Inequality and the West: Capitalism at a Tipping Point Political economist Robert Wade talks about rising inequalities in the Western world, placing New Zealand in the context of international debates. He is a contributor to Inequality: A New Zealand Crisis.

1. THE COSTS OF INEQUALITY
DEMOCRATIC CAPITALISM AT A TIPPING POINT?
Robert Hunter Wade, LSE
Speaking at the Museum of New Zealand
Te Papa Tongarewa, 16 July 2013
Supported by the Bridget Williams Books Publishing Trust
and the J.R. McKenzie Trust

2. Trends in income inequality
• Income inequality can be measured in several
ways, which give substantially different results
• Trends depend on which measures we
choose.
• Income concentration: share of top 1% in
national income, & size of income gap b/w top
1% & others (eg median), are important
measures especially for assessing political
effects of inequality

3. Adapted from Bryan Perry, Household Incomes in NZ, Ministry of Social Development, 2012, p218
NZ trends

4. NZ income concentration
• In 25 years from mid 80s to 2010, average (inflation-
adjusted) income of top 1% doubled, from $150,000
to $300,000. These figures exclude capital gains &
income held in trusts (so in reality higher); they are
pre-tax.
• Average (post-tax) income of middle decile and
bottom decile remained almost stagnant throughout.
• Income gap b/w top 1% & middle decile roughly
doubled, from about $125,000 to $270,000.
• Rogernomics?

5. Source: Derived from figures in the World Top Incomes Database, for New Zealand, 1921–2009,
http://topincomes.gmond.parisschoolofeconomics.eu

6. NZ income concentration
• In 25 years from mid 1980s to 2010 (pre-tax)
income share of top 1% increased from about
5% to about 9% of national income.
• 9% is much less than in US; but more than in
NW Europe.
• Top 1%’s rise from 5% to 9% means that
everyone else now shares 91% of national
income rather than 95% as before.

7. Scandinavia
• Scandinavia -- also Germany, other NW
European countries – show that rising (post-
tax) income concentration since 1980s is not
an “inevitability” of immutable forces of
globalization, skill-biased technological
change, etc.
• They show that it is possible for a modern
capitalist economy to be very prosperous with
income concentration < US, UK, NZ et al.

8. Surge in income concentration is
global
• Surprisingly, rich are almost everywhere
getting richer compared to everyone else,
during post-2008 Second Great Depression.
• # of HNWIs (High Net Worth Individuals, people with
more than $1 million to invest) increased by > 9% in
2012 over 2011, to 12 million people; their wealth
increased by 10% over previous year.
• Within this rich group the super-rich (> $30mn,
111,000 people) doing best of all.

9. Inequality -- little political salience
even as surged. Why?
• Conservatives, social democrats, mainstream
economists – focus on poverty, exclusion,
failing families, gender, etc.; & distribution of
“opportunities” (cf “incomes”)
• Most accept mainstream economics
argument: income inequality necessary for
dynamic capitalism, necessary to generate
resources to re-distribute to poor.
Rogernomics.

10. Tony Blair, 2001
• “If you end up going after those people who
are the most wealthy in society, what you
actually end up doing is in fact not even
helping those at the bottom end”.

11. Obama 2010
• “I, like most of the American people, don’t
begrudge people’s success or wealth. That is
part of the free-market system” (2010).
• He was defending $17 million bonus awarded
in 2009 to JPM CEO Dimon & $9 million to GS
CEO Blankfein.
J.Goldman & I.Katz, 2010, “Obama doesn’t ‘begrudge’ bonuses for Blankfein, Dimon”, Bloomberg News, July 10.

12. Center-left tactical choice
• Even leaders of center-left parties who DO
worry about inequality (not just poverty etc)
make TACTICAL choice not to talk about
inequality, especially not INCOME
CONCENTRATION at the top.
• Why? (1) Depend on Big Donors for party and
individual finance; (2) middle-class electorate
uncomfortable with talk of “redistribution”.

13. Mainstream economists
• “Poverty bothers me. Inequality does not. I
just don’t care [what anyone else gets]”
(Willem Buiter, ex-professor of economics,
LSE, now chief economist, CitiGroup)
• Econ inequality (a) inevitable, (b) necessary
for incentives.
• World Bank has said almost nothing about
inequality of income in past 20 years (as
distinct from “poverty”)

14. What determines success in
economics profession?
• D. Colander, “The making of an economist redux”, J. Econ Perspectives 19 (1), 2005
• 231 grad students of econ, 7 top-ranked Econ
Depts, early 2000s
• “v impt”, “moderate impt”, “unimpt”, “don’t
know”
• “having a thorough knowledge of the
economy”: “v impt” – 9%, “unimpt” – 51%
• “V impt”: 1st
& 2nd
yr: 15%. 4th
& 5th
yr: < 1%

15. Summary: “inequality” invisible, as
surged
• focus has been on: poverty, exclusion, etc.;
inequality of opportunities (not income)
• to extent that inequality of income treated as
“problem”, framed as: does X deserve his $9
million bonus?
• This avoids focussing on society-wide effects

16. However, recent signs of change
• 2012, Min Zhu, deputy MD IMF: “The increase
in inequality is the most serious challenge for
the world”.
• I would not quite that far!

17. Costs of inequality (dev’ed c’ies)
• (1) economic;
• (2)social & health;
• (3) political

18. (1) Inequality & economic performance
• Q: Are more unequal economies more
prosperous? Q: US is more unequal than NW
Europe. Does it have better economic
performance?
• Yes, by GDP per person (#2 in OECD after
Luxembourg, 2005; NZ = #21)
• No, by GDP per hour worked (#8 after France,
Norway, Netherlands, etc.; about equal to
Germany; NZ = #22)

19. Long-run economic performance:
inequality & heights
• Average height can be used as non-income
measure of long-run economic performance
• Height depends on nutrition in youth, wh
depends on household income, etc.
• Q: Do more unequal countries have higher
average heights?

20. Econ performance: inequality & crisis
• Rising income inequality one of the causes of
the financial crises of 1929 and 2007-8.
• As inequality increased, incomes of middle &
lower stagnated or fell; the wealthy lent their
savings; govt increased credit available to
middle & lower.
• Plautus, 3rd
century BC: “I am a rich man, as
long as I do not have to repay my creditors”.
• Housing & stock market bubbles

21. Hyper-financialization over 2000s
• Financial transactions/world GDP: 1997 = 15;
2012 = almost 70
• Of 50 biggest firms in world by revenues, 49
are financial (2010).

22. (2) Inequality & social & health costs
• Wilkinson & Pickett, The Spirit Level: Why
More Equal Societies Almost Always Do Better
(2009)
• Core argument: More unequal (developed)
countries and US states have higher average
levels of social & health problems than less
unequal countries and US states
• Average levels of social & health problems
NOT closely linked to GDP per person

23. Conclusion about social & health
costs
• Wilkinson & Pickett: “If you want to live the
American dream, go to Denmark.”

24. (3) Inequality & political costs
• Political costs of high inequality have received
very little attention .
• Argument: As income concentration increases,
the political & business elites tend to
transform themselves from “establishment”
elites to “oligarchic” or “plutocratic” elites.
• In countries with “oligarchic” elite, economic
policy is made “by the top 1%, for the top
1%”.

25. US: economic policy “by 1%, for 1%”
• Research by Martin Gilens shows that US
national politicians respond mainly to
wealthiest voters (not to median voter). “Inequality and
democratic responsiveness”, Public Opinion Quarterly, 69, 5, 2005, 778-96.

26. US: preferences -- policy
• “When Americans with different income levels differ
in their policy preferences, actual policy outcomes
strongly reflect the preferences of the most affluent
but bear virtually no relationship to the prefcs of
poor or middle-class Americans. The vast
discrepancy … in govt responsiveness to citizens with
different income levels stands in sharp contrast to
the ideal of political equality that Americans hold
dear….representational biases of this magnitude call
into question the very democratic character of our
society” (778)

27. US: economic policy “by 1%, for 1%”
• Polling evidence for US shows that large majority of
US “wealthy” agree: (1) top priority is to cut budget
deficit, not raise employment; (2) deficit must be
reduced by cutting public spending on health care &
Social Security; (3) minimum wage must not be
linked to cost of living.
• Public at large has opposite preferences.
• US economic policy reflects preferences of
“wealthy”.

28. Inequality & economic policy
• Why do elites in high-inequality developed
countries tend to behave like oligarchies,
making laws & policies in own interest?
• It is more complicated than economists’
“everyone acts selfishly”.
• Psychologists have found “money-empathy
gap”. In more unequal societies, those living
high on socioeconomic ladder tend to be
more selfish, less empathetic, less moral; tend
to see most others as aids or obstacles to
their ambitions.

29. Money-empathy gap
• Paul Piff (Berkeley): “The rich are way more
likely to prioritize their own self-interests
above the interests of other people”.
• The rich develop social stereotypes, or
prejudices about “the poor” which blame the
poor for their poverty & unemployment.
• Conservative political ideology tends to justify
these prejudices.

30. Effects of money-empathy gap
• To understand fallacies of conservative ideology,
suppose that 100 dogs are ushered into a room in
which 95 bones are hidden.
• 5 dogs come out without a bone.
• Compassionate conservatives say: these 5 dogs need
to be sent to bone-hunting school, etc.
• Normal conservatives say: the 5 dogs are lazy, cut
their income support, force them to hunt harder,
“get on your bike”.

31. US normal conservative money-
empathy gap
• Chair of House Budget Committee, 2013:
• US national character is being sapped by social
programs.
• Social programs “turn the safety net into a
hammock that lulls able-bodied people to
lives of dependency & complacency”

32. NZ normal conservative money-
empathy gap
• NBR, 2011: “Prime Minister John Key today
stood by his comment that some people
needed to use foodbanks because they had
made poor choices.”
• “’Anyone on a benefit actually has a lifestyle
choice. If one budgets properly, one can pay
one's bills’, Mr Key said”.
Source: National Business Review, 21 February 2011
http://www.nbr.co.nz/article/key-stands-some-poor-make-poor-choices-foodbank-comment-nn-86501

33. Why are rich so influential in economic
policy?
• Because political parties, political candidates
have become so dependent on a wealthy
minority (investors, speculators, lenders,
hirers, firers) for donations & loans. Hence
the wealthy’s money-empathy gap shapes
economic policy.
• NZ? Nicky Hager, The Hollow Men, chapter
14 & 15 on National Party financing

34. Summary: inequality & democracy
• Evidence from polling, from relationship
between money & empathy gap, & much else,
suggests that high-inequality capitalism now
working at cross-purposes with democracy
• High-inequality capitalism is weakening
substantive democracy (within framework of
formal democracy)

35. A plutocrat celebrates loss of
democracy
• Bernard Arnault, 10th
richest on earth:
“Businesses, esp international ones, have ever
greater resources, & in Europe they have
acquired the ability to compete with states …
Politicians’ real impact on the economic life of
a country is more & more limited.
Fortunately.” (2000, emphasis added)
• Implies that private sector firms can best
regulate themselves.

36. Summary: overall effects of inequality
• Swimming pool with a “urinating section” and
a “non-urinating section”
• Non-urinators cannot insulate themselves
from actions of urinators
• High inequality (as US, UK levels) has high
economy-wide, society-wide, polity-wide
costs.
• NZ?

37. A progressive agenda
• (1) Insist that making capitalism work for everyone,
not just plutocrats or oligarchs, one of our most
pressing problems
• (2) Accept that some inequality inevitable &
necessary (eg Scandinavian levels).
• (3) Challenge idea that inequality of incomes (at
US/UK levels) necessary for dynamic economic
performance
• (4) Insist that income concentration at top
intimately related to poverty, exclusion, etc.
• (5) Emphasise far-reaching econ, soc, health, political
costs of Anglo-levels of inequality

38. (6) More attention to pre-distribution
• Center-left has focussed too much on re-
distribution: tax policy and public spending
policy (as though private sector is like a caged
lion waiting to spring free of govt regulation)
• Focus more on pre-distribution (how to make
“market income” distribution, before “take
home” income, less unequal)

39. Why progressives should focus more
on pre-distribution
• Most of the disparity of “take home” incomes is
result of disparity of incomes before taxes &
benefits.
• Many laws, regulations, policies have the effect
of sluicing income up towards the top.
• We have a “conservative nanny state” (Dean
Baker)

40. Income concentrating policies
• Eg Quantitative easing (central bank buys
govt bonds to increase liquidity), as distinct
from lowering interest rates
• Bank of England study (August 2012) showed
that QE is a mechanism of crisis mitigation
which strongly advances interests of
wealthy.
• QE in UK since 2008 has driven shares up by >
25% where wld otherwise be.
• 40% of shares owned by richest 5%

41. Income concentrating pre-distribution
measures
• Corporate governance law
• Trade union law/rights to organize
• Intellectual property law
• Exchange rate policy
• Etc

42. (7) The entrepreneurial state
• Stop talking down the state, stop framing the
debate as “more market & less state, or more
state & less market”.
• See the potential for state as entrepreneurial
complement to entrepreneurs in private
sector.
• Marianna Mazzucato, The Entrepreneurial
State, 2013

43. (8) Limit role of Big Money in party
financing
• Big Donors can shape certain public policies to
their liking, directly via grants/loans to parties &
candidates, indirectly to interest groups.

44. Example of Big Donor influence: Dodd-
Frank
• Dodd-Frank is the main US financial reform law.
• Sunlight Foundation: Wall St lobbyists met 1,298
times with govt officials to influence Dodd-Frank
law. Public interest groups met with them 242
times (= one fifth).
• Dodd-Frank now being eviscerated.
• Eg US T announced (day before Thanksgiving
2012) that FX swaps & forwards are exempt from
the regulations. This is dynamite.

45. Failed effort to limit Big Money in
politics
• UK Committee on Standards in Public Life 2011,
“Political party financing: ending the Big Donor
culture”, Nov.
• Identified 3 routes: (1) Restrict amount any
individual or organization (companies, TUs) can
give or loan; (2) limit party & candidate
(campaign) spending; (3) provide public funding.
• Report died on day of publication. Nothing
changed….

46. Big Donors in NZ politics
• See Nicky Hager, The Hollow Men, 2006,
chapters 14 & 15.

47. If western societies do not reduce
income concentration…
• We will continue to transit from “democratic
market capitalism” towards “oligarchic
impunity capitalism”, & experience high &
rising economic, social, health and political
costs.
• So, surging income disparity is almost as
serious a threat to future of democratic
market capitalism as climate change & human
aging.
• Read Inequality: A NZ Crisis, as a start!

48. References
• Robert H. Wade, 2012, “Why has income inequality remained on the side-lines of public policy for so long?”, Challenge, May-June, 21-
50.
• Robert H. Wade, 2014, “Growth, inequality and poverty: arguments, evidence and economists”, in J. Ravenhill (ed), Global Political
Economy, Oxford University Press, 4th
edition.
• Robert H. Wade, 2004, Governing the Market, Princeton University Press (Best Book in Political Economy prize, American Political
Science Association)
• RBC Wealth Management and Capgemini Financial Services, 2013, World Wealth Report, June. Quoted in Chrystia Freeland, 2013, “The
problem with many millionaires”, IHT, 21 June, p.2
• Bernard Arnault, 2000, La Passion Creative, Plon, Paris.
• A.B.Atkinson and J.E. Sogaard, 2013, “The long-run history of income inequality in Denmark: top incomes from 1870 to 2010”, EPRU
Working Paper Series, 2013-01, Department of Economics, University of Copenhagen.
• Thorvalder Gylfason, 2007, “Why Europe works less and grows taller”, Challenge, Jan/Feb.
• Lisa Miller, 2012, “The money-empathy gap”, New York Magazine, 1 July.
• Oren Levin-Waldman, 2012, “Income inequality and declining civic participation”, Challenge May-June, 51-70.
• David Callahan & Mijin Cha, 2013, “Stacked deck: how the dominance of politics by the affluent and business undermines economic
mobility in America”, Demos.
• Kevin Gallagher, 2013, “The US as a global risk generator”, The Globalist, June 27.
• J. Fisher & T. Eisenstadt, “Introduction: comparative party finance”, Party Politics, 10, 6, 2004, 619-26
• Albert Hunt, 2013, “A rare story of success in Congress”, IHT July 1, p.2.