Sharing wealth is the best antidote to populism
Chris Johns: As a first step to cutting income inequality, let’s make pensions mandatory
Stock market success: investors have benefited from returns that nobody could have predicted. Photograph: Lucas Jackson/Reuters
The consequences of income inequality are all too obvious, not least in the rise of populism. Eastern Europe is the latest worry: some analysts regard the threat to the EU posed by the rise of right-wing authoritarianism in places like Poland and Hungary as a bigger deal than Brexit.
If the results are clear the causes are not. But there are clues.
The doyen of inequality economists is Thomas Piketty. He has built and analysed a formidable body of data. His conclusion: inequality results from the rate of return on capital being persistently higher than underlying economic growth. Profits have done better than wages.
This means that owners of shares (of various kinds), over time, do fabulously well. Only a small minority of people own equities, and, even then, only a vanishingly small number of those own enough to make much of a difference.
Piketty and many others think one answer is a wealth tax. That has economic logic but is of little appeal to politicians pretty much everywhere, including Ireland.
Few of us are lucky (or cursed) enough to inherit wealth; nor do most people earn enough to become serious stock-market investors. A few workers do own shares, indirectly at least, via their pensions. We know that a frighteningly large number of employees have pitiful or no pension savings. So, even though equities have tended to deliver fabulous returns over the long haul (recent wobbles notwithstanding), few people have gained.
Being rich has, generally, little to do with talent or effort. Or at least as much as the well-off like to think it has
Just why stocks have done so well over the past couple of centuries is a bit of a mystery: finance academics agree that equity prices should go up over time but cannot really explain why they have gone up as much as they have.
That rate of return, identified by Piketty, looks like a prime suspect. Investors have been extremely fortunate: they have benefited from returns that nobody could have predicted – or had any right to expect.
But all of this fails to answer a deeper question: why are so few people financially successful? Is it luck? Or is it down to talent and hard work?
One way to think about this question is via statistics. We know that talent, as conventionally measured by intellectual (and other) abilities, is “normally” distributed throughout the population. It’s a bit like height: the distributions of talent and height look roughly the same, forming the famous bell curve. There are about the same number of people with above-average talents as there are with below-average talents.
If success were the result solely of the cleverness of the population, the resulting distribution of income and wealth should look like the one for talent: that bell curve again. Inputs correspond to outputs. Financial rewards would be spread around the world’s population in a reasonably even way.
But the distribution of income and wealth looks nothing like a bell curve. Statisticians call it a power curve, a graph that describes inequality: a few people with a lot; most with not very much.
Being rich has, generally, little to do with talent or effort. Or at least as much as the well-off like to think it has. “Power” is a good word to use about income distribution.
Three academics, Alessandro Pluchino, Alessio Biondo and Andrea Rapisarda, physicists and economists, have recently written about all of this, adding to a growing literature supporting the idea that success, at least of the monetary variety, is mostly down to chance. Of course, this is not a new idea. Nassim Taleb is well known for a series of books pointing out the role of randomness – dumb luck – in both life and business.
More people owning stocks will cause inequality to fall. The looming pension crisis would also be solved.
The latest research seeks to skewer the key philosophical underpinning of western culture: meritocracy. And that research agrees with Taleb: it’s all down to randomness, not skill or talent.
The modern originator of the concept of meritocracy, Michael Young, in 1958, never meant it to be used with approval; he was satirical. He probably chuckles at the sight of the West’s flabby political centre collapsing while trying to give life to the mirage of meritocracy.
What’s do be done? The evisceration of liberalism by political extremism demands a response. Far from tearing down the established order that many seem to think is the right solution, I have a simple proposal, based on Piketty’s observations about profits.
Everyone should be forced to own equities. And that’s easy to do. It’s called mandatory, state-sponsored (and part-funded) saving. Start with pensions. More people owning stocks will cause inequality to fall. The looming pension crisis would also be solved.
If the problem is too few people owning equities, solve that problem. The one system better than all the others at generating income and wealth – liberal capitalism – can continue to do its job.
Or we could just let the political headbangers take over. Perhaps they already have. That will do the trick: the economic consequences of political extremism are always broadly the same. At least, the policies of the hard left and hard right will hammer the rate of return on capital. Everyone becomes poorer, especially the rich. A solution to Piketty’s problem, certainly, but not a pretty one.