Why inequality needs a radical agenda

Business Standard

Content from the Brookings Institution India Center is now archived. After seven years of an impactful partnership, as of September 11, 2020, Brookings India is now the Centre for Social and Economic Progress, an independent public policy institution based in India.

Anthony B Atkinson
Pages 400, Rs 1,250

Inequality is back in fashion, thanks to Thomas Piketty. Yet, before Mr Piketty, there was Tony Atkinson, his teacher, who has been at the forefront of research on the topic since the 1960s. Over the last few years, inequality has become a central concern of public debate in much of the developed world. The Pew Research Center’s Global Attitudes Project asked respondents in 2014 about the “greatest danger to the world” and found that in the United States and Europe “concerns about inequality trump all other dangers.” In India, inequality is a major concern only after “religious and ethnic hatred”. So the comprehensive set of policies based on theoretical and practical experience that Atkinson recommends bears significance for much of developed and developing world today.

To start with, it is important to clarify the basic difference between the two recent books on inequality. While both are written by academic economists, Mr Atkinson’s Inequality: What Can Be Done? is unlikely to match the blockbuster fate of Thomas Piketty’s Capital in the Twenty-First Century. That is simply because Mr Piketty’s book outlines empirical trends in inequality using extensive data, establishing the relative returns to capital and labour over time, whereas Mr Atkinson’s book focuses on what can be done to bring about fundamental shifts in the distribution of income and is, therefore, intellectually more involved.

In the first of the three sections, Mr Atkinson analyses the diagnosis of inequality by carefully looking at the evidence of its existence and making a case for equality of “outcomes” beyond the more obvious equality of “opportunity”. He argues that effort alone doesn’t determine outcomes, and that luck is an important factor too. Besides, it is the economic and social arrangements in society that determine the rewards structure.

Empirical evidence is presented to show that inequality reduced during the post-war decades in Europe due to several equalising forces which included conscious policies until the 1970s. The 1980s saw an “inequality turn” when several of those conscious policies ceased to operate or were reversed. The forces that Mr Atkinson highlights are technological change and globalisation, which have radically reshaped the labour markets of rich and developing countries and led to a widening of the wage gap. However, he departs from the textbook story and weaves a novel narrative in claiming that technological progress is not a force of nature but reflects social and economic decisions.

In the second part of the book, Mr Atkinson discusses a series of proposals to reduce income inequality in modern societies. He argues that to significantly reduce inequality, we have to go beyond taxes. Reducing income inequality should become a priority for everyone. Within the government, it must concern ministries such as IT as well as social protection, health and education. This should be a priority for labour market reforms as well competition commissions. It concerns individual in their roles as employers, workers, consumers, savers and tax payers. Atkinson suggests ambitious new policies in five key areas: technology, employment, social security, the sharing of capital and taxation.

The presumption so far has been that the market knows best when it comes to competition, technology and jobs, but Mr Atkinson pushes for aggressive policy interventions on all these fronts. He advises industrial democracy, especially for top pay and recommends new rules for corporate mergers that should be promoted not only with the single objective of lower prices to consumers but also with the aim of creating jobs. The direction of technological change should also be an explicit concern of policy makers, encouraging innovation in a form that increases the employability of workers and emphasises the human dimension of service provision. An important means to this end is through financing scientific research. The government’s role is illustrated by the example of the iPhone in the US, which depended on fundamental scientific and technological breakthroughs such as GPS, multi-touch screen, LCD displays, lithium batteries and so on. All of these emerged from research supported by the government.

What I find most interesting about this book is that unlike most modern day economic literature, which focuses on average effects of a policy change, Mr Atkinson painstakingly discusses its distributional aspects. “Who gains and who loses?” is a critical question to answer because most economic models assume identical representative agents and there is no room to discuss the fairness or justice of the resulting outcome.

Some of his ideas are standard left-wing mantras such as higher minimum wages, more inheritance tax, progressive taxation, expanding child benefit. Several are more radical such as encouraging firms to innovate to enhance job growth, requiring competition authorities to consider income distribution issues, a guaranteed return on savings and state-guaranteed employment. Many have argued that these policy recommendations have absolutely no chance of being implemented by any European government, but guaranteed employment has been a reality for nearly a decade in India. Countries have to experiment with radical ideas if they are to address inequality in any significant way.

This article first appeared in Business Standard, on September 11, 2015. Like other products of the Brookings Institution India Center, this is intended to contribute to discussion and stimulate debate on important issues. The views are those of the author.