The exact date is hard to pinpoint, but sometime in the early years after the global financial crisis concerns about inequality moved to centrestage. Evidence once discussed mostly in academic seminars found a wider audience among people trying to understand what had gone wrong in Western economies. Disparities in income and wealth were striking, particularly in the United States, where they challenged the image of a land of opportunity unshackled by the social rigidities of “Old Europe.”
Two insights played a crucial role in this surge of interest. The first, associated mostly with the economists Thomas Piketty and Emmanuel Saez, rested on new historical data about the share of income flowing to the richest 1 per cent of households. Piketty and Saez found that the share of income going to the top 1 per cent was substantially larger than previously supposed, and growing rapidly. Most of the benefits of economic growth were flowing to a relatively small part of the population, while living standards for everyone else stagnated or even declined.
The second insight, reached by a broad range of researchers, was that social mobility was declining in the United States, and was lower than in more egalitarian countries in Europe. The chance that a person with parents at the top (or bottom) of the income distribution would end up in the same or a similar position, they found, was now higher in the United States than in Europe. Until at least the late twentieth century, there had been good reason to think that the opposite was true.
Low social mobility is partly a predictable consequence of inequality. Where incomes are relatively equal, only a modest improvement in income is needed to move up the scale.
But inequality is also self-reinforcing, challenging the common distinction between “equality of outcomes” and “equality of opportunity.” The greater the disparity in resources available to households, the easier it is for the better-off to give their children a head start. Since the desire to look after your children is both natural and admirable, there is no real way to offset this tendency except by resisting increasingly unequal outcomes using tax policies and other mechanisms.
One particularly striking piece of evidence, drawn from a study by economists Richard Reeves and Isabel Sawhill, is that rich kids who make bad choices do pretty much as well as poor kids who do everything right. Poor university graduates have only a 20 per cent chance of ending up in the top 10 per cent of earners, marginally greater than the chance of rich high school dropouts ending up there.
The combination of these various findings yielded the new and much gloomier picture of inequality presented most clearly in Thomas Piketty’s Capital in the Twenty-First Century, which became a surprise bestseller in 2013. In the absence of political action, said Piketty, growing inequality would ultimately return us to the kind of “patrimonial” society that prevailed in the nineteenth century. Those were the days when wealth and social position came primarily from inheritances, and marriage was used to consolidate fortunes.
To illustrate his point, Piketty referred to Jane Austen, Honoré de Balzac and other classic nineteenth-century novelists. In their narratives, every possible marriage is graded in terms of the wealth and annual incomes of the prospective partners. Romance might have required that the relatively impoverished heroine wins the affections of the wealthy hero, but reality meant that financial calculation usually triumphed.
This point is even more evident in the “industrial” novels of the later nineteenth century, whose plots are driven by the impossibility of ascending the social scale simply through hard work and intelligence. With the authors of these novels unable to contemplate a political solution, their characters’ dilemmas could be resolved only through “a legacy, a marriage, emigration or death” (in the words of the protagonist of David Lodge’s novel Nice Work). Either play by the rules of patrimonial society and win, or leave once and for all.
Is this the future that awaits us? Recent movements in the distribution of income and wealth suggest it is. Although the clearest evidence is from the United States, Piketty also found signs of growing inequality in Britain and France. Even in Australia, where the shift has been moderated by relatively progressive tax and welfare policies, similar trends are emerging.
The news on inequality in the United States is nearly all bad. The top 1 per cent might have lost more than most during the global financial crisis, but that was just a blip. Between 2009 and 2015, the top 1 per cent of American families picked up more than half of total growth in real income. Their share of national income reached 22 per cent, one of the highest points since income tax records were first collected in 1913.
The top 1 per cent have attracted most attention, but focusing on this group can be misleading. Within the top 1 per cent, like a set of Russian dolls, the pattern of inequality is replicated: the top 0.01 per cent, which may be seen as “the 1 per cent of the 1 per cent,” has done much better than the remaining 0.99 per cent of the top 1 per cent.
Within that group (about 16,000 families), the top 1 per cent (that is, the top 0.0001 per cent of households, amounting to a few hundred people) own substantially more than the bottom 50 per cent of all households. In the racially divided context of US politics, it’s worth noting that the top 0.0001 per cent own more wealth than the entire African-American population, even including billionaires like Oprah Winfrey.
Beyond the top 1 per cent, have high-income professionals and business owners benefited from shifts in income distribution? To some extent they have, but not nearly as much as is often imagined. When Emmanuel Saez broke the top 10 per cent of income earners into three groups — the top 1 per cent, the next 4 per cent, and the next 5 per cent — he found the top 1 per cent to have done very well indeed. Their share of total income bounces about because much of it takes the form of capital gains, but the upward trend is clear and strong. The next 4 per cent have also done well, adding around five percentage points to their share since the 1980s.
But the next 5 per cent haven’t done nearly so well. Their share of total income has barely budged since the 1980s and now appears to be falling. Households in this group have seen their incomes grow in line with the average growth of total income in the United States, which has been considerably slower in recent years than in the 1950s and 1960s. In other words, this group did better in postwar decades of relatively equal income and strong economic growth.
The picture is much worse for the rest of the population. Incomes among households outside the top 10 per cent have declined consistently in relative terms; for many, the decline has been absolute. These disastrous outcomes are reflected in, and reinforced by, a variety of social stresses, including an epidemic of opioid addiction and declining life expectancy for large sectors of the population.
The one apparent bright spot is that those at the top were more likely to earn than inherit their riches. In particular, most of the very wealthiest Americans have made their fortunes from the technology boom that began in the 1990s. This might seem like a refutation of Piketty’s prediction, but in reality it mostly reflects the time lags involved in building dynastic fortunes.
The fact that currently wealthy Americans have not, in general, inherited their wealth follows logically from the fact that their parents’ generation didn’t accumulate wealth at such a rate. Compared with earlier periods and with the current one, income and wealth were more equally distributed between 1950 and 1980. Inequality of income must precede growing inequality of wealth, since wealth is simply the cumulative excess of income over consumption.
So, given the current era of highly unequal incomes and social immobility, we can expect inheritance to play a much bigger role in explaining inequality for the generations now entering adulthood. That will include direct transfers of wealth, mainly via inheritances, as well as the effects of increasingly unequal access to education, early job opportunities and home ownership.
Australia typically follows the United States, with a lag. Between 2003 and 2017, the most commonly used measure of wealth inequality, the Gini coefficient, rose from 0.57 to 0.62 (the higher the number, the more unequal the wealth). By 2017, the top 20 per cent of households held 63 per cent of all wealth. Ownership of shares and other financial assets is particularly concentrated; with asset values increasing faster than wages, this implies an increase in the importance of inheritance.
For the mass of the population whose financial wealth is limited to a superannuation account, a different form of inherited inequality is becoming evident. With median house prices exceeding $1 million in Sydney, it is more or less impossible for young people on average or below-average incomes to enter the housing market unaided. Far more commonly, young people rely on parental assistance to provide a deposit and, in many cases, to guarantee a loan.
What will a patrimonial society look like? Most obviously, it won’t be pleasant for those born to families who lack the resources needed to give them a head start in life. More generally, it is likely to be economically and socially stagnant. A patrimonial society inevitably wastes much of its talent, instead putting its privileged children into positions of power and influence for which they may have little aptitude.
In a society of this kind, as Thomas Gray observed in 1751 in his “Elegy Written in a Country Churchyard,” most people’s opportunities are circumscribed from birth:
Full many a flower is born to blush unseen,
And waste its sweetness on the desert air.
Some village Hampden, that with dauntless breast
The little tyrant of his fields withstood;
Some mute inglorious Milton here may rest,
Some Cromwell guiltless of his country’s blood.
This doesn’t mean that no one can ever rise to the top. Given even the smallest opportunity, those of exceptional ability will rise in any society, as did both Oliver and Thomas Cromwell. But the odds against such an achievement are long.
Indeed, we have probably already passed the point where the growth of inequality and the accumulation of massive fortunes, particularly in the finance sector, have become a drag on economic growth. Even the OECD and other advocates of liberalisation recognise that the finance sector, which has created massive fortunes, has reached the point where it reduces growth, makes economies more vulnerable to crises and undermines the living standards of most households. In Australia, the governor of the Reserve Bank has expressed alarm at the consequences of stagnant or declining wages.
What, if anything, can be done about this trend? The Biden administration is pushing hard to reverse some of the measures that have increased inequality. Most notable is the proposal to tax the unrealised capital gains of assets passed on through inheritance, which would substantially reduce inherited inequality. Precisely for this reason, it is the object of vigorous attacks from lobbyists for the wealthy. In view of the Democrats’ narrow majority in Congress, it remains to be seen whether this measure will be passed, but the fact that it has been put forward at all is significant.
In Australia, by contrast, things are only going to get worse. There is no prospect of any kind of tax on wealth or inheritance. The Coalition’s stage three tax cuts, legislated with Labor’s support, will massively reduce the progressivity of the tax system. Worse, the magnitude of the cuts, rising to $30 billion a year over time, combined with the hangover from the pandemic, means that governments will have little or no capacity to spend money on any measures that might reduce inequality. The current government is already looking for cuts, and Labor has made it clear that the pro-equality proposals it put forward in 2019 are off the table.
Whether we like it or not, the patrimonial society seems to be on its way. •
This is an updated version of an article first published in July 2017.