Where do we go from here?

In this final report on the Attitudes to Wealth and Economic Inequality in the UK event run by Cumberland Lodge, Charlotte Cavaille asks ‘where do we go from here on attitudes to redistribution?’ 

From the two previous posts, the following picture emerges: the UK has become a high inequality country (relative to where it was in the immediate post-war period) with signs that this situation might constitute a high inequality/low redistribution equilibrium point. Indeed, there is no evidence in terms of attitudinal trends that tax-based redistribution or transfers to the needy will become a central policy goal any time soon.

How does one move out of such equilibrium? I consider a potential answer to this question, independently of any considerations of how desirable such outcome might be and what consequences it might have for growth, politics and social life in general.

The role of norms

At the end of his talk, John Hills gave his own take on change. He emphasized the role of “social norms” in constraining distributional outcomes. He first pointed to Sir Robert Walpole, UK’s first Prime Minister in the early 18th century, and his capacity to extract additional income from his political position. I then mentioned David Cameron’s pre-tax income, £147 000, or 1/7 of what Walpole got from the Treasury to re-furnish one room at Houghton Hall in Norfolk. Norms, defined – my definition – as a shared understanding of the realm of the possible, can successfully change and constrain rent-extracting behaviors (I am sure Cameron is finding other ways to extract rent but let’s not fall into easy cynicism here).

So how does one change norms (again keeping my definition in mind)? I can think of two other instances that illustrate a change in norms with important political consequences. One is the change in beliefs which brought about the fall of the Soviet Union. The other is the increase in within-group income variance, i.e. the increase in wage differences among groups of individuals with similar gender, education, and occupation ( Western and Bloome 2009), using the example of academics in the US.

The collapse of the USSR

I provide here a personal interpretation of Mark Beissinger’s contribution in his great book entitled Nationalism and the Collapse of the Soviet  State. He examines the mechanisms through which the Soviet Union’s collapse moved from the realm of the impossible to the inevitable in the space of 4 years (1987-1991). There are important structural reasons for this demise, however none can explaining the timing of the collapse and the specific shape it took (nationalist revolutions in the periphery of the Soviet State). Beissinger examines how, “events” (that he defines as “contentious and potentially subversive acts that challenge normalized practices, modes of causation, or systems of authority”) built on each other, demonstrating that challenges are possible, inspiring other members of the opposition in similar situations and re-shaping beliefs about how immutable the regime is. The share of the population sharing these new beliefs reached a tipping point after which survival of the existing institutions and power distribution no longer belongs to the realm of things perceived to be possible.

I won’t get into any more details here – but this study, while emphasizing the importance of pre-conditions facilitating the build up to such tipping-point, is convincing in its account of the role of beliefs and how quickly they can change. How can this be applied to income distribution?

Academic wages in the US

Such analysis might be helpful to understand the mechanisms through which we got into the current situation. Sandy Jencks at the Harvard Kennedy school described to me how the within-group inequality among professors had sharply increased since the 1980’s (i.e. the difference between the most and least well-paid professor). This was triggered by poaching practices from up and coming, cash heavy universities who wanted to attract successful and famous professors. They started bidding up wages, giving other professors more bargaining power to also negotiate their income upwards. Those with lower bargaining power because of less successful careers, less trendy fields or less individual “stamina” were left behind increasing the variance in the distribution of wages.

What used to be a shared understanding of what the average income of a professor is and of what the relationship between success and income should be. Previous shared beliefs thus emphasized a different symbolic/pecuniary reward basket. Current norms give more weight to the pecuniary dimension as a way to assess skills and quality of work. Of course, all this might not have happened without a huge influx of cash, so “structure” does matter. However, of interest in this account is the speed of change from one understanding of reward and worth to another. One needs “events” that challenge previous understandings and “tipping-points” that push one into a new mix of norms/beliefs.

A change in norms in high inequality countries

Ok, back to the original question: how do we move away from the current situation? One could imagine a change in norms in the opposite direction from the one just described above. This move would be favored by a change in “structural variables” (I am purposely vague here), the occurrence of a set of norm-challenging “events” and the reaching of a “tipping-point” after which there is not return to previous beliefs about what is “possible”.

What could this look like in practice? Well we have a recession, and high budget deficits, the structural forces in favor of the extraction of more income from the workforce are present. Government might make the leap of trying to challenge the existing “low-taxation” norm in countries like the UK or the US. If one government makes the step and  doomsday does not happen (i.e. capital flight) then other government might feel empowered to do so. Public opinions might start to believe that high taxation is possible and in turn buttress governments in their attempts to do so.

Most of this move will depend on information availability and transparency : indeed, if the elite generating data on available taxable income and shaping the beliefs and norms on the boundaries of the possible (I.e on the consequences of such move)  are themselves directly concerned by such policy move, the tipping-point might not be easily reached.

The signs here are not encouraging: most governments today are lead or highly influenced by individuals who themselves participated in (I did not say “caused”) the creation of the housing bubble and financial system that collapsed in 2008. They were called in because not that many people understood what had happened (on this issue of expertise and business power see Pepper Cullpepper’s book).

Resentment

Something that might push this forward is mass pressure for such norm-changing policy moves by cash-strapped governments. The conference had a session on “economic inequality and social resentment”. I already argued in the first two posts that I could not see, for the moment, signs of this emerging among the middle class. However, with the crisis, things are no longer looking so good for this group. I personally believe that we might be reaching a turning point, especially if government transfers no longer cushion income volatility in the lower bottom part of the income distribution.

The situation in the US for instance is scary: unemployment, under-employment, lost homes, lost wealth, student loans, historically low saving rates. Americans now talk of a lost decade in terms of wealth accumulation.  The UK does not look much better though the drop in housing prices has not been as high. Will this provide the absolute loss in material well-being needed to make the middle pay attention to inequalities, the poor and redistribution? Maybe.

Happiness and inequalities

A talk by Professor Gordon Brown at Warwick University provided some evidence that absolute income loss might not be the only channel for resentment to crystallize. In a 2010 paper , he examined the relationship between absolute income, relative income and happiness. He and his co-authors look at a very specific measure of relative income which takes into account one’s ranking in the reference group. They conclude that:

“the ranked position of an individual’s income predicts general life satisfaction, whereas absolute income and reference income have no effect. Furthermore, individuals weight upward comparisons more heavily than downward comparisons.”

The growth in within group inequality could thus be said to feed unhappiness by triggering unsatisfying comparisons between one’s income at that of the most-well-to-do. Such unhappiness might bolster the type of resentment mentioned above.

However, Brown et al. emphasize another implication of their results:

“According to the rank hypothesis, income and utility are not directly linked: Increasing an individual’s income will increase his or her utility only if ranked position also increases and will necessarily reduce the utility of others who will lose rank.”

 

In other words, the reaction might be 1) to work harder, as individuals, to rank first at the expense of others (see my comment in the first post on the increasing competition for income providing assets such as education)  and 2) to increase one’s ranking by pushing those ranking lower even lower in terms of social status and income (see my second blog post on resentment agains the unemployed and the poor).

I have given two very different pictures of where we might be heading. I personally find comfort in the fact that there is no real obvious case for a deterministic, “WWII all over again”, interpretation of the political consequences of the current crisis.

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One Response to Where do we go from here?

  1. I am interested in hearing more and attending. Please give me more information.
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