Inequality is a threat to our democracies

One possible development is the rise of ‘plutocratic populism’

Martin Wolf

Between 1980 and 2016, the top 1 per cent captured 28 per cent of the aggregate increase in real incomes in the US, Canada and western Europe, while the bottom 50 per cent captured just 9 per cent of it. But these aggregates conceal huge differences: in western Europe, the top 1 per cent captured “only” as much as the bottom 51 per cent. In North America, however, the top 1 per cent captured as much as the bottom 88 per cent. These extraordinary facts prove that aggregate growth itself tells us very little — indeed, in the case of the US, virtually nothing — about the scale of improvements in economic welfare for the population as a whole.

These striking data come from the World Inequality Lab’s recently released World Inequality Report 2018. The broad picture is one of convergence among countries and divergence within them. But the latter has not happened to the same extent everywhere. Thus, “since 1980, income inequality has increased rapidly in North America and Asia, grown moderately in Europe, and stabilised at an extremely high level in the Middle East, sub-Saharan Africa, and Brazil.” The report also shows that, after the second world war, shares of the top 1 per cent were relatively low, at least by prewar standards, across the west. But, since then, these shares have jumped in the anglophone countries, especially in the US, but little in France, Germany or Italy.

Walter Scheidel, a historian of the ancient world and author of the The Great Leveler, would say that rising inequality is just what one should expect. In this remarkable study, he argues that after agriculture (and the agrarian state) was invented, elites were amazingly successful in extracting all the surplus the economy created.

The limit on predation was set by the need to let the producers survive. Remarkably, many desperately poor agrarian societies approached this limit, the Roman and Byzantine empires among them. In times of peace and tranquility, argues Mr Scheidel, powerful interests so manipulated society as to enlarge their share (and that of descendants) of the pie. Power creates wealth and wealth creates power. Can anything halt this process? Yes indeed, argues the book: the four horsemen of catastrophe — war, revolution, plague, and famine.

Some will argue that the past was not quite as grim as the book suggests. When states relied on military mobilisation, for instance, they had to take some account of the prosperity of the people. But, in all, the inequality in premodern societies was often staggering.

What has this to do with today’s far wealthier, post-industrial societies? More, it appears, than we might like. Again, in the 20th century, revolutions (in the Soviet Union and China, for example) and the two world wars reduced inequality dramatically. But, when revolutionary regimes softened (or collapsed) or the exigencies of war faded from memory, quite similar processes to those of the old agrarian states took hold. Vastly wealthy new elites emerged, gained political power, and again used it for their own ends. Those who doubt this should look closely at the politics and economics of the tax bill now going through the US Congress.

The implication of this parallel would be that, barring some catastrophic event, we are now on the way back to ever-rising inequality. Global thermonuclear war would be equalising. But catastrophe is not a policy.

Yet we have three more appealing reasons for being relatively optimistic. The first is that our societies are far less unequal than they might be: our poor are relatively poor, but not on the margins of subsistence. The second is that high-income countries do not all share the same tendency towards high and growing inequality. The last is that states now possess a range of policy tools with which to ameliorate income and wealth inequality, should they wish to do so. A comparison between the distribution of market and disposable incomes in significant high-income countries (Canada, France, Germany, Italy, Spain, the UK and US) demonstrates the last point well. In all these cases, taxes and public spending reduce inequality substantially. But the extent to which they do so varies significantly, from the US, the least active, to Germany the most.

The big question, however, is whether the pressures for inequality will go on rising and the willingness to offset them generally decline. On the former, it is quite hard to be optimistic. The market value of the work of relatively unskilled people in high-income countries seems very unlikely to rise. On the latter, one can point, optimistically, to a desire to enjoy some degree of social harmony and the material abundance of modern economies, as reasons to believe the wealthy might be prepared to share their abundance. Nevertheless, as the military mobilisation of the early to mid-20th century and the egalitarian ideologies that accompanied industrialisation and mass warfare fade away and individualism becomes ever stronger, elites may become more determined to seize whatever they can for themselves.

If so, that would augur badly, not just for social peace, but even for the survival of the stable universal-suffrage democracies that emerged in today’s high-income countries in the 19th and 20th centuries. One possible development is the sort of “plutocratic populism” that has become such a signal feature of the contemporary US — the country that did, we should recall, ensure the survival of liberal democracy during the turmoil of the previous century. The future could then consist of a stable plutocracy, which manages to keep the mass of the people divided and docile. The alternative might be emergence of a dictator, who rides to power on the back of a faux opposition to just such elites.

Mr Scheidel suggests that inequality is sure to rise. We must prove him wrong. If we fail to do so, soaring inequality might slay democracy, too, in the end.

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