Why a little income inequality might be a good thing

Pundits rail against income inequality—but new research suggests it’s a key driver of prosperity

 
row of fishing huts in Bohuslan, Sweden
A certain sameness…. Fishing huts in Bohuslan, Sweden. (Christian Aslund/Getty)

Income inequality is the top global issue of 2015, says the World Economic Forum. As if to prove this claim, federal Liberal leader Justin Trudeau announced that one plank of his election platform will be to realign the tax system to shift wealth away from those nasty one-percenters and down to the middle class. Trudeau said he’s fighting income inequality “because it has harmful effects. It is a source of social tension; it is stopping millions of Canadians from achieving their ambitions.”

But what if income inequality—rather than being a roadblock to ambition and upward mobility—is actually the indispensable mojo that keeps things moving forward in a modern, successful economy?

Sweden has long enjoyed a reputation as the global exemplar for income, gender and social equity, driven largely by a tax and welfare system that modulates any extremes of economic success or failure. “Sweden is as noted for its high personal taxes as it is for IKEA furniture and ABBA,” boasts an official Swedish government website, bragging that its citizens gladly pay high taxes because they appreciate the tremendous benefits conferred on them by the country’s cradle-to-grave safety net.

Yet judging by its school system—perhaps the most important indicator of a country’s future economic performance—this Swedish model’s looks appear to be fading fast.

Over the past decade, Sweden’s performance in international tests has dropped precipitously. Truancy and classroom disorder are growing rapidly. Teachers are increasingly frustrated. Given this dismal state of affairs, the Swedish government asked the Organisation for Economic Co-operation and Development (OECD) to investigate. “Sweden’s student performance has declined in all key domains of literacy, numeracy and science,” says the recently released OECD report. No country has fallen as far or as fast as Sweden. Such a result is puzzling, given the country spends a greater proportion of its GDP on education than the OECD average. After dismissing a variety of possible causes, including a recent surge in immigration, the most likely culprit seems to be Sweden’s commitment to social democracy and egalitarianism.

According to OECD investigators, those high taxes necessary to equalize income across high-and low-skilled occupations, plus the effects of the welfare state, “may not provide sufficient incentive for learning and working hard.” As a result, the “importance placed on equality in Swedish society may have had the unintended effect of not challenging all students sufficiently.” If everyone is equal, no one will ever be exceptional.

Even more worrisome, this lack of interest in academic effort appears to have started at home. “Swedish parents’ expectations of their children may not be sufficiently high,” the OECD report warns. “The high proportion of students with truancy issues…may support such a hypothesis.” OECD researchers arrived looking for solutions to Sweden’s poor test scores. They left concluding that the country is suffering from a severe case of national apathy, brought on by an obsession with eliminating income disparity. (Given the OECD has produced several reports criticizing rising levels of inequality, it seems an especially striking conclusion.)

Having spent generations idealizing equality and punishing high-skilled, high-income earners with punitive tax rates, it’s entirely plausible that Swedish kids and their parents would finally realize education, ability and work ethic are irrelevant to success in adulthood. Why work hard—or even show up for school on time—if you know everyone ends up equal in the end? If this becomes a permanent state of affairs, such communal lassitude will pose an existential threat to the Swedish economy.

To turn things around, Sweden needs students and parents to care once more about striving, perseverance and success. That means accepting greater variance in income and living standards. As unfair as income inequality may appear, getting rid of it could be far more damaging over the long run.

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