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Plutocrats: a look at the income gap between the super-rich and ... the rest of us

Chrystia Freeland

Brian Ferraro

Chrystia Freeland
Doubleday Canada

The trouble with critically profiling the 1 per cent is the Playboy problem: The visuals overwhelm the text. There are only so many descriptions of the uber-rich's private jets, helicopters to St. Tropez, straight-outta-Top-Gear supercars and pop-star-themed parties that the brain can handle before the That Should Be Me reaction kicks in, followed by some ex-post moralizing about how you don't actually care about material possessions, even if a Bugatti Veyron would work as a daily commuter, and, anyway, rich people aren't always happy. QED.

In Plutocrats, her book about the rise of the super-wealthy (the "1 per cent" in that awful neo-numerical-logism), Chrystia Freeland – columnist and one-time deputy editor for The Globe and Mail and currently Reuters global editor – mostly avoids these traps, focusing instead on the societally corrosive effects of growing income inequality. Note: If you actually want to feel a little daily delight/disgust at the antics of the rich and shameless, leave this book on the (e-)shelf. You're better off with the Rich Kids of Instagram tumblr blog.

The rise of the 1 per cent and its consequences has come noisily to the fore. It is partly because it is an election year in the United States, partly because so many lost so much money after the 2008 crisis. But it's also because of a puzzle: Why has U.S. income inequality soared after declining for so long?

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There is nothing new about puzzling over inequality. The subject is central to economics, having attracted worried attention all the way back to Adam Smith. Inequality and its effects have attracted many other writers, both scholarly and popular, from Karl Marx to Milton Friedman to Simon Kuznets, to more modern entries such as Thomas Frank's What's the Matter with Kansas and Robert Barro's work relating income inequality, to country growth. Freeland has read and seemingly cites almost everyone on this list, plus many others, which is either a strength of this book or a weakness, depending on your feelings about citation-centric books.

As Freeland shows, the econo-academic consensus on inequality, insofar as there is one, is fairly narrow: Income inequality exists in all societies. That's it. It is, admittedly, playing tennis without a net as far as reaching a meaningful academic consensus goes, but it is a start. Things narrow a lot from there, with many adhering to the Kuznets curve view that inequality starts fairly low early in a country's economic history, then gets wider, and then gets lower again as the country matures into a more developed form. The United States, as Freeland points out, was long a poster child for this view, with income inequality low, then high, then lower again into the late 20th century.

That inverted-U shaped Kuznets curve (low/high/low) gave aid and comfort to many in the economic development business, as Freeland ably describes. You didn't have to believe that income inequality was everywhere and always a good thing (hard-line view: It creates necessary incentives for lazy people to do hard work). Instead, you could argue, with serious economists on your side, that income inequality didn't reflect looting, that revolution doesn't loom when inequality spikes, and that the presence of yacht-loving oligarchs (see Mikhail Khodorkovsky et al.) in developing economies was regrettable, but transient.

This was always a good story in economics, and like most good stories, it was usually retold for hortatory or moralistic purposes, and without fact-checking. The trouble is, U.S. income inequality, rather than declining and staying declined, has widened again in recent years. Specifically, the 1 per cent's share of income bottomed around 1978, and has climbed ever since. And, more societally worrisome, the share of the lowest half of income earners has declined at the same time. Here be economic dragons, as France's pre-Revolution royalty can testify.

Many, like Freeland, worry about what is happening here. If developed economies aren't financially fair, and they're getting less fair, what are the implications? Why play rigged games, as opposed to, say, trying to get your loot while the looting is good? The latter condition leads to klepto-sclerosis, at best, or oligarchs and revolutions at worse. Not exactly soothing if we are to govern as if market-driven outcomes are preferable to government-determined ones.

What should we do about it? One argument is we should do nothing. To this way of thinking, differences in income are motivating: Economies need people to want to keep up with the Joneses (or the Khodorkovskys), and the larger the gap, the higher the motivation. A second argument is the libertarian one, that what someone earns within the law is what it is, and it's not your business. It platonically … is.

There are many problems with both of these arguments, of course. First, the evidence in favour of inequality driving economic growth in developed countries is equivocal, and the relationship seems to go the wrong way in developing countries. Second, starting conditions aren't fair in economics. We don't get to pick our parents, our countries or our economic era. Economists call these "endowment effects," and they differ wildly across people. Granted, so do beauty and intelligence, but those have a significant genetic component while there is no gene for bank balance, so endowment effects matter more given their mutability.

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So, we should do something about it, right? Perhaps, but it's not clear what, as Freeland concedes. She argues, gently, for a kind of plutocrats-don't-let-plutocrats-wreck-economies approach, sort of like post-New Year's party carpooling for billionaires. And, while time-consuming and politically unsatisfying – what, no perp walk? – that has a better chance of working than trying to legislate good plutocrat behaviour.

I am left with deeper questions. Why has U.S. inequality increased and what does it mean for other countries this happened? Freeland's analysis of this problem is rich and worthwhile, and admirably free of St. Tropez helicopter glam shots, but the ecological flux of economic inequality remains a puzzle.

Paul Kedrosky is a senior fellow at the Kauffman Institute.

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