Big government & equality

Richard Exell poses the question: can fiscal conservatives reduce inequality?
Maybe.  For one thing, it is possible to make the tax system more progressive, for example through a progressive consumption tax, land taxes or inheritance tax. And we shouldn’t rule out the possibility of very high top tax rates. It’s also possible to both shrink the state and increase equality by cutting corporate welfare - handouts to the likes of BAe Systems, Serco, Capita, CSC and A4E.
There is, though, something else. My chart shows that the correlation between big government and equality is weak. Yes, countries with big government spending tend to be more equal, but there’s a lot of variation around this. For example, France and Norway have similar levels of equality, but France spends 13 percentage points more of GDP. And the UK has the same inequality as Australia or Japan, but spends 10 percentage points more of GDP.
In fact, it could be that the positive correlation between equality and public spending doesn’t reflect causality from the latter to the former at all, but rather an omitted variable. Countries that combine big government and equality tend to be high trust societies. It could be, then, that the same high trust that makes people supportive of redistribution - because they believe “welfare scroungers” aren’t ripping them off - also makes them support big government as they trust politicians not to waste money.
This possibility hints at another - that perhaps it’s possible to combine small government and equality if the right cultural or institutional factors are in place. I mean, for example:
- Strong trades unions. These not only raise the pay of the worst off, but also help restrain top pay.
- A collectivist culture. A society that believes that corporate performance depends upon the abilities of all its employees will be more egalitarian than one which believes that organizations can be transformed by star managers.
- Education. A highly educated workforce might be more equal, if only because it creates more competition for top jobs. There is a correlation between education levels (pdf) and equality - the egalitarian Nordics do better than the inegalitarian US and latin Americans. And the causality mightn’t be entirely from inequality to poor education. However, high educational standards are achieved not by increased spending, but by a culture which values schooling - and the UK lacks this.
Herein, I fear, lies the big challenge for the Left. Although it is technically possible to reconcile small government or fiscal conservatism with greater equality, the UK lacks the cultural underpinnings which would permit this happy combination.