It’s hard to pinpoint an exact date, but sometime early in the years after the global financial crisis the problem of inequality moved to centrestage. Evidence that had once been discussed mostly in academic seminars found a wider audience among people trying to understand what had gone wrong in Western economies. What the figures showed were striking disparities in income and wealth, particularly in the United States, where they challenged the longstanding self-perception of a land of opportunity unshackled by the social rigidities of “Old Europe.”
Among all the research, two findings were crucial. First, French economists Thomas Piketty and Emmanuel Saez went back to the raw evidence about the income share flowing to the top 1 per cent of households. This detail had been buried — for statistical or privacy reasons — in the broad categories used by data collectors, or had been obscured by sampling problems. Piketty and Saez found that the share of income going to these households was substantially larger than had previously been supposed, and was growing rapidly. Most of the benefits of economic growth were flowing to a relatively small part of the population; living standards for everyone else were stagnant or even declining.
The second finding, from a wider range of researchers, was that social mobility — the chance that someone born to poor parents would become wealthy, or vice versa — was declining in the United States, and was now lower than the more egalitarian European countries. Because comparisons across time are difficult, the most reliable way to quantify this trend is to look at relativities between countries. By this measure, the chance that a person with parents at the top (or bottom) of the income distribution will end up in the same or a similar position is now higher in the United States than in Europe. Until at least the late twentieth century, the evidence had suggested the opposite to be true.
Low social mobility is partly a predictable result of inequality. With relative equality, a modest lift in income is all that’s needed for an individual to move up the scale.
But inequality is also self-reinforcing, making a mockery of the common distinction between “equality of outcomes” and “equality of opportunity.” The greater the disparity in resources available to families, 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 to resist the rise of unequal outcomes.
Together, these two sets of findings yielded a new and much gloomier picture of inequality in the West. They were presented most clearly in Thomas Piketty’s Capital in the Twenty-First Century, which became a surprise bestseller in 2013.
Unfortunately the debate sparked by Capital was diverted into a largely sterile discussion of Piketty’s claim that the growth of inequality depended on the formula r > g (in other words, that the rate of return on capital exceeds the rate of economic growth). This obscured Piketty’s more crucial observation that, in the absence of political action to counter it, growing inequality would ultimately restore the “patrimonial” society that prevailed in the nineteenth century.
Wealth and social position in a patrimonial society are primarily obtained, as the name implies, through inheritance. Patrimonial societies preserve their structure against the fissile tendencies of inheritance by encouraging the combination of fortunes through marriage. Piketty illustrates this tendency through reference to portrayals by Jane Austen, Honoré de Balzac and other classic nineteenth-century novelists.
In these novels, every possible marriage is graded in terms of the wealth and annual incomes of the prospective partners. Romance might require that the relatively impoverished heroine should succeed in winning the affections of the wealthy hero, but financial calculation usually triumphed. Balzac presents a darker view, with his protagonist Rastignac plotting a loveless marriage in pursuit of an inheritance.
This point is even more evident in the “industrial novels” of the later nineteenth century, where the impossibility of ascending the social scale through hard work and intelligence is at the core of the class divisions that drive the plot. As the protagonist of David Lodge’s twentieth-century novel Nice Work observes, the authors of the industrial novels were unable to contemplate a political solution, and so the dilemmas of the characters could be resolved only through “a legacy, a marriage, emigration or death.” Play by the rules of patrimonial society and win, or leave once and for all.
Is this the future that awaits us? If so, what will it look like? The years since the publication of Capital have seen a modest recovery from the Great Recession. But that recovery hasn’t been sufficient to prevent the breakdown of the old political order, which relied on a consensus favouring some version of market liberalism.
To understand occurrences like Brexit and the Trump presidency, it’s useful to look at the most recent developments in the unequal distribution of income and wealth. The clearest evidence is from the United States — but where the United States leads, the rest of the world is likely to follow. Piketty finds evidence of growing inequality in Britain and France; and 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 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 families earned more than half of total real income growth per family. As a result, their share of total US income reached 22 per cent, one of the highest values since records based on income tax returns were first collected in 1913.
The top 1 per cent have attracted most attention, but focusing on that group can be misleading. Within the top 1 per cent, the pattern of unequal benefits is replicated, just like a set of nested Russian dolls or a fractal pattern in mathematics.
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. Within this group (made up of about 16,000 families), the top 1 per cent (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 United States, it’s worth noting that the top 0.0001 per cent own more wealth than the entire African-American population, even including billionaires such as Oprah Winfrey.
Looking beyond the top 1 per cent, have the benefits of increased income inequality flowed to high-income professionals and business owners as a group? To some extent they have, but not nearly as much as is often imagined. For a recent report, Striking It Richer, Emmanuel Saez divided the top decile (or 10 per cent) of the income distribution into three groups, the top 1 per cent, the next 4 per cent and the next 5 per cent. The top 1 per cent have done very well indeed. Their share of total income bounces around 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.
Emmanuel Saez’s breakdown of the top 10 per cent of US income-earners, 1913–2015
Note: Income is defined as market income including capital gains. Source: Striking it Richer: The Evolution of Top Incomes in the United States.
The next 5 per cent have not done nearly so well. Their share of total income has barely changed since the 1980s and now appears to be falling. The incomes of households in this group have grown 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.
For the rest of the population, the picture is much worse. Households outside the top 10 per cent have seen their share of total income decline consistently. For many, income has declined in absolute terms. 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 the process of building dynastic fortunes.
The fact that currently wealthy Americans have not, in general, inherited their wealth follows logically from the fact that, in their parents’ generation, there weren’t comparable accumulations of wealth to be bequeathed. More generally, starting from the position of relatively equal income and wealth (relative to earlier periods and to the current one, that is), which prevailed between about 1950 and 1980, growing inequality of income must precede growing inequality of wealth. Wealth is simply the cumulative excess of income over consumption (and American high-income earners have not been notable for restrained consumption).
So, given 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 than for the current recipients of high incomes. That inheritance will include direct transfers of wealth as well as the effects of increasingly unequal access to education, early job opportunities and home ownership.
Counterintuitively, this process is further advanced in Australia. Of the top ten people on the Australian Financial Review’s Rich List, three inherited their money. Two are foreign businessmen, listed because they hold dual citizenship in Australia, so we can put them to one side. Of the remaining five, some of them members of the talented generation of Jewish refugees who came to Australia and prospered in the years after the second world war, only one (Andrew Forrest) is under eighty. When they’re gone, the rich list will be dominated by heirs, not founders.
The same point is even clearer with the paper’s list of rich families. As recently as twenty years ago, all but one of these clans were still headed by the entrepreneurs who had made the family fortune in the first place. Now, all but one of the families are rich by inheritance.
Meanwhile, 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 over $1 million in Sydney, it is essentially impossible for young people on average or below-average incomes to enter the housing market unaided. Far more commonly, they rely on parental assistance to provide a deposit and, in many cases, to guarantee a loan. Malcolm Turnbull’s suggestion that wealthy parents should “shell out” to buy houses for their children, and that anyone who had problems with this idea was engaged in “class warfare,” illustrates the point.
What will a patrimonial society look like? Most obviously, it won’t be pleasant for those born to families who lack the resources 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, often putting its privileged children into positions of power and influence for which they may have little aptitude.
As was notably observed by Thomas Gray in his “Elegy Written in a Country Churchyard,” in a society of this kind, most people’s opportunities are circumscribed from birth:
Full many a flow’r 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 does not 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 financial sector, have become a drag on economic growth. Even such staunch advocates of liberalisation as the OECD recognise that the financialisation that allowed the accumulation of 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? The policies that reduced inequality in the twentieth century, notably including inheritance taxes and progressive income taxes, are widely assumed to be off the table in the current economy. But if the political events of the last couple of years have shown anything, it is that it is a mistake to write off any political outcome as impossible.
The fact that Labor, led by a man as cautious and instinctively centrist as Bill Shorten, can campaign on a platform of increasing the top marginal tax rate suggests that the appeal of “trickle down” theories of income fairness has been erased by the actual experience of an unequal society. The forces pushing us towards a patrimonial society are powerful, but not irresistible. •