Inequality is back in the news but confusion too often knocks the discussion off trackby Mike Brewer / June 22, 2019 / Leave a comment
Inequality is back in the news. Jeremy Corbyn recently announced that pursuing social justice for all is more important than social mobility. Nobel-prize winner Angus Deaton is helping the Nuffield Foundation and the Institute for Fiscal Studies run a multi-year study into high inequality in the UK.
But there is lots of confusion. Philip Hammond and Theresa May have said that inequality in the UK is falling. Respected economics journalists and commentators—Chris Giles, Ed Conway, Fraser Nelson, James Kirkup—argue that it’s wrong to talk about an inequality crisis. So just where do we stand with inequality today? My view is that inequality in the UK is too high, and it does not need to be this way. Here are five reasons why we should put the issue at the heart of our social and economic agenda.
We should worry about whether inequality is high or low, not rising or falling
Income inequality shot up in the 1980s, as top pay exploded, taxes were slashed and benefits failed to keep pace with earnings. But since then, inequality has hardly changed. This is the key evidence supporting the idea that there is no inequality crisis. But whether inequality is rising or falling is much less important than whether the level is damaging our society and economy. In my new book, I summarise the evidence that high levels make us less healthy and cause us to die younger, be more violent and less trusting, be more anxious and less happy. Respected organisations like the International Monetary Fund think that high levels of inequality hurt economic performance, and economists blame inequality for sowing the seeds for the financial crash of 2008. It can be hard to prove cause and effect here, but if the research is right, then we will be suffering a major hangover from our 30 years of high inequality for decades to come.
The very rich are close to taking a record-high share of the UK economy
The most commonly used estimate of income inequality understates the incomes of the very rich. The Office for National Statistics recently tried a new correction to that, but we can learn more by going to the underlying data source: information provided to the tax authorities. That tells us that the share of economy-wide income going to the very rich rose through the 1980s, like the normal measure of inequality, but then continued to rise through the 1990s and the 2000s right until the financial crisis. This rise in top income shares is staggering: in 2009, the richest 0.1 per cent took a larger share of national income than did the richest 1 per cent in 1979. Yes, the very rich have had a tough few years after the financial crisis, but the latest data—for 2015/16—shows the richest 0.1 per cent (about 53,000 adults, all earning over £500,000 a year) in the UK taking their second highest share of national income ever.
The UK is unequal compared with other developed economies
It’s true that we are not alone in seeing inequality rise: if the UK could return to the level of inequality it had in the mid-1970s, it would be one of the most equal countries now. But the UK is more unequal than most other comparable, developed economies. What is confusing is that the main source of international data, the OECD, compares inequality not just across OECD member countries, but also in other, less developed countries. But the OECD chart shows us that, out of the G7 countries, only the US is more unequal than the UK. Across the EU, only Lithuania is more unequal. Yes, other countries have higher levels of inequality, but these are South Africa, China, India, Costa Rica, Brazil, Mexico, Chile, Turkey and Russia. “More equal than the BRICs” is not something to crow about.
Wealth is extremely unequally distributed, and growing in importance
Wealth is distributed far less equally than income. The wealthiest 1 per cent own 12 per cent of all wealth in the UK, according to a study which probably underestimates the true value; the figure is 20 per cent, if you prefer to use information from estates. I admit this is not as bad as it was a century ago: in 1910, the richest 1 per cent may have owned 70 per cent of our nation’s wealth. But that’s barely relevant: since when did we assess social progress taking Downton Abbey as our benchmark? The pertinent point is that wealth has been growing steadily more unequal since the 1970s.
Even more concerning, as Thomas Piketty warned us, is that the amount of wealth held by households has also been growing. Total household wealth was two to three times national income in the 1970s, but it’s now over six times as large. That means that it is becoming ever harder to climb up the wealth ladder simply by saving out of your income: the gap between the rungs is getting larger each year. Over a third of wealth is in housing, but we can’t rely on inheritances to make us more equal: amongst non-home-owning 20–35 year olds, nearly half (46 per cent) have parents who do not own property either, but 83 per cent of millennial home-owners have a parent who also owns their own home.
Inequality worsens social mobility and entrenches divides
We now know a lot more than we did about how inequalities lead to more inequalities. Piketty warned us what could happen if high incomes turn into wealth which turns into inherited riches. Some have argued that the very well-off have too much influence over policy and politicians, and that they rig the system to prevent others from joining them. Whatever the truth of that, the hard numbers are worth paying attention to. Internationally, it is not the unequal United States that is the land of opportunity, where pluck, hard work and grit will give you your just rewards; quite the opposite—it’s the more equal, socially democratic Sweden.
What about in the UK? Stephen Machin, Jo Blanden and friends pointed out that those born in the 1950s were more socially mobile than those born in the 1970s, who entered the labour market at the UK’s peak of inequality. It seems obvious when you write it down, but new research has shown that the more there is at stake—like in highly unequal societies—then the more parents try to help their children get on in life, and it is so much easier for rich parents to provide that help than it is for those with few resources.
Economic inequalities dramatically tilt the playing field faced by the next generation. What might have begun as a deserved difference in outcomes so easily turns into undeserved differences and entrenched divides. Corbyn is absolutely right to focus on social justice over social mobility: we can’t solve our social mobility problem without addressing the huge inequalities in resources available to families. Every year of high inequality is another year that strains our sense of fairness, and another year where equality of opportunity becomes harder to achieve.
Mike Brewer is a professor of economics at the University of Essex. His new book, “What Do We Know and What Should We Do About Inequality?”, is out now