A Slice of the Pie

How can we tackle increasing income inequality, asks Charles Daniel Nolan

Populism was certainly a buzzword of 2017, and beyond the dystopian hysteria it has been driven by unsettling global trends – front and centre of which has been the rise of income inequality globally. The inaugural World Inequality Report, released before Christmas, highlighted that global income inequality has been rising across the world since the 1980s. At times, it can be difficult to contextualise income inequality both nationally and internationally, but a simple methodology known as the ‘Veil of Ignorance’ can help provide an effective perspective. Essentially the method asks an implicit question: if you were to be born today to randomly selected parents, would you happily play the game, or would you look for concessions?

Taking the US and Western Europe as examples, the report highlights the divergence in inequality levels between both jurisdictions.

“While the top 1% income share was close to 10% in both regions in 1980, it rose only slightly to 12% in 2016 in Western Europe while it shot up to 20% in the United States. Meanwhile, in the United States, the bottom 50% income share decreased from more than 20% in 1980 to 13% in 2016”.

The report identifies the combination of massive educational inequalities and an increasingly regressive tax scheme in the US as being major culprits in the rise of income inequality.

A natural progression, having identified that income inequality is in fact rising, would be to question if the rise is simply the peak of a cycle or if there has been a fundamental shift in wealth distribution globally? To answer this, I’d like to discuss the two factors identified by the report as having heavily contributed to the acceleration of income inequality; government policies and educational inequality.

Government policies are naturally subject to change and can therefore be used to mitigate or, conversely, grow income inequality.

As discussed, tax regimes are an obvious lever which can be harnessed to improve equality levels, although some would argue that the rise of ‘tax havens’ has somewhat curtailed this approach.

Similarly, governments recent employment of tools to help alleviate the recession spawning from the 2008 financial crisis could potentially have had an equal, if not greater impact on income equality globally. Central banks (governments) have stepped into the uncharted waters of ‘Quantitative Easing’, essentially printing money to buy assets all around the world with the aim of improving economic conditions. This has made assets around the world like pension portfolios and houses more valuable, all of which are inevitably owned by wealthier individuals. Wealthier individuals are also less inclined to spend and instead save their increased wealth resulting in less income being distributed to those at the other end of the income spectrum.

The importance of educational equality will become increasingly prominent due to rapid changes in how countries provide goods and services. Technological advancements have had a profound impact on income equality levels globally. One of many economic theories which have been unceremoniously kicked to the scrapyard of history was the concept that labour share is constant throughout time. If a country’s total income were a pie, labour  (workers) and capital (machines) would always get the same slice of said pie. However, in developed countries this has proven not to be the case with capital getting an ever-larger slice of the pie. Technological advancements such as cloud computing, machines, software developments etc are often cited as having caused this shift and with wealthier individuals inherently owning the capital, those at the wrong end of the income inequality spectrum are receiving less and less of the pie.

The key differentiation between both trends is that where government policies are subject to constant change, I would argue that technological advancements will only accelerate in one direction for the foreseeable future. So perhaps the most important question of all, assuming you believe severe income inequality is in fact unjust and unsustainable, is how can we as collective reverse and even improve income equality levels globally? I would argue that, as discussed by the World Inequality Report, educational equality should be a paramount focus especially considering the shifts in the income pie caused by technological advancements.

Taking Ireland specifically, much has been done to improve educational equality, from government initiatives such as the introduction of free third level fees, to voluntary groups such as CoderDojo providing free opportunities for young people to develop programming skills and most recently the Irish government is in the process of eradicating the ‘Baptism Barrier’ so that children have equal opportunity to education regardless of their religious beliefs. Yes, so much has been done, but there is still so much work to do. The Irish Times 2017 ‘Feeder School Survey’ is a stark reminder of this, highlighting how

“fee-paying schools account for 10 of the top 20 schools sending the most students to college and pupils in schools in the most affluent areas of Dublin are up to five times more likely to go to third-level than those in the poorest areas.”

Trusting democratic governments will set optimal policies in the long run, the requirement to improve educational equality will become central in creating more equal future societies. Educational equality will become the foundation for creating equal opportunity for 2018 and beyond.

“Until we get equality in education we won’t have an equal society” – Sonia Sotomayor, Associate Justice of the Supreme Court of the United States.