We’re all aware of the mobs of screaming harpies telling us that inequality is damaging to the economy, nay to the very life of the nation. We even had a whole book about it, The Spirit Level, which manipulated (and badly) every statistic it could to try and convince us of this point. The problem for the thesis is that if this were true, if inequality were bad for the economy, then we would see the economies of places which are more unequal doing worse than the economies of places which were more equal. And, to be frank about it, this isn’t what we see:
When we talk about competitiveness, we don’t talk much about fairness. Fairness is more a moral issue. If you look at the top countries on our list, they are not the equal countries, with the exception of Sweden. The U.S., Switzerland, Hong Kong and Singapore are countries where income inequality tends to be high. If you look at our data, there is a U-shaped relationship when it comes to income inequality. Countries that are very competitive or not competitive at all tend to be very unequal. The two extremes are the U.S. and Venezuela. Both countries are quite unequal. The countries where economic inequality is quite low, rank high but they are certainly not on the top. There is a price to pay in order to promote or guarantee a certain level of equality and that comes at the expense of competitiveness.
As we’ve noted around here before, Venezuela’s problems do not stem from the inequality in that country, rather from the silly, even pig ignorant, methods they’ve tried to use to reduce that inequality. Similarly Sweden is both more equal and competitive because they do two things right. Firstly, underneath the tax burden, they run an intensely classically liberal economy and secondly, they raise that monstrous amount of tax revenues by taxing consumption, not capital or corporations.
Which leads us to two observations: the first being that we don’t actually have any evidence that inequality harms the growth prospects of the economy. The second is that even if it does whether reducing that inequality will reduce the performance of the economy depends upon precisely how we reduce the inequality. We might try price controls, rationing, import substitution, nationalisation, the Venezuelan route, or we might try a properly free market economy with a high VAT to give us the money to redistribute, the Swedish way. That latter works, in that the country is more equal (if that’s something you want to worry about and we don’t) and also remains competitive. The former doesn’t work in either sense: but sadly if we look around UK politics we see those concerned with inequality arguing for those Venezuelan policies rather than those Swedish ones.
Which end of the political spectrum is said to be the evidence based one again?