In 2008, when US investment bank Lehman Brothers collapsed, the world was jolted out of more than two-and-a-half decades of neo-liberal triumphalism and experienced the worst recession since the 1930s.
This crisis once again brought income inequality back to the forefront. Anthony Atkinson’s Inequality: What Can Be Done? is a valuable addition to the growing body of literature on this pressing issue and comes close on the heels of French economist Thomas Piketty’s Capital in the Twenty-First Century .
War and after The western world saw inequality declining during the post-war years, but this trend began reversing since 1980. Atkinson calls this phenomenon ‘inequality turn’ and this ironically coincided with the era where the world started moving towards a more market oriented economic structure where the government’s role in economic management was drastically curtailed and the financial sector became less and less regulated.
This book not only dissects the causes behind the rising income inequality in the Western world, but also gets into the policy realm by suggesting specific measures to reduce inequality. The book has three parts; Part 1 deals with the diagnosis of inequality — the meaning and extent of inequality; the lessons to be learnt from earlier periods when inequality fell; their causes; and so on.
In the second part, Atkinson comes up with 15 proposals aimed at reducing inequality, and in the third part, he discusses a range of objections to his proposals, specifically the equity-efficiency debate.
Atkinson says the objective must be to “reduce inequality below its current level in the belief that present level of inequality is excessive.” To give an idea of the extent of inequality on today’s world, Atkinson says the “share of the top 1 per cent has returned to its value of 100 years ago. The top 1 per cent in the US now receives one-fifth of the total gross income”. The trends in the UK have been similar. Atkinson finds that the Anglo-Saxon countries have a much higher level of income inequality than continental Europe and the Nordic countries.
Quoting Piketty, Atkinson says, “There was no gradual, consensual conflict-free evolution towards greater equality. In the 20th century, it was war, not harmonious democratic or economic rationality, which erased the past.”
The Labour government which came to power in the UK in 1945 after World War II established the welfare State which played a major part in reducing inequality in the country.
Market mayhem In the US too, the postwar years saw an appreciable reduction in inequality but the trend reversed in the 1980s. Atkinson says government transfers played a significant role in reducing inequality in the postwar years in the US. Taxation played a crucial part here: the average top tax rate in the US on earned income was 75 per cent in the 1950-79 period whereas it fell to 39 per cent during 1980-2009, a period marked by growing inequality.
What were the causes of the reversal of the trend of declining in inequality? Atkinson says in the UK the contribution from taxes and transfers moved away from the lower income groups.
There was also a fall in the coverage of unemployment benefits in most western countries due to tighter eligibility rules and rise in “non-standard workers”. So the gradual rolling back of the welfare state since the 1980s was the main cause.
The post-1war decades were also a period where the share of wages was higher than the share of capital in the national income. This trend was reversed in the later period.
Atkinson says this was caused by the growing “financialisation” of the economy, or what commentators on the Left call the domination of “finance capital”. The power of the trade unions also gradually declined in this period.
As a reflection of greater power of finance capital, Atkinson argues that “there is now an important distinction between wealth and capital. The power of capital is exercised by the fund managers, not by the beneficial owners (page 104).” Also, in the US the richer groups have managed to lobby for changes in regulatory framework and tax rules.
In Part 2, the proposals he makes, aimed at reducing inequality, include governments encouraging technical innovation that lead to more jobs; greater power to unions; guaranteed public employment at minimum wage; creation of a sovereign wealth fund aimed at building up the net worth of the state; a more progressive rate of taxation and others. Atkinson argues that many of these proposals will work better if they are implemented together.
Giving the cover In Part 3, Atkinson answers the important question, ‘Can it be done?’ He admits there is no magic bullet and each of his proposals must be taken according to its merit. He argues that some of the proposals may lead to a “shrinking of the national cake”, there is no general presumption that this will happen. He also dismisses the view that there is a conflict between efficiency and equity.
Atkinson rejects the argument that the world is too interconnected or globalised hence no action is possible on inequality, saying that the modern welfare state was born during an earlier period of globalisation in the 19th century. It was in the 1870-1914 period of globalisation that the need for social protection was felt in Europe.
Atkinson ends by saying that extreme levels of inequality are incompatible with democracy. Major reforms are needed in all areas of social and economic life. He says both political will and individual action are needed to reduce inequality.
Are the governments listening?