“An imbalance between rich and poor is the oldest and most fatal ailment of all republics.” Plutarch (45-120ad)
As the above quote shows, income inequality is by no means a new concern but it is one that seems to have become increasingly controversial and politicised in recent years. yet how much of this is down to the fact that, while – as we illustrated with tongue firmly in cheek in Tangled up with blue– there are many correlations to be found in the world, none has any statistical value without a causal link?’.
Certainly there would appear to be no shortage of politicians able to find an economist to provide them with a plausible number to back up whatever point they wish to argue. Our own point here on the value perspective, however, is that much of the resulting debate on income inequality stems not from a difference of facts and statistics but of definitions and assumptions.
In other words, it often comes down to how the question is framed. Are you, for example, looking at income inequality at a household or an individual level? Are you talking about pre-tax or post-tax income? Are you adding in government distributions, such as child or housing benefit? These and other factors can all make an enormous difference to the resulting statistics and supposed correlations.
Of course you can slice and dice the numbers to make pretty much any case you want but how can we hope to achieve any sort of consensus – and therefore find any sort of solution – if we do not start from the same place? to that end – and using us data throughout as it is more in-depth – let’s consider some of the key variables that are often used (and abused) in debates on income inequality.
To us, the question of whether you look at pre-tax or post-tax income should not be controversial – after all, rich or poor, you can only spend that part of your income the government does not take away in taxes – but not everyone sees it that way. Similarly, since they can be spent as income, surely any benefits payments should be factored into the equation. Again, however, not everyone sees it that way.
Whether you assess income at a household or an individual level also makes a big difference because, in the last 50 years, the proportion of us households that comprise just one person has more than doubled. As such, if you compare past and current numbers on a household rather than individual basis, you are not making a like-for-like comparison.
A still more significant variable in the debate is age – indeed, studies in the US suggest this factor could account for 75% of all income inequality. After all, after a lifetime of work and compounding your wealth, the chances are you are going to be a lot richer than most people who are just starting out in life. Once again, if you ignore this, you are not comparing like with like
Once we make all these important distinctions and definitional changes – that is, we adjust for age and consider post-tax and post-distribution income at the individual rather than household level – we reach an interesting conclusion. Between 1987 – before which time the US data is less reliable – and now, real spending per person by income quintile shows income inequality has not changed at all. That of course says nothing about whether it is too high or low – merely that it has not deteriorated the way that is frequently argued.
Furthermore, when analysing the data, people tend to focus on income groupings – the data here, for example, is divided into fifths or ‘quintiles’ – and so can overlook the important dynamic of significant mobility between income quintiles. As we suggested before, as people grow older, they tend to grow richer, until they reach the point of retirement and start moving backwards through the quintiles again.
The constituents of the ‘the richest’ or ‘the poorest’ categories are thus changing frequently – an important distinction that can be missed when using the device of quintiles. nevertheless, the fact the income inequality debate is often so badly framed does not, of course, help the case of those people who find themselves genuinely at a financial disadvantage in life – so what might?
Clearly calling on people, say, to live in bigger households is unrealistic – and telling them to age a decade or two even more so – but study after study does reveal one big causal link with income inequality and that is education. As the table below shows, for example, a quarter of the lowest-income quintile never finished high school while almost four-fifths of the top quintile finished university.
Source: Census Bureau, March 2014
While it may not be possible to guarantee equality of income, it is possible to work towards equality of opportunity and – irrespective of whether you approach the issue from the left or the right of the political spectrum – the facts suggest universal access to a good education would be a huge step in the right direction. Politicians just need to realise that, when you are looking for an answer, it helps if you can first agree on the question.