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THE subject of income inequality, once pushed to the margins of economics by more attractive offerings such as economic growth, has experienced a spectacular turnaround.

This is especially true in the aftermath of financial crises and movements like Wall Street vs Main Street, which brought to the fore the staggering gap in the incomes of the rich and poor. A few years ago, pathbreaking work by French economist Thomas Piketty in his Capital in the 21st Century gave further vent to the problem of increasing inequalities in income across the globe.

A new paper by three renowned economists confirms this trend in the US. Thomas Piketty, Gabriel Zucman and Emanuel Saez calculated the share of income going to different groups. Not surprisingly, they found that since the 1970s, income inequalities has exacerbated with no signs of reversing. While the income of the middle and poor class has tended to stagnate, that of the rich has climbed precipitously. At present, the bottom half of the US population is earning only 12 per cent of the total income generated in the US economy, down from 20pc in the 1970s.

How can a government tackle inequality?

But there is something different about this paper that makes people notice. It’s an issue that forms one of the central questions of economic policymaking: redistribution of resources. In their research, the three economists factored in the government transfers over time under various redistribution schemes. Did it help stem the tide in favour of the rich? The answer, as per this research, is no.

This assumes critical importance when one considers that the US redistributes a staggering $5 trillion under its various resource redistribution initiatives. But years of trillions of dollars of efforts to redistribute income to people in the lower-earning brackets have barely made a difference, and the bottom 50pc of the working-age population’s income has barely budged since at least the 1970s.

To rephrase, the $5tr being spent by the government constitutes a waste since it’s not having the intended effect. A book by Walter Scheidel will ignite this debate further. Scheidel is a professor of history at Stanford, who’s upcoming book (The Great Leveller) takes a historical look at the problem of inequality. From ancient Greece to the modern 21st-century welfare states, governments have tried their best to create equal societies through resource redistribution. His worrying thesis, though, is that efforts at lasting and substantial reductions in income inequality through redistribution are bound to fail.

Scouring through the historical record, Scheidel found that economic development has always led to deepening of entrenched income inequalities. The policies to reverse that trend did not make much difference. Notice that Scheidel’s findings are somewhat similar to that of Piketty, who in his book found the same pattern of entrenched income inequalities in favour of the rich. These, and other such findings, also tend to discredit the long-held belief of ‘trickle-down’ economics, which proposed rising inequalities in earlier stages of growth but an equalling of incomes in the later stages.

So, what are we to think about redistribution policies? As far as Scheidel is concerned, if policymakers are looking for drastic resetting of wealth and income concentrations, then the only way is extreme events like war, violence and plagues. He cites various instances to prove his point.

For example, the demise of the Roman Empire in the fifth century and the Plague of Justinian led to drastic changes in wealth and income. Italian city states such as Florence and Genoa, in the Middle Ages, exhibited extreme wealth inequalities in favour of a select few families. But the onset of the destructive bubonic plague (the ‘black death’) that ravaged Europe drastically reset wealth concentration, leading to more equal societies. The French Revolution represents another such episode.

Piketty also pointed out the First and the Second World Wars as occasions when wealth distribution and income inequalities were substantially reset. But surely, any sane person would dread to take this route. Which leaves us with the possibility of only marginal improvements through redistribution, something that is hardly worth the effort relative to massive expenditure of state resources.

So, what can a government do? One probable answer comes from Lawrence Katz, an economist at Harvard. He emphasises the importance of early intervention in terms of events that lead to skewed wealth distribution. For example, earnings through financial innovation are one area where early intervention could have made a difference. Thus, one can argue that it is imperative that the government create a level playing field for all rather than redistribute on its own.

The writer is an economist and consultant.

Published in Dawn, February 8th, 2017

The views expressed by this writer and commenters below do not necessarily reflect the views and policies of the Dawn Media Group.

Comments (7) Closed

UFO Feb 08, 2017 05:46am

Your theory aside, in practical terms governments must 'redistribute' to give poor a chance at life. How else can you provide a basic living, food, and education to poor children? Do you know how much more the wall street bankers made after they tanked the US economy in last recession? So many people lost their jobs and are earning much less than before. The recent upheavals in US politics are result of those. Level playing field just like trickle down economics is a fraud! The only way out is regulation and taxes on the uber rich and wall street!!

Junaid Feb 08, 2017 07:00am

On redistribution, while the US does redistribute $5trillion to the lower income, imagine the interest that is redistributed upwards to the wealthy providers of capital from the poor. That almost certainly exceeds $5trillion. As long as we remain in interest based financial system, all efforts to redistribute wealth will fail miserably....I understand this view will be deemed conservative/religious/archaic by some .

N C Mishra Feb 08, 2017 10:16am

The governments can do a lot. They should re-examine criteria for availability of public funds to existing businesses since we have had several instance of their misuse (what is surprising is that they also manage to get away). Governments should also implement innovative schemes like "micro finance" which has been successful in Bangladesh and some other countries. Encouraging sharing of assets in communities is another that comes to mind. Innumerable ideas and options exist. Only one has to move away from the beaten path.

Shalone Feb 08, 2017 10:29am

Inequality is part of the capitalist system and although it should decrease but I am not in favor of taking the money from the top and distributing to the poor. Those who create jobs by investment should be encouraged and not punished for helping to increase production. I am, however, in favor of making laws to have minimum wages and decrease of working hours in non productive jobs, like household help and sales personnel in high street.

Sohail ramzan rana Feb 08, 2017 04:39pm

If economists are seriously thinking about the income equality then it should be about distribution of resources and opportunities, not about redistribution of income. When you allow people to amass a lot of wealth, then expecting them to be kind and nice towards the poor is a naive idea; especially when governments are mere robotic devices in the hands of the rich. Until and unless the poor take control of these resources and opportunities, the rich are never going to hand them a better life just for charity. The findings of the researches confirm the fact that the development economics and redistribution thought is another ploy of the rich to keep the poor stuck in their poverty and be grateful to the rich at the same time for their benevolence. An early intervention by the govt of the rich is again not going to make any difference but yes we can make the poor wait and see the eventual failure of yet another meaningless effort of the rich to publicize their good intentions.

Abdul Latif Mari Feb 08, 2017 10:48pm

Unambiguously, all governments provide a level playing field for all and sundry. It is the rich, who always turn the corner for their own favour. Once they start exploiting the system in their own favour, no one but only the state has to intervene. As it happened in the form of frequent Martial Law regimes in Pakistan where democracy does not function well whereas, through heavy taxation in advanced countries, where state machinery is capable enough to curb the growing divide between the haves and have-nots. Nevertheless, the phenomenon persisted over times. Numerous conscious and subconscious efforts have been made to bridge the income gap between the rich and the poor but it resurfaces with more vigour. Theories abound, practical measures need to be taken for this menace otherwise it is going to wreak havoc with the ailing humanity, which is already suffering from malnutrition and poverty.

Just Someone Feb 08, 2017 11:28pm

The redistribution should be done on the basis of wealth and not income.