Posts Tagged ‘inequality’

The Inner Level: How More Equal Societies Reduce Stress, Restore Sanity and Improve Everyone’s Well-being is a book by Richard Wilkinson and Kate Pickett.

In the book, the authors make the case that inequality is both bad, and currently rising. It is bad because it degrades our mental and physical health, and increases a whole host of related issues such as addiction, crime, and social isolation.

Importantly, they present evidence to show that it is causative. That is to say that rising inequality is the cause of poorer well-being, and not the other way around. We know it is causative from a host of factors including a dose-response relationship, a plausible theoretical basis, poorer well-being following inquality, and being able to see this both across countries (Denmark is happier than the UK) and longitudinally (people in the UK were happier when equality was higher).

Status anxiety and its problems

Humans, like many animals, are sensitive to status. Many animals live in hierarchies and are constantly anxious about where they are in the pecking order. When equality is high, we all feel on the same level. When equality is low, those at the bottom feel depressed, and those everywhere else experience status anxiety. As a result, everyone’s wellbeing gets worse.

You might think that because it impacts so many animals, hierarchies are natural. But that is not the cause with humans. For most of human history, we lived in egalitarian societies where humans worked together and shared things, particularly big game kills. Hierarchies only came into fashion with the agricultural revolution: a relatively short time period in the course of human history.

In summary, the reason there is so much misery at the moment is that we have so much inequality.

What about meritocracy?

Some might argue that this is a good thing because it motivates people to work hard and that those who are successful are rewarded. The problem with this idea is that it is wrong. As inequality rises, the strongest predictor of where you will end up is your starting point. Class at birth is a better predictor of where you will end up than ability or hard work.

In fact, the causative relationship works the other way around. Rather than ability leading to a higher social class, the privilege of being born into a higher class (and its associated benefits such as private schools, more free time, more money) means people end up with more developed abilities than those born into poverty.

As a result, the greater the inequality, the less motivation there is to work hard and “improve your station” because it simply does not work.

Impact on climate breakdown

Another problem with inequality is that it drives a lot of climate change.

When we experience status anxiety, we are consume more. We buy more things to demonstrate to our peers that we belong in a certain social class. For example, designer clothes, gym membrships andyoga classes, prestige cars, bigger houses, etc.

If we built a more equality society, individuals would experience less status anxiety, and therefore be less concerned with consumption. We would value time with each other more having physical possessions.

Similarly, the need for consumption drives long working hours to earn money. This leads us with little time: our free time is valuable, which makes it more time-expensive to look after the environment. If he we consumed less and worked less, we would worry less about the extra time it takes to walk to work, rather than taking the car.

What do we need to do?

If you are with me so far, you will hopefully now agree we should make a more equality society. If you don’t agree with me, go read the book, which makes a much more convincing case than I can do in a short blog post. But what do we need to do to make such a change?

The authors argue we need economic democracy.

In the west, we often view democracy as one person, one vote. But that ignores the fact that some people spend hundreds of millions changing election results. Or that most of the media is owned by billionaires who can use this to control the narrative. Or that corporations often have more power than governments do.

A clear example of this is trade unions. If a company mistreats you, you can complain, or even sue them. But realistically, what can you do when you are just one person and they are a multinational corporation with a team of lawyers and enough money that all they need to do is stall you in court until you go bankrupt? Trade unions restore this power imbalance and make the situation fairer.

But the authors argue we need to go much further. Companies regularly say they have to focus on generating returns for shareholders. This is a misconception. But speaks to how they act. Anything for a quick profit.

One of the reasons for this is the changing way in which companies are owned. Shares used to be owned by individuals who would hold them for an average of seven years. Now most shares are owned by institutional investors, often engaged in high-frequency trading where they hold shares for minutes at a time. When a shareholder only cares about the performance in the next 10 minutes, and not the next 10 years, it is easy to see why companies struggle to maintain a long-term outlook. This system is shares is not suitable for the 21st century.

The authors propose that all companies could be mandated to have employee representation on company boards. This is already the case in many countries, including Germany. They also suggest that, as a society, we could do more to promote, facilitate and encourage employee-owned companies.

Critically, all of this points to inequality not being an inevitable product of society, but a political choice made by pursuing neoliberalism. We can choose something else, such as the social democracy that brought such improvements to wellbeing in the 20th century.

Oh Atticus Finch. Not a big man, or a tough man, but a moral man. An ideal character to aspire to if like me, you are similarly old and tired. I like to think I would have done the same thing as Atticus, but who really knows.

It’s a pretty good book. However, I had already seen the film, and I am not sure I learned anything more by reading the book.

How has wealth inequality changed over the previous few centuries and what does that tell us about the present? That is the rather large question that French economist Thomas Piketty attempts to answer in this book.

No doubt his writing is in a far more coherant and structured format than my description of it, but here goes.

H begins with a global outlook. Poor countries are gradually catching up with rich countries, and he notes that wealth inequality is primarily within a country. China is making rapid progress in catching up with Europe for example, while the working class of Europe are not making the same gains on the upper class.

Nevertheless, it is a long and hard struggle. Once one country has an advantage, it can essentially own another. This is how European nations managed to maintain colonial domination while running a trade deficit. We could simply put our colonies into debt and then force them to work for us to pay it off.

Once they do grow, they are unlikely to overtake us because as they become a first world country the growth levels off. They are also a long way behind. Europe has 2000% the wealth of China for example, so even growing at 8% a year, once you factor in that Europe is also growing, that is a long way to catch up.

The oil countries could see huge growth though because of their sovereign wealth funds.

Europe itself remains incredibly rich. Richer than anyone else in the world. Though admittedly the United States are the only real competition. However this wealth is all in private hands. European governments themselves are heavily in debt, mostly to their own citizens, and typically have a capital of 0, because their public assets only just cover said debts.

It is traditionally highly unequal wealth. Far from being the land of the financially free, it was the United States that pioneered high tax of the wealthiest and it is only in recent decades that America’s wealth inequality has become greater than Europe’s.

This wealth is very concentrated. One way is labour inequality. Some people are paid far more than others. Though this is not always the close. In 1970s Scandinavia the top 10% of earners claimed 20% of the earnings. This seems a reasonable level of inequality to me.

A much more pressing issue though is capital inequality. Even in the most equal societies the bottom 50% will typically own nothing. Before the World Wars 1% typically owned 50% and 10% owned another 40%. The Wars changed this, but only as far as to allow the next 40% to buy their own home, which is not much by comparison, and still leaving 50% without assets.

Capital inequality is typically inherited. Thus it is not a useful form of inequality because it does not provide motivation for people to earn money. The point of inequality is to motivate people to work hard and earn money, but there is no utility in allowing people to merely inherit large amounts of capital – in fact this encourages them to do nothing.

It is also worth noting that labour inequality does not necessarily provide this motivation either. This is because the differences in “super manager” compensation cannot be directly related to a persons output but rather by industry and non-talent based conditions (luck).

Once people are rich the problem of wealth inequality perpetuates itself. Inflation, which many assume would reduce wealth, actually makes the situation worse. This is because poor people see their savings eroded by inflation while large amounts of capital is able to better protect itself.

It does this in a number of ways. By being larger, the capital of American university endowments when compared to individual savers for example, can afford to spend far more on management. Harvard has around $30 billion, so can spend $100 million a year on management with that only being 0.3% of their capital, which will be more than made up for in growth.

Secondly, with a bigger fund you can diversity into more risky assets. This produces a less predictable short term but a more profitable long term. Thirdly, many options that Harvard invest in may simply be entirely unavailable to small amounts of capital, such as products which require a large minimum investment.

Thus the rich get richer and the poor get poorer with no relation to the work, productivity or utility of the individual. There is no self-correcting mechanism for this.

What can we do about this?

Free university could be one way. It seems to have reduced inequality in the Nordics, though this has not been entirely proven. Picketty also suggests minimum wage will not help in the long run.

He suggests a global tax on capital. This would be low, initially at 0.1% of total capital, progressively rising to 0.5% for the largest fortunes.

This would have to be done in a global level, or at least a European level and require cooperation from banks. Otherwise people would just hide their assets. Indeed, it should be noted that the balance of payments for Earth is currently negative! More wealth flows out that comes in. This is of course theoretically impossible, but could be accounted for by tax heavens not being transparent.

A global tax on capital would encourage people to generate money and become rich, which ensuring that these fortunes cannot be used by future generations to unfairly dominate the economic landscape.

In summary, the following points:

• Capital inequality is the biggest form of inequality
• The twentieth century saw some reduction in the importance of inheritance, but this is now returning
• Large inherited fortunes serve no utility to society
• Large fortunes are able to perpetuate themselves and thus the rich get richer and the poor get poorer
• There is no natural self-correcting mechanism for this
• The best way to tackle this would be with a global tax on capital

Michael Shermer recently tweeted a link about income inequality in different countries. One of the most interesting graphs can be seen here.

This shows the share of income that the top 1% have. In the UK this peaked (technically it troughed) in 1977 when the level reached 6%, the lowest on record. This suggests we had the lowest levels of income inequality at this time.

From here on it goes up. The data only goes as far as 1988, but other sources shows that it has continued to increase.

Notably, 1977 is two years before Margaret Thatcher came to power. “Ah ha!” I hear you yell, “I know it all along”. To some extend, it probably is Thatcher’s fault, as the UK income equality gap has grown more than most. However, it is unfair to lay all the blame at her door (or grave) because this has been a global trend. Almost all countries in the developed world peaked in the late 70s and have since become less equal.

According to an article on the BBC, the UK has reached 16% by 2005. This means that despite a decade under Labour, the income equality in the UK did not stop growing after Thatcher was gone.

Ultimately, what this tells us is that we should definitely vote Loony.

I recently watched the BBC documentary, The Super-Rich and Us.

I am getting more left wing as I get older, and I think I am now of the opinion that we should take a cap, saying £10 million, and anyone worth more than that should be lined up and shot.

Well, maybe not that. At least without legislation that allows us to take take control of their wealth. However, if someone did murder a tax-avoiding billionaire, I am not sure I would be able to judge their actions as immoral.

It is also worth watching the TED talk by Nick Hanauer on why plutocrats such as him need to be stoped.

I think sometimes, we forget what the problem with a diversity imbalance is.

Take the example of students studying psychology. As of 2005, men made up 28% of students starting or continuing a degree; women made up the remaining 72%. On the face of it, this is an inequality issue. Why is it that men aren’t studying psychology? Are we being discriminated against, victims of stereotype threat, perhaps?

But it might simply be naive to assume that it is because of discrimination. Maybe it is an entirely benign reason behind the gender gap. Maybe it’s just a coincidence, maybe it’s just that men are less interested in psychology than women.

In that case, there would actually be no inequality issue – after all, inequality is about providing everyone with equal opportunities, not about forcing everyone to be the same. Suggesting that there is a problem, merely because the diversity of a particular field doesn’t exactly match the diversity of society, needs a dose of our old friend “correlation doesn’t apply causation” – and how many times have we each had to stress that to a religious person?

The reason that we often consider these issues a problem is that a lack of diversity in a particular field is usually indicative of a problem – such as discrimination- that needs to be dealt with it. But it’s important to remember that a lack of diversity isn’t inherently an inequality issue.

One of my friends was recently screwed over by an agency he was contracting for who refused to pay him a rather large amount of money they owed him. This caused all sorts of problems, including a rather late rent payment, and as a consequence he soon found his letting agent moaning about how they had had the landlady (who owned their house) on the phone screaming that she couldn’t pay her mortgage.

This was something that really resonated with me. Because, it’s nonsense.

As if it’s our job as tenants, to pay their mortgage. That is the risk you take when you choose to rent your second house out, and it’s not our job to cater for your bad financial planning. Don’t buy a house unless you can afford it.

If I wanted the stress of having to make sure I could make a mortgage payment every month, I would buy a house. I rent, because I don’t want that stress.

But much more than that, it is a problem with the inequality in society. These people are so wealthy that they can afford not just one house, the one they live in, but at least a second one, the one they rent out to you.

What do we receive for the privilege of helping these people build their property empire? We get to pay their mortgage for them, keeping them rich and us poor. And we’re supposed to give a shit if they can’t pay the mortgage on their second home while the tenant struggles to find the money to feed his child? Fuck off.