In a recent article, Matt Ridley presents some of the facts behind the inequality debate and points out that despite the overblown obsession with inequality, few people are aware that at the global level, both inequality and poverty are falling dramatically. Ridley finds it puzzling that so many people in the US and UK fret about inequality, when in many ways it is so much less acute, and absolute poverty at the global level is so much less prevalent, than it was in 1900 or 1950 or 1970 (see chart above)? Here’s a slice:
President Obama recently used his State of the Union speech to take aim at inequality.
The puzzling thing about this is that by any conceivable measure, absolute poverty has fallen dramatically over the past few decades, so why should it matter if the rich get richer? Today’s British poor spend half as much of their income on food and clothing as in the 1950s, while working many fewer hours, living about eight years longer and having access to phones, cars, medicines and budget airlines that would have amazed even the rich in the 1950s.
Moreover, here’s a question: given that inequality has been rising recently in China, India, America and many other countries, is global inequality rising or falling? The answer: it’s falling and has been for several decades, however you measure it. The reason is that people in poor countries are getting richer more quickly than people in rich countries are getting better off.
That fall in global inequality has accelerated since the start of the financial crisis. As Africa now experiences record rates of growth, the number of people trying to live on $1.25 a day is plummeting fast.
If you measure consumption inequality, it is far lower than pre-tax income inequality, because the top 40% of earners pay more in than they get out, while the bottom 60% get more out than they pay in. Indeed, in Britain the top 1% generate about 30% of the total income-tax haul. After such redistribution, the richest fifth of the population has only four times as much money to play with as the poorest fifth.
With big increases in housing benefit and other redistributions, consumption inequality may be as low as it has ever been. Add in the value of pensions (including the state pension), free healthcare, the fall in the price of food and clothing relative to wages, plus the dramatic fall in the cost of much technology and it is clear that for most basic needs, the country has never been less poor or less unequal. A smartphone’s search engine may be about as capable as a plutocrat’s full-time secretary was in 1960.
Here’s another question: does income generally grow faster for people in the lowest fifth of the population or people in the highest? It’s the lowest, because many of those people are young, low-paid people just starting out on their careers, while many of the richest fifth are older people at the peak of their pay, about to retire. That is to say, the category “poorest fifth” may not seem to show much change, but the people in it do. Income mobility is far from dead: 80% of people born in households below the poverty line escape poverty when they reach adulthood.
None of this is meant to imply that people are wrong to resent inequality in income or wealth, or be bothered about the winner-take-all features of executive pay in recent decades. Indeed, my point is rather the reverse: to try to understand why it is that people mind so much today, when in many ways inequality is so much less acute, and absolute poverty so much less prevalent, than it was in, say, 1900 or 1950. Now that starvation and squalor are mostly avoidable, so what if somebody else has a yacht?
HT: Warren Smith