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Inequality: What Can Be Done?

2 Comments 🕔24.Sep 2015

Sir Anthony Atkinson has gained a distinctive position in the social sciences. By publishing dozens of books and hundreds of papers he has almost single-handedly laid the groundwork for the modern study of income inequality – one that is embedded in historical and institutional accounts, based on a careful analysis of data, and closely connected to the moral dimension of the social sciences.

His latest book, Inequality: What Can Be Done?, presents a broad set of policy proposals that together form a more or less coherent strategy to counter the trend of rising income inequality that is widespread in developed countries. It has a particular focus on the United Kingdom. The book neatly builds on Atkinson’s previous work with its rigorous and very careful discussion of the data (Chapter 2) – a large part of which was meticulously gathered by Atkinson himself. Also, theoretically, Atkinson reiterates a more modern view of the economy. He takes imperfect competition because of market power and heterogeneity among citizens as his point of departure, rather than sketching an idealized picture of a homogeneous representative agent living in a world of frictionless markets. Yet this book is more personal than his previous work as he enters the realm of actively promoting public intervention. The result is a list of intellectually innovative and far-reaching “proposals that have been less widely canvassed and that are more radical” (303). Atkinson’s main line of reasoning is that the widespread rise in inequality in developed countries is not a fatalistic trend, but can be altered by public interventions, most of which have proven their effectiveness in the past. As there is space for changing the tide, his book reads as refreshingly optimistic.

The book departs from the view that there are both instrumental and normative reasons why the distribution of income matters. There is (much-debated) evidence that inequality can lead to social and economic underperformance, and large income differences can be seen as unjust from a perspective of justice. Atkinson continues by arguing that economic inequality or inequality of economic outcomes, such as income or wealth, is relevant even if theoretically there would be equal opportunities – an elegant line of research that took off with John Roemer and Francisco Ferreira. As Atkinson states, morally, we should still care about individuals who are unsuccessful because of sheer bad luck. Moreover, the “determination of the prize structure” after the equal start is still “largely socially constructed” and can be deemed unfair, and inequality of outcomes seeps through into unfair opportunities for future generations (9–11). Atkinson does not have a specific goal or ideal level of inequality in mind. Instead, he calls for lowering inequality “below its current level, in the belief that the present level of inequality is excessive.”

Atkinson devotes considerable attention to his key premise, that we are not at the mercy of some exogenous market factors, such as technological change and globalization, that necessarily induce widening incomes. Since experiences of inequality differ across countries and time, there is space for maneuvering. The direction of technological change can be influenced (something I will come back to). Globalization also does not imply that government’s hands are tied, which can be seen for instance in the fact that the welfare state emerged in a highly globalized time during the industrial revolution (Chapter 10). Indeed, around 1880, migration, capital flows, and trade in goods were comparable or even higher on average than they are now (O’Rourke 2001; see also Nagdy and Roser 2015). Nevertheless, all three plummeted during the decades of nationalism and war that followed, leading to significantly lower, though rising, external pressure during the ‘golden age’ of welfare state expansion. Still, the lack of evidence of a race-to-the-bottom convergence in social protection in the welfare state literature supports Atkinson’s claims (e.g., Starke et al. 2008).

Atkinson draws a total of fifteen proposals to lower inequality, which cover a large span: two on technology, two on employment and wages, three on capital, four on taxation, and four on social security. Atkinson proposes detailed plans tailored to the UK, which include a discussion of costs and possible disadvantages rather than offering more general but superficial plans. The ideas are put in an international perspective, and many of them are relevant for other countries. At first sight, Atkinson’s proposals are indeed far-reaching, but he manages to make clear to the reader that placed in a historical perspective, many of the policies have been implemented before.

For a set of proposals related to social security and income taxation, Atkinson can show the effects on inequality using a tax-benefit simulation method. Atkinson pleads for returning to a system of marginal tax rates of 55 percent for incomes above £100,000, and 65 percent for incomes above £200,000, combined with a substantial earned income discount for low levels of earnings. He proposes to use this extra funding to expand social protection, in particular by markedly raising child benefits and, in one variant, guaranteeing participation income for all citizens, or instead, raising the national insurance state pension and the job-seeker’s allowance by 25 percent.

In Chapter 11, the effects of these social security and income tax policies are simulated using the EUROMOD tax-benefit simulation method, founded by Atkinson together with Holly Sutherland. This chapter could have been expanded to help the reader. Atkinson takes into account the costs of all his measures and calculates a revenue-neutral policy change. If the previously mentioned proposals were all implemented, the Gini inequality index would fall by 3.9 (the participation income version) or 2.7 (the social insurance version) percentage points. Even though this is a noticeable reduction in inequality, Atkinson shows us earlier in the book that the Gini coefficient increased by 10 percentage points in the UK around the 1980s (21). The fact that Atkinson’s far-reaching ideas can only reduce inequality by a third of its initial rise reveals how enormous this rise in inequality was. Should we conclude from this that not much can be done about inequality after all? Atkinson does not believe such pessimism is warranted, as he argues in the beginning of the book: “[…] reduced inequality cannot be achieved solely through fiscal measures […]. This is why many of the policy measures proposed in this book are directed at making the distribution of market income less unequal. It is also why a radical policy to reduce inequality has to engage the whole of government” (21).

The acknowledgement that we should move beyond tax and transfer instruments to reduce inequality and how we can think about such proposals is a major contribution of the book. I only mention a couple of innovative ideas here. Technological change is not exogenously given, but can and should be influenced by distributional considerations, for instance through steering public funding to research and development. The role of trade unions should be reinforced, partly by founding a Social and Economic Council involving social partners. The statutory minimum wage can be set at a living wage level. These innovative ideas are broad measures and together form a research agenda. For example, even if the government might be able to steer technological change in a more job-saving way, raising minimum wages increases the incentive for companies to invest in labor-substituting technology, or innovations developed in other countries might still be implemented.

Atkinson’s Inequality: What Can Be Done? is an outstanding book and policy project, written in an optimistic, lucid, and even witty tone at times. Atkinson pushes the academic and policy frontier while cautiously nuancing his conclusions by explicitly drawing attention to the imperfect data and uncertainty of effects instead of sweeping things under the carpet to make a case. This adds to the credibility of his ideas and makes him a role model for engaged researchers. The book is highly relevant for the social sciences and for policymakers. For students of comparative political economy or social policy, it re-establishes the role of the welfare state in reducing inequality, albeit one where the welfare state should look for instruments beyond progressive taxes and transfers. It provides ample research opportunities, for instance under which the electoral and political circumstances for Atkinson’s ideas were and can be politically feasible (see also p. 305). This research could help us in establishing whether Anthony Atkinson’s optimism to turn the tide of rising inequality is indeed warranted.

Reviewed by Stefan Thewissen, Institute for New Economic Thinking (INET) at the University of Oxford


Inequality: What Can Be Done?
by Anthony B. Atkinson
Harvard University Press
Hardcover / 400 pages / 2015
ISBN: 9780674504769


References

O’Rourke, Kevin H. 2001. “Globalization and Inequality: Historical Trends.” NBER Working Paper Series 8339.

Nagdy, Mohamed, and Max Roser. 2015. “International Trade.” OurWorldInData.org, accessed July 15, 2015.

Starke, Peter, Herbert Obinger, and Francis G. Castles. 2008. “Convergence towards Where: In What Ways, If Any, are Welfare States becoming More Similar?” Journal of European Public Policy 15(7): 975–1000.

2 Comments

  1. 🕔 13:31, 25.Sep 2015

    CF73

    Having read your review, it worries me that this book does not attempt to make sense of the ways in which the increasing entanglement between big business and governemnt has in turn resulted in the retrenchment of the pubic services necessary to enable individuals from deprived backgrounds, for example, to claw their way towards improving their circumstamces and prospects.

    The public sphere is comprised a whole raft of support and services that many ‘ordindary folk’. But in these times, these have been cut. With that has gone any tangible opportunity for self-development.

    All of this is critical for reducing inequality. Ineqaulity cannot simply be understood as an issue of ‘income’. Research has shown that, for example, be able to read well leads to improved prospects and greater earnings. But closure of libraries, or their reduction in terms of opening hours, leads to clear impacts upon communities, particularly those communities who depend upon them (in my case, I grew up in inner city Britain, I educated myself at a local library not at school; at school I was told I should consider lesser careers, given my socio-economic/ethnic background).

    I observe how the UK government is currently purusing policies that create or embed poverty. How is it possible to encourage income or any other form of ineqaulity if not addressing the political dimensions in which poverty grows?

    Seems to lack any kind of meat. Indeed, seems to be intentionally steering clear of the political determinants of poverty

    There is too much to say on these matters and not enough space

    reply comment
    • 🕔 13:34, 25.Sep 2015

      CF73

      Should read:

      “How is it possible to encourage income or any other form of EQUALITY if not addressing the political determinants of poverty [AND INEQAUALITY]”

      reply comment

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