PART II LOOKS AT the data on inequality and its effects.
Chapter 5 ‘Has the world become more unequal’ looks at the data on inequality using different measures. It looks at both wealth and income and at Gini coefficients when available. It points out that there have been essentially three periods in recent history with different trends in inequality.
First there was a long period from about 1890 to about 1970 when in most Western countries inequality on most measures diminished. This is dismissed by Piketty and by more serious commentators such as Atkinson as an historic anomaly caused by wars and the great depression. It seems hard to dismiss a period of 80 years as an historical anomaly and I am not so sure they are right.
The second period is between about 1970 and roughly ten years ago when the financial crisis struck. In this period inequality generally rose within Western economies though inequality between countries, especially between rich and poor countries, generally fell.
The third period is the past ten years when inequality has largely fallen in advanced economies. There is less data in emerging economies but one should not be surprised if inequality there has risen. Again, inequality between rich and poor countries has almost certainly fallen.
Chapter 6 ‘The paradox of rising inequality and falling poverty’ looks at the link between inequality and poverty. Unfortunately many confuse the two and hence put forward policy proposals on the grounds that they will reduce inequality even though the side-effects might increase poverty. This chapter shows that in the Piketty period from 1970 to around 2008, while inequality was rising in most Western economies, global poverty fell dramatically. Rising inequality in individual countries can be combined with falling poverty and it is critically important to distinguish between the two. They are different phenomena.
Chapter 7 ‘Inequality and growth’ looks at the links between them. It shows that the links are mixed and often due to third factors ignored in some analyses.
It finds that naturally cohesive societies even with quite high public spending and taxes can have low inequality and high standards of living and often relatively rapid growth. It shows that countries which are very diverse and have large-scale inward migration can have quite high inequality and also have rapid growth but tend to need to have relaxed labour laws, low taxation and public spending to achieve rapid growth. It also finds that some highly equal societies can be stagnant with little growth, but this can also be the case for unequal societies.
By far the greatest driver of growth is good education throughout the population, which both reduces inequality and boosts growth. But it is also the case that low taxes tend to be associated with faster growth and sometimes with reduced inequality in the West. So different mixes of inequality and growth are possible. Raising taxes to reduce inequality, for example, might not only reduce growth but increase poverty. But improving education to reduce inequality is much more likely to increase growth and reduce poverty at the same time.