Thursday 16 May 2019

Fake news about inequality

Imagine if a sports journalist regularly described Sergio Agüero as a Manchester United player and insisted that West Bromwich Albion won the Premier League this season.

Imagine a political correspondent routinely referring to the Liberal Democrats as the ruling party and claiming that the Chancellor was Michael Fabricant.

They wouldn't last very long. Readers and editors take a dim view of hacks who make basic mistakes with easily verifiable information. But when it comes to economic statistics that can be checked in a few seconds, standards are slacker. As a result, the British public have been told for over a decade that income inequality, relative poverty and child poverty are rising (or even 'soaring') when they are not.

The data on these economic variables are so easy to access via the Office of National Statistics (ONS) that journalists should be genuinely ashamed when they get it wrong. And yet shameless misinformation continues.

A classic example arrived today when the Institute for Fiscal studies launched what it called the 'most ambitious study of its kind' into inequality, to be led by the respected economist Angus Deaton. The project will look at 'inequality not just of income, but of health, wealth, political participation, and opportunity; and not just between rich and poor but by gender, ethnicity, geography, age and education'.

Under the headline 'Growing inequality threatens democracy',* two BBC journalists reported this news as follows:

Inequalities in pay and opportunities in the UK are becoming so extreme they are threatening democracy, an Institute for Fiscal Studies study has said.

The Institute for Fiscal Studies 'study' is actually a launch document which 'is intended to serve as an introduction to just a few of the issues that will be addressed as part of this project, to give a taste of what is to come. The aim is not to present answers, but to illustrate the breadth of the review'. It draws no conclusions and includes only one reference to democracy:

'With support for populist candidates rising on both sides of the Atlantic, and on both sides of the political spectrum, some question whether inequality may pose a threat not just to capitalism but also to our democratic system.'

This is immediately followed by an assurance that 'inequality does not necessarily spell crisis' and a sensible discussion about why people are concerned about inequality in some contexts but not in others. In an interview with the Today programme, Prof Deaton said that rent-seeking is one source of inequality about which people were right to be concerned. I can only concur.

According to the BBC:

The report says such widening gaps are "making a mockery of democracy".

The 'report' says no such thing because work on the report has barely begun. Presumably the BBC means the launch document, but the launch document doesn't say that either.

Nor is income inequality 'growing' in any meaningful sense. The launch document notes that when income inequality is measured with the standard Gini coefficient, it 'has remained broadly unchanged since the early 1990s'. This is correct. The rate of inequality has fluctuated in the last thirty years but has been basically flat. In its most recent data set, the ONS notes that it 'slightly increased' in 2017/18. Not enough to threaten democracy, surely?

The IFS also points out that...

Another common measure of household income inequality, the 90:10 ratio (which measures the household income of the person who is 90% of the way up the distribution – with a higher income than 90% of the population – relative to that of the person 10% of the way up), has actually fallen since the early 1990s. This means that household incomes are now more evenly distributed across most of the distribution than they were 25 years ago.

Nevertheless, the BBC continues:

[The IFS] suggests pay inequality in the UK is high by international standards - with the share of household income going to the richest 1% having tripled in the past three decades.

The launch document doesn't actually claim that earnings inequality is high by international standards although it is true that income inequality in Britain is much higher before taxes and benefits are taken into account. To illustrate the first claim, the BBC uses this graphic showing rates of income inequality in a few countries:

The word 'sample' is doing a lot of heavy lifting here. The OECD's data show that eight of the 38 countries in its analysis have a higher rate of inequality than the UK. Of these eight countries, only one (the USA) is shown in the BBC's graph.

Moreover, the figure used by the OECD for the UK is higher than that shown in other sources. The OCED uses a figure of 35.1 whereas the ONS uses a figure of 32.5 and the World Bank uses a figure of 33.2.

These might seem like small differences but they have a big effect on the rankings. If the ONS figure is correct, the UK does not have the ninth highest rate of income inequality out of the OECD's 38 countries but the nineteenth, ie. it is bang in the middle. When Ryan Bourne and I compared inequality data on rich countries (from the World Bank) in 2016 we found that income inequality in Britain is indeed pretty average.

Income inequality in the UK is not 'high by international standards', even if you look at rich countries. If you include poorer countries, it is well below average. If you want to see high rates of inequality, go to Africa and South America.

As for the top one per cent, data is patchier and we can be less confident about the estimates, but those in the top one per cent (who - let's remember - are not the same people from year to year) seem to have had a growing share of income between 1980 and 2000. But there has been no consistent rise in the last twenty years and their income share has not 'tripled in the last three decades', as the BBC claims. According to the IFS's figures, their share of income doubled between 1980 and 2000, from 4 per cent of income to 8 per cent, but it has remained at around 8 per cent ever since.

The latest ONS estimates show something similar, with sharp fluctuations from year to year but no overall rise in recent years. The share going to the top one per cent remains below pre-crash levels.

Finally, the BBC makes the following assertion:

The big picture, says the IFS, is the UK is becoming more like the US, with a concentration of wealth at the top and pressure on working families lower down the pay scale.

Once again, I can find no evidence of the IFS saying this - it certainly isn't in the launch document - but I agree that there are reasons to be concerned about wealth inequality. As the launch document rightly says, house price inflation has meant that fewer young people are getting on the housing ladder and are therefore 'accumulating significantly less wealth than previous generations'. Higher house prices also mean that if your parents own their own home, you are likely to get a significantly bigger inheritance than someone who does not.

But there are huge differences between the UK and the USA. Whilst the UK has not seen a rise in income inequality for a generation, income inequality in the USA has continued to rise. And it is a little known fact that the UK not only has a much lower rate of wealth inequality than the USA, it also has a lower rate of wealth inequality than supposedly egalitarian countries like Denmark and Sweden.

None of these statistics are hard to find. Some of them are in the IFS launch document. Professor Deaton is quoted as saying that 'people were troubled by inequality'. This is hardly surprising when the public is routinely misled about the facts.

Previously published on the IEA blog
* The BBC changes the headline and opening sentence after this post was writen. 

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