equality

The changing face of the equality debate

Like climate change, inequality is a global, systemic problem. Both are long-term and because they unfold in such slow motion, are easily pushed off the agenda by more obviously urgent things. And like climate science, our understanding of inequality is moving fast.

It’s been an interesting debate to track over the past few years on the blog, and there have been several key moments. One was the book The Spirit Level, which described correlations between inequality and a host of social problems, from alcohol abuse to depression to teenage pregnancy or obesity. It caused its fair share of controversy, but it started all kinds of discussion. It turned out that inequality couldn’t be safely ignored, as the New Labour project had assumed. There are consequences that affect us all.

The financial crisis also took us a step forward in our understanding. While the economy was growing, the realities of income disparity didn’t seem too pressing. Superficially at least, the trickledown effect appeared to be working. Once the economy stalled and austerity became the order of the day, inequality was suddenly thrown into relief. The richest in society bounced back far more quickly from the crisis, if they were affected at all, while wages stagnated and real wealth declined for most of us. Joseph Stiglitz coined the phrase that caught the imagination, an economy run by and for the richest 1%.

By then it was apparent that inequality could be a serious risk to political stability, as protest movements sprung up around the world. In places like Egypt, where a decade of booming economic growth ended with more people below the poverty line than at the start, the turmoil resulted in full blown revolution. ‘Severe income disparity’ began to feature prominently in The World Economic Forum’s annual survey of global risk.

Inequality was now squarely back on the agenda and attracting some serious attention. The IMF studied it, looking at the links between inequality and growth. Extreme inequality undermines growth, they found – and anything that threatens growth gets attention in a growth economy. A long-standing objection was swept away by an unlikely source. IMF researchers also identified inequality as a major factor in the financial crisis.

Over at the World Bank, analysts were studying inequality in the context of development and finding that inequality slows poverty reduction. Countries with lower levels of inequality were able to lift more people out of poverty faster. The prevailing wisdom that rising inequality was an inevitable aspect of development started to look rather shaky.

This year came Thomas Piketty’s surprise bestseller Capital in the 21st Century, which argues that wealth in a free market economy will inevitably concentrate in the hands of a few, unless government intervention can keep it in check. Again, the book is not without its critics, but if offered important new evidence.

It’s now generally accepted that a) inequality is systemic, b) it has consequences, and c) it can be addressed. Like climate change, the big debate now is about what to do about it.

There’s some positive news on that front. As that evidence has mounted, the number of people discussing inequality has broadened. Importantly, it is no longer a concern heard exclusively from the traditional left side of the political divide. That has opened up new ways to respond to the problem, finally putting to bed the Thatcherite notion that acting on inequality would make everyone poorer.

Proof of that comes in the form of the Confederation of British Industry, not exactly a champion of socialist thinking, whose conference this week is all about sharing the benefits of growth. Their accompanying report, Better off Britain, is a case study in the shifting debate around inequality. It acknowledges the problem, but notes that “traditional ‘answers’ to the question of inequality are not likely to be effective… Instead the goal must be creating a society where growth has the potential to benefit all through a concerted effort to create more opportunities for people to increase their earnings and by growing the economy.”

Obviously the CBI are as wedded to the growth imperative as ever. They’re also trying to get ahead of a Labour government that wants to raise the minimum wage. But my point is not to highlight their solutions so much as their presence in the debate. They recognise that inequality needs action, and that just redistributing wealth is not enough by itself – we need to create an inclusive economy that doesn’t leave people behind in the first place. On that front, they’re entirely right.

As Oxfam’s Even it Up campaign underscored last week, the world remains dramatically unequal and many countries are getting worse. But we know far more than we did a decade ago. We know the consequences of inequality, and we know that we can do something about it. We have actually come a long way in the last decade.

What remains is the fight for change, overcoming the vested interests that protect an economy that serves the richest first. That will not be easy, but today, if you still believe extreme inequality is acceptable, unavoidable and necessary, you are in a dwindling minority.

30 comments

  1. I know you don’t like it when I point out you are in a tiny minority but I don’t mind if this is aimed at me.

    It is clear that there is public disquiet about inequality and there is probably a shifting of the Overton window as a result. But even if inequality is a problem the supposed solutions often proposed either would’t work or would conflict with other public desires, such as having a growing standard of living.

    1. Yes, this is a follow on to our previous discussion. If I’m going to write longer explanations of my views, it seems a shame to bury them in the comments on previous posts.

      I agree with you that many of the proposed solutions would make things worse. That’s why I’m interested in new voices on the topic.

      I have no problem with being in a minority, by the way. I’m aware of it on a daily basis.

  2. DevonChap says supposed solutions wouldn’t work. How does he know? They have never been tried. As to public desires, the public is hoodwinked by the money makers into believing they would rather have the latest Pod or Pad than a health service. Does pandering to desires to own a car capable of travelling at three times the legal speed limit really make economic sense?

    1. Which solutions haven’t been tried? We know taxes on wealth and capital reduce wealth all round and high minimum wages cost jobs.

  3. If you do not understand the cause of a problem you cannot solve it. If you misunderstand the cause of a problem you will not solve it.

    At one level inequality is due to rent-seeking. There are those who receive rent, and there are the rest, who must work for wages and pay rent. The former are they “1%.” Most of the 99% are wannabee rent-seekers and the 1% control what people think and how they think. So until that changes, DevonChap is right – the problem is not soluble.

    There are technical solutions in existence, in theory, that definitely would work but they rarely even see the light of day.

    1. Land value taxation is exactly the sort of solution I’m talking about – something that’s not the usual redistributive socialist sticking plaster, but that gets to the heart of the matter.

        1. The Land Value Tax is something that might be useful but only it is is equally applied (no excluding farm land or lower priced housing). What it would do is encourage development. I don’t think it would do much to decrease inequality since land ownership is not the major cause of it.

          1. There are those who own land and receive rent, and there are the rest, who pay rent and work for wages – this includes most capitalists and entrepreneurs. Land ownership is usually wrapped up in securities, equities, etc. If it is not the major cause of inequality, then what is?

          2. For most businesses, coffee shops excepted, rent of land and buildings isn’t that big a part of their expenses. If the land owners had such monopoly they would drive that up.

            Globalization, capital provision and automation are driving much inequality but they are providing far greater advantages. The rich also have far better habits (getting married, valuing education) than the poor in the West.

            Now in the UK we have put lots of wealth into domestic housing but the problem here is lack of planning consent. An LVT might push more planning (or not giving misaligned incentives). But it isn’t going to fix inequality. Obessing over land is very 19th century.

          3. There is a huge variation in rental values across the UK, for all classes of property. That difference is land value. The property sector is huge and at least half of that value is land value. In prime locations it is over 80% of total value. I am surprised that you are under the impression that rent is not a big part of their expenses. Given the amount of vacant property, it is obviously more than a lot of business can afford.

            Land values are orders of magnitude higher than they were in the nineteenth century. Every shrewd investor obsesses over land -;) How did Charles Clore make his millions?

          4. While land values are higher the wide economy is also much higher meaning land has declined. According to the ONS Wealth and Assets survey property is much smaller than pension wealth.

            While property is part of a balanced portfolio you would be ill advised to make it the main part.

            If you go with Picketty then it is investment wealth that has caused the growth in inequality. Property is not the largest part of that.

          5. Pension wealth also consists in large part of land wealth. If you look at the underlying assets, the only thing of lasting value ie capable of yielding a consistent revenue stream over a long period, is land.

            Physical non-land capital ie buildings, machinery, vehicles, ships, etc, is a wasting asset which wears out or becomes obsolute within, at most, a couple of decades. Consequently it cannot provide the long term revenue stream needed to sustain a pension. The same applies to intellectual property rights. A substantial proportion of the revenue stream needs to be re-invested if the yield is to be sustained.

            It is necessary to look at the physical reality that lies behind assets. If the ONS has not done this, then it is not doing its job properly.

          6. If the only asset that provides long term revenue is land, which they aren’t making any more, then how does the economy grow? Population growth doesn’t account for the many fold increase in the economy.

            Expanding human knowledge and innovation are the key. Knowledge doesn’t waste. Wasting physical assets aren’t such a problem when they would be replaced by better stuff anyway.

          7. Increased produtivity eg through innovation is what leads to growth. Most of the value of increased production goes to rent of land. This follows logically from Ricardos Law of Rent. The return to physical capital tends to a fixed rate of yield because if yields are high then more capital is produced and that drives the rate down again. Wages settle at the least that people are willing to accept. Tax takes a chunk and everything over consists of rent of land and is claimed by whoever owns land. It cannot go anywhere else.

            This was realised early on in the industrial revolution when the introduction of steam power increased productivity by at least an order of magnitude. Wages dropped, the return to capital remained around 5% and all the rest led to sharply increased land values in industrial and commercial areas, and in residential areas in the cities.

            Wasting physical assets are a big problem to those who own them. The nice shiny machine that is worth scrap value in a few years has to be worked hard to get the investment value out of it. So pension funds invest in land-based assets which do not lose their value. In the circumstances they would be stupid to invest in anything else, but investment in land adds nothing to production because it was there and available for use all the time. The pension funds are just purchasing a reliable revenue stream.

          8. That sounds good but I haven’t seen figures that back that up. A theory that doesn’t match reality is just a theory. Dissing the ONS doesn’t help.

            If this were true rent, especially commercial and industrial land, would rise at a faster rate than the wider economy. I don’t think it has. If you can show me evidence to the contrary I’d be interested.

          9. Interesting discussion. I think the simplest place to see how land prices affect inequality is in the housing market. You could have two neighbours moving into the same London street in 2000, one renting and one buying. By 2010 the one who bought the house will have made a quarter of a million, untaxed and without earning it.

            The renter will have gained nothing, but will have higher rent to pay. If they can’t afford it, they may have to turn to housing benefit. In which case the government has now stepped in to subsidise rent, a transfer of wealth from taxpayers to landlords.

            This compounds across generations and perpetuates inequality, as parents help their children with deposits on houses of their own.

          10. A couple of points to bear in mind. Firstly the buyer did take a risk in buying a house that could fall in value.

            Secondly rising house prices don’t raise rents. They are both caused by rising demand for housing. So taxing property gains will probably not lower rents.

          11. There’s no way a return of the kind we’re talking about is fair compensation for the risk. And that argument only really applies if we’re talking about buying houses as as investment, rather than a home to live in.

            Agreed, rent doesn’t track rising house prices – mercifully. Rents have been rising faster than wages in recent years though, and it’s likely that the housing market is one of several factors involved. (High house prices deter buyers on lower incomes, who then have to rent instead. That pushes up demand for rental properties, and since we aren’t building new homes fast enough, prices rise).

          12. Buying a house to live in involves risk, quite big risks. I owned a house in 1992 and well remember 10% interest rates and my house lost 15% of its value in the subsequent crash, wiping out my equity if I’d had to sell then. Fortunately the market recovered and then some but it isn’t a one way bet.

          13. Land prices are subject to cycles due to the interaction of the land market with the credit system. So are rents but to nowhere near the same extent. The purchase of a land title is the purchase of the anticipated rental income stream. So there is a speculative component in the price from that cause. There is a further speculative component when prices are in the rising phase of the cycle, as purchasers imagine they are going to get wealthier as prices will continue to rise. This gives rise to a positive feedback effect and a wave of panic buying develops, as happened around 1972, 1988 and 2005. Eventually this leads to an overshoot when debts can no longer be serviced, the system is at the point of instability and something triggers a collapse. These happened in 1974, 1992 and 2010. Significantly, these were at 18 year intervals, a pattern that can be traced throughout the nineteenth century.

            If you purchase at the top of a cycle you will be left nursing a loss when the inevitable crash comes. Timing is important.

            There is no overall shortage of supply. There is a maldistribution across the UK and indeed most countries. It is not altogether a natural phenomenon. The effects of geographical disadvantage are amplified by the tax system.

          14. Commercial and residential rents have risen faster than inflation for the past 50 years. There is lots of information out there eg on the RICS web site for which you have to register. There is this, for instance
            http://www.telegraph.co.uk/finance/personalfinance/investing/10561689/Commercial-property-will-offer-double-digit-returns-tips-for-2014.html
            and this is also putting the squeeze on entrepreneurs.
            http://www.beingaleaseholder.co.uk/blog/average-length-of-commercial-lease-reducing

          15. You are getting muddled. Inequality is not causing high house prices or rents, it is a shortage of supply that would be a problem in even the most equal of countries. High property prices are creating inequality but not caused by it.

          16. Henry, did you read the Darlingtons’ post? It argues against your point that the rentier has the advantage. Leases are getting shorter because the occupiers want more flexibility and given the market conditions, can demand it. The entrepreneurs it is putting a squeeze on are those who’s business is owning and renting out property. Obviously this is part of the business cycle but doesn’t prove your point.

          17. Short leases will eventually put the squeeze on entrepreneurs as the cycle moves into the steady growth phase. In poor locations the business rate is part of the problem at the moment – it should be on land values only.

            The trend that counts is the long-term one stretching across at least three cycles.

          18. Well, short leases seems to be what the retailers want at the moment. I’d expect them to have the best idea of what is in their interest.

            Also you may noticed the internet is changing the economics of high street retail so we don’t know how that will work out

          19. I will agree that the property market is turning in the interests of commercial tenants when there is evidence that upwards-only rent revision clauses are on the way out.

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