"r > g" spells trouble

In a speech today, James Brokenshire the Minister of State for Immigration told an audience the following:

For too long, the benefits of immigration went to employers who wanted an easy supply of cheap labour, or to the wealthy metropolitan elite who wanted cheap tradesmen and services—but not to the ordinary, hard-working people of this country.

In saying this Brokenshire mirrored comments made earlier this week at a Prospect round table by Sir Stuart Wheeler the Treasurer of Ukip. In a discussion of the question “Has immigration been good for Britain?” Wheeler said:

We think we should not allow them in because we have a lot of unemployed people and our duty is more towards our own people than it is towards our own businesses.

It is instructive to note the similarity of those two statements. There is no doubt that the sentiment expressed has a powerful appeal. It speaks to an intuitive sense that when immigrants arrive in a host country, the employment they gain, and the pay they earn must inevitably come at the expense of the indigenous population. It is a popular perception, and one that has served well the politicians who in the past have sought to deploy it.

But it is incorrect, and founded on one of the most significant fallacies in economic discourse: the assumption that an economy is a zero sum system. This is incorrect. Economies are not zero sum—one person’s pay and labour do not displace those of another. If immigrants come into an economy, the result is not a corresponding rise in unemployment. The result is a larger economy.

There is a grain of insight to be gleaned from Brokenshire’s comments, and it resides in the groups identified in his analysis—on the one hand a “wealthy metropolitan elite” and on the other, “ordinary, hard-working people.” These two groups certainly exist. The divide between them is substantial and shows no sign of closing—and at this point, the economic analysis heads into territory far removed from anything that a Conservative minister might sanction.

The reason for the bifurcation of Britain’s economic classes into a metropolitan elite and the rest is simply that the incomes of the former have tended to rise in the last 30 years, while the incomes of the latter have not—in fact, median wage growth in Britain has been on a downward trajectory since the early 1980s. This predates the opening of British borders to immigration from the EU by a substantial distance.

The downward trend in wage growth is less to do with immigrants, and more to do with the last interest rate cycle, which started in the early 1980s and persisted for 30 years, during which time rates remained low, credit was abundant and asset prices rose rapidly. Central Bankers, suffering from a certain hubris, termed this period “The Great Moderation”—a term that, in the light of the events of 2008, looks absurd. The chief beneficiary of this period was the asset-owning class—or “wealthy metropolitan elite”—a cohort which, as it became richer, pulled away from “ordinary, hard-working people”, in doing so creating the split that Brokenshire identifies in his comments.

Thomas Piketty, whose book Capital in the 21^st Century is about to be everywhere, has delivered a coruscating analysis of precisely this issue, which he sees as being the defining problem of modern capitalism. His principal insight is that the ratio of privately-owned capital to income—a nation’s capital-income ratio—has varied substantially over time. When it is low, inequality is low, when it is high, so inequality rises. In western Europe in the late nineteenth century, the “total amount of private wealth hovered around six or seven years of national income.” The shocks of the early 20^th century reduced the ratio to between two and three, meaning that the amount of privately-owned capital was low relative to income; but from 1950, the ratio began to rise steadily, such that now it stands at around six.

Private capital earns a financial return—and Piketty finds that in cases when r > g, that is, when the return on capital is greater than the rate of growth, then “the risk of divergence in the distribution of wealth is very high. This, says Picketty, “sums up the overall logic of my conclusions."

This is the process that has led to the unevenness with which British wealth is distributed, and that has divided the urban elite from“the ordinary, hard-working people” of Brokenshire’s speech. Simply put, over the last three decades people who have owned valuable things have seen the value of those things increase—they have benefitted and the rest have not. Resultantly, inequality has increased and some people have been left behind. That is the problem. Immigration plays no part in that story.