For Richer, For Poorer

Summary of Economist Special Report

Lower Inequality?

• 1889: George Vanderbilt II had a mansion which was 300 times bigger than the average dwelling of its day

• 2012: Bill Gates’ home only 30 times bigger than the average modern American home.

Most of countries are experiencing increase in disparity among its people…

Gini Coefficient…

The riches are getting richer.. But the world as a whole is becoming a fairer place…

Kusnetz Curve: Inverted U…

• Simon Kusnetz (1955) described the relationship between inequality and prosperity as an upside-down U Kuznets Curve.– Inequality rises in the early stages of

industrialization as people leave the land and become more productive and earn more in factories. Once industrialization is complete and better educated citizens demand redistribution from their government, it declines again.

Latest trend, from inverted U to N…

• Until 1980, Kuznets prediction appeared to have been vindicated.

• But the past 30 years, the inverted U has turned into something closer to an italicised N, with the final stroke pointing menacingly upwards.

Inequality starts becoming TOP political agenda…• Whether taxes should rise at the top and how big a

role government should play in helping the rest have become major questions in US Presidential Election.

• Francois Hollande, France’s new president, wants a top income tax rate of 75%.

• India’s government is under fire for the lack of “inclusive growth”. Inclusive growth is also one of the medium term goal for Indonesia’s national planning.

• Wen Jiabao (China) has long pushed for a “harmonious society”

Efficiency vs Equality???• In theory, there is trade off between efficiency and equity/equality.• The mainstream consensus has long been that a growing economy

raises all boat, to much better effect than incentive-dulling redistribution.– “Of the tendencies that are harmful to sound economics, the most

seductive and … poisonous is to focus on questions of distribution.” Robert Lucas (2003)

– “Precisely the inequality of the distribution of wealth which made possible those vast accumulation of fixed wealth and of capital improvements which distinguish (the Gilded Age) from all others).” Keynes (1919)

– Milton Freedman argued that greater inequality would spur people to work harder and boost productivity.

So, should we, economists, also join the boat? Starts caring about inequality…??

• In theory, inequality has an ambiguous relationship with prosperity.– It can boost growth, because richer folk save and

invest more and because people work harder in response to incentive.

– But big income gaps can also be inefficient, because they can bar talented poor people from access to education or feed resentment that results in growth destroying populist policies.

Empirical evidence…

In a recent report, the Asian Development Bank argued that if emerging Asia’s income distribution had not worsened over the past 20 years, the region’s rapid growth would have lifted an extra 240m people out of extreme poverty.

Some facts on Inequality… that can boost growth if we fix it..• In countries with the biggest income gaps, increasing

inequality is partly a function of rigidities and rent seeking.

• Rising inequality has not, by and large, been accompanied by a smaller (and hence less distortive states).

• Recent experience from China and America suggests that high and growing levels of income inequality can translate into growing inequality for the next generation and hence declining social mobility.

What kind of inequality should we care?

• Inequality as measured by Gini coefficient is simply a snapshot of outcomes.– Income gaps can arise for a good reason (such as when people are

rewarded for productive for work).– Or bad ones (if poorer children do not get the same opportunities as richer

ones).

• Some societies are more concerned about equality of opportunity, others more about equality of outcome.– Europeans tend to be more egalitarian, believing that in a fair society there

should be no big income gaps. (Welfare State)– Americans and Chinese put more emphasis on equality of opportunity.

Provided people can move up to the social ladder, they believe a society with wide income gaps can still be fair.

Economists arguments…

• Although the modern global economy is leading to wider gaps between the more and the less educated, a big driver of today’s income distribution is government policy.

• A lot of today’s inequality is inefficient, particularly in the most unequal countries. It reflects market and government failures that also reduce growth, social mobility, and future prosperity.

• There is a reform agenda to reduce income disparities that makes sense whatever your attitude toward fairness. It is not about higher taxes and more handouts. It is about attacking cronyism and investing in the young (True Progressivism)

Points of Discussion…

• What are the causes of the soaring in inequality?

• Should we prioritize equality than efficiency?• If yes, equality of income or opportunity?• Do you agree with Economist arguments?