Bringing Europe's Leaders Together

The Inequality Paradox

Better education for the least privileged, true market competition and tax reform are key to tackling inequalities, writes Douglas McWilliams.

The debate on inequality has long ranged between those, generally on the Right of politics, who claim that inequality is not a problem and those, generally on the Left, who believe that it is and that this justifies higher minimum wages, strong trade unions and higher taxes to correct the perceived abuses.

But arguably both are wrong. Although inequality on most measures has lessened since Thomas Piketty published his magnum opus on inequality ‘Capital in the Twenty First Century’, my analysis of the data for my forthcoming book ‘The Inequality Paradox’ suggests that the fall is temporary, caused mainly by the knock-on effects of the financial crisis. In coming years it seems likely that without action inequality will increase again.

Piketty seems to have missed some of the main causes of increasing inequality. And because he has misdiagnosed the disease, his recommendations for solving the problem like super high tax rates of 80%, higher wages and global taxes on capital would lead to much higher levels of poverty and would only reduce inequality through creating an equality of misery.

My analysis of the causes of inequality suggests that although exploitation, which Piketty sees as the main cause of rising inequality, plays a role, it accounts for only about a fifth of the long term increase in inequality since the 1970s. The main causes of rising inequality since then have been globalisation (which has had the beneficial side effect of reducing extreme poverty around the world) and technology. A new and increasing cause of inequality is the gaps in the quality of parenting between the best educated who tend to partner with others like them and those with fewer educational advantages. This so-called homogamy is encouraged when people leave home to go to university. In the US, 71% of college graduates marry other college graduates.

If these are the causes of rising inequality, what can we do about it?

There are no quick fixes and what is needed is a determined focus on a wide range of policies to lean into the wind against the powerful forces that are causing inequality to rise.

By far the single most important requirement is better education for the least privileged. This needs to be lifelong, although advantages lost early are hard to make up later. Ensuring that all children are well brought up may sound dangerously intrusive but it needs to become a cause for all of society to prevent damaged children causing knock-on damage to society.

My next target is to ensure competition. Monopolies both enrich the already rich and impoverish everyone else through raising the cost of living. An example of how to keep the cost of living down is Singapore where despite land shortages and being rather wealthier measured by GDP per capita than either the US or the UK its cost of living is 40% lower. This is because Singapore’s economic system forces both its public and private sectors to be more competitive and efficient.

Getting taxes right is also important. Most Western economies have quite onerous systems of income taxation on high earners but tax wealth relatively lightly. Long term this combination tends to lead to increased inequality. Better redistribution of wealth, probably best done through inheritance taxes, should ultimately be an objective. And why not encourage additional voluntary tax payments? In the UK, Westminster Council’s voluntary levy on houses worth more than £10 million already brings in as much as 1% of all council tax receipts.

Finally, we need to recognise that although markets can be regulated, the business community needs to police itself to ensure that business is a force for good. Defined professional groups like bankers should have codes of conduct that ensure that they act in the interests of their clients, not themselves. Those who overpay themselves need to be scorned. We should avoid doing business with those who abuse tax loopholes and who do not pay their fair share. If we want to avoid capitalism being treated as immoral we should ensure those who abuse its privileges need to face the wrath of their peers.

Douglas McWilliams is Founder and Deputy Chairman of the London-based economics consultancy Cebr. His book ‘The Inequality Paradox’, published by the Overlook Press in New York, will come out on 20 November 2018.