Monday, April 4, 2011

Doubts about Equality: Part II

This Vanity Fair article argues that American society has become dysfunctionally unequal in wealth. This inequality, writes Joseph E. Stiglitz, has numerous negative side-effects, including a reduced appetite for government expenditure on "infrastructure, education, and technology":

But America has long suffered from an under-investment in infrastructure (look at the condition of our highways and bridges, our railroads and airports), in basic research, and in education at all levels. Further cutbacks in these areas lie ahead.
Let's explore this claim a little more. First, look at expenditure on transport infrastructure, from the OECD's International Transport Forum:

As expected, inland transport infrastructure spending is lower in unequal United States than relatively more equal Western Europe (WEC). Yet Russia, which the Vanity Fair author identifies as being similarly unequal to the US, has much higher transport infrastructure expenditure. Another graph shows that spending in the US and Western Europe is fairly flat, with slow increases since 1995. Yet spending in fairly equal Japan has collapsed and in unequal Russia has soared:


This is not what we should expect if Stiglitz is right in associating spending on transport infrastructure with equality. Let's dig a little deeper. This graph shows OECD's figures from 2005 for public expenditure on educational institutions of all kinds (vertical axis) and gross domestic expenditure on research and development (horizontal axis), both as percentages of GDP. Each dot stands for a country, the size representing population and colour representing gini coefficient: income inequality.


Stiglitz's argument seems to break down. Highly unequal Mexico spends more as a percentage of GDP on public education than highly equal Slovakia. The United States has relatively high educational expenditure, higher than the social democracies of Netherlands, Japan or Germany. Likewise there seems to be no correlation between spending on R&D and inequality (though these figures include private and public spending). If the US has really suffered under-investment in education, then the more equal social democracies of Germany and Netherlands seem to suffer even worse.

Supposing, however, that high expenditure on elite university students distorts the statistics for the United States. We can look instead at public educational expenditure for primary education - that education which children of all socio-economic backgrounds experience - only. The World Bank collects such statistics:


It is a little difficult to see by this shading, but the US government spent more on primary education per student, as a percentage of GDP per capita, from 2005-2009 than most of the West European social democracies. To give a few examples from 2007:

United States: 22.4%
Australia: 17.7%
Austria: 23.1%
Belgium: 20.8%
Finland: 17.5%
France (2006): 17.1%
Germany (2006): 16.1%
Japan: 21.6%
Netherlands (2006): 17.8%
Norway: 18.4%

Nowhere do we see a correlation between income inequality and under-investment in public primary expenditure. For secondary education the US is more in line with other developed countries, spending more than Germany, Japan and Australia but less than France and Netherlands.

It is troubling that an opinion piece that seeks to convince readers that income inequality is harmful, would list off-hand these claims, which seem on examination untrue. Income inequality does not appear to significantly impact spending on education, transport or research.

One final note of concern is Stiglitz's explanation of American inequality. He lists several factors, like globalisation and industrial technology that makes American blue collar workers compete with low-paid foreign workers, or with machines. He adds that "one big part of the reason we have so much inequality is that the top 1 percent want it that way", arguing that tax policies have rewarded the wealthy at the expense of the poor. Yet there is another major factor in understanding American inequality: immigration. The US has experienced sustained mass-immigration from low-income Latin American countries. This means that the poorest proportion of the American population is constantly being renewed by poor immigrants. Even if these immigrants do rise in income, more poor immigrants follow. The strange outcome is that success - poor immigrants growing wealthy and attracting more immigrants - could look like failure as internal inequality appears to grow.

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