Income Inequality Gets Less and Less

[LauraBridges]

A good summary in The Times

"The bare necessities of life will come to you
Matt Ridley

Most of us think the poor stay poor and inequality is exploding. Wrong. The evidence is that these are times of plenty
The Swedish data impresario Hans Rosling recently asked some British people to estimate the average number of births per woman in Bangladesh and gave them four possible answers. Just 12 per cent got the right answer (2.5), whereas 25 per cent of chimpanzees would have got it right if the answers had been written on four bananas from which they could choose one at random. Remarkably, university-educated Britons did worse, not better, than non-graduates. It is not so much what you don’t know as what you know that isn’t so.

Hold that thought while I introduce you to Tom Perkins, the Silicon Valley venture capitalist and former husband of the crime writer Danielle Steel, who stirred up fury in America when he wrote to The Wall Street Journal last month complaining about a rising tide of hatred against the very rich, and indirectly but crassly comparing it to Kristallnacht. A few days later President Obama used his State of the Union speech to take aim at inequality. In this country, too, inequality is one thing that much rankles with most people, as the 50 per cent tax rate row reveals.

The puzzling thing about this is that by any conceivable measure, absolute poverty has fallen dramatically over the past few decades, so why should it matter if the rich get richer? Today’s British poor spend half as much of their income on food and clothing as in the 1950s, while working many fewer hours, living about eight years longer and having access to phones, cars, medicines and budget airlines that would have amazed even the rich in the 1950s.
Moreover, here’s a question I’m willing to bet that chimpanzees would do better than people at: given that inequality has been rising recently in China, India, America and many other countries, is global inequality rising or falling?

The answer: it’s falling and has been for several decades, however you measure it. The reason is that people in poor countries are getting richer more quickly than people in rich countries are getting better off.
That fall in global inequality has accelerated since the start of the financial crisis. As Africa now experiences record rates of growth, the number of people trying to live on $1.25 a day is plummeting fast. Mr Rosling likes to show two charts in his talks: the graph of global income was once a two-humped camel; now it’s a one-humped dromedary, with the vast majority of the world’s people in the middle.

Here’s another question that I fancy the chimps would beat the people at: did poverty and inequality in Britain increase or decrease as a result of the recession? The answer is that both fell. Inequality has fallen to levels not seen since the mid 1990s, as it usually does during recessions, though it is still higher than it was in the 1970s. Meanwhile the Left’s favourite measure of poverty — those earning less than 60 per cent of the median income — has by definition gone down, because median income has gone down. Redefining poverty in this relative (and very inadequate) way has therefore rather backfired.

If you measure consumption inequality, it is far lower than pre-tax income inequality, because the top 40 per cent of earners pay more in than they get out, while the bottom 60 per cent get more out than they pay in. Indeed, in Britain the top 1 per cent generate about 30 per cent of the total income-tax haul. After such redistribution, the richest fifth of the population has only four times as much money to play with as the poorest fifth.

With big increases in housing benefit and other redistributions, consumption inequality may be as low as it has ever been. Add in the value of pensions (including the state pension), free healthcare, the fall in the price of food and clothing relative to wages, plus the dramatic fall in the cost of much technology and it is clear that for most basic needs, the country has never been less poor or less unequal. A smartphone’s search engine may be about as capable as a plutocrat’s full-time secretary was in 1960.

Imagine being told that one of the people in a meeting is a genuine billionaire (I owe this idea to Professor Don Boudreaux). How would you tell which one? His bodyguards, private jets and grouse moors are outside the room; his shirt and jeans are unlikely to give him away (as they would in 1900); his Rolex could be a cheap imitation; his teeth, girth and height are probably unremarkable (unlike in 1800); even his Diet Coke is the same as everybody else’s. Much more than in the past, most inequality in this country these days — though by no means all — is in luxuries, rather than necessities.

Here’s another question where my money is on the chimps: does income generally grow faster for people in the lowest fifth of the population or people in the highest? It’s the lowest, because many of those people are young, low-paid people just starting out on their careers, while many of the richest fifth are older people at the peak of their pay, about to retire. That is to say, the category “poorest fifth” may not seem to show much change, but the people in it do. Income mobility is far from dead: 80 per cent of people born in households below the poverty line escape poverty when they reach adulthood.

None of this is meant to imply that people are wrong to resent inequality in income or wealth, or be bothered about the winner-take-all features of executive pay in recent decades. Indeed, my point is rather the reverse: to try to understand why it is that people mind so much today, when in many ways inequality is so much less acute, and absolute poverty so much less prevalent, than it was in, say, 1900 or 1950. Now that starvation and squalor are mostly avoidable, so what if somebody else has a yacht?

The short answer is that surely we always have and always will care more about relative than absolute differences. This is no surprise to evolutionary biologists. The reproductive rewards went not to the peacock with a good enough tail, but to the one with the best tail. A few thousand years ago, the bloke with one more cow than the other bloke got the girl, and it would have cut little ice to try to reassure the loser by pointing out that he had more cows than his grandfather, that they were better cows, or that he had more than enough cows to feed himself anyway. What mattered was that he had fewer cows."

[HomeHelpMeGawd]

Ah, Matt Ridley. Who would have imagined that the 5th Viscount Ridley (Eton; Magdalen College Oxford), currently the beneficiary of an inherited seat in the House of Lords where he sits as a Conservative peer, and owner of the tiny pile that is Blagdon Hall, would wish to argue that inequality was disappearing?

Thank goodness that he's turned his sharp intellect to this subject, after having wrought such wonders during his run at Northern Rock. Sorry about the unfortunate pun.

Anyway, play the ball, not the man and all that! So:

• Yes, global inequality is falling, as Hans Rosling has said many times and very eloquently, such as here.
  
• However, as the global population is increasing, the numbers of people who are in poverty may actually be rising
  
• When it comes to the developed world, a focus on quintiles is not that useful, because quite a lot of the top quintile is not benefiting from rising wealth levels. It's really the top 1% that is benefiting, as you can see in this excellent video
  
• On health inequalities, he's dead wrong. Probably the most definitive UK study on this topic was conducted by Professor Sir Michael Marmot. You can read it here. That billionaire in Viscount Ridley's article is likely to live about 10 years longer than one of his gardeners. Indeed, Viscount Ridley is likely to live about 10 years longer than one of his gardeners.

[DoctorTwo]

So it's a myth that my income has stayed the same since 2010 and the wage of the average corporate thief boss has gone up by 30% or so? Thanks for that pile of utter horseshit

Oh, just noticed it's from one of Murdoch's rags.

[LauraBridges]

Under Labour's ridiculous relative poverty marker if the rich get poorer the less well off who may actually have less money are doing better!

[HomeHelpMeGawd]

I don't know why you'd treat this as totemic, Laura. There are obviously benefits and downsides of both relative and absolute metrics for poverty. Absolute metrics need rebasing each year to account for poverty or people appear to move out of poverty by virtue of inflationary effects, for example. Absolute markers also don't work at all well when comparing between countries, given how purchasing power varies between places. £10k obviously goes a lot further in Nigeria than in Nottingham.

There are plenty of decent metrics out there, from Gini to IMD. Taking them in the round and getting a sense of trends is most helpful, rather than wasting time on these kinds of arguments.

Anyway, out of all the points in this article, the choice of marker is hardly the main thrust, is it?

[williaminajetfighter]

I actually thought the piece was interesting as it emphasizes how notions of poverty have changed so radically over a short period. But a bit pointless to question why people resent the rich.

[edamsavestheday]

Homehelp, glad to see the ref. to Marmot, I've mentioned his work a few times on here, deserves to be far better known than it is.

[checkmates]

LAURA sorry to say what you say is TRUE. It is as if the Coalition are rewarding the rich and attacking the poor. Even the disabled