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How Do We Know Hillary’s Approach to Inequality Won’t Work? Brazil

There's no alternative to targeting the rich

Jemal Countess/Getty Images Entertainment

To her credit, Hillary Clinton has seized on inequality as a theme of her proto-presidential campaign. She has despaired about the increasing “share of income and wealth going to those at the very top—not just the top 1 percent, but the top .1 percent or the .01 percent.” She has warned that inequality is an issue that “affects our democracy.”  

But when she has hinted at solutions to the problem, Clinton's rhetoric has been much less rousing. Essentially, Clinton has argued that the answer is to boost the economic lot of “people on the bottom and people in the middle class [who] no longer feel like they have the opportunity to do better.” Lift more people out of poverty and get middle class incomes growing again, and inequality will diminish.

This isn’t really true. The analytical mistake Clinton makes is to assume that inequality is one problem, when in fact it’s two. There’s the problem of economic stagnation for lower- and middle-income workers. And there’s the problem of the ultra-rich capturing more and more of the country’s income and wealth. And fixing one does not mean fixing the other. If you’re as concerned about the escalating power of the one percent as you are about the declining economic fortunes of folks at the bottom, then merely boosting the middle class will not suffice.

We know this partly from a historical episode Clinton should be intimately acquainted with: her husband’s presidency. Over the course of those eight years, poverty declined and the middle-class saw some genuine gains, with average income for the non-wealthy increasing by about 15 percent. But the one percent’s share of income still skyrocketed, from just under 14 percent in 1993 to over 19 percent in 2000, according to data from Emmanuel Saez and Thomas Piketty.1

Of course, one could argue that in the ‘90s the inequality problem hadn’t yet penetrated the mind the way it has since the recent financial crisis and recession. There was no Piketty yet—or at least no Piketty—and no Occupy Wall Street. Had inequality been the preoccupation it is today, Bill Clinton might have worked even harder to raise the incomes of people at the bottom and middle. But even if he’d succeeded, it still wouldn’t have done much to ease inequality.

The example of Brazil illustrates why. Brazil is one of the most notoriously unequal countries in the world. During the 2000s, the government of President Luiz Inacio Lula da Silva made reducing inequality a priority. Lula’s approach was essentially the one Hillary advocates: boosting the economic prospects of the less fortunate. Partly this came from a sustained period of growth, something Brazil hadn’t seen in nearly a generation. Partly it came from increases in the minimum wage. And partly it came from investments in education and welfare benefits—most prominently, the Bolsa Familia program, in which the government makes cash payments to parents who send their children to school and vaccinate them. Overall, poverty fell dramatically during Lula’s presidency. 

Initially, it appeared that inequality fell, too. Using one common measure, the Gini coefficient, inequality dropped by nearly 7 percentage points in Brazil between 2006 and 2012.

But the result was based on unreliable survey data. After unearthing more precise tax data, Fabio Castro, Pedro Ferreira de Souza, and Marcelo Medeiros of the University of Brasilia discovered that inequality barely budged during this period.2 The one percent’s share of income actually ticked up slightly, from just under 25 percent to just over. Even with the higher minimum wage and transfer payments that Lula introduced, the bottom half of the population only earned 11 percent of all the income generated in Brazil between 2006 and 2012, while the top five percent took home half.3

These findings suggest two key conclusions, both of which have big implications for how Hillary Clinton and the rest of us think about inequality in the United States. First, says de Souza, if you’re really serious about reducing inequality, at some point you have to target the rich directly—through tax increases or other policies.4 Because the incomes of the rich tend to grow very quickly (the one percent saw their incomes double under Bill Clinton’s presidency) boosting the bottom and middle will almost never be sufficient to narrow the gap in any meaningful way.

Second, Brazil demonstrates that once the rich control a certain amount of wealth and income, they are very good at protecting it—at using their connections to the government and other powerful people to stay rich. “Intuitively, it makes perfect sense that economic power becomes political power,” says de Souza. “Daily experience would seem to reinforce it.” He notes that, over the past few decades, Brazil has experienced economic crises and economic booms. It has lived through hyperinflation and low inflation. If inequality were strictly a market-based phenomenon, the level of inequality should have lurched around rather violently. Instead, it’s been remarkably stable. The system is almost certainly being gamed.

The upshot is that the longer we wait to deal with inequality, the harder it will be to reverse. In Brazil, where the one percent control 26 percent of the country’s income, it may be too late for all intents and purposes. In the United States, where the one percent control 21 percent and rising, we may have a small window of opportunity, but it’s rapidly closing. Hillary needs to stop messing around and get to work. 

  1. These are pre-tax and pre-government transfer figures. But the after-tax and transfer figures should be pretty similar. While Bill Clinton did raise income taxes on the wealthy in 1993, government redistribution as a whole did almost nothing to mitigate inequality during this period, according to OECD data.

  2. It’s possible that inequality dropped a bit in the two or three years prior to 2006—the authors don’t have data going back that far. But it is unlikely to have dropped by much.

  3. While Castro, de Souza, and Medeiros only measured pre-tax income, it’s unlikely that the tax code would have evened out the distribution much. The top marginal income tax rate in Brazil is just 27.5 percent and, according to de Souza, deductions and allowances are easy to come by. Taxes on capital income and property are also quite low.

  4. In the United States, that would probably be something that limits profits in the financial sector, like a financial transactions tax. Financial sector profits are a major driver of income inequality here.