Stewart Lansley
It has long been recognised that
extreme inequality has many serious social consequences, as well as
causing economic fragility and weakness – now the time has surely come
to act.
There’s a lot of talk about inequality.
From Pope Francis to the Bank of England’s Mark Carney, a rising number
of global figures have declared verbal war on today’s yawning income
gaps. But talk, it seems, is as far as it goes.
In the absence of action, inequality has
continued to grow through the crisis, domestically and globally. In the
UK, the gap between the top and the rest has continued to widen. In the
United States, nearly all the gains from recovery – over 90% – have
been colonised by the very top.
There are a number of reasons for this
gap between rhetoric and reality. Although inequality has been racing up
the political agenda, ‘inequality denial’ remains a potent force,
notably but not just in the US. As the London Mayor, Boris Johnson, puts
it the rich are a ‘put-upon minority` and should be feted and given
‘automatic knighthoods’.
Big corporations and the global
financial elite retain an immense grip over the political classes,
enabling them to dictate on swathes of economic policy, from tax to
business regulation. As the distinguished American economist, Avinash
Persaud, has put it, ‘the regulators have been captured by the
regulated`.
What is at work is a form of
double-speak. World leaders espouse anti-inequality sentiments, while
being complicit in actions that aggravate the income divide. Time and
again, the head of the IMF, Christine Lagarde, has made high profile
attacks on inequality: ‘Excessive inequality is corrosive to growth; it
is corrosive to society.’ Yet the New York based Fund continues to apply
policies that greatly exacerbate the problem. In return for bail-out
loans, for example, the IMF has enforced draconian austerity measures on
a number of southern European states that have impoverished large
sections of their populations.
In part because of the continuing
failure to translate talk into action, the Paris-based OECD has warned
that inequality is set to continue to grow. The average OECD nation, it
predicts, faces ‘an increase in (pre-tax) earnings inequality by 30% in
2060, facing almost the same level of inequality as is seen in the
United States today.’
This echoes the prediction at the heart of Thomas Piketty’s highly influential Capital in the Twenty-First Century,
of ‘a fundamental force for divergence’. Piketty argues that the great
narrowing across western nations – from the early 1930s to the mid-1970s
– was a one-off and we are back to the historic norm of persistently
high and growing inequality.
Does this mean that current levels of
inequality are inevitable and can only continue to deepen? The answer is
no. The historical process is not quite as deterministic as implied in
these pessimistic scenarios. As recognised by Piketty, models of
capitalism are not set in stone. Social and political forces are dynamic
and do change direction. There have been two seismic shifts of
political economy over the last century: the first, the shift from the
pre-war classical market model to the post-war era of regulated,
egalitarian capitalism; then, another fundamental turning point,
triggered by the stagflation crisis of the 1970s, ushered in the era of
inequality-biased market fundamentalism. That model is still largely in
place.
Narrowing today’s yawning income gaps
will require a similar dose of transformative politics. Tinkering here
and there through minor changes on tax and the level of the minimum
wage, slightly more generous doses of redistributive welfare and the
like – will not be enough to turn the rising inequality tide.
So, might history turn again, bringing
another shift in direction to a more progressive, pro-egalitarian era,
and confounding the idea that the post-war era was a one-off, special
case? The big shifts of the 1930s and 1970s were dependent, in each
case, on four central forces: severe economic shock, the intellectual
collapse of the existing model, a loss of faith by the public with the
existing system and a ready-made and credible alternative.
All these factors are at work today,
though to varying degrees. We have been through a severe global crisis.
The market orthodoxy of the last thirty years has a decreasing number of
friends, while most of its central tenets have been discredited. There
is growing public disenchantment with the current model.
What perhaps is missing is a coherent,
ready-made and widely endorsed alternative that would command sufficient
public support. But this was also true of the 1930s and 1970s. The
elements of a new model were being developed and debated in those
decades but did not take a clear shape until many years later. Today,
the precise shape of an alternative and progressive economic and social
settlement is equally uncertain.
Nevertheless, the central elements of an alternative political economy are likely to include:
- A new democratic settlement aimed at spreading power as a counter to
big business – to the workforce, town halls, consumers and small
business. Taming runaway and unaccountable corporate power and
rebuilding collective bargaining are essential to achieving greater
equality.
- The dispersal of capital ownership more widely through encouraging
alternative business models based around partnerships, co-operatives,
social and mutual enterprise and the introduction of collectivised
social wealth funds, drawing on other examples such as the Alaskan sovereign wealth fund and the Swedish wage earner fund.
- Accepting the centrality of the ‘distribution question` in economic
and social policy making, with policies that raise the share of output
going to labour, which raise the earnings floor and lower its ceiling,
and which ensure that the proceeds of growth are more fairly shared.
- The remodeling of the financial services industry with new measures
to check rent-seeking activity and steer more resources into wealth
creation through greater financial support for investment and the
establishment of a State Investment Bank.
- A war on tax avoidance and the building of a more progressive tax
system – through for example the greater taxation of unearned wealth,
buttressed by a greater emphasis on international co-operation for
dealing with tax avoidance.
Such a mix would represent a major
departure from the existing Anglo-Saxon model of capitalism and from New
Labour’s third way politics. So what are the chances of another key
turning point that would usher in a more progressive and pro-equality
model of capitalism? There are, perhaps, two key potential catalysts for
such a change.
Movements
such as Occupy London have helped to bring inequality onto the
political agenda but there is still a lack of concrete action.
The first is the intensity of political
pressure for a progressive alternative. As the American labour
journalist, Sam Pizzigati, has argued in his book The Rich Don’t Always Win the
evolution of a more equal and fairer society after the war depended on
the way ‘egalitarians had battled, decade after decade, to place and
keep before us a compelling vision of a more equal – and better
– society’. Across large parts of the globe, the post-2008 crisis has
brought an upsurge in grass roots political protest in opposition to the
status quo and in support of a broadly social democratic and
egalitarian alternative.
In the UK, there have been high profile
citizens’ based campaigns against tax dodging companies, for the living
wage and in opposition to austerity measures. Students from 25 countries
are rebelling against the dominance of narrow free-market theories in
university economic courses. The US has seen a sustained wave of
co-ordinated industrial walkouts demanding a higher minimum wage.
Yet, while these protest movements have
pushed the inequality question up the political agenda, they have, to
date, been too piecemeal to trigger the unstoppable momentum for change
necessary to force a more significant rupture in political and economic
thinking. While some have dismissed such movements – the writer John
Gray, for example, claims they show ‘the impotence of opposition and the
absence of alternatives` – such protests are a sign that public
patience with the status quo is thinning and that we may be getting
closer to the political and social limits of inequality. If so,
governments are likely to face a much harder ride unless there is a more
even sharing of the economic pie.
Nevertheless, more, much more, is needed
to force the political hand of what one group of Belfast anti-poverty
campaigners has called ‘the big people`. For that reason, the most
significant catalyst for change is likely to come from the impact of
inequality on economic stability. There is now a growing body of
evidence that extreme inequality breeds fragility, weakens growth and
promotes instability. It was a central factor in driving the global
economy over the cliff in 2008 and has contributed to the depth and
longevity of the crisis.
Over the last three decades, the rise in
inequality has been driven in the main by the steady shift in economic
rewards away from labour and in favour of capital. The OECD has shown
that, from 1990 to 2009, the typical wage share across all 34 OECD
nations fell from 66.1 per cent to 61.7 per cent, resulting in a great
surge in corporate and private cash holdings and leading to what Guy
Ryder, the Director-General of the ILO, has called a ‘
dangerous gap between profits and people.’
According to market orthodoxy, this
shift from wages to profits should have led to faster growth and more
stable economies. Instead, it has created a number of highly damaging
distortions, fracturing demand, promoting debt-fuelled consumption and
raising economic risk. Static and falling real wages have cut
wage-financed consumption while booming profits have been associated
with a
catastrophic fall in investment.
The effect has been to make growth
increasingly dependent on artificial stimulants, from the mass printing
of money by central banks to the growth of personal debt. While these
provide a temporary economic boost, they eventually lead to
unsustainable hikes in property and business values and stock markets
and so to economic collapse.
Today’s model of capitalism is
dysfunctional. Because of the power of capital, too much economic
activity is geared to the extraction of existing rather than the
creation of new wealth with consequences that have been toxic for
consumers, the workforce, taxpayers and the wider economy. The
distinction between wealth creation and wealth diversion has long been
recognised. As Adam Smith warned in 1776, because of their love of quick
money, ‘the prodigals and projectors’ could lead the economy astray. In
the 1930s it was Keynes who called for the ‘euthanasia of the
rentier`. In a modern-day equivalent, the leading World Bank economist
Branko Milanovic has distinguished between
‘good’ and ‘bad’ inequality.
Despite these long acknowledged dangers,
the ‘distribution question` – of how the cake is divided – once central
to economic thinking, has been buried by the post-1979
counter-revolution in economic thinking. ‘Of the tendencies that are
harmful to sound economics, the most poisonous is to focus on questions
of distribution’, wrote Robert E Lucas, Nobel Prize winner and one of
the principal architects of the pro-market, self-regulating school, in
2003. Today, that question is creeping back onto the agenda, but too
slowly to have yet rebalanced the application of policy.
If we are to build a fairer and more
sustainable economic model, the distribution question needs to be
restored to the heart of economic management. Economies built around
poverty wages and huge corporate and private surpluses are
unsustainable. In that sense, restoring the balance between wages and
profits, and cutting the great income divide, is not just a matter of
social justice and proportionality it is an economic imperative. As long
as national economic cakes are divided so unevenly, economies will
continue to slide from crisis to crisis.
