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Does equality mean a guaranteed income for all?

What lies behind the idea to give everyone in Switzerland an automatic income and how likely are the Swiss to adopt it? Felix Oberholzer-Gee, Swiss native and Harvard Business School professor, looks at the issue.

This content was published on April 29, 2014 - 16:46
Felix Oberholzer-Gee, Harvard Business School

In Western Europe, there is a lively debate about proposals to guarantee every citizen a basic income. The idea, which has a long history dating back to the 1920s (at least), is increasingly popular in policy circles and the broader population.

The German and Spanish parliaments explored it. The Swiss will soon vote on an initiative that would guarantee everyone $2,800 each month — no questions asked, irrespective of whether a person works. Early polls indicate that more than 45% of Swiss voters will support the initiative.

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The supporters of a guaranteed income are a varied lot. They range from unreconstructed communists to humanists with a strong sense of dignity and the wealthy. One concern that many of them share, however, is the global rise in income inequality.

In the past few decades, economic growth lifted hundreds of millions out of poverty. But, at the same time, the distribution of income became increasingly skewed in favor of wealthy individuals.

The current situation is exceptional from a historical point of view. For example, the top 10% of earners in the U.S. captured 35% of income through the 1950s and 1960s.

Today, this share stands at 50%. Rising inequality reflects gains at the top in all sources of income: salaries and business income, as well as capital income and capital gains.

There are many reasons why income inequality has risen. One is technology, which tends to benefit the well-educated. Machines increasingly take over routine tasks, leaving low-paid service jobs for unskilled workers.

As a result, US employment and wages tend to grow at the very bottom and at the very top of the distribution in skills. The middle is hollowed out.

Import competition from poorer countries is a second reason. Chinese imports, for example, explain about one quarter of the decline in U.S. manufacturing from 1990 to 2007.

Third, globalization produces so-called superstar effects. In a flat world, top talent is handsomely rewarded for its broad appeal. The Brazilian soccer player Pelé, the best ever, earned $1.1 million in 1960 (adjusted for inflation). The Portuguese forward Cristiano Ronaldo made $17 million this past year. Pelé played for 350,000 television sets in Brazil. At the most recent World Cup, 700 million people watched Ronaldo, as Eduardo Porter writes in “The Price of Everything.”

While rising income inequality is a global phenomenon, it is perhaps surprising to see that radical redistribution is more extensively debated in Europe than in the United States. After all, income inequality is greater in the U.S. than in Europe, and it is growing faster in America too.

Comparing the incomes of the top 20% to the bottom 20%, this ratio stands at 4.0 in Sweden, 4.3 in Germany and 5.6 in France. With a ratio of 8.4, the U.S. is in a different league, more similar to Kenya (8.2), Ghana (8.4), and Nicaragua (8.8). So why is there far more demand for redistribution in Western Europe?

Felix Oberholzer-Gee

Felix Oberholzer-Gee is a professor of business administration in the Strategy Unit at Harvard Business School. He received his Masters degree and his PhD in Economics from the University of Zurich. His research and consulting are centred on competitive strategy, international competition and non-market strategy.

His work has been published in peer-reviewed journals and profiled by media outlets around the world, including  Financial Times, Neue Zürcher Zeitung, New York Times and Singapore Straits Times.

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Beliefs about the reasons for inequality turn out to be important. According to the World Values Survey, 60% of Americans believe that the poor could become rich if they just tried hard enough. In Europe, however, the number of individuals who hold similar beliefs is only half as large. In Brazil, a mere 19% believe that poverty stems from laziness rather than circumstances, connections and luck.

Beliefs about the reasons for poverty are critical for the willingness to redistribute income. People like to be generous if they think the poor are deserving of their support. But they have a strong aversion to giving if they suspect the less fortunate do not try hard to escape their circumstances.

These differences in beliefs give rise to two policy regimes: one with little redistribution and low taxes, the United States, and one with a greater demand for redistribution, Europe.

There is evidence in both places for these dynamics. As U.S. tax rates fell, the top income share rose, not only because the affluent paid less, but also because it makes sense to bargain harder for improved remuneration in a lower-tax environment. Meanwhile, in Europe, people are justified in thinking that “luck” (in the form of being born to the right parents) is an increasingly important determinant of income.

From 1820 to 1910, inheritances made up 20-25% of disposable income in France. This share fell to 5% in the early part of the 20th century. Today, France is back to where it was 100 years ago. This return of inherited wealth is a far weaker dynamic in the United States.

So, will Europe provide a guaranteed income to its citizens? My personal view is that this is unlikely. The Swiss in particular (most of whom are temperamentally risk averse) are too practical to turn into strong proponents of radical redistribution. Differences in beliefs about the reasons for income inequality, however, will continue to drive redistributive policies.

First published by PBS NewsHour

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