How much inequality is too much?

BBC Business

Image copyrightiStock

The richest 10% of Americans earn half of all of income. In Britain, the top 10% hold 40% of all the income.

Inequality isn't just an issue for rich countries: a billion people have been lifted out of poverty since 1990, but inequality has also been rising in many countries too.

Four experts talk to the BBC World Service Inquiry programme about the effect inequality has on growth and prosperity.

---

Deirdre McCloskey: Capitalism is not the enemy

Deirdre McCloskey is Distinguished Professor of Economics, History, English, and Communication at the University of Illinois at Chicago. The daughter of a Harvard Professor, her brother became a university cleaner.

"You can't force people to take advantages that are placed in front of their nose, and that's my brother's case. No amount of income redistribution or socialist schemes to give my brother more opportunities would have made any difference at all to his life.

Image copyrightGetty Images

Image captionOccupy protesters have highlighted the gap between the wealthiest 1% and the other 99%

"If people strive, some of them succeed and get rich, at least momentarily until other people strive and compete with them. This striving turns out to be good for all of us.

"The percentage of people in the world living on $2 (£1.30) a day - an appalling level of income - has halved in the last 30 years. That's not by foreign aid or redistribution. It's by letting the economy function in a more innovative way.

"The wrong way to cure inequality is to attack the people who are taller, or have better parents, or live in richer countries. The way to do it is to uplift the poor. I approve of being taxed to help the very poor. But I don't want to kill the goose that laid the golden eggs. Capitalism is not the problem, it's the solution.

"The growth in the last couple of centuries has been astounding. It's a factor of 30 - about 3,000% per head for the average English or American person. Explosive, unprecedented growth. Meanwhile, inequality has gone up and down a little bit.

"If you were to make a rule that the chief executive could only earn 50 times the shop floor employee, that would not reduce inequality substantially.

"I'm very relaxed about [inequality] as long as it's not force or fraud that caused it."

---

Jared Bernstein: Inequality impedes growth

Jared Bernstein is a senior fellow at the Center on Budget and Policy Priorities in Washington DC, and a former economic advisor to President Obama.

"I was a member of the President's economics team during the worst recession we've had since the Great Depression. The responsibility to try to turn that around was huge.

"This wedge of inequality between growth and the income of working families undermines the basic incentive that hard work will be rewarded.

Image copyrightGetty Images

"I call it the shampoo cycle - bubble, bust, repeat. And because middle and low income families lack the income growth they used to see, they borrow to make the difference. That creates large leverage bubbles which explode and hurt growth.

"Once wage inequality gets too high, and you have lots of low income people stuck in tough neighbourhoods that are segregated by income and race, and they have fewer libraries and a more difficult learning environment, you begin to see this connection between high levels of inequality and barriers to opportunity.

"You don't necessarily see that in today's economy because that's a cumulative process, but it's very possible that we'll see that in economies 20 years from now when these children come into the job market.

"If you go back to the period where productivity and incomes for middle class families were growing together - in the US that would be back to the mid 1970s - you'll see that the top 1% held about 10% of all income.

"Now it's 20 times that. That's too much. I'm not saying we necessarily have to get back to the late 1970s level, but I do think that a good metric here would be that the income of middle income families would grow closer to the rate of productivity growth, and that's something that we haven't seen for a while."

---

Jonathan Ostry: Opportunity more important than inequality

Jonathan Ostry is deputy director of the Research Department of the International Monetary Fund.

"We don't have a threshold level for how much inequality is too much. We don't have a magic number. Sometimes a rise in inequality is perfectly compatible with healthy growth and prosperity, and in other cases the rise has gone way too far.

"When China opened up, it not only took off in terms of economic growth, but there was a marked and quite significant increase in income inequality. I'd be prepared to venture that was a good increase in inequality. Sometimes you need to have a little bit more inequality in order to get growth going as part of deregulating of your economy.

Image copyrightGetty Images

Image captionThe Bolsa Familia programme to tackle poverty was a centrepiece of former Brazilian President Lula's social policy

"Think of the very high levels of inequality that prevailed in Brazil when President Lula came to office, and the steps he took with the Bolsa Familia conditional cash transfer programmes. His policies were successful without jeopardising economic growth.

"I would want to be sure that in a country with a lot of inequality those at the bottom still had opportunities to be well-educated, to have adequate nutrition, and were not shut out from credit and banks. Likewise if there was a fair degree of equality, but nevertheless those at the bottom didn't have adequate opportunities, I'd be concerned.

"So for me it would be more a question of whether there were adequate opportunities for the less well-off in society. Provided that was the case I wouldn't be overly concerned that a given level of inequality was causing great harm.

"[However] it turns out that income equality is an important factor in separating countries that have been successful at sustaining growth for long periods, versus those that have enjoyed spurts of growth which have fizzled out rather quickly. Too much inequality can undercut the ability to sustain growth.

"In more equal societies, those that are more socially cohesive, governments are able to take measures that have buy-in from the population at large. Therefore they can right their economies more quickly.

"In more unequal, less socially cohesive societies, people don't buy the notion that if the economic ship is righted, everyone will benefit. They're more likely to oppose the painful short-term measures that governments need to take to right the economic ship. And so righting that ship becomes much more difficult in less equal societies."

---

Branko Milanovic: Beware rising inequality within countries

Professor Branko Milanovic has spent his career studying inequality, and is now a visiting professor at the City University of New York.

"We need inequality. Perfect equality, everybody having the same income, doesn't exist anywhere, nor has it. Obviously some countries - maybe China during the cultural revolution - came relatively close, but some inequality has always existed.

"Without inequality you lack incentives to do practically anything - to work, to invent new things or to invest. Nobody is going to do things for nothing and we know that monetary rewards are really crucial, so this is the good part of inequality. We should not forget that inequality is indispensible for the development of a society.

"Globalisation has been very good for the middle classes in the emerging markets - China in particular, parts of India, Thailand, Indonesia. They are still not level in terms of income with the middle class in the rich world, but it's improving, On the other hand, we have essentially a stagnation of middle class incomes in rich countries, a very interesting and a potentially politically destabilising development.

Image copyrightGetty Images

Image captionThe economic disparity between the wealthiest and poorest in China is stark

"If the gaps keep on increasing as they've increased in the last 20 years, you would end up with two types of societies within a single country. If there is no sufficient middle class and if the poor really are very far from the rich, then you really cannot speak of a single society.

"We could end up with a kind of a global plutocracy, this global one per cent or even half a per cent that are very similar among themselves, but really belong to different nations.

"We might have a situation that most of global inequality is due to inequalities within nations which was more or less the situation 200 years ago. So we may be really going back to the situation that existed before the industrial revolution."

Is this Prosperity for Real?

By Pritish Nandy

Despite the economic downturn there remain clear signs of growing prosperity all around us. Almost every week someone or the other walks into my office wanting to make a movie and ready to pay for it. It was like this ever since I entered this profession. But earlier, people came with a few lakhs, a script, a camera and an autograph book. Now they come with ten or twenty crores.

Most of them come from remote towns and states, where they claim to have made a neat fortune in some business they are not ready to disclose details about. Others come, having sold off some ancestral land or property. They turn up in Mumbai with big dreams of making movies and doubling or tripling their wealth. When I warn them it’s not that easy, many go away with disbelief. Most times I turn them back because they come with cash. They are surprised when I tell them that the real guys who make movies in this town do not deal in cash any more. Only hustlers do.

But what never ceases to surprise me is the amount of wealth that actually exists in India. It is possibly because once you are a few miles out of the main cities, no one really bothers about things like taxes. Life is simpler. You neither hire CAs nor do you bump into tax officers. You simply do your business and get ahead with life. I seriously doubt how many of the rich guys out there actually bank their wealth. They put their profits back into land and property or gold and, now, increasingly into fancy SUVs and a lifestyle that they see in television serials and movies. That’s what defines their ambitions.

But yes, prosperity exists in certain pockets and it’s clearly growing. Much of this prosperity comes from two things: Inflation and the selling of family assets that the young generation is no longer keen to hold. So the wealth you see is not actually created, as all real wealth ought to be. It is wealth that is generated from the falling value of the rupee and the rising cost of land and property. It is, in that sense, illusory. For the amount of money you get from selling a family asset once acquired in thousands and now being sold in crores is not really all that much as it may appear. The crores you now get have the same purchasing power as the few thousands that were once paid to acquire that very asset. It is the value of the rupee that has fallen. So these crores will not fetch you much more than what those thousands could have fetched your grandfather. And those who sell those assets ultimately find them irreplaceable and the huge pile of cash they get is blown up quicker than they imagine, on a trashy lifestyle that they think will upgrade the quality of their life. It never does. But you realise that only after the money disappears.

That is the danger with unearned wealth. It disappears as swiftly as it comes. And because you never made the effort to acquire the skills required to earn that money, you are unlikely to know how and where to spend it in a way that can actually enhance the magic of your life. That leaves you worse off than where you began. At least you had the assets then. Now you are left with nothing.

I see this happening all around me. Suddenly people become rich and then equally suddenly, they become poor again. In between there’s a lot of selling and buying and selling that takes place but seldom the creation of any real wealth. It’s always land, property, gold, and family heirlooms that have appreciated in value over the years. When you sell them, you sell your past without acquiring a real future. People who talked in thousands begin to talk in lakhs and people who talked in lakhs now talk in crores. But they are talking about the same things. It is just that some extra zeroes have been added to the numbers and no one quite knows why.

But one thing is certain: When old assets become central to the idea of creating wealth, it means we have lost our skills in knowing how to build new ones. All we are relying on is inflation, and inflation just grows the numbers but never gives you anything more in real terms. Certainly not a better life.

Criticism of Schumacher - if you curtail growth, living standards drop

Schumacher was no radical – if you curtail growth, living standards drop

By suggesting it's better to be economically poorer and spiritually richer, Schumacher ignores links between growth and wellbeing

• 
• • Daniel Ben-Ami
  • guardian.co.uk, Wednesday 16 November 2011 11.30 GMT
  • larger | smaller

Consumer revolution … a customer inspects washing machines at a supermarket in Wuhan, China. Photograph: Darley Shen/Reuters

EF Schumacher's Small is Beautiful is widely viewed as a humanistic and radical tract. Nothing could be further from the truth. Viewed in its proper context it is both profoundly anti-human and deeply conservative.
The central idea in Schumacher's text is that there is a natural limit to economic growth. As he put it: "Economic growth, which viewed from the point of view of economics, physics, chemistry and technology, has no discernible limit, must necessarily run into decisive bottlenecks when viewed from the point of view of the environmental sciences."

Schumacher objected to organising the economy on a large scale precisely because he believed that more prosperity would damage the environment. He correctly understood that small-scale communities cannot produce nearly as much as those operating on a regional or global scale. A modern car, for example, typically relies on components, raw materials and know-how from around the globe. From the perspective of Schumacher's "Buddhist economics", it is better for people to be poorer in economic terms if they can be spiritually richer.

This argument flies against a huge weight of evidence showing that material advance is closely bound up with progress more generally. The past two centuries of modern economic growth have seen huge advances in human welfare along with technological innovation and social advance. Perhaps the most striking single indicator of this improvement is the increase in human life expectancy from about 30 in 1800 to nearly 70 today. Note that this is a global average, so it includes the billions of people who live in poor countries as well as the minority who live in rich ones.

Almost every other measure of wellbeing has increased hugely over the long term, including infant mortality, food consumption and level of education. Most of humanity, even in the developing world, has access to services our ancestors could only have dreamt of, including electricity, clean water, sanitation and mobile phones.

None of the arguments used by Schumacher's followers to counter this narrative of progress are convincing. Greens often side-step the broader case for growth by deriding the accumulation of consumer goods and services. Environmentalist arguments have more than a tinge of elitism, with comfortably middle-class greens scoffing at the masses for wanting flat-screen televisions and foreign holidays. It should also be remembered that some consumer goods, such as washing machines, have directly led to huge improvements in human welfare.

Anti-consumerism reveals more about the narrowness of the green vision than it does about economic growth. Viewing rising prosperity simply in terms of consumer goods is incredibly blinkered. Growth provides the resources for much else including airports, art galleries, hospitals, museums, power stations, railways, roads, schools and universities. Popular prosperity provides the bedrock for much that we value in contemporary society.

Another common green rebuttal to the benefits of growth is to point to the existence of inequality. Of course it is true that there are huge disparities both within countries as well as between the developed and developing world. The key question, however, is how best to tackle the problem. From Schumacher's perspective it is desirable to reduce the living standards of everyone except the poorest of the poor. His is a narrative of shared sacrifice and lower living standards for almost all. The alternative vision, the traditional position of the left, was to argue for plenty for everyone.

Finally, there is the argument about the environment itself. The most popular variant of the idea of a natural limit nowadays is that growth inevitably means runaway climate change. However, there is plenty of evidence to the contrary. There are many forms of energy, including nuclear, that do not emit greenhouse gases. There are also ways to adapt to global warming such as building higher sea walls. Since such measures are expensive it will take more resources to pay for them; which means more economic growth rather than less. If anything the green drive to curb prosperity is likely to undermine our capacity to tackle climate change.
Schumacher's fundamentally conservative argument chimes well with those who want to reconcile us to austerity. It suits those in power for the mass of the population to accept the need to make do with less. Under such circumstances it is no surprise that David Cameron, like his international peers, is keen for us to focus on individual contentment rather than material prosperity.

It is hard to imagine a more anti-human outlook than one advocating a sharp fall in living standards for the bulk of the world's population.