Rising Inequality: myth or reality?

Years pass by, but the tradition always goes the same way: little Mike, red faced after an awkward moment when everyone was merrily chanting and clasping in his honor, grabs a knife, starts cutting the cake in even slices and distributes them among all guests. Two or three of them sneak back to the table and eat away the remainders, but no soul seems to pay them any mind. Everyone seems satisfied. The birthday boy can calmly have his own slice while the party goes on.

The invisible hand, on the other hand, is not having the same luck. Praised and criticized over the last couple of centuries, our old friend has grown used to be in the center of intense debates since Adam Smith first named it and decided to write a comprehensive account of all its intricacies. Regardless of mounting complaints over many of its flaws, it always ended up finding support on some of its most ferocious defenders. However, the recent past has seen it become lonely facing serious charges over rising inequality.

Are those fair charges? Is income indeed becoming less well distributed over time? Absolutely, most argue, as the average Gini coefficient of disposable household income for the 37 OECD countries reached a level of 0.318 in 2014, compared to 0.315 in 2010. This widely used indicator expresses inequality on a scale ranging from 0 to 1, where 0 would be perfect equality and 1 perfect inequality, that is, a situation where one individual would have all the income in a society. Having this said, it is easy to conclude that, on average, inequality has increased within this group of countries. The scenario looks even gloomier, since this is the highest reported level since the mid-1980s, which reinforces the overall idea of rising inequality and turns it into a long-term phenomenon. There is only one slight detail leaning against the idea of a generalized trend: there are 158 other countries in the world.

Within this apparently irrelevant group, inequality seems to be decreasing among a big share of its countries. Brazil and Argentina, for instance, have seen this indicator falling from 0.593 and 0.533, respectively, in 2001, to 0.515 and 0.427, in 2014. For most countries, though, data is inexistent or, in the best scenario, inconclusive. The only certainty is that there is definitely not a reported trend of rising inequality. In many of these countries, the opposite is actually the case. Even within the group of OECD member states, this is far from being generalized. Countries like France, the UK and Italy do not show any signs of a clear trend, according to the evolution of their respective Gini coefficients.

In addition to this index, other measures of inequality tend not to confirm the idea of a global rising inequality. A very popular method consists in the comparison between the top and bottom earners. In other words, what percentage of total income does the top 10% have? What percentage goes for the bottom 10%? The same logic can be applied to all possible shares of the population, the previously mentioned example being one of the most frequent. Resorting to this sort of data yields us the same lack of definitive conclusions for both the global and OECD scales.

At any rate, these measures are less rigorous than the Gini, as they don’t account for what happens to all the population in between those down and upper limits. Are they closer to the poor guys, struggling to afford basic needs or to the wealthy ones, in a serious dilemma regarding a Mercedes against a BMW? Considering the income share of the top 1%, for instance, is a classic in any discussion with respect to the topic. Although providing us with a clear impression of how obscenely well-off the economic elite is, this statistic ends up neglecting the distribution among the remaining 99%. In contrast, it has some very interesting properties, namely the ability to sell newspapers and induce clicks on online articles, as well as a strong political resonance among the electorate.

Nevertheless, even though empirical evidence does not prove rising inequality to be a worldwide reality, there is one particular country which seems to be responsible for the creation of that conception: the land of Uncle Sam. Indeed, the Gini coefficient in the US jumped from 0.346, in 1979, to 0.41, in 2014 (although it stabilized in the past decade). The income share of the bottom 20% in the country also slipped in the same period, albeit slightly. The income share of the top 20%, on the other hand, rose considerably. The aforementioned favorite among politicians, the income share of the top 1%, almost doubled, from 10.7% in 1980, to 20.1%, in 2014.

Unfortunately, there are few reasons to believe this trend is going to be reversed in the near future, as the current administration and its President are set to put to practice a plan that will decrease corporate taxes and mostly benefit the richest. The impact on the federal budget will either be neutralized, at the expense of the poorer and the middle class, in the present or in the future, but one thing is almost certain: income inequality should only keep growing with such a scheme. This is the opposite of Donald Trump’s pledges, during the campaign, of helping those left behind. The question, though, is on whether he doesn’t understand it or simply does not care.

The country’s importance on the overall economic debate has biased the general opinion towards the idea that income inequality has been rising around the world. That is not to say the US is the only example of this phenomenon. Spain, for instance, has seen its Gini coefficient gradual and consistently increase over the last decade. Furthermore, it is reasonable to assume that a rising inequality is the most important social issue policy makers should be concerned with. However, before coming up with explanations and solutions for this problem, one must be serious in pointing out if, where and to what extent it is happening. Even in the cases where it is not, efforts should be made to decrease it, but only after a rigorous analysis of the reality.

In addition to this, we must take into account that there are many more dimensions to this topic that were not covered above. Where is income coming from? Capital or labor? What is happening to income disparities between countries? Are those disparities more relevant than inequality within countries? Shouldn’t we also consider the inequality of wealth? What about poverty? How is it evolving? How long do individuals remain poor? Only after that can we finally examine all the factors that might be shaping the way well-being is distributed in nowadays societies. Some of the main reasons given so far have ranged from the globalization process to the skill-biased technological revolution going on, but many more have been considered.

Anyhow, it is clear that helping little Mike fairly slice the cake, does not require full knowledge of his previous performance, of which guests are getting more and which guests are getting less. But in policy making and economic debates, the opposite is the case and only after that can we confidently attempt to solve the problem and keep the party going. That should be a priority, even when Mike is actually 71, orange, instead of red faced and wears suits.

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