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Elephant man

13 June 2019

 Salomons Judgement

Is ‘elephant man’ Branko Milanovic right? Is too much inequality disastrous for democracy and does it create an static upper class? 

Every year, the university of Groningen invites a distinguished guest speaker for a lecture in honour of Angus Maddison. Professor Maddison is no longer with us, but his database with historical economic data on almost all the countries in the world since the start of our era is. The guest speaker must therefore have some kind of affinity with economic history.

After Thomas Piketty in 2018, it was  Branko Milanovic’s turn this year. His name probably doesn’t mean much to you, but he’s no stranger to me. I mentioned him earlier when I debated differences in income and market forces with academics of various political signatures. He is the man behind the famous elephant chart, that provided insight into global income inequality.

So again, a lot about inequality. It remains an important issue that is both difficult and requires nuancing. The world is a much better place to live now compared to the past. We have become more prosperous, while inequality between countries is decreasing. Thanks to globalisation, this process continues. The inequality within countries, however, is increasing. This puts social cohesion under pressure.

To equalise the differences in prosperity, a country can no longer just rely on the trade unions. Globalisation puts pressure on the welfare state and the middle class. The difference between rich and poor within countries visibly increases as a result of differences in lifestyle and spending. Too much inequality is disastrous for democracy and creates an upper class, says Milanovic. I see his point, but think this characterisation is a bit too harsh. Especially in Europe. 

How to deal with this enormous challenge of inequality? Building walls is not the answer, as I stated earlier in our seminar on populism. That will act as a boomerang. Milanovic advocated a focus on equalizing endowments (see lecture from 1h17m). He means reducing wealth inequality and giving equal access to higher education. The middle class should also be able to send two kids to (top)universities. 

I couldn’t agree more. But how? Equal access to education requires government incentives and ability to borrow ‘freely’. If you are afraid that wealth concentration lower the social dynamics than the solution is not necessarily higher taxes. I would focus on differences between capital and labour. How about the same marginal tax rate for labour, realized capital gains and other income? Sometimes that will lead to a higher rate, sometimes also to a lower rate. And it reduces bureaucracy at the same time.

The author

Roelof Salomons

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