Attitudes towards Inequality

What would some years of smug academic life in Britain turn a displaced islander into? A lost soul who dreads trips to the petrol station, because of the discomfort of listening to Top FM while his car tank is being filled by someone, paid a few dollars for a 10-hour working day. A guilt-ridden, middle-class fool who fails to understand titles and hierarchies at work. Beyond the anecdote is the important issue of cross-country differences in attitudes towards inequality.

Thomas Piketty (1995)* provides an interesting setting to think about the preferences for equality. Suppose that everybody agrees that effort leads to higher income. However, they disagree on the degree to which this is true: some may believe that luck or other factors beyond one’s control (say, being born rich) are also important. Now, the question is why would some choose to believe in factors beyond their control, such as luck and some in factors within their control, such as effort? The answer could be life outcomes. Even if attitudes didn’t differ in the beginning, those who have succeeded and attained high income may be tempted to attach more importance to effort, while those who have been less successful and have to contend themselves with low income may attribute that to bad luck, to unequal opportunities or to poverty traps. Why? Because people do not infer social mobility from a representative sample of individuals, but mainly from their own experiences. Hence, they suffer from a classic problem of selection bias. In subsequent papers, Piketty (1996, 1999)** has shown strong empirical support for this hypothesis in the US and in France. The attitude towards inequality is clearly dependent on the belief about the role of effort, which itself depends on individual achievement.

Now suppose that, one night, a “bad” fairy decides to take all income from the poor (say, those below the median income) and redistributes to the rich. The result is higher inequality in the country. Selection bias will induce those who are richer to believe in the importance of effort, those who are made poorer will reflect on their bad luck. Hence, an economy which is unequal will tend to have highly polarised attitudes towards the causes of inequality. This could explain part of the Atlantic divide. According to Alesina and Glaeser(2004), 60% of Americans believe that the poor are poor because they are lazy, but only 26% of Europeans share that view. 60% of Europeans believe that the poor are trapped in poverty compared to 29% of Americans.

To understand Mauritian attitudes, one has to reflect on its past. For nearly a century, the country’s main labour force consisted of slaves and for the next century, indentured labourers. It would be fair to say that in its 250 years of history, one can only talk of social mobility in the last thirty years or so, when education became publicly available to all. The theory predicts nothing more explosive than this situation. The rich who for 200 years have been comforted in their belief that effort matters, are now being joined by the young and successful, who have risen from rags to riches, thanks to improved opportunities. Terrible predicament for the middle-aged chap who has little by way of qualifications and is forced to be part of a sizeable low-pay, low-skilled labour force. Incidentally, many local economists see the existence of cheap labour as the driving force behind the Mauritian economic miracle. One ought to recognise that it is one of our biggest liabilities: what incentive is there to improve efficiency in the non-tradeable sector when cheap, yet productive labour is abundant?

The above raises a fascinating political economy question. Why don’t the poor, who are so confident about their lack of opportunities, ‘vote’ for redistributive policies in a democracy? This is indeed puzzling in Mauritius, where successive governments have been elected on a platform of ‘minimalist’ intervention. In fact, a close look at spending and taxation patterns reveals important ways in which the state practices ‘regressive’ transfers: in 2005, nearly 80% of income came from indirect taxes (more than 50% in the form of Value-Added Taxes which affect the poor proportionately more than the rich as they consume a higher fraction of their income), while the biggest item in spending (12%) is interest payments on government debt, held principally by the wealthy.

Two possible reasons. One could be the ‘prospect of upward mobility‘. Roland Bénabou and Efe Ok (2001)*** show how altruistic individuals who earn below-the-average income may oppose redistribution, if they believe that there exists a strong-enough chance of their offsprings earning above-the-average income and they do not wish to see them taxed heavily in the future. In this light, the key role played by an elitist education regime becomes clear: by offering families the possibility to enhance future income, it acts as a lottery and reduces current pressures for redistribution. Perhaps this could explain the support by the poor for this regime, although they are not the most obvious beneficiaries. It may be that the poor lack in any other opportunity for social mobility that even a lottery with odds stacked against them seems desirable.

Secondly, policy choices are multi-dimensional, that is, the poor also care about factors other than inequality in their choice of a political party. Roemer (1998)**** proposes a model in which people care about both inequality and religion, and shows how a right-wing party can be favoured by the poor over a left-wing party for its religiosity inspite of its stated goal of low redistribution. As a consequence, even a left-wing party may opt for low redistribution, to maximise the chances of being elected. Applied to ethnically-diverse Mauritius, it becomes clear why elections are hardly ever fought on core economic issues, but on side issues, such as the foreign languages to be taught at school, or the Prime Minister’s caste.

Will things ever change? As much as I am confident that the ingredients for robust economic growth in the next 10 years are present, I am pessimistic about fundamental ’social revolutions’ on attitudes towards inequality or the tendency for social comparison. I shall continue to be the weirdo who dreams of Scandinavian-style social equality.

REFERENCES:

*Piketty, Thomas: “Social Mobility and Redistributive Politics,” Quarterly Journal of Economics, 1995, 110, pp. 551-584

**Piketty, Thomas: “Mobilité économique et attitudes politiques face à la redistribution“, CEPREMAP Working Paper, 1996, 57 p.

Piketty, Thomas: “Attitudes toward income inequality in France : do people really disagree?,” CEPREMAP Working Paper, 1999, 27 p.

***Bénabou, Roland and Efe Ok: “Social Mobility and the Demand for Redistribution: The POUM Hypothesis”, Quarterly Journal of Economics, 2001, 116(2), 447-487

**** Roemer, J.: “Why the poor do not expropriate the rich: an old argument in new garb”, Journal of Public Economics, 1998, 70, pp. 399-424.