Should We Worry about Inequality?

One of the Left’s major bugbears is inequality. In Britain, thinktanks like the Fabian Society and newspapers like the Guardian are always banging on about its supposedly pernicious effects. And such organisations no doubt have their counterparts in other Western countries.

Back in 2009, a wildly popular book called The Spirit Level claimed to show that almost all social ills can be traced back to inequality. And I’m not exaggerating when I say “almost all”. Part II of the book, “The Costs of Inequality”, has sections on “community life”, “mental health”, “obesity”, “violence” and “teenage births”—to name just a few.

One problem with the thesis that inequality is terrible for society is that it’s not obvious why this should be the case. Suppose Bill Gates moves to Britain. Because he has a huge amount of money, this makes Britain more unequal. But it’s hard to see how ordinary people are worse off. Would they be better off if every billionaire picked up and left? Surely not.

The mechanism proposed by the authors of The Spirit Level, Richard Wilkinson and Kate Pickett, is that inequality makes life more stressful for the have-nots by magnifying social status differences. Humans evolved in relatively egalitarian bands of hunter gatherers, the authors note, so they aren’t adapted to societies with vast differences in material resources.

This is not an unreasonable argument—though it should be noted that humans have continued to evolve since the dawn of agriculture when complex social hierarchies first emerged.

However, the argument makes a crucial assumption—that people can correctly perceive the level of inequality. If they can’t, then higher levels of inequality aren’t necessarily bad.

When social scientists have looked into this, they’ve found that people have only a vague idea about the level of inequality in their country. In a 2018 paper, Vladimir Gimpelson and Daniel Treisman reported small-to-moderate correlations between measures of perceived inequality and measures of income inequality, as well as negative correlations between measures of perceived inequality and measures of wealth inequality. A more recent paper tracked the relationship over time in a sample of countries and found that it was small and non-significant.

Interestingly, both papers found that support for redistribution was strongly related to perceived inequality but not to actual inequality. So people want the government to reduce income differences when they perceive those differences to be large—not when those differences actually are large.

What all this means is that Wilkinson and Pickett’s proposed mechanism probably doesn’t work, at least when it comes to differences between nation states. If people have only a vague idea about the level of inequality in their country, it seems unlikely that inequality itself is making their lives more stressful (though their perceptions of inequality might be).

Another reason the Left’s crusade against inequality is misplaced is that the situation in Britain has barely changed for more than three decades and has actually improved slightly since the Financial Crisis. As figures published by the ONS show, the Gini index—a measure of income inequality—is lower now than it was in 2007.

Taxing the rich at a higher rate than the poor to pay for public services is entirely appropriate and most governments around the world do it. But fretting endlessly about inequality doesn’t make much sense.