Inequality has become the fallback position for politicians in need of a theme, or organisations that want to show they care. Inequality, it seems, is driving political change — pushing voters to extremes — and uncomfortable electoral outcomes.
Inequality seemingly threatens the very survival of capitalism, which is why the World Economic Forum, as it gathers in Davos this week, has named it as one of three key risks facing the world economy over the next 10 years and has as its theme “responsive and responsible leadership”.
Inequality provided the backdrop to Jeremy Corbyn’s populist relaunch and his pay cap proposal. Or was it a pay ratio? The maximum wage, last seen in British football in the early 1960s (it was £20 a week; now, some earn that a minute), seems to appeal to the Labour leader.
I don’t worry too much about the World Economic Forum, which has to find something to talk about and has a habit of picking the wrong themes. I don’t worry much about Corbyn either. The idea of a populist relaunch is to make yourself popular, and he is a very long way from that, and from power.
I do, however, worry about somebody who is in power — our prime minister.
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In her first big speech for a while, Theresa May warmed to a theme I fear will become a motif for her premiership. Though her speech on the “shared society” focused on mental health, a worthy topic, it was interspersed with other references.
“We need to address the economic inequalities that have emerged in recent years,” she said, so everybody shares in prosperity. She criticised “politicians who supported and promoted an economic system that works well for a privileged few but failed to ensure that the prosperity generated by free markets and free trade is shared by everyone, in every corner and community of their land”.
You might think, if the PM is saying this, that Britain must be suffering a crisis of rising inequality. In fact, as official figures released shortly after her speech show, inequality has been falling.
The Office for National Statistics (ONS) reported that in the 2015-16 tax year inequality in Britain, as measured by the Gini coefficient, fell to its lowest since 1986. As the ONS put it: “There has been a gradual decline in income inequality in the last 10 years, with levels similar to those seen in the mid to late 1980s.”
If we take the period since the start of the financial crisis, the poorest fifth of households have seen a 13.2% rise in real incomes (adjusted for the consumer prices index) since 2007-8, compared with 6.6% for the next quintile, 3.9% for the middle fifth and 4% for the next-to-richest quintile. The best-paid fifth of the population have, in contrast, seen a cumulative drop in incomes of 3.4%, the only group worse off than before the crisis.
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The experience of the top fifth of the population demonstrates that, apart from the fact that some high-paying occupations have suffered in recent years, redistribution through taxes and tax credits works, as the Insitute for Fiscal Studies pointed out on Friday, (and is of course much more sensible than silly ideas such as pay caps).
George Osborne deliberately targeted the lower paid with his tax changes, excluding those on higher incomes from most or all of the gains from, for example, raising the personal income tax allowance. That and the government’s generosity towards pensioners explain why inequality has been falling.
You may say at this point that it is one thing for those on higher incomes to have suffered a bit since the crisis; in some cases perhaps they deserved to, but that is a small price for having lived high on the hog in the period leading up to it. Surely these global citizens cleaned up then?
Again, no, or at least not disproportionately so. The rising pre-crisis tide lifted all boats. Figures from Matthew Whittaker, chief economist at the Resolution Foundation, show all income groups enjoyed healthy and sustained real income rises in the period from 1990 to 2007-8.
For those in the bottom fifth, real incomes rose an average of 2.3% a year, rising to 2.7% for the next band. The middle quintile saw an average rise of 2% a year. For the top two groups, increases were 1.7% and 1.8% respectively. Income inequality has fallen to a 30-year low because lower income groups have done relatively well over a long period.
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There are, of course, caveats. Some would say the gains of the top 1%, or 0.1%, are of greater concern than what has happened to these larger groupings, such as the top 20%. Nobody should excuse the excesses, often apparently unrelated to performance, in some boardrooms.
The prime minister’s “privileged few” language, however, risks not only undermining the generally successful growth story of recent decades but setting different groups against one another. May, an unlikely champion of the working class, is in danger of stoking class war.
There are bigger issues here. One, highlighted by Whittaker, is that more important than the distribution of income is the fact that, in the post-crisis period, everybody’s incomes have grown very slowly, and that what in the past was regarded as a normal, unremarkable rise in living standards has not been achieved. So the middle fifth of the population, having seen their real incomes rise by 2% a year in the two decades leading up to the crisis, have had an annual rise of just 0.5% since then. That should mean a focus on raising productivity, and hence real wages.
The other issue is how prosperity, particularly in recent years, has been distributed between generations. As the ONS pointed out, retired households have on average seen a 13% rise in their real incomes since 2007-8, while non-retired households have yet to get their heads above water; their incomes are on average 1.2% lower than in 2007-8.
Retired households have benefited from government policy on uprating state pensions and from wealth gains thanks to policies such as quantitative easing. Though the incomes of younger households have been rising in recent years, this has been a lost decade for them and is not sustainable for the longer term.
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So, while income inequality is a natural target for politicians wanting to show they care, generational inequality has been the problem of recent years. And the need for policies and economic performance that raise incomes in general is pressing. But blaming the privileged few is bad economics and questionable politics.
PS As promised, the results of my seasonal quiz. The questions were:
1. George Osborne served as chancellor for six years and two months. Did that make him the longest-serving Conservative chancellor since 1945, and if it did not, who was?
2. Alan Greenspan, former chairman of the Federal Reserve, was a musician before he became an economist. What instrument did he play?
3. Which British economist was joint winner of 2016’sNobel prize in economics?
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And a tie-breaker. 2016 was momentous: what was its most important lesson as far as the economy was concerned?
A surprising number answered Gordon Brown to the first question; either a Freudian slip or they had not noticed the word Conservative. The answer was Nigel Lawson, who pipped Osborne by a couple of months. Clarinet or saxophone, or both, were Greenspan’s instruments. Oliver Hart was the joint Nobel winner.
The three winners, who get a signed copy of my book Something Will Turn Up, are: John Henderson, whose lesson from 2016 was that nothing is as bad, or as good, as it first seems; David Middleton, who said economic events, not political ones, drive economic output; and Linda Hall, economics teacher at Sale Grammar, who is having to tear up one element of the teaching specification — the benefits of EU membership for Britain. Congratulations to them and the many runners-up.