As mentioned in my last post, Jian has recently told me about The Spirit Level, by Richard Wilkinson and Kate Pickett. Although it is not wholly personal-finance related, it covers topics such as financial equality among others, and so I asked him to review it for the blog. Here are his thoughts..PF
As Penny knows, I hadn't heard of this book or its authors when I spotted it at Heathrow while waiting for our flight to Athens. However, it looked like my sort of thing, so off it went into the rucksack for later perusal.
Yes, I paid for it.
The Spirit Level (subtitle: Why More Equal Societies Almost Always Do Better) is basically a popular sociology book by two British researchers, Richard Wilkinson and Kate Pickett. It is a summary of research conducted by the authors about the associations of various social outcomes and variables (including physical health, mental health, drug abuse, education, and imprisonment) with financial equality in around twenty developed nations (such as the UK, US, Japan, and Sweden) and the 50 states of the United States. Financial equality being, basically, how narrow the distribution of wages are in that state or nation. It's not about social equality, or gender equality, or racial equality, though all those are discussed later.
They're pretty clear about how they conducted the research, having mainly obtained the figures from objective censuses and United Nations records. The data is generally presented as scatter plots; there's a nice little chapter at the beginning about how scatter plots work, and how a statistically significant effect might be detected.
(A quick aside for the statistically minded: Yes, this is generally cross-sectional, and so gives at first instance no chronological data, though this is covered in one of the chapters concerning increasing inequality in the US and UK and the effect on outcomes. No, scatter plots are not necessarily the best tool for detecting this sort of association. No, they didn't say how many associations they tested, and so they could have cherry-picked the significant ones; however, the fact that the vast majority of the associations shown are pretty straightforward and not statistically nudged for significance does make this very unlikely.)
The book therefore consists of two parts after a brief discussion of methods: results and conclusions, and what to do about said conclusions. First part: as you might expect, financial equality has been going down the tubes in the US and UK over the last fifty years. And financially equal nations are healthier (both physically and mentally), have less crime, less teen pregnancy (though, in an odd exception, Japan – a financially pretty equal nation – has high rates of teen pregnancy. However, it's almost all married teen pregnancy), fewer people in prison, less drug abuse, and higher social mobility, than unequal nations. Shocker, eh? In other words, there's good hard data that countries with a few very rich people and a lot of very poor people (top scorers: USA, UK, Portugal), are worse off in almost every way than countries with more even wealth distribution (top scorers: Japan, pretty much all of Scandinavia). The conclusion is, unequal countries suffer from an overall lack of trust and security: people don't trust each other, so they're out for themselves, so they commit crimes, cheat on their taxes, and vote for police and prisons rather than health care and drug rehabilitation. As a result, everyone suffers, including the rich.
All the data is, as noted before, from rich countries (the top twenty most developed and wealthy nations); that's what the book is concerned with. So no comparisons with Cuba, for instance, except to note that yes, Americans generally have lower mortality and higher infant mortality than Cubans.
By the way, the same pattern holds across the different states of the USA.
You might be feeling a bit depressed by now, I certainly was; while the analysis presented is hardly invulnerable to criticism, it's very difficult to deflect or write off the argument unless you really are the most blinkered kind of self-deceiving idiot. And I hope I'm not. So, I asked, what can I, or we, do about this? Isn't this the fate of all humanity, to develop less equal societies where selfishness and ambition are rewarded over altruism and co-operation? After all, the equal European way seems to be failing; the financial crisis is driving various European governments to cur public service funding and encourage less equal financial policies.
Well no, say the authors. They cite a game where you form participants into pairs of offerers and recipients. The pairs never meet, and never play this game again, to avoid learning behaviour. All participants are told that there is, for each pair, a pot of £100 (or $100, or whatever). The offerer is asked to offer the recipient, by note or similar, a share of this money. If the recipient accepts this share, both get the money; if he refuses, neither do. The researchers were expecting an average accepted offer of about £30 (in other words, this would be about the threshold at which most recipients will accept a share, however unequal, rather than get no money at all. More would be more than most offerers would be willing to give, and less would be less than most recipients would swallow their pride in order to accept). Actually, the average accepted offer was about £48. It turns out, we are inclined to reward generosity and punish selfishness more than you might think.
The authors continue to discuss how to make society more equal. One way is to encourage companies and organisations who treat their employees more equally or are genuinely co-operative, and discourage those that don't: they cite the Co-op (shocker!) and John Lewis in the UK as good companies to support. Another way is to shake off the Cold War idea that we can't have both equality and liberty; as we have seen, less equal societies are less free societies, with less social mobility and more prisons. We should encourage our politicians and business leaders to stop bandaging the cracks; a measure to reduce drinking by increasing the cost of alcohol (to get all topical in the UK) may reduce drinking a little, but really all it does is increase profits for the government and for drink manufacturers. People drink themselves blind at the weekend because they're stressed, and it's a good escape; and they're stressed, for instance, because they have no money, are in debt, and can't leave their jobs. And these things are worse because of inequality. Change that, and they might stop drinking so much. Similarly, there's no point kidding ourselves that we'll reduce our carbon footprints and save the planet with advances in green technology; if we save ourselves a bit of ecological resource with low-energy light-bulbs or electric cars, we'll just spend it again. And again. Because of the way our societies are.
There are two ways, say the authors, to improve financial equality in societies. One is the Japanese way, which is to have more equal incomes before benefits; in other words, have a society where the most highly paid aren't paid much more than the least well paid. The other is the Scandinavian way, which is to have benefits, taxes, and other governmental measures to increase the effective incomes of the least well off. The second options requires more state input and control, but does at least allow for those who are unemployed to be supported by society. And from our starting point of wide disparity in incomes, it probably makes more sense.
Phew! Sorry if I've been a bit long-winded. Basically, it's a fantastic read, and very well communicated. Whether you agree or disagree with its agenda and conclusions, give it a go. Personally, I think it's a bit thin on practical solutions, but that's hardly very surprising, and it would make a whole separate book in itself. Maybe that's due.
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