Republic of unequals

Republic of unequals

 

The inequality baked into contemporary US capitalism is warping America’s society and politics, explains Nobel laureate Angus Deaton. Joe Biden’s administration is bursting with inequality experts, but what chance do they really stand of fixing the problem?

 

 

By Angus Deaton

Prospect

January 4, 2021

JD Rockerfeller—a "robber baron" of the last gilded age; but is 21st America into a new one? Photo: Creative Commons

 

 

In 2013, President Obama called inequality “the defining issue of our time,” and noted that “a few dozen individuals controlled as much wealth as the poorest half of humanity.” The speech was notable because inequality per se had not previously been a particularly salient issue for most Americans, at least since the Gilded Age with its robber barons and gigantic industrial trusts. Until relatively recently, inequality was less discussed in the US than in other countries. The standard measures of income and wealth inequality—the Gini index, the Theil index, the Atkinson index, the Palma index—all bear the names of non-Americans.

 

American interest, however, has certainly risen since Obama’s speech: Frenchman Thomas Piketty’s Capital in the 21st Century crossed the Atlantic to top the US Amazon charts the year after, and prominent homegrown American economists including Joseph Stiglitz and Paul Krugman have made great waves writing about the issue. The new interest is not restricted to the bookstore—Senator Bernie Sanders, who at one point last year looked like Donald Trump’s most likely Democrat challenger—says he does not believe that billionaires should exist. Dan Riffle, policy advisor to the fast-rising Congresswoman, Alexandria Ocasio-Cortez, claims that “every billionaire is a policy failure.” Now President-elect Biden has announced an economic team, due to take up post later this month, which is collectively steeped in the issue—Treasury Secretary Janet Yellen, and Council of Economic Advisors members, Cecilia Rouse, Jared Bernstein, and Heather Boushey. Inequality will soon have arrived not only as a central issue in American politics, but in American government.

 

And yet in one sense this development might seem surprising. One can point to the long decline in income and wealth inequality through the first three-quarters of the 20th century and speculate that it was this that then drew the sting from the issue among American politicians and voters. By contrast, the very recent surge in attention is perhaps more tied to the post-Reagan surge in inequality in the eighties and nineties than to the much more modest increases since 2008. At least until the pandemic, the usual measures of wealth and income inequality have not changed much in the US since the financial crisis. Since then, and up until 2020 and Covid-19, despite their spectacular earlier gains, and despite what many would suspect, the world’s super-rich—whose ranks include many Americans—have not in fact done particularly well. So why the new interest just now?

 

 

Behind the new interest

 

To economists, “inequality” is usually taken to refer to income or wealth, a gauge of how far the distribution departs from what it would look like if everyone had the same. And even if inequality in America was relatively flat for the decade before the virus, income and wealth inequalities in the US are among the largest in the world.

 

But to explain the new interest in inequality we do well to remember that there are also other kinds of inequality that might be as great or greater causes for concern. Racial inequality is perhaps the most obvious in the US. Black Americans do worse than whites on almost all outcomes, including wealth (the median white household has eight times as much wealth as the median black household) and income (almost twice as much), and extends into other aspects of life, such as education (black Americans are 10 percentage points less likely to have a BA degree than whites) and longevity (3.8 years lower), not to mention being grossly overrepresented in America’s prisons (33 per cent of the prison population compared with 12 per cent of the general population.) Covid-19 has taken a heavy and disproportionate toll on African American lives, as well as on Hispanic and Native American lives.

 

There are other important inequalities across groups, as opposed to individuals. Men and women are far from equal, and while the virus has killed more men, the sorts of service industries worst affected by lockdowns and changing consumer habits has hit female employment harder, even before consideration is given to the extra burden of childcare associated with the disruptions.

 

Education, particularly the divide between those with and without a college degree, has become more and more salient in the US in the last half century, with expanding gaps in earnings, in morbidity, and in mortality. The “public philosopher” Michael Sandel has noted that “the college degree is a condition of dignified work and of social esteem.” Anne Case and I have argued that those without the degree might as well wear a badge with the scarlet letters BA scored through by a diagonal line. This is another divide the pandemic will deepen. Contrast the difficulties and dangers currently facing millions of less-educated workers in shops, meat processing plants, building sites and the likes, where physical attendance is not an option, with the sorts of professional jobs that are easily carried on over the internet.

 

For some, all such inequalities may seem inherently unjust, while others disagree. Different people have very different ideas about what is or is not just. A more fruitful approach is to think about “democratic” or “relational” inequality. The philosopher Elizabeth Anderson has argued that we should pay more attention to equality defined as a state of affairs, not where everyone gets the same material wellbeing or at least gets what they deserve, but where “people stand in relations of equality to others.” The important thing is “equal respect and concern for all citizens,” something that need not require equality of wealth or income. This perspective shifts attention to how societies work, whether their rules, procedures and institutions treat everyone fairly, and whether everyone has equal ability to participate in society, to have their views be heard.

 

Relational inequality can help us think about what is wrong with income and wealth inequality, as well as racial and educational inequalities. Even if I have no objection to your being richer than I am, I can certainly object if you use your wealth to capture political leaders for your own benefit, to avoid paying taxes and to reduce the supply of public goods on which I depend. Louis Brandeis, a US Supreme Court justice between the wars argued that extreme inequality was incompatible with democracy—wealth inequality undermines democratic equality—and this kind of thought is surely behind much of the present concern. Relational equality might be difficult or impossible in the face of extreme inequality in income and wealth.

 

And this is, inescapably, going to be a political problem. For as the most celebrated early admirer of the American republic, Alexis de Tocqueville, wrote: “Democracy attaches all possible value to each man.” Slowly but ineluctably, unequal respect, unequal esteem, and unequal rewards in American society have come to be felt as a crisis of American democracy.

 

 

Tech-charged capitalism

 

Capital and labour are the two groups that divide up almost all of national income, and the distribution of income between them (and landowners)—the “functional” distribution of income—traditionally dominated discussions of inequality among “classical” political economists. In the first half of the early 20th century, many economists—including John Maynard Keynes—thought that the ratio of the “labour share” and “capital share” would hold steady. Subsequently, the crunching of first tax and then other forms of individual and household-level data saw discussion of profit and wage shares in the economy eclipsed by attention to the distribution across persons.

 

More recently, though, the functional distribution has returned with a vengeance—because the once-thought-to-be immutable ratio of profits to wages has turned against American workers. And because profits tend to accrue to relatively high-income people, this shift contributed to the widening of the distribution of personal income. During the pandemic, and largely because of it, the US stock market—which values profits, not wages—rose to record levels, a sign that it too expects higher future profits, especially in big tech, even if national income and wages fall. It has been hard to watch the market during the pandemic, when so many working people are suffering job losses, or risking their lives, or queueing at foodbanks. It is as if the market is celebrating their distress, or at the very least is indifferent to it.

 

The financial crisis generated enormous resentment among ordinary people that the likes of bankers could get enormously rich by causing others to lose their jobs and their homes. Even after malfeasance became clear, almost no one was punished—in some cases quite the reverse. Today, there is permanent resentment against powerful corporations—and not only the banks.

 

Pharmaceutical companies killed tens of thousands of people by peddling opioids, essentially legalised heroin with an FDA label of approval. The US government and its administrators, instead of preventing this outrage, as other governments did, connived at the destruction, with powerful legislators on Capitol Hill preventing even the enforcement of existing laws while also rewriting the rules in the companies’ favour. Purdue pharma, whose predation was advised by McKinsey, has been convicted of criminal charges, but no one is going to jail. Johnson and Johnson, another one of America’s most admired companies, fueled the epidemic by growing opium in Tasmania. If this is capitalism, many Americans want nothing to do with it.

 

The healthcare industry—pharma, hospitals, device manufacturers, and physicians—have five lobbyists in Washington for every member of Congress, and is rewarded by the highest prices in the world, as well as the overuse of expensive but close to useless procedures. The US spends nearly one dollar in five on healthcare—the highest in the world by far—in spite of having the worst life expectancy of any rich country. American healthcare is designed not to deliver good health, but to deliver high incomes to providers, an engine of upward redistribution. And because it is funded largely through what is essentially a poll tax on employment, low-skilled jobs, whose output cannot carry the cost, are becoming scarcer, especially in large firms.

 

If banks and pharmaceutical firms are widely disliked, there was—at least until lately­—no general approbation of big tech, especially Amazon, Apple, Google, Microsoft, and Facebook. These are, after all, innovative firms that have changed the lives of customers by the products they provide, often free of charge, or at least of financial charge. When the bankers became the villains, initially Steve Jobs and the other tech innovators remained heroes.

 

But today, there is increasing suspicion of big tech as predators. This is a familiar historical pattern at work. Innovators—creative destructors—are at first hailed for improving daily life through new industries, which also spur economic growth. But when innovators turn into incumbents, they pull up the ladders behind them, block further innovation, and exploit their market power to become “takers” not “makers,” and the immense riches they initially generate by real ingenuity come to be maintained by ever-more dubious practices.

 

When Google abandoned its original motto of “do no evil,” and turned itself into Alphabet, it also overcame its distaste for lobbying. It spent nothing before 2006, but in 2018 spent $28m, more than any other corporation. There are deep concerns about the use of personal data by Facebook, Google, and Amazon. However good Amazon and Walmart may be at what they do, there is rising concern about increasing industrial concentration in retail. And there is anxiety, too, that anti-trust enforcement has been lax, particularly in allowing companies to buy up potential rivals before they become actual rivals.

 

For those who worry about the riches being hoarded at very top of the income distribution, big tech is no longer a side show, but the main event. The richest Americans today are the tech entrepreneurs who started these firms: Bezos, Musk, Gates, Ellison, Zuckerberg, Walton, Ballmer, Page, Brin and Bloomberg. The EU has been more successful at enforcing anti-trust and holding these firms to account. Defenders of these businesses counter it is no accident that all of these businesses are American, and not European and—until recently—the obvious benefits they brought to the consumer were beyond argument. But now American prices are rising faster than in Europe, and there is evidence of both anti-competitive price and wage setting.

 

In debates about inequality it is often argued that even confiscatory taxes on the rich would do little for the poor, because there are so few of the former and so many of the latter. But similar logic applies in the opposite direction: when monopolists raise prices, they take a little from the many, but plenty enough to make a few very rich. Meanwhile, fiscal policies warped by corporate lobbying further tilt the distribution of income towards the rich. According to the Financial Times, the Trump tax cuts in 2017 made Apple richer by $47bn, and the reduction in corporation tax from 35 to 21 per cent will primarily benefit richer Americans.

 

 

Degrees of unfairness

 

Look away from the plutocrats and back towards middle America, and perhaps the largest and fastest-widening gap is that between the third of the population who have a four-year college degree and the majority who do not.

 

Men without a BA degree have wages that go up and down with the business cycle, but their median real wages in March 2020 (just before the full force of the pandemic was felt) were lower than at any time in the 1980s. Over three or four decades during which the march of technology has enabled average real GDP per capita to double, working men who did not complete college have seen no sign of progress in their pay-packet—indeed, quite the opposite. The attachment of these people to the labour force—the ratio of employment to population—has also, notwithstanding cyclical bumps up and down, seen a 40-year downward slide. And remarkably, despite the familiar assumption about ever-more women working, the same has been true for women without a BA since 2000.

 

Good jobs in large corporations for less-educated workers have been outsourced both domestically and internationally. Few corporations today employ their own security, maintenance, transport, or catering staffs, relying instead on outside contractors. Working for those firms rarely involves the commitment by either firm or worker that often existed in the past, even for low-skill positions in large firms.

 

At the same time, the social lives of people without a BA have deteriorated relative to those who have the diploma. Marriage rates have tumbled, and nonmarital childbearing has risen, which in modern America (far more than in contemporary Europe) continues to be a sign of fragile cohabitations. Church going has fallen more for the less-educated, and so has the social life that used to come with the unions, which once raised wages for their members and in effect policed conditions for everybody, but have today almost vanished from the private sector.

 

Morbidity—pain of all sorts—but also depression, disability, and the inability to socialise, have worsened over time, with each successive birth cohort doing worse than its predecessor. Nothing of the sort is happening among those with a four-year degree. What Daniel Patrick Moynihan called a “tangle of pathologies” when writing about the black community in the 1960s was not a one-time, one-race story. Now the other shoe has dropped, and this time it is less-educated whites.

 

Perhaps the most startling inequality is in longevity itself. Overall life expectancy at birth in the US peaked in 2014, and has not returned to that level in the five years since—Americans overall have shorter lives now than in 2014, a stunning reversal of the almost unremitting progress towards longer lives that has been normal in all rich countries in peacetime for as long as anyone can remember. The pandemic will knock 2020 even lower. (British readers will be concerned that there is a parallel with recent faltering growth in longevity in Britain, but relieved it had not—at least pre-pandemic—gone into outright reverse in the same way as the US). But while this remarkable and frightening development is now showing up in the statistics for American society as a whole, it is not happening for everyone, but instead heavily concentrated—in particular—on those with less education.

 

If we look at life expectancy at 25, by which time most people either have a BA or will never have one, it peaks earlier, in 2012, but has the same trend. On this measure, all of the decline is among those without a BA; those with the BA continue to see gains, albeit at a somewhat slower rate after 2000 than before. The causes of death are deaths of despair (particularly drug overdoses, but also rising suicides and alcohol abuse), and, largest of all, a slowdown and then reversal of the previous strongly favorable trend in cardiovascular disease. What is driving this turnround is unknown, though obesity is a candidate.

 

There is another, and perhaps even more troubling aspect to the divide by diploma, one that is again emphasised by Michael Sandel. America prides itself on being a meritocracy, but it is today an enormously unequal meritocracy. The prizes for winning are enormous, so that it is not just hard work—but also cheating—that is incentivised. Those who have successfully passed all of the exams, and worked hard to better themselves, tend to credit their success to their own efforts, forgetting about luck, and forgetting the social scaffolding within which their success took place. They can be smug, and have little sympathy for those whom they perceive as having had the same opportunities, but who blew it.

 

Meanwhile, those who “blew” it, the “deplorables” as Hillary Clinton disastrously called them, tend to suspect that the system is rigged against them—rightly so when the meritocrats write the rules. Less comfortably, they may have a sneaking suspicion that, indeed, it might be their own fault. And for less-educated whites, another, even more disturbing force will sometimes be at work. While African Americans still experience a large and stubborn penalty as compared with whites on social indicators such as life expectancy, their fortunes on some of these measures improved rapidly in the two decades after 1990. This withdrawal of “white privilege”—so long enjoyed that it came to seem normal, natural, and deserved—looks more like oppression to those on the wrong end of the process.

 

Put all this together, and it is a recipe for social division, for a failure of relational equality, and a danger to democracy. Recall that in Michael Young’s dystopia—where the word “meritocracy” originated—meritocracy brings civil war between the populists and the meritocratic elite.

 

 

After the virus

 

Long before Covid-19, the medical anthropologist and frontline physician Paul Farmer wrote that infections follow inequalities, highlighting society’s fault lines, and that pre-existing inequalities shape the distribution of infectious disease, who gets infected and who dies. As well as compounding just about all the inequalities that I have described, the pandemic has added some new fault-lines. Hispanic Americans and Asian Americans, who typically have better health than either whites or blacks, have seen elevated mortality rates.

 

We will not know death rates by education until the end of 2021, but it would be astonishing if they did not further widen the pre-existing gap in longevity. Looking at a stock market that, at the end of 2020, hit record highs—the S&P is more than 10 per cent higher than on the eve of the pandemic—while 340,000 are dead and much of the real economy remains badly damaged, it is hard to resist the belief that many of the pandemic inequalities will become permanent: that big tech will get even bigger, that the educated elite, working safely from home on Zoom, will watch their portfolios balloon even as ordinary wages fall and people die. I have some hope for the future if only because those who are about to take charge fully understand all of these issues, but they have no easy task ahead of them.

Angus Deaton chairs an ongoing multidisciplinary review into inequalities at the Institute for Fiscal Studies, funded by the Nuffield Foundation. The views expressed here are his own, not those of the IFS or the review. His most recent book (with Anne Case) is “Deaths of despair and the future of capitalism” (Princeton)

 

 

Angus Deaton a Nobel laureate and chair of a review into inequalities at the Institute for Fiscal Studies, funded by the Nuffield Foundation. His most recent book, co-authored with Anne Case is “Deaths of despair and the future of capitalism” (Princeton)