Income Distribution and the UK Referendum Result
Robert Wade - 29th June 2016
Robert Wade explores what the income distribution among voters in Britain's recent referendum may mean for those wondering what to do next.
Large numbers of those who voted in favor of leaving the EU in the UK's In/Out referendum -- 51.9% of voters voted Out -- did so less from a negative assessment of EU membership than from anger at their falling relative income over the past many years and worry that their children would fare economically even worse than they. This conclusion comes both from poll and media interviews conducted after the vote closed, and from the fact that the day after the referendum the second most frequently asked question of Google, among all the EU-related questions, was "What is the EU?".
The Remain camp argued that Britain has done well and will continue to do well economically from EU membership. But the claims of a British "boom" ring hollow to those who are unemployed, or on zero-hours contracts, or forced off benefits.
Much the same applies in the Rust Belt of the United States, and in parts of Europe where politicians like Donald Trump and Marie Le Pen enjoy high electoral support. It helps to understand the Trump phenomenon to know that that ever since 2004 a majority of Americans have told pollsters that they expect their children to be worse off economically than themselves.
The deep causes lie apparently far away in trends in global income distribution. If we place all people (or households) in the world shoulder to shoulder in order of income in 1988 we can calculate the increase of income at each percentage (or each five percentage points, or ventiles) up to 2008. These twenty years are the high period of "globalization works", to echo the title of Martin Wolf's celebratory Why Globalization Works (2004). With the 1988 distribution on the horizontal axis and the cumulative increase in incomes on the vertical axis, the trend line takes the shape of an "elephant curve" (an elephant's head in profile) or "supine S curve" (supine meaning an S lying on its back). (See Branko Milanovic, Global Inequality: A New Approach for the Age of Globalization, 2016.)
The place in the 1988 distribution where incomes grew the most over the next twenty years is the middle; most of these people are located in China. The top 1 percent in global income distribution in 1988 enjoyed almost as big a percentage increase in incomes by 2008 as did those in the middle reaches, and of course from a very much higher base; most of these people are located in the West. The place in the global distribution in 1988 which enjoyed the least income increase was the 80th to 99th percentiles; most of these people are in the working and lower-middle classes of western countries, including the UK. These "least gainers" in the UK voted heavily in favor of leaving the EU.
The referendum shock may precipitate action to reduce income inequality
Income and wealth distribution has long been a neglected subject in economics and other social sciences. The current chief economist of Citigroup and former professor of economics at LSE, Willem Buiter, justified the neglect when he said in the Financial Times in 2007,
"Poverty bothers me. Inequality does not. I just don't care."
Social scientists tend to study phenomena identified as "problems". So we have huge amounts of social science on "the poor" and "poverty", but little on "the rich" and "riches", and not much on the relationship between the riches of the rich and the poverty of the poor.
In economics, we have a flourishing "poor economics" but no "rich economics". Economists have long ascribed to the marginal productivity theory of income distribution, according to which – in a competitive market -- each factor of production is paid its marginal productivity, including those at the top; a theory which eliminates power between classes as a focus of attention and supports the conclusion that the existing distribution is more or less "fair" and therefore not a "problem" in need of economists' research. The bishop is paid 10 times the rubbish collector, and the hedge fund manager is paid 10 times the bishop, because, broadly speaking, these differentials reflect their marginal productivities, and marginal productivities reflect, more or less, "relative market-valued contributions to society".
The occlusion of income distribution runs deep, even to the main measure of national economic performance. In the early years of the Great Depression, when the US government asked Simon Kuznets to come up with a measure of the performance of the US economy, he and collaborators focused on national income – because the government wanted to know how much income was going into people's pockets, how much they had to spend. During the Second World War the war planners switched focus to production – the amount of armaments, food and the like being produced as a basis for deciding how to raise the amount. Kuznets warned that after the war the focus should go back to income. Instead, ever since, Gross Domestic (or National) Product, not National Income, has been the main measure. John Kenneth Galbraith observed in his 1958 book The Affluent Society that "inequality has ceased to preoccupy men's minds".
Even though the product and the income measures are calibrated to produce the same result (production equals income), the focus on "production" supports the social-peace-keeping assumption that when the cake expands everyone somehow gets a bigger slice. The focus on "income" points to the more conflict-provoking issue of who gets how much. (See Philipp Lepenies, The Power of a Single Number, 2016.)
One possible upside to the referendum shock throughout Europe is more attention by elites to securing a more equal distribution of income and wealth, in the interests of protecting the EU and even in their own longer run self-interest.
Robert H. Wade is professor of political economy at LSE. He won the Leontief Prize for Advancing the Frontiers of Economic Thought in 2008.
Harpers Ferry, WV
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