Should we put a limit to inequality?

Martin Hanson

Opinion

Cigar-smoking CEO to his PA: “Miss Smith, buy up the rights to the Bible and get that part changed about the rich man and the eye of the needle” — cartoon in The Spirit Level.

The Inland Revenue Department report showing that 311 of New Zealand’s wealthiest families paid tax at less than half the rate of the average New Zealander has re-ignited the issue of inequality.

The economic gap between rich and poor is usually expressed by the “Gini coefficient”, in which values range between 0 and 100 percent. A Gini coefficient of 0 indicates perfect equality, everyone having the same income, and a value of 100 percent means maximum possible inequality, one individual having all the wealth. Actual values (from Wikipedia) range from 23.2 (Slovakia, 2019) to 63.0 (South Africa, 2014), with New Zealand 36.2 (2019) and USA 41.5 (2019).

We can assume that few, if any, would advocate a Gini coefficient of either 0 or 100, so unless you’re one of the tiny number of people who think that everyone should be paid the same, how much financial inequality is acceptable? Most would think that hard work should be rewarded, but would anyone argue that Doug McMillon, CEO of Walmart, works 933 times harder than the average Walmart employee? Of course not; such high salaries are justified, we’re told, by the need to attract the best talent in a competitive market.

But what about unearned income — using money to create more money — which seems to have no obvious connection to either work or talent (except talent for making money from money)? I’m thinking of bankers and financiers who can take home even more than top CEOs or Hollywood stars. According to Institutional Investor’s Rich List, in 2020 the 25 highest-paid hedge fund managers made a record $32 billion, an increase of 50 percent over 2019. The top earner was Israel Englander, earning $3.8bn.

The great majority will be affronted by such grotesque earnings by people who appear to do little more than push money around. No doubt their apologists would argue that cutting taxes to the wealthy promotes economic growth and job creation, thus helping society as a whole, including the “have-nots”.

The benefits of such a “trickle-down” effect have been questioned by Richard Wilkinson and Kate Pickett in their book The Spirit Level: Why greater equality makes societies stronger. Using publicly available data, they show that by virtually all measures of societal “health” — educational performance, mental illness, use of illegal drugs, infant mortality, obesity, life expectancy, teenage births, violence, imprisonment and punishment, level of trust between individuals, and social mobility and equality of opportunity — all these indices are strongly correlated with degree of inequality. Moreover, in the United States the relationship holds for comparisons between individual states.

Of course, correlation does not prove causation, but the correlations are so strong and numerous that it would be intellectually dishonest to deny the possibility of causation.

The Spirit Level challenges the most basic economic and social assumptions on which many industrial economies are based, so it is not surprising that it elicited strongly negative and positive reviews, generally corresponding with the vested interests of the “haves” and “have nots” and their representative media. Those on the Left generally like The Spirit Level — Guardian columnist Polly Toynbee described it as “that great classic of inequality research”. On the other hand media identifying with the “haves” were more dismissive; Toby Young in the right-leaning Spectator called it “junk food for the brain”.

Among the latter was Roger Kerr, then executive director of the New Zealand Business Roundtable. A few months before his death he published a long critique of The Spirit Level, in which he took issue, among other things, with anthropogenic global warming and the view that economic growth would have to be severely limited in the richest countries in order to control CO2 emissions.

In calling for such a reduction to economic growth in the rich countries, Wilkinson and Pickett implied that society has a choice. Not so; growth cannot continue forever in a finite system such as planet Earth, despite what Roger Kerr and politicians would like us to think.

Like it or not, growth in CO2 production is going to cease; fossil fuels are finite and remaining reserves require increasing investments of energy to exploit.

The origin of Homo sapiens go back over 200,000 years. For all but the last few thousand, our ancestors were hunter-gatherers, and cooperation was an absolute pre-requisite for survival. The invention of agriculture marked the beginnings of competition for status and power, and with the Industrial Revolution, this went into overdrive. Unless we can somehow return to a cooperative existence, Nature will resolve the situation of us — and I need hardly dwell on what that means.