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For more than 30 years wealth and income inequality has been growing across the world’s economies and according to the OECD matters are rapidly getting worse.   Unhappily this is one area where the UK can claim to be up with the leaders yet, or perhaps because, it is an issue that receives scant attention.   I hope that the publicity surrounding Thomas Piketty’s tome ‘Capital in the Twenty-First Century’ will serve to change this.    

 

Piketty seems to have spent much of his academic career amassing a huge data set stretching back more than two hundred years on income and wealth inequality, primarily in the UK, France and the US.   His central conclusion, somewhat simplified, is that all other factors remaining equal wealth inequality grows continually in capitalist economies because over the long term the return to capital outpaces the return to employees ie, wage growth.   He shows that the share of wealth going to the top one cent, having fallen during the twentieth century, is now rising again and, in the absence of counteracting policies, Piketty postulates it will eventually return to where it was a century ago.   In 1910 the top one per cent accounted for almost 70 per cent of the UK’s total wealth; their share fell to 22 per cent in 1970 since when it has been rising and is now in excess of 30 per cent.

 

No doubt Piketty’s book will become the subject of much academic discourse but his identification of the continual redistribution of wealth towards the rich accords with current experience.   Since its dip at the beginning of the Great Recession the FTSE100 has climbed significantly, rising above its level in 2007 while average real wages have declined.   Research shows that the 100 wealthiest people in the UK now have as much wealth as the poorest 18 million.   Such inequality begs an important question for those under the illusion that the UK is firmly on the road to sustainable economic growth; namely, economic growth can be sustained in the face of a growing imbalance in the distribution of wealth.  

 

Inequality in a capitalist society is akin to unemployment; a certain level is necessary to facilitate enterprise and flexibility respectively but if either grows too large society becomes unstable, a process that starts with protests by the young followed by rising support for the political extremes.   Closely related to the concentration of wealth is the rise of super income inequalities.   The real value of average regular earnings ie, net of bonuses, has fallen back to its 2003 level; some 8 per cent lower than its peak before the Great Recession.   However, averages can be misleading.   The situation is very different if we focus on the top percentiles.   The share of the gross weekly wage bill going to the top decile, and particularly the 99th percentile had increased substantially since 2000.   If allowance is made for bonuses, in terms of value, these are overwhelmingly concentrated on the 95th percentile and above and are bias towards the financial sector.

 

Piketty argues that this extreme wage inequality, where a handful of individuals reap huge rewards while 90 per cent of employees suffer falling real wages, is the result of high-level executives setting their own pay, constrained only by social norms rather than market discipline.   He attributes the growing divergence of pay for those at the top to the erosion of these norms.   I have great sympathy for this hypothesis.   How else do we explain the association of those on high earnings with aggressive tax avoidance despite the top marginal rate of income tax being considerably lower now than 30 years ago?   In the absence of strong, ethical leadership there is little prospect of a return to the social values of the immediate post war period where progressive taxation helped reduce the concentration of income and wealth.  

 

Great wealth purchases great influence; hence, it is not surprising that political and business leaders adopt the mantra that a more progressive tax system would threaten economic growth.   But this position is untenable.   Whether or not one views extremes of inequality as ethically undesirable the evidence says it results in low and unsustainable growth.   For example, a recent study by the IMF¹  argues that fiscal redistribution does not destroy growth; on the contrary it concludes that lower inequality is robustly correlated with faster and more durable growth.   A combination of progressive taxes and faster, sustainable growth is the surest way to improve public finances.   The more so as growing poverty is costing the UK economy more than £39bn a year according to the Equality Trust.  

 

I have argued repeatedly in these blogs that the UK’s economic recovery is far from robust relying primarily on house price inflation and its associated debt to get the government past the 2015 election.   This might make those who own their homes or have a relatively small mortgage feel good but as a basis for a sustainable recovery it is an illusion.   The ‘trickle down’ of wealth to jobs and wider prosperity is not happening.   For the vast majority the labour market has taken a very worrying turn.   The government claims it has created more than a million private sector jobs – actually about 100,000 lower if allowance is made for the reclassification of many further education jobs – but as I pointed out in my previous blog these largely consist of self-employment or entry-level jobs, neither of which offer other than low pay nor much in terms of advancement.   Pay levels that grow faster than inflation depend on rising productivity which in turn depends on business investment which in turn depends of the belief that the recovery is sustainable.   Is it any wonder productivity is so low when property seems to be the focus of investment and people so under-valued?    

 

1’Redistribution, Inequality, and Growth’, J. D. Ostry, A. Berg, C. G. Tsangarides, International Monetary Fund, April, 2014.

P I K E T T Y ’ S  P O S T U L A T E

23rd May 2014

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