Davos: Our continuing obsession with inequality

The world's intellectual elite are meeting this week in Davos to, apparently, solve our economic ills. None too soon. We have a mountain of economic problems to challenge the brightest minds on the planet. But I’m a little bothered that they (the special people) have been at this for 45 years and the world economy seems to be getting worse. To paraphrase Woody Allen, I think we should give them five more years and then head over to Lourdes.

And what issue will most occupy these great minds this time around? Jobs? Anemic economic growth? The collapse in commodity prices? The costs of war? The refugee crisis? Terrorism? Corrupt governments stealing the futures of their nations? None of these? Then surely it’s poverty? Wrong again. No, we are assured that it is inequality that we should be most concerned about. Seriously.

But isn't inequality and poverty the same thing? Well, no they are not the same. Poverty is about severe deprivation; about hunger and the lack of the basic needs. Inequality is a measure of the gaps in living standards—often using income as an indicator but sometimes employing consumption (what we spend) or wealth (our net worth). So, why is inequality a more important issue than hunger and serious deprivation?

See, that's the thing. Economists have been asking that question for quite some time without getting a satisfactory answer.  

Several years ago, in "The Spirit Level," it was claimed that inequality leads to a whole range of social and economic ills—from crime to single parenthood to bad health outcomes. Critical examination of these claims found that the authors used flawed and selective data to get the results they wanted. This year's Nobel Prize winner in economics, Angus Deaton, has reviewed the case linking inequality and health outcomes and finds no evidence to support that claim. There is a modest negative correlation between inequality and economic growth rates in richer nations over the past four decades. However, correlation is not causation and there are many, many factors that contribute to economic growth. More importantly, there is a stronger positive correlation between inequality and economic growth in poorer nations.  

This year's claim is that inequality erodes "trust" between governments and citizens. I wonder if the recent rise in the "trust gap" might have anything to do with the failures of government policies; with deception and corruption by state officials; and the perception (often correct) that governments are outrageously inefficient stewards of its citizen's money, rather than the rise in income inequality?

In a paper to be published by the Fraser Institute later this winter, I address the issue of consumption inequality in Canada. I look at consumption because it is, for most economists, considered a better proxy for actual living standards than income. And I find that, over the past 40 years, consumption inequality has increased about three per cent. This remarkably small change is noteworthy given all the substantial changes in society and in the economy over that period. I also report on a couple of recent U.S. studies that show a similar, very modest increase in consumption inequality in America. But this will not prevent the social justice warriors (who will be well represented at Davos) from voicing their familiar narrative, which is that economic inequality is out of control.  

But what about wealth inequality, currently a hot topic at the Davos conference?

Chris Rock, the American comedian, famously said "If poor people knew how rich rich people are, there would be riots in the streets." A funny line from a funny man. Rock, 50 years old, has an estimated net worth of $70 million. That's surely far more than 99 per cent of us will ever accumulate. He was not born into wealth to say the least. His wealth comes from the thousands of people who voluntarily buy tickets to his concerts and movies. And from his own savings and investment choices. Oxfam and many others consider this unjust. Shame on them.