Coping with inequalities in wealth

There has been some interest recently in wealth inequalities, for example in work by the Fairness Foundation.  Much of this focuses on the wealth of the very rich.  In recent correspondence, I’ve been struck by the extent to which others considering the issue have focused, not so much on the implications of inequalities in wealth, but on fair taxation and inequalities of income – problems relating to benefits and low wages.  I’m sceptical that either focus can address wealth inequalities in a meaningful way.

Any conceivable redistribution of income will not (by definition) touch the established holdings of people who hold assets as wealth – typically in the form of real property or financial products.  There may have been an argument in the 1950s and 60s for heavy taxation of income (the flow) to prevent the accumulation of wealth (the stock), but the genie is out of the bottle; the wealth has been already been accumulated. Income taxation now can slow further accumulation, but that does not begin to address the issue.

That may seem to some to constitute an argument for wealth taxes, such as property taxes, inheritance tax or taxes on capital transfer.  That makes sense in terms of fairness – subjecting wealthy to the same criteria as others – but it can only ever have a limited effect on the distribution of assets, because they are based on a proportion of wealth at best.

What we need to do, instead, is to reconsider how the problems created by unequal wealth might be addressed.  Wealth inequalities may have seemed harmless to Tony Blair, who said he was “intensely relaxed about people getting filthy rich”, but they have implications for people who don’t share in that wealth.  In particular, they create obstacles to access to land, housing and, to the extent that people have become rich by using their assets to extract money from people who aren’t rich, they make for problems relating to rent, poverty and debt.

I think there are two main directions to go in.  The first is to consider the problems, not of the rich few, but of the many poor – in these terms, those who do not have assets. More income will help deal with issues of poverty, debt and manutrition; and regulations to cover those circumstances, such as protection related to financial services or limiting the interest that any  creditor can receive,  would have direct benefits.  However, in important fields of life – especially rent and residential care  – the main beneficiaries of greater income support will be those who hold the assets on which those services are based.  Supporting income is not enough.

The second direction is to establish a base of assets that will be available to people regardless of their financial circumstances.When the National Health Service was introduced, it had a major effect on the resources available to the poor – an effect that is largely concealed by the way we choose to keep public accounts.  Part of this can be seen as an implicit income: everyone in Britain has, whether they use the service or not, a financial gain equivalent to the value of health insurance. Part, however, is the equivalent of a savings fund: the protection of assets that in other circumstances would be exhausted.  When people have access to social housing, libraries, museums and parks they have gained command over resources – if not quite as good as ownership, something pretty close.   And when those resources are withdrawn from people, they feel the loss.

A wide range of basic services could be treated in this way.  They include, for example, funeral plots, free transport, legal aid, university education, wi-fi, child care, basic banking services and mailboxes.  Provided publicly, these things allow people to act as if they had the assets themselves.  That would have a much great effect than any focus on the assets of billionaires.

The pitfalls of comparative analysis: does the welfare state lead to wealth inequality?

A blog from the right-wing Cato Institute caught my eye.  It claims, on the basis of an article published last year, that poorer households have less personal wealth in countries with higher welfare state expenditure.  Apparently, this is because people in welfare states don’t need to provide for the same contingencies that others might have to.  The headline claims: “Welfare State Causes Wealth Inequality”.

The original article , by Fessler and Schürz, is complex and careful, and it’s capable of being interpreted in several ways.  The article is behind a paywall, so here’s a link to a slide show with key details.  Wealth holding is very strongly reflects the pattern of inheritance, and the people this most affects aren’t the poorest.   The authors explore a range of interpretations, most notably the apparent paradox that

social services provided by the state are substitutes for private wealth accumulation and partly explain observed differences in levels of household net wealth across European countries. …  This implies that an increase in welfare state spending goes along with an increase — rather than a decrease — of observed wealth inequality.

I’m not convinced that we can treat social expenditure as a unified element – the way countries treat pensions is not necessarily how they treat people with disabilities – and if there is a generative relationship, it’s not at all clear what affects what.  In my own published work, more generally, I’ve been critical of analysing country effects in this way.

The paper where I make the arguments is on open access here.  What matters is not the number of data points within the countries, because those points are interdependent, but the number of policy units (that is,  governments).   There just aren’t enough countries to be able to do this analysis sensibly, and this paper is no exception.  direction  Here is a graph from Fessler and  Schürz‘s paper, showing some of the key information.

The data in the article are based on 13 countries; this graph has eleven.  One of them is Luxembourg, a notorious outlier – not just because it’s small, but because it’s distinctive.  Remove Luxembourg from the analysis, and the line in the graph goes clearly and strongly in the opposite direction.  (That reversal of direction, which contrasts with the apparent pattern for people with less wealth, actually makes the findings more interesting.)

This doesn’t mean that the interpretation in the article is wrong.  The hypothesis is intriguing and plausible,  and it could still be true.  The problem is that we can’t tell.

The shape of inequality is not what Piketty thinks it is

Half of England, a Guardian report tells us, is owned by less than 1% of the population.  That sounds, on the face of the matter, like a justification of the Marxist view of the concentration of capital – and, for that matter, of Thomas Piketty’s argument, in Capital in the 21st Century, that inequalities are increasingly likely to  be concentrated in the hands of wealthy individuals.  But the figures for land ownership in England don’t quite show that.  The largest group of landowners are still the aristocracy and gentry, fundamentally a pre-capitalist source of inequality still accounting for 30% of the land.  17% of the land is owned by ‘new’ money, oligarchs and capitalists.  But 29% is owned by corporates, institutions, public authorities and organisations.  The central weakness of Piketty’s analysis is its  failure to engage with ownership that isn’t in the hands of private individuals.  Organisations and other non-human entities have an advantage over human beings; once their wealth is concentrated, it will either remain or it will pass to other non-human owners.  In the long term, this, rather than the hands of private individuals, is where wealth will be concentrated.

Not austerity, but a purposeful aggravation of inequalities

A report for the EHRC identifies the impact of ‘austerity’ policies since 2010.  The cumulative effect of policy changes has been disproportionately to affect people on low incomes, women, people with disabilities and minority ethnic groups.  This is not about austerity, which has always been a misnomer.  Austerity means spending less; this is something quite different.

Oxfam is critical of extreme inequality but it’s not clear about what the problems are.

Oxfam’s briefing paper on inequality, An economy for the 99%, has attracted some plaudits, but I was disappointed.  Its main theme is the startling disparity between the super-rich and the rest of the world.   While it’s well researched, it suffers from two key vices.  The first is that it doesn’t do enough to explain why this inequality is a bad thing.  The second that it gets distracted by other issues – climate change and violence against women.  That’s not to say that they’re not important, but so are lots of other things – war, corruption, sanitation, communications –  and they’re all irrelevant to this case, too.

What, then, is wrong with extreme inequality?  The problem with  inequality is not that very rich people don’t pay their taxes, though it would help if they did.  It’s that their wealth limits the rights and security of the poor, most obviously in access to land and resources.  At the same time,  that the maldistribution of resources going to lower paid workers holds back the world economy, ultimately costing everyone.  We need to be wary, too, of the assumption that the Rich are exclusively made up of people richer than us.  From the point of view of much of the world, those of us living comfortably in Europe are the Rich, and we’re just as much of a problem as Bill Gates and Warren Buffet.

Redistribution, inequality and growth

A paper from the IMF finds that redistribution does not damage growth, and may help it.  “Lower net inequality is robustly correlated with faster and more durable growth”, and “redistribution appears generally benign in terms of its impact on growth”.   This is not any great surprise.  Richer countries tend to better public services and greater equality; transfer payments have limited economic effects; the evidence over many years has been that welfare does not damage an economy.  However, it may be surprising that it’s the IMF saying it.

Apology: I originally posted this with a link to an older IMF paper.  The link has now been corrected.  PS

Why refer to poverty as a proportion of median income?

This is the abstract of a paper I’ve just had published in the Journal of Poverty and Social Justice, vol 20(2) pp 163-176 – the paper is not online yet but I have received a paper copy, so it will appear shortly.

“The most widely used indicator of poverty refers to a threshold set at 60% of median income. This paper reviews the implications of this approach and the conceptual problems it raises. The threshold relates to inequality and ‘economic distance’ rather than need. Though it was initially intended to be simple and comprehensible, the indicator causes considerable confusion, and successive refinements, including adjustments for disposable income, housing costs and equivalence, have limited the accessibility and use of the figures. Referring to median earnings would be a simpler, more practical approach.”