The debate about inequality is an old one. But in the wake of a financial crisis that is widely blamed on Wall Street fat cats, from which the richest have rebounded fastest, and ahead of public-spending cuts that will hit the poor hardest, its tone has changed. For much of the past two decades the prevailing view among the world’s policy elite—call it the Davos consensus—was that inequality itself was less important than ensuring that those at the bottom were becoming better-off. Tony Blair, ex-British prime minister, embodied that attitude. His party was famously said to be “intensely relaxed” about the millions earned by David Beckham (a footballer) provided that child poverty fell.
Now the focus is on inequality itself, and its supposedly pernicious consequences. One strand of argument, epitomised by “The Spirit Level”, a book that caused a stir in Britain, suggests that countries with greater disparities of income fare worse on all manner of social indicators, from higher murder rates to lower life expectancy. A second thread revisits the macroeconomic consequences of income disparities. Several prominent economists now reckon that inequality was a root cause of the financial crisis: politicians tried to counter the growing gap between rich and poor by encouraging poorer folk to take on more credit. A third argument is that inequality perverts politics, with Wall Street’s influence in Washington often cited as exhibit A of the unhealthy clout of a plutocratic elite.
If these arguments are right, there might be a case for some fairly radical responses, especially a greater focus on redistribution. In fact, much of the recent hand-wringing about widening inequality is based on sloppy thinking. The old Davos consensus of boosting growth and combating poverty is still a better guide to good policy. Rather than a sweeping assault on inequality itself, policymakers would do better to take on the market distortions that often lie behind the most galling income gaps, and which also impede economic growth.
Begin with the facts about inequality. Globally, the gap between the rich and the poor has actually been narrowing, as poorer countries are growing faster. Nor is there a monolithic trend within countries. In Latin America, long home to the world’s most unequal societies, many countries—including the biggest, Brazil—have become a bit more equal, as governments have boosted the incomes of the poor with fast growth and an overhaul of public spending to improve the social safety-net (but not by raising tax rates for the rich).
The gap between rich and poor has risen in other emerging economies (notably China and India) as well as in many rich countries (especially America, but also in places with a reputation for being more egalitarian, such as Germany). But the reasons for this differ. In China inequality has a lot to do with the hukou system of residency permits, which limits internal migration to the towns; by some measures inequality has peaked as rural labour becomes more scarce. In America income inequality began to widen in the 1980s largely because the poor fell behind those in the middle. More recently, the shift has been overwhelmingly due to a rise in the share of income going to the very top—the highest 1% of earners and above—particularly those working in the financial sector. Many Americans are seeing their living standards stagnate, but the gap between most of them has not changed all that much.
The links between inequality and the ills attributed to it are often weak. For instance, some of the findings in “The Spirit Level” were distorted by outliers: strip out America’s high murder rate (which many would blame on guns, not inequality) or Japan’s longevity (diet, not equality), and flatter societies no longer look so much healthier. As for the mooted link to the financial crisis, the timing is dodgy: America’s poor fell behind in the 1980s, the credit bubble took off two decades later.