Realist, not conformist analysis of the latest financial, business and political news

To Prove That Recessions Reduce Inequality

Just a little note to point out why it is that recessions reduce inequality. They do indeed increase poverty – lots of people get to have less money which is a useful definition of getting poorer. But inequality reduces in a recession. Because the richer among us gain more of their income from profits than do the poorer among us. So, richer incomes fall more as profits payouts reduce:

Investors in UK companies suffered a 41pc slump in dividends last year, worse than any other major market, as firms battled to conserve cash during the pandemic.

A hypothetical rentier living off nothing but a fat share portfolio has lost 41% of their income this past year. Someone on benefits and nothing but benefits has lost none of their income this past year. Inequality between the trustafarian and the oik has shrunk. Inequality shrinks in recessions.

This has an interesting effect. In the good times it’s possible to whinge that inequality is increasing. And because we’ve now a formal definition of “poverty” that is in fact one of inequality – less than 60% of median income – then we can say poverty is increasing in the good times.

In the bad times of course that means poverty by this definition is decreasing. But no one at all wants to say that. Which is why we get this from the Fabian Society:

The reason we don’t trust them? They change their definition of poverty according to what best suits the insistence that more must be spent. Always.

When it is convenient, as in this report, to use a measure of relative poverty to argue for more tax and spend then they do that. When a relative measure would lead to less tax and spend – this being their complaining above about perversity, that when median incomes fall this means that fewer are in relative poverty, or that the relative poverty line falls – then they switch to an absolute measure of income.

This is intellectual casuistry and no, we shouldn’t trust people who do this. Humpty Dumpty is meant to be a joke in a children’s book, not a blueprint for the design of national policy. Sadly, so too is the Queen of Hearts and her efficient manner of dealing with such behaviour only a joke.

Casuistry, d’ye see?

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