The future of inequality

By John McDermott

“Life is better now than at almost any time in history”, Angus Deaton writes in The Great Escape. The Princeton economist’s account of health and wealth is a fundamentally positive story. Lives are longer, healthier, richer and more satisfying than ever before. To take one statistic from this compendium of progress: in every country in the world, infant and child mortality is lower than it was in 1950. On average, humankind is having a pretty good run.

Our incomplete flight from deprivation and early death is, however, more than a story of averages. Deaton’s lucid book celebrates the riches brought by growth while judiciously explaining why some people are always “left behind”. He draws a distinction between the inequalities that are opened up by advances in knowledge and those caused by flawed political systems. For it is humanity’s lot that, ultimately, “inequality is the handmaiden of progress”.

Does this matter? Yes. But inequality is a knotty subject. There is little agreement on what ought to be equal. Should it be a measurable outcome such as income or wealth; a hazier outcome such as power or freedom; or a vague aspiration such as “equality of opportunity”? It is often said that the world is becoming more unequal. But it is less than clear what is meant by that. As Deaton notes, income inequality between countries has grown over the past three centuries but it may now be narrowing between the world’s people as a whole.

Regardless of the precise metrics, what matters most is the dynamics of inequality. Complete equality of income is neither practical nor desirable, but the consequences of inequality can be highly corrosive, as Deaton shows. He explores how it took a long time for humanity to acquire this problem. Ninety-five per cent of our time on earth has been spent as “egalitarian” hunter-gatherers. There is no clear evidence that agriculture marked a material advance; this only came definitively with the scientific and industrial revolutions.

And with them came the widespread inequalities that have marked the modern world. Deaton uses medical innovations as an example. The application of new knowledge, such as inoculation and germ theory, was first available to the rich before becoming cheaper and popular. In his telling, these material inequalities are temporary, justifiable side-effects of material progress.

Deaton adds that these differences did not narrow by chance. Politics matters. The implementation of germ theory required sanitation, which in turn “required action by public authorities, which required political agitation”. A similar argument could be made concerning the bans on smoking in public places now common in Europe and North America. Functioning democracy helps ensure fewer people are “left behind”.

Living standards “moved in parallel” with improvements in health. The average income in the world increased between seven- and eightfold in real terms from 1820 to 1992. The “great divergence” after the industrial revolution saw western countries pull ahead of nearly all other nations. Since the second world war, globalisation and the rise of China and India have meant that while about a billion people remain incredibly poor, the share of the world living in poverty has fallen dramatically.

As Deaton notes, however, material inequality has recently increased within many countries, especially rich ones. He gives the US particular attention, making a strong case that the extent of the country’s inequality and its political problems show the hollowness of its claim to be a land of opportunity. The book’s rich historical and geographical context adds to the power of this message.

After the early 1970s, growth in US median incomes all but stopped, while inequality accelerated. Deaton lists several familiar causes for this – technological change favouring high-skill labour, globalisation, demographic changes such as the emergence of “power couples” and the decline of trade unions. The patterns can also be seen to varying extents across other rich countries, including the UK.

Deaton argues that there is something “special” about the top 1 per cent of the US income scale, “just because of the enormous sums of money that are involved”. Since 1980, the aggregate pre-tax income of the bottom 90 per cent of US households has grown by 1.9 per cent in real terms. But among the top 1 per cent, pre-tax incomes have more than doubled. Deaton adds: “All but the top 1 per cent of the French population did better than all but the top 1 per cent of the American population.”

For Sasha Abramsky, author of The American Way of Poverty, this imbalance shows the failure of the US to complete the New Deal and Great Society projects, launched by Franklin Roosevelt and Lyndon Johnson respectively. Abramsky, a US-based journalist and a fellow at centre-left think-tank Demos, makes a conscious attempt in his sixth book to revisit The Other America (1962), Michael Harrington’s influential chronicle of US poverty in the age of affluence.

Abramsky travels from the urban decay of Detroit and Los Angeles’s Skid Row to the Mississippi Delta, the Appalachians and the town of El Paso, Texas, on the Mexican border. Abramsky’s subjects are often eloquent. “The month is longer than the money,” says Billye McPherson, an 84-year-old from Siskiyou County in California. “Something’s happening to my stature,” reflects Matthew Joseph, a struggling sheet metal worker.

Frustratingly, however, these experiences are reduced to vignettes. In contrast, the depth of characterisation in George Packer’s recent book The Unwinding creates a more lasting sense of the human consequences of America’s deindustrialisation. The three things Abramsky surmises about his poor subjects – diversity, complexity, resilience – at times come dangerously close to cliché.

Nevertheless, it is a necessary and important book – if only because, as Abramsky writes, “we hermetically seal off this kind of saga from the broader American story”. Without lapsing into polemic, he details the depth of the problem: one in six Americans below an artificially low poverty line; nearly 3m children in households in which each person has less than $2 a day to spend. Astutely, Abramsky observes that we struggle to find the language to talk about inequality. He makes the wise suggestion that the depth of American poverty must be seen as not only a problem in its own right but also a sign that something is wrong with democracy itself.

This leads Abramsky to decry the lack of “political will” that could deliver the “redistributing [of] a few hundred billion dollars per year”. Like Deaton, he is under few illusions about the structural impediments to political change. But looking at the ongoing government shutdown, led by a rogue minority who believe in the perniciousness of state spending, Abramsky clearly has his work cut out. There is little of the moral fervour concerning poverty that was around during Harrington’s time.

The US’s long-term fiscal forecast will make redistribution even more politically difficult. Moreover, redistribution by itself would not solve the problems Abramsky describes. He could have done more with the voguish idea of “predistribution” – the need to change the economy’s underlying structure to boost employment and wages – which is popular among progressive policy wonks.

Tyler Cowen has no such reluctance to look at the deep changes in the US economy. According to the George Mason University professor, America should be prepared for even more inequality. If Deaton’s book surveys the past and Abramsky’s the present, Cowen’s audacious and fascinating Average is Over looks to the future.

In The Great Stagnation (2011), Cowen explained the absence of real median income growth since the early 1970s. Now he predicts how technology will continue to transform economics and politics. His book comes with a warning: “This is not a world where everyone is going to feel comfortable.” In the future, “marriages, families, businesses, countries, cities, and regions all will see a greater split in material outcomes”. This is mainly due to the rise of “mechanised intelligence” – an ever-faster internet, robots, artificial intelligence and computer programs that can quickly perform vast data calculations. For Cowen, the question of our times becomes: “are you good at working with intelligent machines or not?” If so, riches await. If not, trouble. There will be no middle ground.

The rise of the machines means that the economy will be “passing along most of the higher rewards to a relatively small cognitive elite”. Unlike in Deaton’s examples, the gains will stay in few hands. To explain why, Cowen uses chess as an (at times overly) extended metaphor. The best players used to be humans, such as Garry Kasparov. Then they were computers, such as IBM’s Deep Blue. Now they are “human-computer teams” – “freestyle” players.

Cowen argues that the high-income earners of tomorrow will be those who, like freestyle chess players, complement the speed and power of machines. Quantitative measurement of performance will become ubiquitous. At the same time there will be more low-paying jobs in sectors where humans are not as easily replaceable, such as in care homes.

This technological change will have profound consequences for in-equality. “We will move from a society based on the pretence that everyone is given an okay standard of living to a society in which people are expected to fend for themselves much more than they do now.” Unlike Abramsky, Cowen believes that there is little the US political system, dominated by old and rich voters, can do about inequality. But he is cheered by the notion that “genius machines” will bring a “hyper-meritocracy”. In Cowen’s telling, this is because when performance is always quantitatively measured and working with machines is more important than networking with other humans, there will be more opportunities for the self-motivated to rise to the top.

This outcome seems less likely than Cowen expects. Social mobility is slow in the US, where some of his trends are already apparent. Soft skills such as conscientiousness are themselves not equally distributed. And if there are fewer middle-class jobs, then this may make it harder for families to make gradual progress across generations. The importance of human connections may remain stronger than Cowen expects. In his meritocratic world of high finance there are a fair few princeling interns.

Finally, there is Deaton’s warning, borrowed from the lawyer Louis Brandeis (1856-1941): “If democracy becomes plutocracy, those who are not rich are effectively disenfranchised.” Cowen is, sadly, right to be sceptical of Abramsky’s optimism about the ease of political change. But he fails to take the next step: accepting, like Deaton, that a toxic mix of money and politics may hinder the rise of any hyper-meritocracy. Inequalities of power have their own dynamic. For the greater the gains to being part of an elite, the more those currently at the top will fight to stay there.

Copyright The Financial Times Limited 2013.