Jul 2010 07

The Spirit Level has become an important text for those advocating big increases in taxation and spending aimed at levelling out income inequalities.  It suggests that the incidence of a whole range of social maladies is driven by income inequality.  No less than Jonathon Porritt, head of the Sustainable Development Commission for almost a decade, recently cited it as a vital contribution to the national debate.  But before policymakers rush to enforce the income equality that the authors suggest is so vital to improve public health and general wellbeing, it is important that we properly scrutinise its claims. 

The new report published today by the TaxPayers' Alliance does just that.  It looks at whether the most important correlations established in the book can be replicated.

The findings are stark.  On almost no measure does the central claim of the Spirit Level, that income inequality decreases life expectancy, stand up to scrutiny. In some areas, the book’s authors appear to be promoting utterly absurd ideas, like the notion that the United States doesn’t host a particularly innovative economy.

The truth is that income inequality is a much more complex phenomenon than the all-purpose bogeyman that redistributionist politicians would like it to be.

In a classic work of economic history, William Baumol wrote that policy couldn’t really affect the supply of entrepreneurship – the ambitious and able would always find a way to try and get ahead – but could affect the allocation – how they tried to get ahead.   In Ancient Rome it was viewed as degrading for honourable men to get ahead by working in industry or commerce, but extracting money from what we would now understand as abusing a political position was acceptable.  In the early Middle Ages warfare was the best way for the nobility to improve their economic fortunes.

In Ancient Rome or the Middle Ages riches probably did reflect behaviour that hurt the interests of wider society.  Plenty of people around the world who are rich today may have attained their position through political rent-seeking, climbing the ranks in a corporate bureaucracy doing little for shareholders or other means that are bad news the rest of us.  But in free market economies – thankfully still including most of Britain today – the best way of getting rich is by satisfying or anticipating the wants of other people.  The ambitious turn their hands either to out and out entrepreneurship or to being economically important enough to command high pay from existing corporations.

Further down the income scale, inequality reflects an incentive for people to learn new skills and move to more promising careers.  There can certainly be problems if a failure to provide proper education and training or social dysfunction prevents certain groups within society responding to that incentive, and creates a lasting inequality.  But the answer then is not to try and treat the symptom, inequality, but the cause, and reform education and benefit systems that trap people in poverty.

Hopefully this report can contribute to a more meaningful debate about the causes and importance of inequality, by showing that the simplicity of The Spirit Level just doesn’t reflect reality.  That way we can avoid unjustified policies hurting the economy and burdening ordinary taxpayers.

Matthew was the Chief Executive of the TaxPayers' Alliance, author of Let Them Eat Carbon and editor of How to Cut Public Spending (and still win an election)

  • http://www.greenteethmm.com/true_hockey_stick.shtml Ed Butt

    The spirit level sounds like a relative of the hockey stick and the pie in the sky

  • http://www.stocreditsale.com/ sto credits

    “The spirit level sounds like a relative of the hockey stick and the pie in the sky”a word interesting…..

  • http://www.playerassist.com/ffxiv/ ffxiv gil

    The right to be heard does not automatically include the right to be taken seriously.It’s better to waste one’s youth than to do nothing with it at all.It’s kinda fun to do the impossible.

  • http://pc.blogspot.com/ Falafulu Fisi

    I came here via a cross-linked from another blog (No-minister), so I thought that I may point out this interesting paper on wealth inequality. Here is an article on New York Times (from a few years back), which quoted econo-physicist Dr Victor Yakovenko on the subject of inequality:
    “Econophysics and Inequality”
    Dr. Yakovenko’s paper which was submitted & appeared in Statistical Mechanics journal , Physica A (Physics publication) is freely available for download. Here is a revised updated version (PDF format).
    “Universal patterns of inequality”