Rising Inequality: Raising Questions.

Who gets the crumbs?
Source: Flickr, Creative Commons: Jonathan Hinkle

Last week the New Zealand Herald reported that inequality in New Zealand had increased substantially in 2011¹.  The Ministry of Social Development (MSD) report that it quoted also said that inequality was now at its highest level ever.  Contributing to the growing gap were two divergent trends.  On one hand the income of the richest 10% “rose sharply” whereas, on the other, the median income fell 3%.  As anyone with a little statistical knowledge knows, the median income level of most countries is less than the average income.  Thus, a fall in the median income suggests that those in the lower deciles are likely to have suffered significant income loss.

In that same week a book arrived in my Post Office box, having been posted in the UK a few weeks earlier.  What’s the connection?  Well, the book was a signed copy of The Spirit Level: Why Equality is Better for Everyone by Richard Wilkinson and Kate Pickett.  Wilkinson and Pickett are British epidemiologists with special interest in the social determinants of health.

The Spirit Level analyses data from 23 of the world’s richest nations and shows in case after case² that there is a positive link between income inequality and the level of social ills in society.

But a link between inequality and health, obesity, educational performance or violence does not equate to causality does it?  No, not per se.  But wait, Wilkinson and Pickett are aware of this criticism.  In the final section of their book they tackle this awkward question.  After looking at a number of possible alternative explanations they conclude (p 195) that:

“It is very difficult to see how the enormous variations which exist from one society to another in the level of problems associated with low social status can be explained without accepting that inequality is the common denominator, and a hugely damaging force.”

Now back to that MSD report.  Why was there a rise in inequality in 2011?  According to MSD the “widening gap between rich and poor was due to volatility cause by the global financial crisis.”  Oh, really?!  Somehow the richest 10% weren’t affected though.  In fact, they appear to have benefited, financially at least.

Can Wilkinson and Pickett shed any light on this?  Yes, they can.  The first edition of their book was published in early 2009 only about 6 months after the start of the global financial crisis.  Since then they have updated the book and a revised edition (the one that landed in my post box) was published in late 2010.

In this revision Wilkinson and Pickett include a short section entitled Inequality, Debt and the Financial Crash.  Drawing on the work of economists at Boston College, the London School of Economics and others the authors conclude (p296) that “there is now evidence that inequality played a central causal role in the financial crashes of 1929 and 2008.”³

Quite the reverse of what MSD are saying.  Perhaps the analysts at MSD would be well advised to read this revised edition of The Spirit Level.  Failing that, maybe watching the forthcoming film/documentary based on the book.

A campaign to raise funds to produce a film/documentary based on The Spirit Level now has sufficient funds to enable production to begin.  Watch out for it.

1. A quick bit of research suggests that a similar rise in inequality occurred in Australia and possibly other OECD countries.
2. A total of 10 cases are presented: Trust, Life expectancy, Infant mortality, Obesity, Mental illness, Education scores, Teenage birth rates, Homicides, Imprisonment, Social mobility.
3. There now appears to be evidence that a contributing factor towards the financial crisis has been the siphoning of wealth from the poor towards the rich, contributing to debt.  But that’s for another blog.