The Inequality Paradox - Part II

Define 'inequality'. We all think we can define it when we see it - the guy in the black SUV roaring past a rough sleeper huddled a shop doorway; the private jet taxiing to the VIP terminal as the rest of us wait to board our low-cost flight, the family at the gated mansion at the top of the road; the family in the tumble-down cottage at the other end, damp walls, rubbish in the garden...

But these are subjective impressions. Has that SUV been bought outright, or is it leased, its driver uncertain how to meet the next payment? Are those on board the private jet its owners, or just a group of executives on a final trip just before they're sacked? Is the owner of the mansion up to his eyebrows in debt, his business about to go bankrupt?

We need to be able to define 'wealth' and 'income' objectively and look at measures to compare them across societies using robust methodologies based on hard data. The first chapter of the second part of McWilliams' book is the most technical, but is necessary to understand if one is to consider policy solutions to a problem with the potential to tear down society.

McWilliams looks at inequality through the prism of six different measures across different economies mostly from the Western world, plus India and China.

1. How much income is earned by the top 1% of earners?
2. How much income is earned by the top 10% of earners?
3. How much wealth is owned by the wealthiest 1%?
4. How much wealth is owned by the wealthiest 10%?
5. The Gini coefficient of income
6. The Gini coefficient of wealth

The Gini coefficient is an interesting measure. It works on a scale of zero to one, where 'zero' is a situation that every single person in a given country has exactly the same amount of income or wealth, and 'one' is a situation where just one person in that country has all the income or wealth (and the rest of the population has nothing). Neither zero nor one is possible in the real world. But the lower the Gini coefficient, the more equal a society in terms of wealth distribution.

I won't spoil your read of the book by copying out league tables of income and wealth inequality across different countries. The important thing to note is that over time, things change; some countries have seen rising inequality over the past decades, in some it has stayed broadly the same, whilst others have seen it fall. Most, however, fall into the first category.

[You may ask how Poland is faring - it must be said that the Gini coefficient is falling, while over the same time, in the UK it has been rising, according to Eurostat...]

However, there has been a "huge fall in inequality in all measures between the late 19th or early 20th century and the late 20th century." "For the UK... the share of wealth of the top 1% ranged from 70% to 75% from 1895 to 1906, but bottomed out at 15.2% in 1984. There has been a small recovery to 19.8% in 2012". This is quite amazing. The two world wars have had an intense levelling effect on British society.

The next chapter addresses the paradox within the book's title. While inequality in rich countries in rich countries has been growing from its postwar lows, the world has seen "a quite extraordinary reduction in poverty". Define 'poverty', then. According to the World Bank, the current poverty line, set in 2015 is $1.90 (£1.45 / 7.22zł) a day. Below this level person is considered to be living in 'extreme poverty'. By this measure, by 2013, 10.9% of the world is living in extreme poverty - down from 44% in 1981 and 72% in 1950.

But living costs vary enormously from country to country. Malnourishment is a better measure of extreme poverty. And here too, progress. From 2000 to 2015, the percentage of human beings who are malnourished has fallen from 14.7% to 10.6%, according to the UN's Food and Agriculture Organisation.

Globalisation has helped lift billions of people from extreme poverty. China and India, as the world's two most populous countries, have been at the forefront of this trend. Inward investment and local entrepreneurs producing products and services for global markets have created jobs on a massive scale. Despite rising populations, the number of paupers has fallen over the past three decades, in China far more dramatically than in India. Other populous countries across Asia have seen similar improvements. And further improvements are likely to continue happening, with the greatest pockets of poverty remaining in war-torn or failed states.

Yet this process of making "the poor in poor countries richer has been associated with falling real wages for poorer people in rich countries," and hence the paradox.

The next chapter looks at the complex relationship between inequality and economic growth. Do countries with less inequality grow faster than those with greater inequality - or vice versa? The answer is mixed. "The trick is not to make crude assumptions based on correlations... it seems to be the case that higher inequality is associated with less growth. So one might be tempted to raise taxes to redistribute from rich to poor to boost growth. But then one discovers that higher taxes are ... also associated with lower growth."

So if high inequality slows down growth, but higher taxation also slows down growth - what should policy makers do?

Some answers to follow - but first - who are the super rich, and what defines them.

This time last year
Jakubowizna in mid-winter
[This year - no snow, warmer spell forecast]

This two years ago:
Warm winter's day in Jakubowizna

This time three years ago:
Seeking an aesthetic in the Grim

This time four years ago:
UK overtakes France as the World's 5th Biggest Economy 

This time seven years ago:
Ice in the Vistula

This time ten years ago:
A consolation to my British readers

This time 11 years ago:
Winter in its finery

The time 11 years ago:
Snow fences keep the trains running