There was a row last week between the “rock star economist” Thomas Piketty and Chris Giles of the Financial Times over statistics on inequalities in wealth — in this country in particular. When the dust settled, the upshot seemed to be that in Britain wealth inequality probably did inch up between 1980 and 2010, but not by as much as Piketty had claimed, though it depends on which data sets you trust.
Well, knock me down with a feather. You mean to say that during three decades when the government encouraged asset bubbles in house prices; gave tax breaks to pensions; lightly taxed wealthy non-doms; poured money into farm subsidies; and severely restricted the supply of land for housing, pushing up the premium earned by planning permission for development, the wealthy owners of capital saw their relative wealth increase slightly? Well, I’ll be damned.
My point is that a good part of any increase in wealth concentration since 1980 has been driven by government policy, which has systematically redirected earning opportunities to the rich rather than the poor. Look at our energy policy: thanks to the allegedly left-wing energy secretaries Ed Miliband and Ed Davey, we pay double or treble the going rate for land-hungry projects such as wind, wood and solar energy, all of which results in rewards going to the owners of property. Try getting through a dinner party in the shires these days without somebody waxing lyrical about the subsidised “payback” on wood-chip boilers or solar panels. The upper class has a welfare dependency problem as well as the underclass.
Yet even Piketty’s figures show that British wealth inequality is only back to where it was in the mid-1960s, when the top 10 per cent of people held about 70 per cent of the wealth. The figure dipped to about 60 per cent in 1980, having peaked at 90 per cent in 1910. So it is not true that we are back to Edwardian levels of wealth inequality. One reason for this modest change is that government has at the same time systematically redistributed money from the rich to the poor by taxing the rich at higher rates and by handing benefits to the poor.
And in doing so it has reduced income inequality. Yes, the widespread assumption that income inequality has also been shooting upwards is plain wrong: in this country, in terms of disposable income, the gap between the well paid and the poorly paid has been going down. Top salaries have certainly rocketed, but so has the turnover of people getting them — as has the turnover of people in the lowest income bracket. And once you take into account tax and benefits, the Office for National Statistics confirms that the Gini coefficient (an income distribution index) of inequality in this country is actually lower now than it was 25 years ago (though it’s higher than it was 35 years ago in the confiscatory tax regime of the 1970s).
I was startled when I learnt this fact, which seems to be missing from the entire debate, the assumption of which is that income inequality is getting worse right now. It is not. In chapter and verse, the recent ONS bulletin entitled The Effects of Taxes and Benefits on Household Income, 2011/12 finds that the highest-earning 20 per cent of British households earned 14 times as much as the lowest earning 20 per cent before tax and benefits — but just four times as much after tax and benefits. These measures cut the average income of the top 20 per cent from £78,300 to £57,300, while they raise the average income of the bottom 20 per cent from £5,400 to £15,800. Thus, even though government may enact policies that help the wealthy to increase their wealth, it does at least redress the balance through the tax system. As it should.
Remember too that global inequality is not going up: it is plunging downwards. Nobody knows quite how fast — there’s a similar row about the numbers of the Spanish economist Xavier Sala-i-Martín on this question — but every economist I speak to agrees that global income inequality is falling, even before you take into account tax and benefits.
It has to be. For a quarter of a century people in poor countries have been getting rich faster than people in rich countries have been getting richer. In the past five years that discrepancy has exploded, thanks to recession in rich countries and continuing rapid growth in poor ones. Mozambique’s economy is 60 per cent larger than it was in 2007; Italy’s is 6 per cent smaller. Isn’t this redistribution of growth from the rich world to the poor world the big story about inequality? In countries such as Mozambique, inequality means some people going without adequate food, shelter, running water or medicine.
It is worth remembering that nowhere in the world, with the possible exception of North Korea and Somalia, are the poor getting poorer. The percentage of the world’s population living on $2 a day (corrected for inflation) has halved since 1990 — a truly unprecedented change (see here). Any increase in wealth inequality or pre-tax income inequality in Britain or America is caused by the rich getting disproportionately richer, not by the poor getting poorer. This is the point made forcefullyby the economist-philosopher Deirdre McCloskey in Saturday’s Times, and in her trilogy of books on the bourgeois virtues. The gaps that are opening up in the West are mostly in luxuries, not in necessities.
Yet I have to admit that arguments such as these fall mostly on deaf ears. People genuinely seem to mind about the unfairness of unequal income as much as or more than they mind about poverty. They think in terms of relative wealth, not absolute, which is why inequality reduction is an end in itself. As Margaret Thatcher said in response to Simon Hughes in one of her last appearances as prime minister: “He would rather that the poor were poorer, provided that the rich were less rich.”
Neither Britain nor the world is especially unequal right now compared with most of the past two centuries. If you want to reduce wealth inequality in Britain, then the quickest way is to liberalise the planning laws to bring down house prices. If you want to make poor people less poor, then raise the growth rate of the economy and keep on redistributing.