ANALYSIS:There are strong economic arguments for boosting equality of opportunity
IN 2004 Michael McDowell famously argued that inequality is an inevitable part of any society that offers people incentives to succeed. His comments drew heavy criticism from a wide variety of left-leaning critics and social commentators, and prompted yet another version of the age-old debate about taxation and social spending.
Taken literally, his remarks are difficult to dispute: some degree of income inequality is inevitable when markets are free and open. Modern capitalism leads to wage differentials between people of varying levels of education, experience, skills and work/leisure preferences. Free trade and technological change result in the rise and fall of returns across the economy.
The 2004 controversy was caused by a clash of deeply held political convictions in relation to the following question: should government policy seek primarily to strengthen incentives to work, invest and innovate, or prioritise a reduction in poverty and inequality?
Inspired by the euphoria of Ireland’s economic boom and, more recently, by the desperate need to grow out of our debt problems, the dominant political philosophy in 21st century Ireland has focused on the preservation of incentives. Should this continue as we emerge from the EU-IMF programme?
To help answer this question it is worth examining the impact of inequality on society. Intuitively, the corrosive effect of inequality is evident from personal experiences, whether with family, friends or work colleagues.
Humans endure feelings of insecurity when compared unfavourably, and experience contrasting feelings of superiority when compared favourably. This causes tension, particularly as inequality affects our ability to identify and empathise with others.
Evidence from social science tells us that more unequal societies suffer to a greater extent from costly health and social problems, even when average income levels are constant. In more unequal societies, people are five times more likely to be imprisoned or suffer from mental illness, six times more likely to be clinically obese, and face higher unemployment rates and lower educational outcomes.
Conversely, levels of societal trust and a sense of community are demonstrably higher in more equal societies.
There are strong economic arguments for boosting equality of opportunity. A meritocratic society with full equality of opportunity avoids losses to poverty that occur when individuals fail to reach their true potential. As Ireland competes internationally on the quality of our labour force, we also need to continue to attract the best international talent. While high incomes undoubtedly attract some to Ireland, quality of life will increasingly become important.
The depth of inequality and poverty in Ireland has changed significantly in recent years. Between 2003 and 2007, Ireland pursued the ultimately unsustainable twin policy of lower taxation and higher social spending. As a result, significant progress was made.
Consistent poverty halved between 2003 and 2008 to 4.2 per cent, and those at risk of poverty (who earn less than 60 per cent of the median income) fell from 19.7 per cent in 2003 to 14.4 per cent in 2008.
As poverty fell, however, inequality increased. According to Eurostat figures, between 2003 and 2006 Ireland’s Gini coefficient – a measure of inequality ranging from 0 to 100 where the higher the number the greater the inequality – rose from 30.6 to 31.9. The economic crisis has caused a reversal as inequality has fallen and poverty has begun to rise. The proportion of Irish people considered to live in consistent poverty increased from 4.2 per cent in 2008 to 5.5 per cent in 2009.
However, inequality declined between 2006 and 2009, as the Gini coefficient has fallen from 31.9 to 28.8. These numbers confirm the central importance of economic growth for levels of inequality and poverty, both directly and, most importantly, in terms of employment opportunities, and indirectly in terms of social spending.
In recent decades, Ireland’s social policy has sought equality of opportunity with the public provision of State services and a low level of social transfers by OECD standards. While some measures have improved, poverty among children and the elderly has remained high and social mobility as measured by the socio-economic background of third-level students remains largely unchanged.
In fact, cross-country evidence suggests that a higher level of redistribution is an essential ingredient, along with the provision of quality public services, to achieve equality of opportunity as defined by high levels of social mobility between generations.
Under the EU-IMF programme, every decision aimed at reducing the deficit will have consequences for incentives and levels of inequality and poverty.
We should seek to protect the most vulnerable while maintaining strong incentives to work, invest and innovate. Strengthening the incentive to make the transition from welfare to training and eventually into employment is essential, as are efforts to eliminate welfare traps and stamp out fraud.
As economic sovereignty is regained, the longer-term strategic questions about Ireland’s future direction will re-emerge. In the middle of the 20th century the Russian-American economist Simon Kuznets suggested that economic inequality increases over time while a country is developing before inequality begins to decrease.
Recent academic research argues that this fall in inequality is not inevitable but is dependent on electoral preferences and government policy.
Examples such as the welfare policies of Franklin Delano Roosevelt in the 1930s and Clement Atlee in the late 1940s, and the centre-right governments in the US and the UK in the 1980s spring to mind.
Recent decades of strong economic growth has allowed centrist politics to argue that strengthening incentives and reducing poverty and inequality can be pursued concurrently.
To some degree this is true, especially when policies for greater social cohesion are modestly defined (and thus less effective) and economic growth is strong.
Unfortunately, given Ireland’s economic predicament and the likely return to uneven economic growth with continued high unemployment, relative poverty and inequality are likely to increase in the years ahead.
Resources will be very limited, but as we shape our future it is worth reconsidering the benefits of a more equal society.
Michael King lectures in the department of economics at Trinity College Dublin, and is founder and former chief executive of Suas Educational Development