Redistributing wealth - from rhetoric to reality

The PTI has used income inequality as its rallying cry for years, but its government is doing little to address this issue, writes Shahid Mehmood

Redistributing wealth - from rhetoric to reality
The subject of income inequality, once pushed to the margins of economics by more attractive offerings such as economic growth, has experienced a spectacular turnaround. This is especially true in the aftermath of the financial crisis and movements like Wall Street versus the Main Street, which brought to fore the staggering gap in incomes of the rich and the poor. A few years ago, the ground-breaking work by French economist Thomas Piketty (published in the form of the book Capital in the 21st Century) gave further vent to the problem of increasing inequalities in income around the globe.

Take the US economy, whose total output stands at around $20 trillion, but the fruits of this output are highly skewed in favour of the rich. This fact is beyond doubt given a plethora of studies, especially by Thomas Piketty, Gabriel Zucman and Emanuel Saez, three French economists of considerable international repute. They calculated the share of income going to various groups. Not surprisingly, it was found that since the 1970s, the process of income inequalities has exacerbated without any signs of reversing. While the income of the middle and the working class has tended to stagnate, income of the rich has climbed precipitously. At present, the bottom half of the American population realises only 12 percent of the total income generated in the US economy, down from 20 percent in the 1970s.

Redistribution using state power is one of the central questions of economic policymaking of our times. In their research, the three economists figured in the government transfers over time, under various redistribution schemes. Did it help stem the tide in favour of the rich? The answer, as per this research, is no.

This assumes critical importance when one considers that the US government redistributes a staggering $5 trillion under its various resource redistribution initiatives. If this mammoth outlay cannot make any difference, then what will? Year after year, efforts to redistribute income to the people in the lower earning brackets have barely made a difference, and the bottom 50 percent of the working age population’s income has barely budged since at least the 1970s (these efforts, though, have managed to help the middle class a bit. But they are not exactly the ones for whom these efforts are intended).

To rephrase the issue, the $5 trillion being spent by the US government constitutes a waste since it is not having the intended effect. Eight years of the Obama administration, one of the most progressive administrations in the American history - given its levy of taxes on the rich - failed to make much of an impact and so is the case with Trump.

If the work by Piketty and his colleagues made people sit up and debate this issue, a book by Walter Scheidel added further spin to the debate. Scheidel is a professor of history at Stanford University, whose book The Great Leveler takes a historical look at the problem of inequality. From ancient Greece to the 21st century, welfare states have tried to create equal societies with equal possession of resources. His worrying thesis, though, is that efforts at lasting and substantial reductions in income inequality through redistribution are bound to fail!

Scouring through the historical record, Scheidel found that economic development has always led to deepening of entrenched income inequalities. The policies to reverse that trend did not made much difference. Notice that Professor Scheidel’s findings are somewhat similar to those of Professor Piketty, who in his book found the same pattern of entrenched income inequalities in favour of the rich. These, and other such findings, discredit the long-held belief of ‘trickle down’ economic, which proposed rising inequalities in earlier stages of growth but an equalling of incomes in later stages.

So, what are we to think of redistribution policies? As far as Scheidel is concerned, if policymakers are looking for drastic resetting of wealth and income concentrations, then the only way is extreme events like war, violence and plagues. He cites various instances from history to prove his point. For example, the demise of the Roman Empire in the 5th century and the plague of Justinian led to drastic change in wealth and income distribution. Italian city states like Florence and Genoa in the Middle Ages exhibited extreme wealth inequalities in favour of a select few families. But the onset of the destructive bubonic plague (the ‘black death’) that ravaged Europe drastically reset wealth concentration, leading to more equal societies. The French revolution did the same.

Notice that Piketty in his book also pointed out the first and the second world wars as occasions when wealth distribution and income inequalities were substantially reset. But surely, any sane person would dread this route. This leaves us with the possibility of only marginal improvements through redistribution, something that is hardly worth the effort relative to massive expenditure of state resources.

We now move towards Pakistan, where a new government has assumed charge. One of its rallying cries during years in opposition was the extreme economic inequality prevalent in Pakistan. Now in government, their challenge is now to turn rhetoric into reality. Their actions till now, however, suggest not much has been done to achieve this goal. For 72 years of its existence, the Pakistani state has done its best to subsidise income inequalities and pamper the elite through transfers that hardly make sense. Take, for example, the generous provision of subsidised lands and plots to generals, judges and bureaucrats, which is besides the perks and privileges that they enjoy in service and in retirement. In essence, the Pakistani government is a rent-seeking platform which serves the elite in further entrenching their hold on wealth. Good luck trying to correct this imbalance.

Can we, considering all this, do something about income and wealth inequality? One probable answer comes from Professor Lawrence Katz, an economist at Harvard who also has studied the same problem. He emphasises the importance of early intervention in terms of events that lead to skewed wealth distribution. For example, earnings through financial innovation is one area where the rich have had a near monopoly, and thus realised its outlandish windfalls. If government intervention had ensured that the middle and lower classes had been part of these developments (through inclusive education), then things could have been different now. But once the windfalls are continuously realised over time, contends Professor Katz, then it is nearly impossible to reverse the trend.

All this reminds me of the importance of setting the field even for every participant, and this job squarely falls on the shoulders of the government. If a government abrogates this responsibility, then severe inequalities are a natural outcome.

The writer is an economist. He tweets at @ShahidMohmand79