Saturday, December 17, 2011

The Great Inequality Debate - I: A World Of A Difference

Over the last couple of years there's been quite a bit of talk about economic inequality, in the wake of the global economic crisis. More recently, thanks to the Occupy (Wall Street, etc.) protests, inequality-related issues have been receiving substantial mindshare from not just economists, policy wonks and academicians but also concerned laity. The mainstream media have been playing a useful role in providing a platform for and promoting public discourse on the subject. The Economist invited guests, earlier this year, to comment on inequality and how it matters. The New York Times runs a special section ("Times Topic") on income inequality. The Boston Review has just recently published a series of opinion essays on inequality by Stanford University professors, exploring key issues raised by the Occupy protests.

Like other controversies of our time, inequality has precipitated sharp differences of opinion, among pundits and plebs alike. But impassioned debate on this subject is not a new phenomenon. Inequality was the subject of fiery discourse even at the time of Greek philosophers, over two millenniums ago. While no clear consensus generally emerges from such debates, it is usually agreed that too much inequality could potentially result in disaffection among the marginalized (whether justified or not is a different question), leading to civil unrest. Dramatic widening of the gap between the haves and the have-nots has been historically known to trigger social uprisings and even revolutions, when the wealthy and powerful few have manifested a "let them eat cake" attitude towards the misery of the many.

Social harmony is a key element of sustainability – my pet "theme-meme" as I track global trends – and so the subject of economic inequality has stayed on my radar, inviting me to study it in a little more detail, at least enough to develop a more informed view of its impact on the sustainability of our current design of human society, and in a broader sense, the longevity of our species. Unfortunately or otherwise I don't have a Ph.D. in economics or other social sciences (or any other subject for that matter), which means I've had to do my own research "from scratch" in order to gain adequate knowledge and insights. As one may expect in such learning expeditions, the initial challenges are mostly about definitions, scope and taxonomy, as one endeavors to mark the contours of the domain under study and map all topics thematically linked to the core subject, and to then develop a method for categorizing, linking and indexing the various terminologies, concepts and constructs within the domain.

I'd like to present this blog entry as the record of a journey rather than an academic thesis, narrated in the spirit of a curious explorer rather than a rigorous researcher or a pedagogical professor. Though my foray into this specialized domain over the last year or so has been a bit of a "random walk" (and a sporadic one, I might add) through a maze of facts and figures, theories and opinions, ideas and ideologies, formal dissertations and informal blog posts, I've aspired for some degree of structure and order in reporting my observations and findings on that journey. I hope the panoply of points to ponder (and pointers to ponderables) presented here makes it worthwhile for you, dear reader, to go through what has turned out to be an inordinately lengthy post. To make it less taxing to read, I've broken it into three parts. In this first part I try and get my head around what exactly we are talking about when it comes to economic inequality, how much of it is prevalent today, and what recent trends seem to indicate. In the second part I ask what, if anything, is wrong with inequality (with specific reference to the Occupy protests, since they have vociferously complained about wrongdoing that has led to inequality), and follow it up with a commentary on the ethical and moral issues involved in the third and concluding part.

So, what exactly are we talking about here?

A good place to start exploring the taxonomy of this domain might be the Wikipedia page on economic inequality, which presents a comprehensive overview covering a variety of related issues, and in doing so, acts as a spoiler to some of what is to follow in this post (though that doesn't stop me from recommending it). Of the many items worthy of note on that Wikipedia page, the distinction between equality of outcome (which, loosely put, means that everybody ends up more or less equally rich or poor) and equality of opportunity (which, loosely put, means that everybody gets the same chances to shape their destiny) stands out as the most significant, asking to be addressed right away. It is particularly significant in that it allows me to clarify my own perspective and vantage position (for which, please see footnote [1]).

Another point of distinction worth mentioning, though not quite as significant as the one we just dealt with, is the one between inequality of income and inequality in distribution of wealth (though both are related). The former refers to differences in what people earn as personal income, say per annum (regardless of the value of assets owned by them), while the latter refers to gaps in the value of assets owned by people (regardless of their annual income). Other topics related to economic inequality include economic mobility and intergenerational equity, though the emphasis on these parameters in this post is limited to contextual relevance. This post focuses on income inequality for the most part.

There are several ways to measure income inequality, and the Wikipedia page on income inequality metrics lists most of them. Of these, the Gini coefficient is perhaps the most noteworthy, since it is referenced extensively. Wikipedia also provides a list of countries by income inequality and a list of countries by distribution of wealth, both of which are interesting to review, in order to get a better idea of where we are by way of economic inequality. It turns out that in a few countries (particularly Scandinavian ones) inequality has remained relatively low over the years. However, in many other countries, such as the U.S., the U.K., India, etc., inequality has been increasing over the last couple of decades.

Inequality in the world's greatest democracy

In the United States, a recently published study by the Congressional Budget Office (CBO) found that between 1979 and 2007 (i.e., a period of close to 3 decades) the average after-tax household income in the U.S. grew by 62% (computed after adjusting for inflation). However, that growth was not uniform: the top 1% households' income grew by 275%, the next 19% households' income grew by 65%, the next three-fifths grew by just under 40%, and the bottom one-fifth by 18% (see chart to the left, below). Further, the study found that the proportion of overall income going to households in the higher income bracket had increased: the top one-fifth of the population saw a 10 percentage-point jump in their share (most of which went to the top 1%), whereas the slice of the pie going to middle and lower income households decreased by 2 to 3 percentage-points (see chart to the right, below).

Income growth in the U.S. between 1979 and 2007 | Source: CBO Director's Blog

As Joseph Stiglitz (Nobel laureate, Professor at Columbia University and former Chief Economist of the World Bank) noted in July this year in his article The Ideological Crisis of Western Capitalism: "Even in its hey-day, from the early 1980’s until 2007, American-style deregulated capitalism brought greater material well-being only to the very richest in the richest country of the world. Indeed, over the course of this ideology’s 30-year ascendance, most Americans saw their incomes decline or stagnate year after year."

Interestingly, the inequality is even sharper within the top 1%. According to research carried out by some economists, three decades ago a taxpayer at the cutoff for the top 0.01% was making about 10 times as much as someone at the cutoff for the top 1%, but now, someone at the cutoff for the top 0.01% makes 30 times as much as someone at the top 1%. Clearly, keeping up with the Joneses has become far tougher for the rich in America. As far as wealth concentration is concerned, an article in Forbes magazine notes that the "top 0.1% – about 315,000 individuals out of 315 million – are making about half of all capital gains on the sale of shares or property after 1 year; and these capital gains make up 60% of the income made by the Forbes 400." This is consistent with documentary film-maker Michael Moore's claim earlier this year, that "Just 400 Americans – 400 – have more wealth than half of all Americans combined", which has been subsequently verified by PolitiFact.

For more on income inequality in the U.S., there's the Wikipedia page on the subject and for even more commentary, analyses, charts and infographics, here are a few recommendations: (Not) Spreading the Wealth in the Washington Post; The United States of Inequality in Slate magazine; It's the Inequality, Stupid in Mother Jones magazine; Charting the Great Inequality Debate in the New Yorker; Global income inequality: Where the U.S. ranks in CNN Money.

Additional reports, on the related topic of economic mobility in the U.S., are available at the Economic Mobility Project (EMP), an initiative of the Pew Charitable Trusts. (A recent EMP report found that "Americans are more likely than citizens of several other nations to be stuck in the same position economically as their parents.") A New York Times infographic on mobility explains how mobility has worked out in the U.S. over the last few decades. Other useful resources include websites such as managed by the Institute for Policy Studies, a Washington-based think tank. Also read: transcript of U.S. President Barack Obama's speech in which, referring to the Occupy protests regarding inequality, he called it "the defining issue of our times" – a landmark declaration, according to the New York Times.

Inequality in the world's largest democracy

The deeply interested reader might find it useful to forage for data, research papers, resource links, etc. at the personal websites of economists Emmanuel SaezThomas PikettyTony Atkinson and Facundo Alvaredo, who have carried out considerable research on income inequality levels in many countries. Their seminal collaborative contribution, in my opinion, is The World Top Incomes Database, an excellent source of income-related statistics, which lets you create your own custom-defined chart for any choice of listed parameters for any of the listed countries over any available period, and export it as a PNG file.

Unfortunately this database does not cover the last decade (i.e. 2000-2010) for India. Be that as it may, the two charts I've created (pasted here below) that plot the growth of incomes over 50 years since Indian independence, tell their own story. (Note that the blue curve in the chart to the left corresponds to the red, not blue, curve in the chart to the right.)

Incomes in India - 50 years since independence | Source: The World Top Incomes Database

As an article in (which, I am guessing, has drawn on the same data sources as above) explains, the rich did get richer in India too. By itself, this not only not objectionable, as many would rush to point out, but even desirable – as long as the promised "trickle down effect" also kicks in. But has it kicked in? According to a report released earlier this week by the Organization for Economic Cooperation and Development (OECD), "India's income inequality has doubled in 20 years" to quote a Times of India news item that covers the report. This seems consistent with the pattern observed in the two charts above. Apparently, keeping up with the Joneses doesn't seem to have gotten any easier for Indians either.

The picture doesn't look any better for India if one were to use a slightly different metric, such as the Human Development Index (HDI) as defined by the United Nations Development Programme (UNDP) (which publishes the Human Development Report every year, ranking countries by their HDI – please see footnote [2] for additional information and links to UNDP's database on HDI). Since last year, they have introduced an Inequality-adjusted HDI (IHDI), which represents the actual level of human development, taking inequality into account (in contrast to the "vanilla" HDI, which may then be viewed as an index of the potential human development that could be achieved if there is no inequality). A recent UNDP report on the IHDI for Indian states found that "inequality in the distribution of human development is distinctly pronounced in India in comparison with the world scenario". The study estimates that while globally, India is ranked 119 out of 169 countries on the HDI, it would lose "32% of its value when adjusted for inequalities" (i.e. on the IHDI). Commenting on "India's Opportunity Gap" with reference to the report, an article in the online WSJ blogs has this to say:
To some observers, higher inequality at least for a while is the price we have to pay for higher growth. They would cite the famous "Kuznets curve," a staple of development studies which claims to show that inequality first rises and then falls with economic development. 
What this misses is that unequal outcomes in areas such as income may be the result of underlying inequalities of opportunity, such as access to education and health. Unequal access could also be the result of belonging to an underprivileged group, such as a religious or ethnic minority, or in the Indian case specifically someone belonging to a Scheduled Caste, Scheduled Tribe and Other Backward Class.
Other studies cited in the WSJ article, examining related factors such as inequality of access to education, wage inequality correlated with inequality of opportunity and the impact of caste considerations, provide the basis to support the hypothesis in the second paragraph quoted above. Some of these findings seem like grotesque reality checks, when seen in the context of India's aspirations to global superpower status. To many observers, such striking contrasts that seem peculiar to India appear to be irreconcilable contradictions. However, such disparities have their reasons, as eminent economists Jean Dreze (visiting Professor, Department of Economics, Allahabad University) and Amartya Sen (Nobel laureate and Professor of Economics and Philosophy at Harvard University) explain.

In a magisterial essay in Outlook magazine titled "Putting Growth In Its Place", Dreze and Sen resolve the apparent contradictions of India's dynamic post-liberalization growth story (dubbed "India Shining" by some), juxtaposed with the poverty starkly visible on the streets and in the shanties of Indian metros, smaller cities and towns. They compare these disparities with China and other countries in South Asia, where the gaps are relatively less than in India (as the tabulated indicators in the article show). In conclusion, they write:
India’s recent development experience includes both spectacular success as well as massive failure. [...] There is probably no other example in the history of world development of an economy growing so fast for so long with such limited results in terms of broad-based social progress. 
There is no mystery in this contrast, or in the limited reach of India’s development efforts. Both reflect the nature of policy priorities in this period. [...] An exaggerated concentration on the lives of the minority of the better-off, fed strongly by media interest, gives an unreal picture of the rosiness of what is happening to Indians in general, and stifles public dialogue of other issues. Imaginative democratic practice, we have argued, is essential for broadening and enhancing India’s development achievements.  
Pranab Bardhan (Professor of Economics, University of California at Berkeley and author of "Awakening Giants, Feet of Clay: Assessing the Rise of China and India") compares inequality in the U.S. and India and comes to a similar conclusion:
The world’s two largest democracies face a grave economic challenge. They must find a way to channel the rising anger caused by economic inequality into productive investments that make the rich feel that they have a stake in ameliorating conditions for the poor. If India and the U.S. move towards overcoming the most pervasive inequality of all, they will reinvigorate their democracies – and their economies.
Key words: policy priorities, imaginative democratic practice, productive investments, reinvigoration of democracy.

Inequality in the world's oldest democracy and elsewhere

The situation in most other countries of the world is not much better. Rather than dwell in detail on the inequality levels in other countries, I will simply list a few links here that tell the story of inequality in the U.K. and elsewhere in the world:

The "Income inequalities" page at the The Poverty Site provides a lot of data points and graphics, as do the Guardian/ Datablog pages: "Inequality in the UK: the data behind the National Equality Panel report" (almost two years old) and the more recent "OECD inequality report: how do different countries compare?" both of which provide a fairly comprehensive idea of the level of inequality in the U.K. (and both use images of John Cleese, Ronnie Barker and Ronnie Corbett to symbolize the three classes). As is visible from the graph in the latter report that plots Gini scores in 1985 and 2008 for various countries, the few countries where the Gini coefficient has improved in those 23 years, such as Greece, Spain and Ireland, are the ones that are presently in the economic doldrums. France seems to be the only exception. All other economically stable countries in that graph show a deterioration of the Gini coefficient, which essentially points to an increase in inequality.

The OECD report (referenced twice, above) "finds that the average income of the richest 10% is now about nine times that of the poorest 10 % across the OECD." Further, it notes that:
The income gap has risen even in traditionally egalitarian countries, such as Germany, Denmark and Sweden, from 5 to 1 in the 1980s to 6 to 1 today. The gap is 10 to 1 in Italy, Japan, Korea and the United Kingdom, and higher still, at 14 to 1 in Israel, Turkey and the United States.
In Chile and Mexico, the incomes of the richest are still more than 25 times those of the poorest, the highest in the OECD, but have finally started dropping. 
Income inequality is much higher in some major emerging economies outside the OECD area. At 50 to 1, Brazil's income gap remains much higher than in many other countries, although it has been falling significantly over the past decade.
Supplementary reading:

"Jobs for Justice", an article by Andrés Velasco (former finance minister of Chile and a visiting professor at Columbia University), which says "Income inequality is a top concern not only in tent cities across the United States, but also among street protesters in Taipei, Tel Aviv, Cairo, Athens, Madrid, Santiago, and elsewhere."

"Global inequality: tackling the elite 1% problem" at the Guardian's "Poverty Matters Blog", which quotes Branko Milanović (lead economist in the World Bank's research department and author of "The Haves and the Have-Nots"), presenting at Warwick University's International Development Summit: "75% of the world's population find themselves in the bottom income quintile, i.e. share 20% of the world's income, while 1.7% of the world's population (119 million people) are in the top quintile." Further, the article notes that the world as a whole has become even more unequal, more so than any one country. "While few countries have a Gini measure of income inequality above 60, the world's Gini coefficient is 70, up from 55 in 1850."

[Continued in Part II: What's Wrong With Inequality?]


  1. In the interest of full disclosure of predilections, propensities and such, this would be a good time to state my personal biases: I am not in favor of equal outcomes; what I am in favor of is equal opportunity. Given that different people have a different mix of ambition, attitude, acumen and ability, it naturally follows that they will respond to the same opportunities differently and also perform differently at them, and as a consequence their incomes will be different. In my view, this is OK as long as the difference in their incomes is purely a function of these factors and does not arise from differences in access to opportunity.

    I must also mention here that a sad fact about discourse on economic inequality is that it is haunted by the ghost of McCarthyism, to the extent that any stated position risks being labeled as commie propaganda (at worst) or the rabid rant of an intellectual pariah (at best), unless prefaced with due apologia and explicit reassurances of a robust pro-capitalism stand. Even now, as a recent article in the New York Times notes, "participants in the national political discourse [are] queasy about addressing issues of class and distribution directly. One of the intellectual victories of the Reagan Revolution was to make it feel practically un-American to talk about how the pie was divided. The culturally acceptable, win-win question to ask was how to make that pie grow."

    Let me hasten, then, to reiterate that my ulterior motive here is merely to provide context for discussing proposals aimed at strengthening and improving capitalism, in order to make it more sustainable (though this post does not actually discuss such proposals – that's for another blog post, another day).
  2. The UNDP Human Development Report for 2011 is worth browsing through, though it deals with a broader scope of issues than income inequality. Also, earlier this year, the UNDP partnered with Google Labs to place their Human Development Report database in the public domain through Google Public Data Explorer, with an interactive charting facility that lets you correlate various parameters for all UN member countries – highly recommended to anyone wanting to play with the statistics a bit and test out various hypotheses.

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