Income Inequality’s False Culprits

Kash Mansouri at The Street Light has an excellent post, “Income Inequality, International Comparisons,” which goes a long way towards debunking the myth that income inequality is the result of education, or technology, or globalization.

Note how the debate over inequality has evolved. We’ve (largely) gone from the denial phase to the “we have to live with it” phase, which consists largely of attributing inequality to Inevitable Economic Forces. Thus, the logic goes, income inequality is a natural state of affairs, putting those who would oppose it in a difficult rhetorical position.

But when are human affairs dictated by nature? One could argue that human society is a grand exercise in defying nature. And various economists have taken on the argument that the rise of a super-wealthy class is the result of the causes commonly cited, such as increasing returns to education.

For example, Paul Krugman notes that the average real income of the college educated has actually fallen since the 1970s; its only the very top 1% that has experienced gains, and even that is concentrated in the top 0.1%. Similarly, MIT economists Frank Levy and Peter Temin in a recent paper found that cultural attitudes and institutional practices had a considerable impact on earnings disparity.

The initiative that Mansouri cites, the Luxembourg Income Study, is persuasive. Its latest report finds that changes in income inequality happen in short bursts, rather than through long lived processes, and that other countries that are subject to globalization and technology aren’t seeing rising income disparity.

From Mansouri:

The Luxembourg Income Study (LIS) group has put out a new working paper by Andrea Brandolini and Timothy Smeeding that gives us an update on some international comparisons on income inequality, titled “Inequality Patterns in Western-Type Democracies: Cross-Country Differences and Time Changes” (pdf file). The paper compares levels and trends in income inequality using the LIS’s unique database on internationally comparable measures of household income in numerous countries.

I found two main results to be of particular interest – though the paper contains lots of valuable tidbits about income inequality in different countries, so please check out the whole thing.

First, it appears that the substantial rise in income inequality in the US over the past several years has not been experienced by other countries. Changes in income inequality since the 1970s seem to be country-specific, and tend to happen in relatively short episodes rather than as decades-long trends. From the Brandolini and Smeeding’s conclusion:

National experiences vary during the last four decades and there is no one overarching common story. There was some tendency for the disposable income distribution to narrow until the mid-1970s. Then, income inequality rose sharply in the United Kingdom in the 1980s and in the United States in the 1980s and 1990s (and still continuing), but more moderately in Canada, Sweden, Finland and West Germany in the 1990s. Moreover, the timing and magnitude of the increase differed widely across nations. Inequality did not show any persistent tendency to rise in the Netherlands, France and Italy. Commonality seems to be greater for market income inequality: in five of the six countries for which we have data, we observe an increase in the 1980s and early 1990s and a substantial stability afterwards.

Changing public monetary redistribution appears to be an important determinant of the time pattern of the inequality of disposable incomes. Changes in inequality do not exhibit clear trajectories, but rather irregular movements, with more substantial changes often concentrated in rather short lapses of time. Together with the lack of a common international pattern, this suggests to look at explanations based on the joint working of multiple factors which sometimes balance out, sometimes reinforce each other, rather than to focus on explanations centered on a single cause like deindustrialization, skill-biased technological progress, or globalization. Identifying and characterizing episodes and turning points in the dynamics of inequality may reveal more fruitful than searching for overarching general tendencies.

This is significant. Since income inequality has been roughly stable over the past decade in countries like Canada, the UK, Germany, and France, it’s harder to argue that rising income inequality in the US is due to some broad-based global economic evolution. As I’ve argued before, I think that rising income inequality in the US is more the result of changes in government policy that have cumulatively shifted the balance of power away from workers and toward the owners of capital.

The second important point that the paper makes is the importance of redistributive policies in reducing income inequality, and how the US stands out when compared to other countries. Progressive taxation and social programs tend to redistribute income toward the poor in all rich democracies, but the degree of redistribution varies quite a bit from country to country. The following table provides a snapshot comparison across several countries.

Notes: Real Disposable Personal Income (DPI) for low- and high-income households expressed as a percent of median income in the US. Reduction in inequality measured as the change in the Gini coefficient between market incomes and after-tax (including transfer payments) disposable personal incomes.

To no one’s surprise, the ratio between rich (households in the top 10% of the income distribution) and poor (those in the bottom 10%) is considerably larger in the US than in any other rich democracy. Part of the explanation (though only a part, to be sure) is the fact that US government policies do considerably less to redistribute income than policies in other countries.

Why are Americans so much less interested in income distribution than, say, Canadians or Australians? I’m not sure. As we think about ways to improve the US’s rather tattered social safety net, that’s an issue worth thinking more about.