Joe Stiglitz is always interesting. He may be more of an ideologue than economist these days but he’s far too bright not to be interesting. So it is with his new report for the G20 about inequality, which gets really interesting if we follow the evidence actually presented.
The base assertion is that inequality is high and it needs to be lower. That is an assertion, not a proof, but fine, we can run with that. So, how should we reduce inequality then?
Some of the policy suggestions seem sensible enough even to a free marketeer like me. There’s no point in enforcing intellectual property claims against poor people as they’ve not the money to pay for the real thing. So, allow them to steal – they’d not buy that real thing and stealing makes them better off at no cost to anyone else. But even the report’s sensible points can quickly become less so, as with the related proposal that any and every climate change technology should be given free to the governments of poor countries – which would seem to reduce the incentive to invent said climate change techs. Similarly, the report’s call to allow poor countries to develop their industries sounds far too much like the infant industry protectionism that really hasn’t worked anywhere. If it did work, then Cuba would be vastly rich, as the island’s inability to trade with the nearby capitalist hegemon gives its infant industries an immense amount of ‘protection’.
The far more fun part of this G20 report is how it defines the ‘high’ inequality that must be banished. The authors use the World Bank definition of ‘high’ inequality. That is a Gini coefficient of over 40. Remember, the way the Gini index works is that an economy where one person has everything scores 100, and an economy where everyone has an exactly equal amount scores 0. And again, fine, we can run with that. When economies have a Gini over 40, then their level of inequality is too high – and must be brought down. Such an assertion also means that less than 40 isn’t too high and – presumably, at least – does not require great efforts to bring it down.
In middle income and rich countries this is measured by income – and yes, after the effects of the welfare system in redistribution. It’s even corrected for that US habit of doing the redistribution by goods and services in kind. In the poor countries it’s measured by consumption, thus neatly blocking the claims of chancers like Jason Hickel and George Monbiot. You know, that peasants aren’t actually poor because they’ve half an acre of maize and two goats and just think of the value of grits and milk, eh? This is deliberately and specifically included.
We can also add in here the OECD’s insistence that redistribution can increase economic growth. Indeed so – as long as we also take note of the limitation they place upon how much does so. Up to 13 points on that Gini seems to increase growth, more than 13 reduces it. 13 points is a little less than the UK does now, a little more – maybe one or two points – than the US does and obviously very much less than many other welfare states.
The really fun part of this definition of ‘high’ inequality is that none of the rich countries – not a single one – meets it. Everyone is below it, the US by a few points, the UK a bit more, places like Sweden by 10 or more. That is, nowhere in the rich world has this high inequality which needs to be reduced by the standards of this report. Page 11 of the World Bank report tells us that it’s basically Latin America and southern Africa which do. So, clearly, that’s where the work has to be done.
Global inequality is of course vastly higher than any one in-country inequality. But that one’s easy – we’ve rich countries and poor countries these days, and if the poor countries get rich then inequality will reduce. As has been happening these recent decades, so we’re on the right path.
But as for within-country inequality, it simply doesn’t exist in the ‘high’ form that worries the World Bank in the rich countries. Yes, yes, I know, that’s a really rather different message from the shrieking of domestic politics, but this is a big international report written in part by a Nobel laureate, and we’re going to have to at least consider what is being said in it. High inequality doesn’t exist in the currently rich countries. Which does lead us to an interesting cure for high within-country inequality – get rich.
At which point, an observation not in the report but one available by looking through any window at the real world. Those places that have been even mildly capitalist and free market for more than a few decades are rich by these global standards – and also don’t have that high inequality that must be abjured. Places that have only done so more recently are getting rich. Those that are not and have not been aren’t rich. And, to complete our box of four possibilities, nowhere has got rich by not being roughly capitalist and free market.
Oh, certainly, we can argue about flavours of markets and capitalism – the social democracy of Sweden, the red in tooth and claw of Hong Kong and so on. But those are variants within the basic observation.
At which point, we can piece together our logic here. As per Stiglitz et al. for the G20, drawing on the judgment of the World Bank, inequality above 40 as measured by the Gini is Bad, M’Kay? Something must be done. Nowhere rich has that level of inequality; many poor places do. Nowhere has got rich without capitalism and markets.
The QED is obvious, isn’t it? The poor places with excessive inequality require more capitalism and markets so that they become rich and have less inequality. Thus – very neatly too – also solving global inequality. Francis Fukuyama might not have been quite correct in declaring the end of history but we do seem to have got to a sensible and logical place with our base economics. We’d like poor people to be richer, so poor people should become richer the same way we and our forebears did – capitalism and markets.
Another way to put this is that the correct economic policy is capitalism, markets and a welfare state of modest size – that 13 points of the Gini. Works for me. Might not work for the Randians but then, well, the Randians. What worries me much more is that a vast swathe of the Left is just so opposed to markets and capitalism that they’ll not even accept what Marx himself pointed out – they work.
At the top, I said Stiglitz is interesting – and this is an interesting outcome of considering his current statements, no? That Stiglitz seems to come to a different conclusion from the evidence he himself presents, well, I never did say he was always right, only interesting.
Capitalist marketry with a welfare state, that’s how we beat inequality. And, you know, poverty too. That is interesting, isn’t it?
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