We have read it many times, income inequality has risen sharply since the 1970s in most advanced economies around the world. Similarly, the current adult population hasn’t pursued education beyond high school at a time when the majority of jobs demand certificates or degrees, and so on. But just like with the myths surrounding the top 1% of earners there might be more to it.

Even in a world of polarisation, fake news and social media, some beliefs remain universal and central to today’s politics. None is more influential than the idea that inequality has risen in the rich world. People read about it in newspapers, hear about it from their politicians and feel it in their daily lives. This belief motivates populists, who say selfish metropolitan elites have pulled the ladder of opportunity away from ordinary people. It has given succor to the left, who as we will see, propose ever more radical ways to redistribute wealth. And it has caused alarm among business people, many of whom now claim to pursue a higher social purpose, lest they be seen to subscribe to a model of capitalism that everyone knows has failed.

In many ways the failure is real. Opportunities are restricted. The cost of university education in America has spiraled beyond the reach of many families. Across the rich world, as rents and house prices have soared, it has become harder to afford to live in the successful cities which contain the most jobs. Meanwhile, the rusting away of old industries has concentrated poverty in particular cities and towns, creating highly visible pockets of deprivation. By some measures inequalities in health and life expectancy are getting worse.

The economy, stupid,” was the slogan of a strategist in Bill Clinton’s campaign for the presidency in 1992. It was a pithy encapsulation of time-honored spin-doctoring wisdom: that a strong economy helps the incumbent and a weak one helps the challenger. When Clinton took on George H.W. Bush in 1992, real wages were stagnant. Unemployment peaked just months before the poll, and, sure enough, Bush failed to win a second term. The 2,000-odd studies on the “economic vote” since then have turned the pollsters’ hunch into the political gospel. A cross-country analysis by Larry Bartels of Vanderbilt University, looking at 2007-11, found that each extra percentage point of GDP growth in the four quarters before an election was associated with a rise of 1% in the incumbent party’s vote share.

But politics has changed. Today’s most heated debates concern issues of identity and culture, openness to immigrants or free trade; attitudes to abortion or transgender bathrooms. Has the economy stopped mattering to voters?

Often it seems so. So for example in America, the correlation between consumer confidence and the public’s approval of the president has broken down. Boris Johnson, Britain’s Conservative prime minister, has tried to make the general election on 12 December a matter of identity by appealing to Brexit voters who want to “take back control” from a distant elite. And his voters support the privileged Johnson because he has promised to get Brexit done. No one is talking about the country’s recent brush with a recession.

The state of the economy must still matter in extremis: would President Donald Trump’s approval rating really hold up if unemployment went from 4% to, say, 20%? But the old rules of thumb about the business cycle and voting patterns are being replaced by a new narrative. This holds that ups and downs in GDP or wages matter less in elections than they used to. Instead, economic factors that shape people’s sense of identity matter more—and could help explain the shift towards populism in many places. Two are particularly important. The first is the sense of insecurity that accompanies globalization. The second is frustration about sky-high housing costs.

The rapid growth of global trade during the 1990s and 2000s brought wide economic benefits, but also unnerved some voters, who now want to slow down the pace of change. Italo Colantone and Piero Stanig, both of Bocconi University in Milan, study election results in 15 European countries. They find that areas facing greater competition from Chinese imports were more likely to vote for nationalist parties.

Robots also make many people uneasy. A paper in 2018 by Carl Benedikt Frey, Thor Berger and Chinchih Chen, all of Oxford University, focuses on anxiety about technological change in America. The authors calculate the share of the workforce in industries that have seen increasing automation. Even after accounting for a range of other factors (including education levels and exposure to Chinese imports), areas more affected by the use of robots were more likely to vote for Trump, the outsider candidate in 2016. In a flight of reasoning that only an economist could dream up, the paper suggests that if the pace of automation had been slower in the years before the 2016 contest, Michigan, Pennsylvania and Wisconsin would have plumped for Hillary Clinton.

A raft of new research, meanwhile, has drawn attention to the political consequences of the housing market. A house is most people’s biggest investment, so changes in its value determine satisfaction with the status quo. Homeowners in areas where the property market is buoyant feel richer than those where it is flat. The housing market also affects people’s perceptions of personal freedom. Those living in an area with low house prices may feel trapped since they would struggle to afford a move to somewhere more vibrant. Such effects may well have strengthened in recent decades since in many developed countries the gap between house prices in the richest areas and the poorest has widened.

Ben Ansell of Oxford University and David Adler of the European University Institute analyzed data from the Brexit referendum of 2016 and the French presidential election the next year. After controlling for factors such as demography and pay, they found that in an area where house prices had tripled in nominal terms, the Remain vote share was 16 percentage points higher than in one with no change. Similarly, areas of France with strong house prices were inclined to choose Emmanuel Macron over the far-right Marine Le Pen. Further work by Ansell and others has found that areas with falling house prices tend to see rising support for populists, such as the Danish People’s Party, the Finns Party, and the Sweden Democrats. Simply put, a home-owner on a nice street in Notting Hill, Saint-Germain-des-Prés or Östermalm is very likely to support candidates of “the establishment”.

 

I feel the earth move

The old straightforward relationship between the economic cycle and elections could yet return. But the implication of the new research is that support for populism is a deeper-rooted feature of Western economies. People’s perception of the threat from cheap imports or robots, or of being trapped by high house prices, will not change overnight. Governments will need to find ways to compensate those who lose out from wrenching economic change and to make housing more affordable. Voters care less than they used to about the economy’s immediate impact on their wallets. But they care more than ever about how the economy shapes their identity, their sense of security, and their freedom.

Yet precisely because the idea of soaring inequality has become an almost universally held belief, it receives too little scrutiny. That is a mistake, because the four empirical pillars upon which the temple rests—which are not about housing or geography, but income and wealth—are not as firm as you might think.

The fall of the Berlin Wall in 1989 supposedly consigned socialism to history. Now, after a decade of slow growth in living standards, and amid the widespread belief that inequality is soaring, the radical left is back. “Millennial socialists” are fizzing with ideas. A wave of new books shows what millennial socialists really want, and how they plan to get it.

Socialists from Karl Marx onwards have deployed both ethical and empirical arguments to buttress their system. In “The Socialist Manifesto” Bhaskar Sunkara of Jacobin, a radical magazine, proceeds from first principles, maintaining that “to be a socialist is to assert the moral worth of every person, no matter who they are, where they’re from, or what they did”. By contrast, in “The 99 Percent Economy” Paul Adler of the University of Southern California sprays statistics to prove that modern capitalism is broken and socialism is the fix.

Many readers will find both approaches unconvincing. A dyed-in-the-wool libertarian might use Sunkara’s nostrum as a justification for an individualist worldview instead.  Adler’s methodology feels sketchy. Can all the problems he identifies, from stress to racism to underpaid teachers, truly be attributed to the capitalist mode of production? Fortunately, however, both books are better at explaining what 21st-century socialism might look like.

Fortunately, because millennial socialists’ objectives are often misunderstood. One common mistake is to assume that they want to build a society in the image of social democracies such as the Nordic states, where progressive taxation of lightly regulated markets funds high-quality public services. But Sunkara and Adler insist they are no social democrats. Rather, they are democratic socialists.

That may sound like a meaningless factional distinction. In fact, it points to an entirely different system of economic management. Thomas Piketty explores the contrast in his polemical book, “Capital and Ideology”. Though everyone on the left sees social democracy as an improvement on red-blooded capitalism, it nonetheless struggles to break free from what Piketty calls “propertarianism”, defined as “the political ideology founded on the absolute respect for private property”.

Since, under social democracy, true power continues to reside with the capitalists, its commitment to egalitarianism is necessarily fragile. A social-democratic government might tax the rich a bit more and redistribute the proceeds to the poor, which is all well and good. But such reforms are easy to undo. Look at the ease with which the Conservative government elected in Britain in 2010 reversed New Labour’s munificence in the previous decade.

 

Down with social democracy

And the tools which social democrats typically use to advance their goals are ill-suited to the modern economy, as Branko Milanovic, a left-leaning scholar formerly at the World Bank, argues in “Capitalism, Alone”. The heavy industry, the traditional base for trade unions, has shrunk, making it hard to resuscitate organized labor. Meanwhile, “further mass expansion of education is impossible when a country has reached 14 or 15 years of education on average.”

According to the millennial socialists, more radical changes are required. Collectively, their manifesto boils down to three big ideas. First, they want vastly more government spending to provide, among other things, free universal health care, a much more generous social safety-net and a “Green New Deal” to slash carbon-dioxide emissions. Second, many argue for looser monetary policy, to reduce the cost of funding these plans.

The third plank of their thinking is the most radical. The underlying idea is that capitalism does not just produce poverty and inequality (though it does), but that, by forcing people to compete with each other, it also robs them of dignity and freedom. “The power imbalances are obvious when you enter into your employment contract,” says Sunkara. For Adler, capitalism “has sucked the life out of democracy”.

Millennial socialists, therefore, support the “democratisation” of the economy (or socialisme participatif, as Piketty puts it), whereby ordinary people play a greater role in the production process, the market is removed from as many aspects of everyday life as possible, and the influence of the rich is drastically curtailed. Such reforms, they argue, will create happier and more empowered citizens.

What does “democratization” mean in concrete terms? Some millennial socialists say everyone should be guaranteed a job; others want a universal basic income, a drastic reduction in the working week, or both. It also means promoting non-traditional forms of business organization, including co-operatives, which give workers a decisive role in the day-to-day management of their company.

Adler thinks through how such plans would function. Drawing on his expertise in management, he explains in detail how firms could be managed along socialist lines. This practical bent also characterizes a new book by Christine Berry and Joe Guinan, two researchers close to Britain’s Labour Party. In “People Get Ready!” they explain what may be required if a socialist Labour government is to succeed, from imposing capital controls to activists keeping up the pressure on elected politicians if they go soft.

 

Siege mentality

In a few short years, socialists have gone from political and intellectual irrelevance to sketching out plans for government. One big question they face, however, is whether ordinary people have the stomach for the kind of change they envisage. Berry and Guinan appear to accept that a future Labour government’s fight with international finance might turn Britain into what they call a “siege economy.” This is “not particularly desirable as a long-term solution,” they concede; most Britons might object more bluntly. Piketty’s proposed wealth tax of up to 90% would play havoc with incentives to invest, while under Adler’s vision the “entire apparatus of the stock and bond market will disappear,” though, happily, “your phone will be yours to keep or to trade.”

Milanovic sympathizes with the socialists’ yearning for radical change. But ultimately he finds many of their prescriptions unconvincing. A country which tried to de-marketize on the scale envisaged by the millennial socialists would, he says, be unstable and dissatisfied in other ways. Shifting towards a much shorter working week, for instance, would surely leave it poorer than its neighbors, and for how long would people put up with that? Capitalism is far from perfect, his book shows, yet after the fall of the Berlin Wall, it is hard to shake the notion that it is the only system that broadly works. The millennial socialists are on the up, but they may still struggle to prove him wrong.

 

The myth of the top 1% of earners

Consider, first, the claim that the top 1% of earners have become detached from everyone else in recent decades, which took hold after the “Occupy Wall Street” movement in 2011. This was always hard to prove outside America. In Britain, the share of income of the top 1% is no higher than in the mid-1990s, after adjusting for taxes and government transfers. And even in America, official data suggest that the same measure rose until 2000 and since then has been volatile around a flat trend. It is easily forgotten that America has put in place several policies in recent decades that have cut inequality, such as the expansion of Medicaid, government-funded health insurance for the poor, in 2014.

Now some economists have re-crunched the numbers and concluded that the income share of the top 1% in America may have been little changed since as long ago as 1960. They argue that earlier researchers mishandled the tax-return data that yield estimates of inequality. Previous results may also have failed to account for falling marriage rates among the poor, which divides income around more households—but not more people. And a bigger chunk of corporate profits may flow to middle-class people than previously realized because they own shares through pension funds. In 1960 retirement accounts owned just 4% of American shares; by 2015 the figure was 50%.

The second wobbly pillar is the related claim that household incomes and wages have stagnated in the long term. Estimates of inflation-adjusted median income growth in America in 1979-2014 range from a fall of 8% to an increase of 51% and partisans tend to cherry-pick a figure that tells a convenient story. The huge variation reflects differences in how you treat inflation, government transfers and the definition of a household, but the lowest figures are hard to believe. If you argue that income has shrunk you also have to claim that four decades’ worth of innovation in goods and services, from mobile phones and video streaming to cholesterol-lowering statins, have not improved middle-earners’ lives. That is simply not credible.

The third is the notion that capital has triumphed over labor as ruthless businesses, owned by the rich, have exploited their workers, moved jobs offshore and automated factories. The claim that inequality is being driven by the rich accumulating capital was a central thesis of Thomas Piketty’s book, “Capital in the Twenty-First Century”, which in 2014 made him the first rock-star economist since Milton Friedman improbably filled auditoriums in the 1980s. Not all Piketty’s theories caught on among economists, but it is widely assumed that a falling share of the rich world’s GDP has been going to workers and a rising share to investors. After a decade of soaring stock prices, this has some resonance with the public.

Recent research, however, suggests that the decline in labor’s fortunes is explained in most rich countries by exorbitant returns to homeowners, not tycoons. Strip out housing and the earnings of the self-employed (which are hard to divide between capital and labor income), and in most countries, labor shares have not fallen. America since 2000 is an exception. But that reflects a failure of regulation, not a fundamental flaw in capitalism. American antitrust regulators and courts have been unforgivably lax, allowing some industries to become too concentrated. This has enabled some firms to gouge their customers and book abnormally high profits.

The last pillar is that inequalities of wealth, the assets people own, minus their liabilities, have been soaring. Again, this has always been harder to prove in Europe than in America. In Denmark, one of the few places with detailed data, the wealth share of the top 1% has not risen for three decades. By contrast, few deny that the richest Americans have sprinted ahead. But even here, wealth is fiendishly difficult to estimate.

 

Not so rich pickings

The campaign of Elizabeth Warren, a Democratic presidential contender, reckons that the share of wealth owned by the richest 0.1% of Americans rose from 7% in 1978 to 22% in 2012. But a plausible recent estimate suggests that the rise is only half as big as this. (For connoisseurs, the difference rests on the factor by which you scale up investors’ wealth from the capital income they report to the taxman.) This imprecision is a problem for politicians, including Warren and Bernie Sanders, who want wealth taxes, since they may raise less revenue than they expect.

The fact that dubious claims are made about inequality does not reduce the urgency of tackling economic injustice. But it does call for ensuring that the assumptions on which policies are based are accurate. Those, like Britain’s Labour Party, who favor the radical redistribution of income and wealth ought to be sure that inequality is as high as they think it is, especially when their policies bring knock-on costs such as deterring risk-taking and investment. By one estimate, Warren’s wealth tax would leave America’s economy 2% smaller after a decade.

Until these debates are resolved, it would be better for policymakers to stick to more solid ground. The rich world’s housing markets are starving young workers of cash and opportunity; more building is needed in the places that offer attractive jobs. America’s economy needs a revolution in antitrust enforcement to reinvigorate competition. And regardless of trends in inequality, too many high-income workers, including doctors, lawyers, and bankers, are protected from competition by needless regulation and licensing, and senseless restrictions on high-skilled immigration, both of which should be loosened.

Such an agenda would require governments to take on nimbys and corporate lobbies. But it would reduce inequality and boost growth. And its benefits do not depend on a set of beliefs about income and wealth that could yet turn out to be wrong.

 

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