wealth) with the introduction of more innovative instruments (minimum inheritance at adulthood, participation income). These proposals, and the careful justification behind them, advance three core messages to change the conversation about inequality and how to deal with it.

First, the case for more equality is both a normative (fairness and equality have value on their own) and a positive (applied) one. The standard objections against pro-equality interventions are that they impose distortions, lead to higher unemployment, and ultimately shrink the size of the cake, creating suboptimal outcomes.  This is an all too familiar tune that, Atkinson shows, has weak theoretical and empirical foundations. Yet, stuck in the academic and public discourse, it has limited the collective understanding of the actual evolution of inequality in the long run and its determinants.

Atkinson leverages new data to study where and when inequality fell in the first place and why it is increasing again. With Piketty, he highlights the decreasing relative importance of labor earnings relative to capital but cautions an important distinction between wealth and the ability to actually draw returns from capital. It is the latter that is really skewed by income despite the fact that capital ownership via housing has become more widespread. As a result, the earlier crossing between the distribution of earnings and the distribution of capital gains has given way to a new world where there is a significant and growing overlap between them. Along the way, the growing earnings gap reflects a relatively new phenomenon: educational gains are no longer a good predictor of economic gains because the latter reflect the concentration of the ability to exploit technological innovations and the management of capital. In addition, the demographic fabric of inequality has also changed (marriage choices have become a match inter pares, thus polarizing the fortunes across households). And, at the same time, the countervailing power of unions and labor market institutions has become weaker, taxes have become less progressive (by virtue of lowering rates and narrowing bases), and benefits have become less generous (by cutting both levels and coverage).

Second, an effective strategy against inequality must sever these links in a comprehensive way. Since the reasons for the rise in inequality are multidimensional, so should be the reforms to curb it. This implies focusing on inequalities in the market place as much, if not more, as on corrections through fiscal redistributive measures; and paying close attention to the interactions between different interventions in the long-run. For instance, the goals to reallocate the benefits of technological innovation and to equalize the ability to access a minimum stock of capital and secure minimum returns require complex institutional, regulatory and fiscal measures.

The state must not only fund innovation but also partake in the distribution of its returns with an explicit concern for the distributional aspects of policy (p#1 p#7), and competition policy must re-balance the interest of all stake-holders (p#2). To increase the pool of stake-holders everyone must receive a minimum stock of capital during adulthood (minimum inheritance, p#6 ) that small holders ought to be able to leverage without incurring risks (national saving bonds, p#5). In turn, for wage earners to share in the returns of innovation, a renewed, incentive compatible, minimum wage is both possible and desirable along with efforts to ensure fair pay and facilitate efficiency wages (p# 4). 

Beyond the labor market, an expanded social security along with new transfers, such as a universal child benefit taxable as income, and basic income based on contributions to the community (participation income) would make compatible the goals of social integration and economic performance. Implemented in coordination, these policies will arguably generate not only a fairer but a more sustainable society in the face of growing demographic pressures. Those concerned with long run prosperity, even the potential winners, will do well in worrying about inequality and be less myopic. Alas, the management of myopic economic and political actors ranks among the toughest challenges in political economy.

This brings us to the third message of the book: inequality is both an economic and, fundamentally, a political problem. The resources necessary to implement the reforms mentioned above require a progressive impetus in the taxation of income and wealth. The former would imply the return of progressive taxation with a new earned income tax discount limited to the first band of earnings (p#8, p#9); the latter, progressive property taxes (p#11) and a progressive lifetime tax on the transmission of wealth (p#10). Such actions in a global economy are not new but require, Atkinson admits, major coordination efforts between domestic economic and political actors within nations and, as importantly, large levels of international cooperation (e.g. the EU).

The last section of the book is devoted to debunking the myth that these reforms would reduce national income and are economically unsustainable. Both charges collapse quickly under empirical scrutiny: cross-national evidence suggests that more equal nations grow as much and better than more unequal ones, and the microsimulation analysis in the context of the UK illustrates how a pro-equality program is economically feasible.  However, economic feasibility does not translate automatically into political feasibility, a problem treated less in depth than other aspects of progressive reform.

The book mentions several examples of domestic and international cooperation as grounds for optimism, but existing evidence from comparative political economy calls for some caution. The coordination among domestic economic and political actors to create efficient and equitable labor markets, once in place in Northern European economies, is now under question. The very diversification of experiences in the labor market complicates the national conversation about fair pay and employment even in those places where it once guided economic policy. To the extent that the political consequences of immigration and the diversification of labor market risks undermines the political feasibility of such coordination initiatives, the effort necessary to implement the ambitious proposals laid out in this book seem beyond the time horizons of office seeking politicians.

The scene in the international arena does not fare much better. The responses by EU members to the sovereign debt crisis reveal little concern for the distributional implications of adjustment policies beyond immediate electoral needs. While the occasional shock, such as Brexit, may trigger some reflection about the roots behind citizens’ disaffection with the current patterns of economic inequality and the political inaction to tackle them, current leaders seem more preoccupied with their domestic constraints than with developing a coordinated initiative to truly tackle the causes of inequality that go beyond national boundaries. Again, this casts a shadow on the political prospects of some of the proposals, regardless of their economic feasibility.

The next hurdle in thinking through a feasible agenda for equality involves bridging the apparatus this book provides with the political economy of cooperation within and between countries, exploring the institutional conditions under which these reforms can be incentive compatible and, therefore, sustainable for both voters/consumers and producers.

By bringing the conversation about inequality thus far, this book provides a rare milestone in our collective ability to aspire to a better world.

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