THE ROLE OF POLICY

The role ofpolicy is considered in many of the chapters, but this is the explicit focus of the final part of the Handbook.

5.1 Policy Objectives

Here, we should begin by observing that the past 15 years has seen a major change in the extent to which there has been official adoption of distributional objectives.

The most evident manifestation of this change has been the adoption at a world level of the Millennium Development Goals (MDGs). The goals were ratified by world leaders in 2000 at the U.N. Millennium Assembly, and the first on the list was the halving between 1990 and 2015 of the proportion of people whose income was less than $1 a day (later $1.25 a day). At a national level, countries have adopted their own goals, such as the national social target for poverty reduction in Ireland aiming to reduce consistent poverty. In the United Kingdom, the Child Poverty Act 2010 requires the government to produce a poverty strategy every 3 years setting out actions to end child poverty. At a regional level, the European Union adopted in 2010, as part of the Europe 2020 program, the objective of reducing by 20 million the number of people in or at risk ofpoverty and social exclusion. These have been translated to varying degrees into national targets (Social Protection Committee, 2014).

It is not clear whether the same kind of change is occurring in the field of inequality reducing policies. Due to the rise in inequality, and possibly to the recent crisis, it is cer­tainly the case that the public spotlight is focused on inequality and some announcements have been made by politicians that important measures would be taken to fight inequal­ity.

5.2 Impact of Policy to Date

What grounds are there then for optimism if one is concerned with present levels of eco­nomic inequality? Can we point to past experience where inequality has been reduced? The first obvious, but important, point is that inequality is not increasing everywhere. Globally, the recent past has been more encouraging, as is well summarized in Chapter 9 by Alvaredo and Gasparini:

The available evidence suggests that on average the levels of national income inequality in the developing world increased in the 1980s and 1990s, and declined in the 2000s. There was a remarkable fall in income poverty since the early 1980s, driven by the exceptional performance of China over the whole period, and the generalized improvement in living standards in all the regions of the developing world in the 2000s.

They caution that the decline in the 2000s was not universal: in 15% the fall was less than

2.5 percentage points, and in 20% of cases the Gini coefficient increased. The latter included two populous countries: China and Indonesia. The decline was most evident in Latin America, where they say

This remarkable decline appears to be driven by a large set of factors, including the improved macroeconomic conditions that fostered employment, the petering out of the unequalizing effects of the reforms in the 1990s, the expansion ofcoverage in basic education, stronger labour insti­tutions, the recovery of some countries from severe unequalizing crises and a more progressive allocation of government spending, in particular monetary transfers.

In other words, policy was relevant in influencing both market incomes and redistribu­tion. In the case of Brazil, they conclude that the two major determinants were the decline in wage inequality, due to the expansion of the supply of educated workers and to the substantial increase in the minimum wage, and the expansion of cash transfers, notably the Bolsa Familia.

Although lower than in Latin America, inequality is sizable in many emerging Asian countries and it is increasing. In discussing how far the policies pursued in several Latin American countries could be applied in an Asian context, Kanbur notes in Chapter 20 that

the additional expenditure on conditional cash transfers requires revenues, and the progressivity of the tax system is another major determinant of how globalization related increases in inequality can be mitigated. But progressivity is also important in addressing the rise in very high incomes the world over, especially in Asia. Asian tax systems do not generally score highly on progressivity. In fact, it is argued that raising progressivity of taxation would have a bigger impact on inequality than elsewhere in the world.

What about the richer countries? In terms of reducing the inequality of market incomes, the standard policy response is educational expansion, as would be indicated by the supply and demand explanation for rising wage dispersion (as discussed in Section 4). The review of cross-country time series evidence by Forster and Toth in Chapter 19 concludes that most evidence points to an equalizing impact of educational expansion:

none of the studies covering the set of OECD/EU countries suggest a dis-equalising role of the growth in average educational attainment over the past three decades, but to the contrary, in their majority rather an equalising one.

The impact of labor market policy is reviewed in Chapter 18 by Salverda and Checchi who conclude that their empirical results

are consistent with the main findings in the literature.... They confirm that the presence and stringency of a minimum wage reduces earnings inequality, also setting an (implicit) control on the distribution of working hours, which seems to be the main channel of inequality reduction of the bargaining activity of unions. Less common in the literature is the finding of a negative impact of both active and passive labour market policies.

The reason that the overall distributive effect of labor market regulations and institutions can be insignificant, as found by Forster and TtSth in their cross-country analysis, is that the employment and wage dispersion effects can operate in opposite directions.

When it comes to redistributive tax and transfer policy, Forster and Toth conclude in Chapter 19 that:

• Policies are inequality reducing, but the effects vary across countries;

• Transfers are typically more effective than taxation;

• There has been a reduction in the redistributive effectiveness since the 1990s;

• Behavioral responses may offset but do not in general outweigh the first-round effects. The last ofthese conclusions is particularly important. For understandable reasons, much of the analysis of public policy by economists in recent decades has focused on negative behavioral responses. Understandable, since the toolkit of economists is designed to illu­minate these responses and the second-round effects are often missed in the public debate. At the same time, the analysis seems often to lose sight ofthe purpose for which transfers are paid. As put by Ive Marx, Brian Nolan and Javier Olivera in Chapter 23, “no advanced economy achieved a low level of inequality and/or relative income poverty with a low level of social spending, regardless of how well that country performed on other dimen­sions that matter for poverty, notably employment.” The GINI project concluded that

The best performers among the rich countries in terms of employment and economic and social cohesion have one thing in common: a large welfare state that invests in people, stimulating them and supporting them to be active and adequately protecting them when everything else fails.

Salverda et al. (2014, p. 349).

But it is also clear, as these authors bring out, that it is not only the aggregate but also the design of spending that matters. It is for this reason that the construction of policy reforms has to be based on analysis of the contribution that they can make to distributive and efficiency objectives, and to this end an important development has been that of micro­simulation modeling, as surveyed in Chapter 24 by Francesco Figari, Alari Paulus and Holly Sutherland. These models build on the improvements in data availability described in Section 1—their construction requires access to microdata. They also require in-depth knowledge of the institutional details of public policy and how it operates in reality. As is discussed in Chapter 24, there is a considerable challenge in modeling noncompliance and—the less commonly discussed—other side of the coin, which is the non-take-up of benefits to which people are entitled. In melding microdata and institutional detail, the microsimulation models provide an important bridge between the theoretical analysis of policy design and the implementation of policy in the form of legislation and administration.

5.3 Prospects for Future Policy

Given their high level of inequality and the limited development of redistribution in many developing countries, the scope for progress in redistributive policies and in pre­redistribution opportunity equalizing policies is considerable. This is especially true in middle income or emerging countries where state capacity is sufficient to manage effec­tive redistribution instruments.

What should make things easier for emerging countries’ governments wishing to strengthen their redistribution system is, on the one hand, that they can learn from the experience of developed countries and, on the other hand, that modern technology permits better monitoring and control of individual incomes.

Of course, having the capacity to redistribute will lead to a substantial redistribution only if there is the political willingness to do so, or if the political system permits a major­ity to impose some redistribution, as could be expected in a democracy. In the empirical work undertaken in Chapter 21, Acemoglu et al. find that a transition to democracy indeed tends to raise the average tax rate in a country. Yet, no significant effect is found on income inequality as such. This may suggest that the political system is more complex than the mere distinction between democracies and nondemocracies would imply; or, as the authors note, may reflect the poorer quality of the income inequality data, an aspect we discussed in Section 3.

In contrast, OECD countries may be closer to their frontier in terms of the trade-off between less inequality and a higher degree of aggregate economic efficiency. The distance depends however on the institutional features of taxes and transfers—aspects to which economists have devoted too little attention (Atkinson, 1999)—and there may be scope for new and innovative ideas, as discussed in the final part of this section. The frontier itself may have been affected itself by the globalization process, its requirement for more com­petitiveness and, through factor mobility, its weakening of redistributive instruments like the progressivity ofincome taxation, including capital or capital income. At the same time, the same forces of globalization may have increased the need for social protection, just as they did in the early days of the welfare state toward the end of the nineteenth century. Today, as then, the extent to which redistribution takes place depends on the political con­text. It may also be the case that the perception of inequality in the society today may not coincide with the evolution of inequality as measured by statisticians and economists. In the United States, for instance, the feeling that income mobility matters more than income inequality and the (unfounded) belief that income mobility is and remains high in com­parison with other countries may make the public opinion insensitive to the mounting objective income and wealth inequality. Clearly, this cannot continue forever. At some stage, beliefs will change and it is not unlikely that this process is under way—as McCall (2013) seems to detect in the changing discourse on inequality in the U.S. media.

5.4 Thinking Outside the Box

At the beginning of this Introduction, we evoked the increasing attention being paid by policymakers to rising income inequality. To date, the response in terms of policy pro­posals has been along conventional lines, notably investment in education and reform of redistribution. In our view, these are important, but if progress is to be made, then we

Figure 5 Thinking outside the box.

need to think outside of the box. We must consider ideas that—while far from new—are not on the current policy agenda.

The standard labor market policies—shown inside the box in Figure 5—clearly have a major role to play, and there have been moves to strengthen minimum wages, in order to reduce wage dispersion. As we have noted, however, central is the conjunction of wages and employment, and the latter has proved a hard nut to crack. In our view, one of the crucial elements is the direction of technical progress. Rather than concentrating on factor-augmentation, as in much of the literature, our discussion in Section 4.3 suggests that we should instead focus on the interaction between labor and capital, and specifically the supplantation of labor by capital. Given that much of the innovation is funded directly by public bodies, or subsidized through tax or other concessions, it would be possible to influence this trade-off.This is the first of the “out of the box” alternatives shown in Figure 5. The second concerns public employment. The fact that the present-day market economy does not deliver full employment suggests that we should learn from policy responses in other cases of market failure, notably in financial markets. Here, the govern­ment has intervened as a lender of last resort, and the obvious parallel is that the govern­ment should act as the employer of last resort. The state should guarantee to everyone seeking it employment at the minimum wage. Such a proposal may seem to some readers outlandish and infeasible on fiscal grounds, but to others it may appear no more outland­ish or fiscally irresponsible than the policy that financial institutions are too big to fail. After all, such policies have already been pursued. It is an initiative of this type which was taken by the Indian government when it launched the Mahatma Gandhi National Rural Employment Guarantee Act in 2005. Public employment has formed part of active labor market programs in a number of countries. In the United States, it was authorized under the Humphrey-Hawkins Full Employment and Balanced Growth Act of 1978, which allowed the Federal Government to create a “reservoir of public employment,” where these jobs were required to be in the lower ranges of skill and pay to minimize competition with the private sector.

The third proposal refers back to the discussion of bargaining power in Section 4.4. To the extent that rising inequality is the outcome of a shift in the balance of market power favoring profits and capital, its impact may be offset by strengthening the counter­vailing powers. This may take the form of a stronger role for the social partners, or it may involve more determined action to protect consumers against monopolistic pricing. Again such actions may be rejected as too radical, but again they are not so far removed from current policy. In the case of the European Union, both the promotion of com­petition and the encouragement of the social partners are already accepted objectives.

The fourth proposal draws attention to an aspect that has been missing from the policy arena—the capital market—but which has received increasing attention following the debate surrounding Piketty (2014). For macroeconomic reasons outlined in Section 4.6, and given the return of inherited capital in a number of richer countries, capital income is potentially of increasing significance, as it was in the past. The particular proposal is indeed far from new. It goes back at least to the eighteenth century English- man/Frenchman/American Thomas Paine, who in 1797 in his Agrarian Justice proposed:^[11]

To create a national fund, out of which there shall be paid to every person, when arrived at the age of twenty-one years, the sum of fifteen pounds sterling, as a compensation in part, for the loss of his or her natural inheritance, by the introduction of the system of landed property.

The proposal of Paine for a capital element payable on reaching the age of majority has its modern counterpart in various schemes for asset-based egalitarianism (as proposed, for example, by Ackerman and Alstott, 1999). The creation of a sovereign wealth fund, as already well established in a number of countries, would offer the possibility of a minimum inheritance for all.

The fifth proposal—which also has shades of Paine—is for a citizen’s income, or the payment of a guaranteed minimum income to all individuals. Such an income is some­times described as “unconditional”; however, conditions are naturally attached. As described in Figure 5, a condition would be that of citizenship. An alternative, advocated in Atkinson (1995,1996) is that of a participation income, paid not on the basis of citizenship but of participation in the society in question, through employment, past employment (on retirement), caring for dependants, being available for work when unemployed, in approved education or training, and with appropriate provisions for those who are sick, injured, or disabled. The participation income would represent a radical departure from the targeted income-tested transfers that have been the preoccupation of policymakers in recent decades. It would be individual-based, rather than involving a family means-test. It would recognize the fluidity of the employment relationship in the twenty-first century labor market.

No doubt there will be many objections to these final policy proposals, but we hope that the chapters contained in volume II of the Handbook will stimulate new ideas in this important field.

ACKNOWLEDGMENTS

In writing this Introduction, we have drawn heavily on the Handbook chapters. This will be evident from the frequency of cross-references, although we have tried to stop short of the point at which such references become tedious to the reader. We are most grateful to Rolf Aaberge, Facundo Alvaredo, Andrew Berg, Andrea Brandolini, Daniele Checchi, Pierre-Andre Chiappori, Andrew Clark, Koen Decancq, Jean-Yves Duclos, Francesco Figari, Michael Forster, Marc Fleurbaey, StephenJenkins, Salvatore Morelli, Dominique Meurs, Brian Nolan, Jonathan Ostry, Alari Paulus, Sophie Ponthieux, Thomas Piketty, Victor Rios-Rull, Wiemer Salverda, Tim Smeeding, Frederick Solt, Holly Sutherland, Istvan Toth, Alain Trannoy, and Daniel Waldenstrom for their very helpful comments on the draft of the Introduction, but none of them should be held responsible in any way for its contents. We thank Maarit Kivilo for her help with the bibliography. Atkinson’s research for the Introduction was carried out as part of the EMoD program supported by INET at the Oxford Martin School.

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ACKNOWLEDGMENTS

First, we would like to thank Ken Arrow and Mike Intriligator for having persuaded us back in 2010 that the time was ripe for a new volume. How prescient their advice was!

In the course of preparing the new Handbook volume, we have incurred many debts. Without the—more than 50—authors, there would be no Handbook, and we would like to thank them sincerely for the cooperative spirit in which they have produced such excellent chapters. We much appreciate the way in which they responded to several rounds of comments from the editors and (usually) met deadlines. Part of preparation took the form of an Author’s conference, entitled “Recent Advances in the Economics of Income Distribution” that was held on April 4—7, 2013 at the Paris School of Econom­ics. We are most grateful for the support that was provided to this conference by the Agence National de la Recherche (Projet INDURA INEG 2011), Cornell University, the UK Economic and Social Research Council and DFID (Grant ES/1033114/1), Ouvrir la science economique (Opening Economics), and the Paris School of Economics.

Throughout all this, a key organizing role has been played by Veronique Guillotin of the Paris School of Economics, and we thank her most warmly.

Tony Atkinson Francois Bourguignon

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