The roots of inequality

Submitted by AWL on 22 May, 2019 - 11:48 Author: Matt Cooper
fuel poverty

On 14 May, the Institute for Fiscal Studies (IFS) launched its Deaton Review into inequality in Britain. The broadcast and print news outlets carried interviews about the five-year study into the nature and causes of inequality in the UK, with the Nobel laureate Professor Sir Angus Deaton in the chair and a budget of £2.5 million supplied by the charitable Nuffield Trust.

The research promises to be wide-ranging, looking at inequality not just in incomes, but also in other areas such as health, wealth, political participation and opportunity. The first motivation for the report is that the UK is becoming more like America. The IFS has published a preliminary survey, showing that the UK now has one of the most unequal income distributions in the developed world (only the US, Romania, Bulgaria, and Lithuania are worse among European and North American states).

After 1945 inequality was (mildly) reduced by redistribution through tax and benefits, full employment, and other welfare policies, particularly affordable council housing. Important in this, as the IFS survey recognises, was a strong trade union movement capable of pushing wages up and supporting the welfare state.

The Gini coefficient measures inequality, with 0 being complete equality and 1 being complete inequality (one person having everything). On disposable income (after state redistribution by tax and benefits), when Thatcher came into power in 1979 the Gini score was below 0.25. It had been stable for decades. By the end of 1990 it was 0.35. That was a massive shift. 0.25 would make the UK currently one of the most equal societies in Europe. 0.35 makes it one of the most unequal today. Since 1990, the Gini score has remained at a little below this 0.35 level. In fact, since the 2007-08 crisis, it may have decreased a little (more equality). This might sound odd. In fact nearly everyone has seen their real income stagnate or decrease since 2008, but, particularly since Conservative-Lib-Dem austerity from 2010, the richest have got much richer.

The bottom 90% (the upper border of which is a household disposable annual income of £50,000) have been squeezed closer together (hence the stable Gini score). But the super-rich have become richer. The zoom-away group is not even the so-called 1%, but a much smaller group, more like 0.1% or even 0.01%. The richest five families have wealth equivalent to that of the bottom 20%. At the top, wealth is the decisive indicator, and income is less significant: it is just what you choose to draw from the wealth that year.

The IFS review pulls back from looking at this wealth. It does point to increasingly bloated boardroom pay packets, but it does not address this as indicative of the underlying problem of the private ownership of society’s productive forces by the 0.1%. Many in the centre-ground of politics beside the IFS are worried about inequality now.

Thomas Piketty’s Capital in the 21st Century was the left-wing publishing hit of 2014, with its argument that accumulation of capital by the richest, and hence their source of income, exceeds the general rate of growth and thus outpaces average incomes, but similar views are found way beyond the left. Many other writers have blamed spiralling wealth inequality for the 2007-08 crisis.

You can’t put a billion quid in the bank, so the wealthy hectically hunt for new investment vehicles (most famously collateralised debt-obligations on sub-prime mortgages), and that hunt was a factor in the financial crisis. Piketty’s policy proposals, wealth and inheritance taxes, are shared by a broad swathe of opinion, not least Christine Lagarde and the IMF.

The IFS’s turn to concern about inequality is less an outbreak of humanity within mainstream economics, more a reflection of the way that many pro-market economists are seeking to dampen capitalism’s tendency to crisis. There is a second reason why the Deaton Review is happening now — the UK’s vote to leave the EU and the underlying shift to populist politics that this reflects.

The IFS’s preliminary review implies that this is a result of rising inequality, not just in income, but education, political representation and opportunity. This is the “left behind” thesis (popularised by Matthew Goodwin and Robert Ford in their work on UKIP, a view also underpinning Blue Labour and Lexit nationalism).

There is a problem with this view. If inequality drives populism then it should be less successful in more equal states, but this is not the case.

Populism is strong in some of the more equal states in Europe. Slovenia, the Czech Republic and Finland have the three lowest Gini coefficients in Europe. In each populist parties are strong: the anti-immigration Slovenian Democratic Party came second with 21% of the vote in 2018’s general election, in the Czech Republic populists are in power and the (True) Finns won 18% of the vote in Finland’s April 2019 general election.

A better explanation is put forward by the Dutch academic Cas Mudde, who argues that populism is fundamentally a cultural phenomenon originating in an intermediate social layer (lower-middle class, the self-employed) which can then spread to sections of the working class with a weak class identity because of de-industrialisation and precarious employment. The resentments that this is based on include economic pressure and instability, but are not reducible to inequality.

Previous studies have produced strongly critical examinations of poverty, but have concluded with lame policy proposals.

Stewart Lansley and Joanna Mack’s 2015 Breadline Britain is a brilliant indictment of poverty, but concluded that Britain should adopt a more European model of capitalism with UK Uncut and Citizens UK as the agency of change. It is likely that the IFS’s proposals will be even meeker.

The IFS is well known for its fact-checking commentaries on taxation and spending in the UK. It was formed in the late 1960s by well-heeled Conservatives in response to the Labour government’s introduction of corporation and inheritance taxes. It recruited Labour politicians to its board, but from the right of the party. The IFS’s first director was Labour MP Dick Taverne, who left Labour in 1974 to sit as an independent, ending up in the SDP; Roy Jenkins was another senior right-wing Labour politician to serve on the IFS’s board.

The IFS is firmly planted in the uncritical mainstream of academic economics, accepting the inevitability of capitalism and is pro-market in its assumptions. Deaton is in this mainstream too — his Nobel prize is for his work on the mathematical modelling of aggregate consumer behaviour. But he has taken a different direction in recent years with his work on “deaths of despair” particularly among white, middle-aged Americans, which Deaton and his co-author Anne Case, suggest is linked to increasing inequality and the absence of adequate welfare in the US .

Case and Deaton’s work is one of the foundations of the approach the Deaton Review seems set to take, along with other American-focused work: Andrew Cherlin’s Labor’s Love Lost (inequality linked to people living alone rather than in nuclear families) and Robert Putnam’s Our Kids (chaotic families linked to lower income). Both Putnam and Cherlin see stable family units as the basis of society, and both use education as a proxy for class. Their work, however, is strongly empirical and clearly shows, as with Case and Deaton, the human cost of increasing inequality in the US.

The closest the IFS’s preliminary report comes to holding capitalism and the private ownership of the means of production responsible for poverty in the midst of plenty is to suggest curbing chief executives’ pay. They point to the economy becoming dominated by a smaller number of large companies with larger mark-ups on prices over costs — or what a Marxist, at any point in the last hundred and fifty years, might have called the concentration of capital with a heightened rate of exploitation, although in the cases of the tech companies to which IFS is alluding, often the heightened exploitation is in other companies down their supply chain.

The best that IFS can offer is the long standing EU proposal of breaking these companies up to create more competition. Perhaps more interestingly, IFS propose that unionisation be encouraged to give workers a voice, although very much along the German lines of workers on company boards in a more corporatist capitalism. But the IFS proposals represents is a shift in opinion in at least some of the policy makers around the ruling class in Britain and internationally. It parallels the social liberals at the end of the nineteenth and early twentieth century who argued both for welfare policies to create a more stable social order and that increasing consumption could help capitalism remain healthy.

That school of liberalism nurtured both Beveridge and Keynes, the intellectual architects of the post-1945 welfare state. But it was a strong, confident labour movement that forced the creation of that welfare state. Without the labour movement being fundamentally rebuilt, it is unlikely that the IFS report will lead to a new welfare state, let alone solve capitalism’s innate drive to ever increasing inequality.

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