SOLENT LECTURE 4TH MAY 2016

WHAT DO WE DO ABOUT RISING ECONOMIC INEQUALITY?

Rising income inequality creates economic, social and political challenges. It can stifle upward social mobility, making it harder for talented and hard-working people to get the rewards they deserve. Intergenerational earnings mobility is low in countries such as Italy, the United Kingdom and the United States, and much higher in the Nordic countries, where income is distributed more evenly (OECD, 2008). The resulting inequality of opportunity will inevitably impact economic performance as a whole, even if the relationship is not straightforward. Inequality also raises political challenges because it breeds social resentment and generates political instability. It can also fuel populist, protectionist and anti-globalisation sentiments. People will no longer support open trade and free markets if they feel that they are losing out while a small group of winners is getting richer and richer. (OECD, 2011, p. 40).

[...a dangerous and growing inequality and lack of upward mobility that has jeopardised middle-class America’s basic bargain – that if you work hard, you have a chance to get ahead. I believe this is the defining challenge of our time. (President Obama, Remarks on Economic Mobility at the Town Hall Arts Recreation Campus (THEARC) Washington, DC, 4 December 2013).

As long as the problems of the poor are not radically resolved by rejecting the absolute autonomy of markets and financial speculation and by attacking the structural causes of inequality, no solution will be found for the world’s problems or, for that matter, to any problems. Inequality is the root of social ills. (Pope Francis tweet, reported by Emma Green, 29 April 2014).

One of the leading economic stories of our time is rising income inequality, and the dark shadow it casts across the global economy. (Christine Lagarde, Managing Director, International Monetary Fund, Address on Economic Inclusion and Financial Integrity to the Conference on Inclusive Capitalism, London, 27 May 2014).

It is no secret that the past few decades of widening inequality can be summed up as significant income and wealth gains for those at the very top and stagnant living standards for the majority. I think it is appropriate to ask whether this trend is compatible with values rooted in our nation’s history, among them the high value Americans have traditionally placed on equality of opportunity. (Janet Yellen, Chairwoman of the US Federal Reserve, Perspectives on Inequality and Opportunity from the Survey of Consumer Finances, at the Conference on Economic Opportunity and Inequality, Federal Reserve Bank of Boston, Boston, Massachusetts, 17 October 2014).

We’ve got a lot of capital but not many capitalists, and people rightly think that isn’t fair. So this is what too many people see when they look at capitalism today. Markets without morality. Globalisation without competition. And wealth without fairness. It all adds up to capitalism without a conscience and we’ve got to put it right. (David Cameron, then Leader of the Conservative Party, speech to the World Economic Forum, 31 January 2009).]

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Introduction

Many thanks to Solent for inviting me to give this lecture and to you for coming to it. I should particularly like to express my appreciation for the Library Service, and especially Sarah Belcacem in Inter-Library Loans, for their help with this and previous enterprises. I am also very grateful to the Marketing team, especially Demelza Dancy, for their work in arranging and publicising the event. Finally I would like to thank Professor Baldwin for his personal interest and for his kindness and courtesy in inviting me to speak to you today. It is very good to be here.

As the OECD quotation suggests, rising economic inequality is – after climate change – the greatest challenge facing the rich West. In this lecture I shall be asking:

1. What do we know about rising inequality?2. What do we understand about its impacts?3. What do we think are the causes?4. What should we be doing about it?

Under this last heading I shall also be saying something about the potential impact on inequality of the new Government’s policies in its first year.

Before beginning, it may just be worth emphasising that, as well as being very important, increased inequality is also quite a complex phenomenon with many aspects to it. So inevitably what I have to say this evening will be somewhat simplified and compressed. I shall be very happy to expand and provide further information afterwards and am still hoping to publish the results of my work. In the meantime copies of this lecture will be posted on Solent’s website as well as the information you already have on the handout.

Let us start by exploring the general issue of increasing within-country economic inequality.

What do we know about rising economic inequality?

In general, the definition of inequality that I am using here is an economic one, to refer to significant variances in the distribution of income and wealth. These are often linked to other differences, such as gender, ethnicity, disability, location, etc. The issue is not the existence of unequal economic resources – hardly anyone argues that everyone can or should be completely equal – but the extent of such inequality, and whether this can be justified, for example by the relative contributions that different groups make to society. What we are talking about in fact is a major and increasing imbalance between the contributions that various groups and individuals are making to society, on the one hand, and the benefits they derive from it, on the other. As I hope to show this evening, reducing the present degree of inequality in our society is not only a matter of fairness and social justice, it is also crucial to economic efficiency and growth.

So how do we measure within-country economic inequality?

The commonest measure is the Gini coefficient (named after an Italian statistician, Corrado Gini). This measures inequality across the whole of a society (rather than simply comparing different income groups). If all of the income in a society went to a single person, and everyone else got nothing, the Gini coefficient would be 1. If it was shared equally, and everyone got exactly the same, the Gini would be 0. The higher the Gini value, the more unequal a society, and vice versa. Table 1 shows changes in the values of the OECD member countries’ Gini coefficients between the mid-1980s and the late 2000s. As can be seen,

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individual countries’ values range from .48 (Mexico) to .25 (Denmark). The great majority of countries have seen rises over the period, although these have been most marked amongst the Anglophone countries: the US and the UK are amongst the highest ‘scorers’.

In both the US and the UK there have been particularly large increases in the shares of total income being taken by the very top incomes: the top 1 per cent and, even more, the top 0.1 per cent. Tables 2a and 2b set this out. In the UK, the share of income taken by the top 1 per cent rose from 5.93 per cent in 1977 to10.36 per cent in 1993 and 12.70 in 2012; the US percentages at the same dates were 7.9, 12.82 and 18.88. For the top 0.1 per cent, the share in the UK rose from 1.27 per cent in 1977 to 3.09 per cent in 1993 and 4.6 per cent in 2012; the US percentages were 2.04, 4.72 and 8.36. These changes matter because they are likely to affect the entire income distribution. In particular, an increased income share to top earners will increase overall inequality, at least in terms of income before taxes The recent surge in top incomes, especially labour incomes, is also a major cause of the increased concentration of wealth in the US which is the counterpart to increased income inequality. There is even greater inequality in the distribution of wealth but I don’t have time to go into this today.

Hitherto we have been talking about inequalities in personal or household incomes or wealth. But it is also necessary to consider the functional distribution of income, between the shares of national income that are taken respectively by wages and profits. [Daudey and Garcia-Penalosa (2007) demonstrated that a larger labour share in national income is associated with a lower Gini coefficient of personal incomes (i.e., a greater equality of incomes). Stockhammer (2013) looked at changing wage shares in GDP in 71 countries (28 advanced, 43 developing or emerging) between 1970 and 2007. He found that wage shares had fallen in most countries over the period whereas previously they had been stable or even increasing. Overall, real wage growth had lagged behind increases in productivity since around 1980.] Table 3 shows how the shares of wages and profits in US Corporate Value Added have changed since 1970. This is one of those figures that really speaks for itself.

What has been the impact of these changes?

The impacts of inequality

Inequality is not necessarily bad in itself, the key question is to decide whether it is justified, whether there are reasons for it (Piketty, 2014, p. 19)

The literature refers to five main sets of impacts:

1. Social 2. Educational3. Environmental4. Political5. Economic

Let’s review them briefly. There is also, of course, a moral dimension. The greater the amount of inequality, the harder it is to achieve equality of opportunity: the ability to achieve something through your own ambition and efforts (Barry, 2005).

One influential survey of the social effects of increased inequality is that of Richard Wilkinson and Kate Pickett (2009). They identified associations between within-country inequality and a wide range of social problems: levels of trust (essential not only for social cohesion but also for efficient market transactions), mental illness (including drug and alcohol addiction), life expectancy and infant mortality, obesity, children’s educational

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performance, teenage births, homicides, imprisonment rates, and (last but by no means least) intergenerational social mobility. Table 4 shows the association between changes in inequality and changes in social mobility. [Wilkinson and Pickett combined all the health and social problem data for each major developed country and for each US state, to make an Index of Health and Social Problems. They found that for each dataset (i.e., country and state) a higher score on the Index was strongly related to income inequality (but weakly related to average incomes). The UNICEF index of child wellbeing in rich countries was also related to income inequality (Wilkinson and Pickett, 2009, pp. 19-26).] More recently, Michael Marmot (2015) has identified a ‘social gradient’ in health where there is a close correlation between income and physical and mental well being. So there is clear evidence that rising inequality causes or exacerbates a wide range of social problems.

Let’s now look at education.

One major systemic failing in the UK education system is the ‘long tail’ of poorly performing schools and pupils compared with other countries, particularly at the secondary level. A significant part of the explanation for this is the stubborn link between pupils’ socio-economic background and their educational attainment. For example, a fifth of children in England on free school meals (a common measure of disadvantage) do not reach the expected maths level at age 7 (Key Stage 1) and this proportion rises to a third by age 11 (Key Stage 2). The correlation between disadvantage and poor academic attainment is particularly strong in the UK. (Aghion et al., 2013, pp. 16-17).

As income inequality rises, there is a greater disparity in the resources that rich and poor families are able to invest in their children’s education. There is indeed ample evidence of the association between family poverty and educational attainment, what has been termed the ‘attainment gap’ or the ‘achievement gap’(e.g., Clifton and Cook, 2013). Moreover, this association becomes clear even before children start school (for example, Government Equalities Office, 2010; Crawford et al., 2014; Fair Education Alliance, 2014). So increasing economic inequality almost inevitably means a growing difference in the educational experiences and achievements of students from different socio-economic backgrounds. Moreover these differences continue through life, as the recent Institute for Fiscal Studies report (Britton et al., 2016) on variations on graduate earnings demonstrates (students from the 20 per cent wealthiest homes earned 10 per cent more in 2012-13 than their less well-off peers 10 years after graduating, even after controlling for subject and university choice).

In a 2014 report for the Fabian Society, Wilkinson and Pickett argued that reducing inequality is also necessary for environmental sustainability. The main barrier to such sustainability, and especially to reducing carbon emissions, is consumerism (not only found in the West, of course). This in turn is created or exacerbated by the increased status anxieties and status competition that are some of the main concomitants of increased inequality. The authors also make the point that, in general, more equal societies have a much better record on development aid and recycling; indeed, lowering within-country inequality in rich countries will help to improve understanding of poorer countries, which may in turn lead to less between-country inequality as well.

Now as to politics:

It is the next big scandal waiting to happen. It’s an issue that crosses party lines and has tainted our politics for too long, an issue that exposes the far-too-cosy relationship between politics, government, business and money. (David Cameron, then Leader of the Opposition, quoted in the Telegraph, 8 February 2010).

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A number of authors (e.g., Stiglitz, 2013) point to the way in which big money donations to the two main American political parties are turning the US into a plutocracy rather than a democracy. The Prime Minister’s former special adviser Steve Hilton has recently issued a similar warning about party funding here (Shipman, 2015).

So rising inequality has a wide range of negative impacts on our society. In the past, these detriments have been justified, or at least defended, on the basis that they are the price we have to pay for economic efficiency and growth. To quote the current Mayor of London:

Some measure of inequality is essential for the spirit of envy and keeping up with the Joneses that is, like greed, a valuable spur to economic activity. (Johnson, 2013).

However, work by economists at the OECD (Cingano, 2014) and the IMF (Ostry et al., 2014) finds that income inequality is actually harmful to economic growth, and this has been endorsed by the parent organisations.

The OECD has produced several major reports on inequality (2008, 2011, 2015). According to its latest survey, had inequality not increased between 1985 and 2005, the average OECD country would have grown by nearly 33 per cent more than it did (OECD, 2015, p. 67). One of the main ways in which this deficit occurs is through raising the relative cost of education of an increasing fraction of families in the bottom half of the income distribution: note again, not just the bottom ten per cent, this is not simply about poverty.1

Similarly, the latest IMF analysis examines how individuals’ income shares at various points in the distribution matter for growth. A higher net Gini coefficient – a measure of inequality that nets out taxes and transfers, i.e., disposable income – is associated with lower output growth over the medium term.2

So not only is increased inequality harmful to the development of a healthy society, it is also economically damaging. There seems in fact to be no robust case for increasing inequality. What are the causes?

The causes of rising inequality

This is where things become a bit more complicated. Although there is a broad measure of agreement that within-country inequality has risen, there is little consensus as to the main causes. In the literature I have been reading over the past couple of years, I have found at least seven main competing theories:

1. Rising inequality is due to globalisation, not only the increased mobility of jobs and labour but also of goods, knowledge and capital.

2. It is due to technological changes that put a premium on the skills needed for non-routine tasks and reduce the value placed on low skill, routine tasks: what has been termed ‘skill-biased technological change’.

3. It is due to the rise of ‘winner-take-all markets’, where small differences in performance translate into large differences in economic reward.

4. Inequality is an inherent property of capitalism, and in particular its relentless drive to extend production and cut costs through technological innovation, something only kept in check when capital is destroyed by, typically, war and its attendant policies.

5. Inequality is the result of the Neoliberal policies of privatisation, deregulation, welfare cutbacks and tax reductions pursued especially in the larger Anglophone countries since the late 1970s/early 1980s, and for long espoused by such

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influential international organisations as the IMF, the World Bank and the OECD. An important part of this set of reforms was the weakening of the trades unions and other social institutions and norms that may have kept inequality in check.

6. It is the result of the increasingly important role played by the financial sector in most Western countries - what is called ‘financialisation’ - together with increased ‘rent seeking’ by companies and wealthy individuals (rent seeking is where companies obtain income from means other than normal market transactions).

7. It reflects changes in macroeconomic policy and international financial governance.

Let me briefly introduce each one.

Globalisation

The distinguished American economist Richard Freemand has estimated (2006) that the global labour pool doubled in the early 1990s after the fall of communism, China’s move towards market capitalism, and India’s decision to undertake market reforms and enter the global trading system. However the world’s capital stock did not increase to the same extent. This meant that the ratio of capital to labour fell, shifting the global balance of power towards capital and away from labour. [This has had three main impacts on the well-being of workers in the US and other advanced countries. First, it created downward pressures on the employment and earnings of less skilled workers. Second, where developing countries are becoming competitive in technologically advanced industries - as China is in nanotechnology, for instance - it reduces the advanced countries’ comparative advantage, and may mean that displaced workers have to shift to less desirable sectors. Third, the development of computers and the web enhances the ability of firms to move work to low-cost operations abroad.] In a further paper, Freeman emphasised that trade is only part of the story, and that international capital flows, immigration and technology transfer - all of which increased substantially after 1970 – also affect incomes around the world, in most cases in the same direction as trade. But whilst within-country inequalities were increasing, between-country differentials are diminishing:

Inequality measured in relative terms decreased in the era of rapid globalization due to the improved economic performance of developing countries, notably India and China, who together make up one third of the world’s population. (Freeman, 2009, p. 589).

Skill-biased technological change

Computers and other digital advances are doing for mental power – the ability to use our brains to understand and shape our environments – what the steam engine and its descendants did for muscle power (Brynjolfsson and McAfee, 2014, pp.7-8).

The view that changes in technology are the main cause of increased inequality goes back many years (Bound and Johnson, 1989). A recent statement of the case is The Second Machine Age: Work, Progress and Prosperity in a Time of Brilliant Technologies (Brynjolfsson and McAfee, 2014). The authors argue that a second machine age – through digital hardware, software and networks – is doing for brains what the steam engine did for production in the Industrial Revolution (the first machine age). As a result, we now have real, useful Artificial Intelligence and connections through common digital networks. This has come in parallel with increased investment in ‘organisational capital’ – investments in training, hiring and business process redesign - to eliminate more routine tasks, including

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routine cognitive tasks. Together, these changes are ‘exponential, digital and combinatorial’ in character.

There are clear benefits in productivity, in an increased ‘consumer surplus’, and in the quality and range of goods and services available. But there is also a downside: less demand for less skilled workers, leading to a ‘polarisation’ of the labour market between ‘lovely’ and ‘lousy’ jobs (Goos and Manning, 2003); the substitution of technological capital for workers (increasing the profits of the owners of capital and reducing the share of income going to labour); and an increasing gap between the ‘superstars’ in each field and the rest. This takes us to the next theory, ‘winner-take-all markets’.

Winner-take-all markets

In the preface to the revised and updated edition of their 1995 book The Winner-Take-All-Society: Why the Few at the Top Get So Much More Than the Rest of Us, Robert Frank and Philip Cook (2010) continue to argue that the main cause of rising income inequality, at least towards the top of the earnings distribution, is the emergence and intensification of ‘winner-take-all markets’. These are markets where small differences in performance, often assisted by luck, can lead to large differences in economic reward, together with a concentration of such rewards in the hands of a few top performers. Previously confined to sectors like entertainment, sport and the arts, these are now ubiquitous across the professions.

The main causes are (a) the expansion and intensification of competition, including through globalisation, the lowering of trade barriers, deregulation, and reductions in transport costs, and (b) the information revolution that has transformed our ability to collect, process and transmit information, including information about performance. Another important contributor to winner-take-all markets is the tendency to value many goods not just according to their absolute properties but to how they compare with those acquired and consumed by others: ‘status’ or ‘positional’ goods (Hirsch, 1976). As prosperity grows, such goods assume greater importance. However:

By its very nature, the demand for top rank can be satisfied by only a limited number of products in any category. And this, together with the fact that people are often willing to pay substantial premiums for top-ranked products, often gives rise to intense winner-take-all competitions between the aspiring suppliers of those products. (Frank and Cook, 2010, p. 41).

This theory is incidentally of particular relevance to higher education (Frank, 1999) where the financial and status rewards for the universities at the top of the various league tables are quite disproportionate to their achievement (and which current Government policies to create a higher education market will of course exacerbate).

The nature of capitalism

The distinguished French economist Thomas Piketty must wait in the wings no longer. His 2014 book Capital in the Twenty First Century has been a best seller. It is indeed a ‘must read’ for anyone with a serious interest in the relationship between capitalist economies and the distribution of income and wealth.

Using tax records, Piketty argues that, historically, capital – traditionally, land and buildings; more recently, financial and business capital as well as physical property – has always dominated income. This is because the return on capital - by definition, wealth accumulated in the past – usually exceeds the growth rate of the economy. Because the ownership of capital is always less widely distributed than labour income, this leads inevitably to greater

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and greater concentrations of wealth. The only period when this was not the case was between the first decade of the twentieth century and about 1950. Since then, the longer term relationship, where the ratio of the total capital stock to a year’s national income was six or seven to one in Europe (somewhat lower in the US), has reasserted itself, albeit to somewhat lower levels because of the ability of what Piketty calls the ‘patrimonial middle class’ after 1945 to begin to share some of the rewards of capital:

The entrepreneur inevitably tends to become a rentier, more and more dominant over those who own nothing but their labour. Once constituted, capital reproduces itself faster than output increases. The past devours the future. (Piketty, 2014, p. 571).

The main reasons for the twentieth century weakening in the dominance of capital were the two world wars that both (literally) destroyed capital and necessitated policies to control capital: rent controls, more stringent financial regulation, and the taxation of dividends and profits, as well as higher rates of progressive taxation. The loss of capital overseas (Britain and France) was another factor, together with the many bankruptcies that accompanied the Great Depression. Piketty argues that only through a combination of (much) higher economic growth and a depression of the returns to capital - ideally through some sort of global wealth tax applied steadily over time, as well as much higher rates of income tax - can we begin to unwind the position.

Neoliberal reforms

Every family should have the right to spend their money, after tax, as they wish, and not as the government dictates. Let us extend choice, extend the will to choose and the chance to choose. Margaret Thatcher (http://www.brainyquote.com/quotes/m/margaretth564186.html, accessed 18 April 2016).

Each of the explanations considered so far has pointed to underlying features of the economy and society that go wider and deeper than any individual country or set of social or political arrangements: they are what have been characterised as market-based theories (Piketty et al., 2011). By contrast, the next theory takes us into institution-based accounts that emphasise the choices made by particular polities at particular times, and especially the Neoliberal policies pursued by governments in the major Anglophone countries since the late 1970s/early 1980s, and also espoused, at least until very recently, by major international organisations such as the OECD, the IMF and the World Bank (the so-called ‘Washington Consensus’).

Under these policies, freer markets, smaller government and lower taxes have replaced full employment, progressive taxation and inclusive welfare as state priorities. Together, the resultant squeeze on wages, the boost to corporate profits, and booming fortunes at the top have upset the equilibrium needed for economic stability. Increased debt - both public and private - has been the inevitable response, alongside huge and mobile financial surpluses (corporate and personal) that are also a consequence of increased inequality (Lansley, 2011).

On this view, labour market deregulation weakened the trades unions and the share of wages in the economy. There was a fundamental shift in macroeconomic policy from reducing unemployment to preventing inflation, together with an attempt to restructure the economy around services, and especially financial services. (This is something that can still be seen today in the Bank of England’s and the City’s attitude to interest rates). The outcomes were higher unemployment (in spite of the assumed trade-off between wage levels and employment); a shift from manufacturing to finance (‘de-industrialisation’); and a

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polarisation of the labour market, with a growth in high- and low-skilled jobs at the expense of the middle. Whilst the richest have pulled away, the rest of society has become increasingly bunched in the bottom half of the income distribution, with increased downward occupational and social mobility, what one American commentator described as a rowing boat chasing a speedboat.

The irony of course is that although justified on economic grounds, these reforms have produced very little in terms of economic advantage. A recently published study by the Cambridge Judge Institute (Coutts and Gudgin, 2015) finds that so far from producing an ‘economic miracle’, the Neo-liberal economic and social policies pursued by all British governments since 1979 have produced slower growth in both GDP and productivity than in the previous decades, as well as higher unemployment and greater social dislocation. The period since 1979 has of course seen rising inequality in Britain.

Financialisation

I congratulate you on these remarkable achievements, an era that history will record as the beginning of a new golden age for the City of London. I believe it will be said of this age, the first decades of the 21st century, that out of the greatest restructuring of the global economy, perhaps even greater than the industrial revolution, a new world order was created (Gordon Brown MP, Chancellor of the Exchequer, speaking at the opening of the new European headquarters of Lehman Brothers in Canary Wharf in June 2007, quoted in Lansley, 2011, p. 97).

It seems to be generally accepted that, together, globalisation and rising productivity through technological innovation have contributed to major structural shifts in the main Western economies, away from manufacturing to services, and especially financial services: ‘financialisation’. One authoritative estimate (Haldane et al., 2010) is that in the UK, financial intermediation accounted for more than 8 per cent of Gross Valued Added3 in 2007, compared with only 5 per cent in 1970; in the US it quadrupled from 2 per cent of total GDP in the 1950s to about 8 per cent today. [The financial sector’s share of profits - gross operating surpluses - is even higher: one commonly quoted estimate is 40 per cent of corporate profits. Peet (2011, p. 392) estimated that US financial corporate profits exceeded manufacturing companies’ profits every year since 1999 apart from 2008. According to Kotkin (2015), whereas in 1995 the assets of the six largest bank holding companies accounted for 15 per cent of US GDP, by 2011 this share had risen to 64 per cent (aided of course by the massive bailouts of the biggest banks after 2008). In the UK, because of the scale of the bailout, the banks’ balance sheets are five times GDP (Wolf, 2015).] Financialisation has contributed to rising inequality in various ways, in particular by being largely responsible for the huge increases in income and wealth at the top of the income distribution that we noted earlier. This in turn reflects not only the growing scale of finance but also its monopoly rents: the benefits of Government guarantees not only for depositors but also shareholders (in the case of the major banks).

Macroeconomic policy

Finally, a number of writers, notably Jamie Galbraith (2007, 2012) emphasise changes in macroeconomic policy, including changes in world financial governance:

Up until 1973, the world lived under the globally stabilizing financial order of the Bretton Woods system, created in 1944 to provide a framework within which countries could pursue reconstruction and development, with short-term financial assistance from the IMF and long-

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term development aid from the World Bank. Capital movements between countries were generally controlled, and international commercial banking played a minor role in global finance. This system began to break down when Richard Nixon ceased to exchange dollars for gold in central bank settlements in 1971, and it fell apart altogether in 1973. (Galbraith, 2007, p.606)

This in turn points to the need for some degree of international consensus and action if rising inequality is to be checked.

Causes – Conclusions

Well by now your brains are probably hurting! My conclusion – on the basis of a bibliography that is heading for 10,000 words - is that whilst there is no single cause, and whilst wider phenomena like globalisation and technological change have certainly played their parts, the key to the problem of rising inequality in the West lies in the nexus between capitalism, Neoliberalism (especially, deregulation and privatisation), and financialisation, with the market-based approaches that have been adopted in many Western economies since the 1980s uncovering the - possibly inherent - concentrationist tendencies within capitalism, and giving a stimulus to, or facilitating, financialisation and winner-take-all markets (as well, ironically, as various forms of rent seeking)4. It is this interrelationship that links, or is the common factor between, the two main components of inequality: the disproportionate rises at the top and the weakening of the bottom 40 per cent. The deflationary, growth-reducing macroeconomic policies associated with these reforms may have reinforced these effects, as may an associated concentration of political power in the hands of the wealthy, at least in the US and, to a lesser extent so far, Britain.

The main reason for reaching this conclusion is that whilst all the major Western countries have faced similar challenges from globalisation, technological change, etc, it is the economies where the Neoliberal reforms have gone furthest – and especially in America and Britain – that have the highest levels of inequality, at least amongst the more prosperous states (those with the highest per capita GDP). This is supported by what has been happening in some of the Nordic countries. As you will have seen from Table 1, although the overall levels of inequality here are still quite moderate, Finland and Sweden have seen some of the greatest increases. As a very valuable set of country case studies (Nolan et al., 2014) makes clear, these increases have been largely due to the Neoliberal reforms introduced in both countries in the late 90s/early 2000s, such as a dual tax system where capital income is taxed more lightly than labour income, as well as cutbacks in welfare and a less aggressive approach to redistribution. It is also interesting that both countries have slipped down the international education rankings produced by the OECD’s PISA programme.

What should we do about rising inequality?

So what then should we do about rising inequality?

In the time available I can only outline my reform programme:

1. More information and greater transparency would increase awareness of the extent and impact of greater inequality, and would prompt a better-informed discussion about possible responses. Just as with child poverty, it should be a national policy objective to reduce economic inequality, and the Government should report annually to Parliament on the progress made.

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2. Reducing tax avoidance and rent seeking would lower inequality since almost by definition it is mainly the wealthy and the better off who benefit from these activities (as we have just seen in the Panama revelations). It would also increase the resources available for the social expenditure that is needed to reduce or limit inequality and its effects.

3. All exemptions and tax reliefs that disproportionately favour the better off – such as the higher rates of tax relief on pension contributions for higher rate taxpayers5 - should be withdrawn. Increasing marginal income tax rates and introducing heavier taxes on wealth - preferably through a recurrent tax on increases in the value of immovable property - would also have a positive effect on inequality. In the meantime, rates on capital gains should be brought into line with - i.e., raised to the same level as - personal income tax. Another positive step would be for rates of indirect taxes to be lowered: it is mainly because of these that the share of total income taken by taxes is higher for the poorer 10 per cent of households than it is for the richest 10 per cent.6 All this should and can be done without any serious damage to economic growth, motivation or innovation.

4. A basic, fixed minimum income would reduce inequality and poverty, but by being linked to a proper contribution to society through work in the market and/or public service (Atkinson, 2014), it would also contribute to greater social cohesion.

5. More use of active labour market programmes and reforms to labour market institutions, if carefully done, will reduce pre-redistribution inequalities by creating a better and fairer balance between labour and capital. In particular, we need to revive and rehabilitate the trade unions and collective bargaining.

6. A stronger state role in monitoring and regulating product and service markets would also help to ensure a better balance between capital and labour factors, which would again assist with equality. But action will also need to be taken internationally to balance the responsibilities of debtor and creditor nations.

7. Similarly, reforms to corporate governance and incentives to align executives’ decisions and remuneration with companies’ long term interests will reduce inequality towards the top of the income distribution, though they will need to be accompanied by tighter regulation of the financial markets if they are to be fully effective. It is hardly an accident that the biggest single group within the best paid are company executives, and it is surely a sign of the times when the Institute of Directors publicly criticises the pay award for the CEO of British Petroleum (Macalister, 2016).7

8. Although existing educational inequalities are largely a reflection of wider economic and social disparities, policies can be adopted that reduce these disparities still further, the main ones being to limit and reduce private funding of schooling and end or reduce all forms of segregation in primary and secondary education.

9. Adopting macroeconomic policies that focus on wage growth and employment quality, as well as investment and productivity - rather than inflation and the public share in GDP - will create sustainable economic growth, as well as reducing the relative importance of capital that is a major contributor to inequality.

10. State funding of political parties, alongside subscriptions from individual members, as well as strict overall limits on campaign spending, would help to reduce inequality by limiting the extent to which the very wealthy can determine policies that create or facilitate greater inequality.8

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How does the new Government’s policy programme compare with these proposals? We are now at the final part of this lecture.

The new Government

In the Speech from the Throne last May announcing the new Government’s early legislative programme Her Majesty said:

My government will legislate in the interests of everyone in our country. It will adopt a one nation approach, helping working people get on, supporting aspiration, giving new opportunities to the most disadvantaged, and bringing different parts of our country together. (Cabinet Office and Her Majesty the Queen, 2015).

[At the start I included a quote from David Cameron as Leader of the Opposition in 2009. Since the May 2015 election he and other Ministers have talked a good deal about creating or recreating a One Nation society. For example:

Our belief in equality of opportunity, as opposed to equality of outcome...not everyone ending up with the same exam results, the same salary, the same house – but everyone having the same shot at them...you can’t have true opportunity without real equality. (Cameron, 2015).

Only if we remind people of our commitment to social justice, demonstrate our belief in equality of opportunity and affirm that we are warriors for the dispossessed, will we be able to win arguments, and elections, and then be in a position genuinely to help the vulnerable and the voiceless. (Gove, 2015).

...all the actions of a compassionate, one nation Conservative Government determined to offer both social justice and economic security. (The Chancellor of the Exchequer, George Osborne MP speaking in the budget debate in the House of Commons, 22 March 2016, House of Commons Hansard Col.1391).]

Let us briefly review the policy programme so far, using the headings just introduced for my reform programme.

Inequality as a policy priority

Although the Prime Minister has talked a good deal about equality of opportunity, the word ‘inequality’ does not appear anywhere in the Conservative election manifesto, the Queen’s Speech or his October conference speech. Given the care with which these pronouncements are crafted, this can hardly be an oversight. This conclusion is reinforced by the fact that the Treasury has steadfastly refused to issue any kind of distributional analysis of the Government’s various economic decisions, in effect passing this role to independent think tanks like the Institute for Fiscal Studies and the Resolution Foundation (the Office for Budgetary Responsibility is barred from such analysis).

Tax avoidance and rent seeking

Tax avoidance has of course been highlighted by the Panama leaks. The Conservative manifesto spoke of raising ‘at least £5bn from continuing to tackle tax evasion, and aggressive tax avoidance and tax planning, building on the £7bn of annual savings delivered in the previous Parliament’. The Government would increase the annual tax charges paid by those with non-domiciled status, ‘ensuring they make a fair contribution to reducing the

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deficit’ (p. 11), and continue to tackle abuses of this status. Following the Panama brouhaha, the Government has announced its intention to make it a crime if companies fail to put in place measures to stop economic crime, such as tax evasion (something also promised in the election manifesto).

However there has been a huge long term reduction in the numbers of tax officials.9 It is hardly reassuring that the recently appointed Chair of HMRC is a former partner of one of the firms of lawyers who included the Prime Minister’s father among its clients and who is on record as saying in 1999 that taxation was ‘legalised extortion’ (Garside and Asthana, 2016). Little progress has been made on rent seeking and indeed the Chancellor in his recent (March) budget announced his intention to further reduce the rate of Corporation Tax, which is already one of the lowest anywhere and the lowest in the G20.10

Tax rates

The Chancellor has declined to reform the regime whereby higher rate taxpayers receive more in tax relief for pension contributions than standard rate taxpayers. He did however raise the threshold at which higher rates of income tax will be paid, increase the personal tax allowance before tax is paid, and reduce the rates of capital gains tax from 18 to 10 per cent for standard rate taxpayers and from 28 to 20 per cent for higher rate taxpayers. All of these changes will benefit the better off, at a time when reducing the public deficit is said to be the Government’s topmost economic priority.

Minimum incomes

The Chancellor has increased the minimum wage to £7.20 from this month; this will rise to reach 60 per cent of median income by 2020. However these increases only apply to employees of 25 and over, the increased levels are still below the existing Living Wage (of £9.15 in London and £7.85 elsewhere) and, above all, the benefits to the low-paid are more than offset by the continuing cuts in the welfare budget (as various independent commentators have pointed out).11

Labour market reforms

Historically, the trade unions have been one of the main factors in dampening down inequality. Yet trade union membership has fallen by about 50 per cent since the early 1980s, at least in part because of more restrictive legislation. The Government’s new legislation will require 50 per cent of union members to turn out in a vote for strike action for the action to be legal. For essential public service workers, a strike will also have to have the support of 40 per cent of workers eligible to vote. Unions will not be permitted to conduct electronic ballots. The period of notice of a strike to be given to an employer is to be increased from 7 to 14 days. Yet there are no parallel proposals to constrain the ability of companies to withdraw or transfer capital, whatever the likely impact on employees, economic partners or local communities (as we have just seen in the case of the recent announcement by Tata Steel of its intention to sell the Port Talbot steel works).

Market regulation and corporate governance

Another issue thrown up by Tata Steel’s announcement was the absence of any kind of ‘industrial strategy’ or even the kinds of long term support characteristic of most other advanced Western economies. Even where the Government does accept that it has a role to play there has been some rowing back. Potentially the most serious case is that of the

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financial markets, where there appears to have been a weakening of the safeguards introduced in the wake of the 2008 financial crisis.12

Education

The Government’s recent announcement of its intention to compel all state schools to convert to academy status by 2022 (Department for Education and Rt Hon Nicky Morgan MP, 2016) will reinforce the socio-economic segregation that is the single most damaging feature of our education system. In the meantime, the financial situation facing schools is bleak, with schools facing deficits averaging half a million pounds each according to a November 2015 survey by the National Association of Head Teachers. This is the result of a combination of frozen per pupil funding and increased costs due to National Insurance and pension contributions as well as pay increases. At the same time the independent schools continue to benefit from various subsidies from the taxpayer that enable them to keep their fees lower than they would otherwise be. It is quite extraordinary that through these various subsidies the average taxpayer helps wealthier households to put their children at an even greater advantage than is already the case. Finally, the Government has undertaken to double the amount of free child care for working parents with children from the present 15 hours a week to 30. However a number of organisations have pointed out that this will require additional funding and in the meantime children’s centres are being closed across the country. And there has been widespread criticism of the Government’s decision to replace the current and well-established income-based measures of child poverty with new measures of worklessness and educational attainment at age 16 (Roberts and Stewart, 2015).

Macroeconomic policy

We noted earlier the link between deflationary economic policies and rising inequality. Piketty (2014) argued that with very low economic growth, inequality will be greater because the rate of return on capital will be higher. There is also a link between economic growth, with the constant creation of new functions and skills, and social mobility. Several writers (e.g., Galbraith, 2012; Palley, 2012) associate deflationary economic policies with higher unemployment and the consequential pressure on wages leading to a worsening balance between labour and capital when a better balance is essential for reducing inequality. White (2012) argued that the expansionary monetary policies pursued by many governments since the Great Recession, such as ‘quantitative easing’, have exacerbated inequality by inflating the value of such assets as bonds, equities and property which are generally held by the wealthier members of society (cf., King, 2013, and many others).

So it is not encouraging that the Government’s approach of combining loose monetary policies (low interest rates, possibly more QE) with tight fiscal ones (low tax rates, big cuts in public spending) is essentially a continuation of the policies that have contributed to rising inequality at the same time as preventing the economy from achieving its full potential (Wren-Lewis, 2015). The collective international failure to tackle the serious between-state imbalances that have followed the lifting of barriers to the movement of goods, jobs and capital has reinforced this (Palley, 2012).

The Funding of Political Parties

The Government’s trade union legislation will force new union members to opt in to pay a political levy. This means that the previous bipartisan approach to party funding has effectively been shelved. More importantly, it means that the Conservative Party can continue to be funded by wealthy donors whilst an important part of Labour’s funding base is being

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removed. The opposition parties generally will be weakened by the Government’s decision to reduce the money currently given to support them in their work (‘Short money’). Finally, the Government-led changes in the arrangements for voter registration may mean fewer younger people voting, with unhelpful implications for inter-generational mobility.

The new Government and inequality: conclusion

So what is the general conclusion on the new Government’s policies as they affect inequality? There are a few positives – a tougher approach to tax avoidance, the increase in the minimum wage, child care. But overall it seems clear that the upward redistribution of income and wealth that has characterised Britain since the late 1970s/early 1980s will continue, and may even be reinforced, and that our overall economic performance will continue to be sluggish.13

I hope I am not being thought unduly political when I say that in view of the overall analysis I have presented this evening, one has to take the rhetoric about a One Nation Government with a considerable pinch of salt.

Overall conclusion

Well this has been a long, dense and perhaps depressing presentation. I hope I have persuaded you that:

1. There has been a considerable increase in economic inequality in Britain since the late 1970s/early 1980s

2. This increase is mainly associated with the policies of deregulation, privatisation, reduction of taxation and labour market reform which have been pursued to a greater or lesser extent by every administration over that period, up to and including the present Government

3. Such inequality has damaged British society without any compensating improvements in economic efficiency or growth, and

4. It will continue to grow unless a major programme of reform, across a wide range of areas, is put in place

5. Whilst the media attention given to the Panama leaks, Tata Steel and Sir Philip Green’s custodianship of BHS shows that there is increasing awareness of the detriments of inequality, I see little evidence that anyone in a position of actual or potential power is really prepared to undertake the reforms that are needed if we are really to halt and reverse inequality.

Now please tell me what I’ve got wrong.

Thanks again for listening to me.

Notes

1 The analysis looked at three sets of indicators:

1. The quantity of human capital accumulated by the individual, including the probability of attaining tertiary education, and the number of completed years of formal education.

2. Skill proficiency, capturing cognitive ability, and therefore also accounting for the quality of the education completed.

3. Probability of employment.

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To quote:

The results of all three approaches indicate that widening income disparities lowers the outcomes of individuals from low socio-economic backgrounds, but does not affect those of individuals from medium and high backgrounds...the results strongly support the idea that higher inequality lowers opportunities for education (and social mobility) for disadvantaged individuals in the society, an effect that dominates the potentially positive impacts [on economic growth] through incentives. (OECD, 2015a, p. 74).

2 More importantly, we find an inverse relationship between the income share accruing to the rich (top 20 per cent) and economic growth. If the income share of the top 20 percent increases by 1 percentage point, GDP growth is actually 0.8 percentage point lower in the following five years, suggesting that the benefits do not trickle down. Instead, a similar increase in the income share of the bottom 20 percent (the poor) is associated with 0.38 percentage point higher growth. This positive relationship between disposable income shares and higher growth continues to hold for the second and third quintiles (the middle class).(Dabla-Norris et al., 2015, pp. 6-7; original authors’ emphases).

3 The value of the gross output of a sector or industry less the value of intermediate consumption (goods and services used in production).

4 Rent seeking refers to income derived by commercial entities from non-commercial transactions. Government subsidies would be a prime example. This has also been described as ‘corporate welfare’. Kevin Farnsworth at the University of Sheffield has estimated (2013) that these might have been as high as £36bn in 2012-13.

5 Tax relief on pension contributions currently costs the Exchequer £27bn annually. The Pensions Policy Institute calculates that more than half of this goes to higher rate taxpayers (Pickard et al., 2016). There were rumours before the March 2016 budget that the current bands of relief which favour higher rate taxpayers might be replaced by a single band but in the event, and following lobbying by backbench Conservative MPs, the Chancellor decided to stick to the status quo.

6 According to a Taxpayers Alliance analysis (Guardian and Press Association, 2014), direct and indirect taxes together represented an average of 47 per cent of the gross income of the poorest decile of households compared with an average of 35 per cent of the wealthiest decile.

7 The BP board agreed to increase the CEO’s remuneration to £14m – a rise of 20 per cent – in a year when staff were subject to a pay freeze, 7,000 jobs were lost, the share price fell by 13 per cent and the firm lost $6.5bn. 60 per cent of shareholders voted against the increase. At the time of writing (mid-April 2016) the Board’s response to the vote is not known.

8 No costings are offered for this programme. There will clearly be ‘savings’ from reduced tax avoidance and rent seeking. There will also be greater tax revenues from the higher rates of tax on personal incomes and wealth, as well as from higher demand and economic growth generally. These increased public revenues should be sufficient for higher rates of expenditure on active labour market programmes, social protection, the construction of affordable housing, and education and training, without necessarily increasing the share of public expenditure within GDP. But as well as boosting domestic demand through these measures, GDP should be increased by the reforms to the capital and property markets, corporate governance and education.

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9 One estimate is that nearly 40,000 jobs have been lost in the Revenue since 2010 (Prem Sikka, personal communication). The Public Accounts Committee has just (15th April) published a report highly critical of the Revenue’s performance in curbing three main activities (tax evasion, the hidden economy, and criminal attacks).

10 According to the accountants UHY Hacker Young (2016) FTSE 100 companies are paying a quarter less in tax (as a share of profits) than they did in 2010 (Osborne, 2016).

11 By 2019, when most of the planned welfare cuts will have been made, the average poor household will have gained an extra £198 through the increased MW but lost £754 in benefits, an annual net loss of £556; low-income households with children will face a loss of £737 (IfS, reference needed, these figures come from the FT Money 2 April 2016). Also according to IfS, the sustained benefit cuts will mean many households in the bottom 20 per cent of earners losing up to 12 per cent of their income by 2019; households in the top half of income brackets will be no worse off, and even the poorest pensioners will be no more than 2 per cent poorer (Inman, 2016). In a separate analysis for the Fabian Society, Andrew Harrop estimates that by the end of the decade, households in the top fifth of the income distribution will be receiving an average of £9,400 a year in tax allowances and welfare payments whilst the poorest fifth, for whom benefits may be the only source of income, will be receiving an average of £10,200 (Stewart, 2016).

12 One of the key safeguards was the separation (from 2019) of the banks’ investment and retail divisions (some would have preferred a complete separation). In October (2015) the Bank of England accepted that a (so called) ring-fenced bank could transfer capital from its retail arm to other parts of its business in the form of dividends. Another Bank of England policy paper on how to wind down a bank was not as prescriptive as feared (Binham and Dunkley, 2015). In addition, the Treasury removed from the Banking Bill the principal of the reversal of the burden of proof, so that it is now the regulator who has to persuade the court that the senior executives involved took all reasonable steps to prevent a catastrophe, rather than the bankers. The Chancellor has also recalibrated down the banking levy and removed the combative head of the Financial Conduct Authority. The FCA has since abandoned its proposed review of banking culture (Treanor, 2016).

13 It is true that Britain’s rate of economic growth is respectable by current Western standards. However this is as much due to the (even more deflationary) policies being pursued in the Eurozone as it is to the Government’s policies. In fact, growth is slowing, wages have still to recover to pre-crisis levels, the target for eliminating the public deficit keeps being put back, and we have the largest external deficit in our peacetime history. Moreover the Chancellor’s much vaunted aim of rebalancing the economy away from consumption and services towards investment and manufacturing has completely failed whilst productivity is almost completely stuck. It is a pretty dismal picture which would become even more so if interest rates were to rise.

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TABLE 1

Figure 1.3 Income inequality increased in most OECD countriesGini coefficients of income inequality, mid-1980s and 2013, or latest available year

Note: “Little change” in inequality refers to changes of less than 1.5 percentage points. Data year for 2013 (or latest year): seeFigure 1.1. These values differ slightly from those in Figure 1.1 for some countries as they have been adjusted to be comparablewith 1985 values.

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Source: OECD Income Distribution Database (IDD), www.oecd.org/social/income-distribution-database.htm. (OECD, 2015)

TABLE 2A

Share of income of the Top 1%

1977 1993 2012

UK 5.93 10.36 12.7

US 7.9 12.82 18.88

TABLE 2B

Share of income of the Top 0.1%

UK 1.27 3.09 4.6

US 2.04 4.72 8.36

Source: the Top Incomes Database http://topincomes.g-mond.parisschoolofeconomics.eu/#Database

TABLE 3

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TABLE 4

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Source: Economic Report to the President (2012: 177) quoted by Jerrim, J. and Macmillan, L. (2014: 32)

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