There are two standard views of the relationship between poverty and inequality. The first is that there isn’t one: how the poor fare has nothing to do with how much better off the rich are. What determines their well-being is growth, not distribution. If the pie is getting bigger, what matters isn’t the way it’s divided up, but that everyone will have more to eat. Measures designed to reduce inequality, like higher taxes or more generous benefits, will slow growth and hurt the poor as much as, if not more than, everyone else. On this view, there’s an unavoidable trade-off between efficiency and equality: in a modern economy, you can’t have both at once. For the last few decades, economists and politicians have prioritised efficiency. Some have even argued that inequality is good for the poor, because the promise of great wealth encourages innovation and hard work, thus stimulating the growth that helps everyone. These arguments no longer inspire as much confidence as they used to – not least because there’s little evidence for them. Britain’s national income has doubled over the last three decades, but so have key poverty measurements. In Breadline Britain Stewart Lansley and Joanna Mack record that more than twice as many people today report skipping meals as did in the early 1980s, and that twice as many households – 33 per cent – don’t meet minimum living standards. Since the 1990s, the number of households without adequate heating, or enough bedrooms, has tripled. Fewer can pay for healthy food, rid their homes of damp, or put away regular savings.
Breadline Britain makes a strong case for the second standard view of the relationship between poverty and inequality: that poverty is, first and foremost, a problem of distribution. As the 1 per cent take a larger share of national income, less is available for the rest. As they get richer, and acquire more political influence, they become less willing to pay for the public goods needed to raise living conditions at the bottom. According to Lansley and Mack, poverty shouldn’t be thought of as an absolute measure, based on a fixed and timeless understanding of the minimum levels of consumption required to survive. What people need to participate in society, and to live without precariousness, changes over time in accordance with broader social and economic transformations. Owning goods today that the poor could only dream of in the past – like a TV or a fridge – doesn’t necessarily mean that you don’t live in poverty. As levels of income change across society, so too should measures of poverty.
Opponents of the welfare state take the first view, claiming that nothing less than starvation-level hunger should qualify as a marker of extreme poverty. And since starvation has been more or less eradicated in the West, they argue that what remains today is just inequality, which is much less of a problem, so long as the poor are better off than they used to be. ‘However rich a society,’ as John Moore, secretary of state for social security under Thatcher, once put it, ‘it will drag the incubus of relative poverty with it up the income scale. The poverty lobby would in their definition find poverty in Paradise.’ As national income rises, the poor have no right to claim a larger share in it; since they’re obviously much better off than they were in the 19th century, we should be grateful for capitalism’s advances and focus our energies elsewhere. The lived experience of the poor is irrelevant.
By contrast, if you see poverty as a consequence of the imperfect distribution of national income, then it’s no coincidence that poverty has risen since the 1980s as inequality has skyrocketed. In 2005, the top 1 per cent took home 14.3 per cent of British national income, up from 7.1 per cent in 1970. In 1950, top executive pay was thirty times that of the average worker; in 2012, it was 170 times. The numbers are even worse in the US: in 2012, the top 1 per cent claimed over 22 per cent of national income, twice as much as in 1980. (The peak was 24 per cent in 1928.) Since the 1970s, by contrast, the real wages of most American workers have stayed put or, in some cases, actually fallen, and poverty has worsened. The US has the fourth highest rate of poverty among OECD countries, and one of the very worst rates of child poverty, over 30 per cent. After taxes and transfers (welfare, social security, subsidies), it’s also the second most unequal country. (Chile is first; Britain fifth.)
In the last few years, discussion of inequality has drifted away from the issue of poverty. There’s more interest in charting the effects of inequality on the performance of the economy as a whole, and the popular new line is that inequality doesn’t stimulate growth, it slows it down. In December, the OECD published a survey claiming that inequality had a ‘statistically significant’ negative impact on growth, and since the late 1980s had weakened it by as much as 10 per cent in countries including Mexico and New Zealand. Last April, the IMF issued a report stating that inequality, not redistribution, hurts growth; redistribution, it admitted, might even encourage growth, though it isn’t well understood why. One possible explanation is that more unequal societies tend to invest less in education, and therefore produce fewer skilled workers. Another is that the middle class spends less when its income stagnates. As a recent report by the International Labour Organisation put it, growth tends to be ‘wage-led’, not ‘profit-led’, in most major economies. Whether or not these studies prove that there is a link between higher inequality and lower growth, what they do show is that the old orthodoxy – that equality and growth are in zero sum competition – is false. When highly unequal societies get richer, their growth tends to be unstable. When their incomes shrivel, the middle and lower classes become dependent on cheap credit. A rise in top incomes, conversely, encourages the rich to chase profits through ever riskier investments; the high demand for credit fuels a speculative frenzy, causing the financial sector to balloon and dangerous bubbles to grow. The crisis of 2008 had its roots in three decades of rising inequality in the US.
It used to be assumed by many that high inequality couldn’t exist for more than a short time in a modern democracy. As the gap between the classes widened, voters would turn out en masse to demand higher taxes and greater redistribution. Politicians would have no choice but to respond, and the gap would shrink as a result. Democracy, like the market, was seen as a self-correcting system. This makes some sense as a description of politics in the mid-20th century, when unions were stronger, voter turnout was higher, and the general expectation was that the state would take responsibility for adjudicating class conflict. But by the end of the century, as markets were liberated across the West and economic ideology lurched rightwards, inequality no longer seemed a concern of the state, and politicians in the UK and US mostly stopped mentioning it. They promised equal opportunities and upward mobility, but most were relaxed about the prospect of a few getting filthy rich; talk of distribution was pushed to the margins.
This began to change after 2008, as the worst crisis since the Depression was followed by a recovery that has been almost exclusively to the benefit of the top 1 per cent. After years of neglect, distribution is a topic of discussion again, and not only as a question of social justice, but as a problem for the economy itself. ‘Relative equality is good for growth,’ Mark Carney, the governor of the Bank of England, stated last summer. Inequality has re-emerged as a factor in electoral politics too. A recent poll in the US claimed that two-thirds of the population was dissatisfied with the country’s distribution of wealth and income; in a UK poll the figure was 82 per cent. Ed Miliband focused on inequality in his bid for the party leadership in 2010, and the ‘cost of living crisis’ is at the centre of Labour’s election campaign. Obama has called inequality the ‘defining challenge of our time’. Even the new crop of Republican presidential hopefuls have joined the chorus, despite their party’s disdain for even the mildest of redistributive measures.
It’s not clear how seriously we should take any of this. Obama recently laid out a set of policies designed, in part, to tackle wealth inequality – including new taxes on capital gains and dividends and the closure of inheritance tax loopholes – but they have little chance of making it past a hostile Congress. In her early bid for the presidency, Hillary Clinton has promised a more ‘inclusive capitalism’ that would raise the incomes of the Democrats’ middle-class voting base but without indulging in what Larry Summers, a longtime Clinton adviser, has called the ‘politics of envy’. (Financial firms are among her largest donors.) Miliband’s proposals are the most comprehensive and coherent of the lot, calling for higher rates of income tax for top earners and a more generous minimum wage, as well as a set of ‘predistributive’ measures designed to bring up wages and expand housing and educational opportunities before taxes are collected and benefits given out. The Conservatives have so far refused to play along, focusing their re-election campaign on what they see as their greatest achievements – cutting the deficit and raising employment.
Whether there is the political will to deal with inequality is questionable. But in a technical sense, it is a relatively straightforward problem. Among economists and policy wonks, there is a debate, of course, about specific policies and their political feasibility. But few question that a more progressive combination of tax and transfer policies would go a long way towards fixing the problem. Income tax rates for high earners would have to be raised dramatically, to at least 50 per cent and even as high as 80 per cent. There would also need to be higher taxes on wealth – on inheritance, capital gains and dividends – and more systematic measures to close tax loopholes and curtail evasion. Raising the minimum wage would bring bottom incomes up. More generous unemployment benefits and other forms of social security establish a floor; subsidising education promotes upward mobility.
The most obvious way of increasing wages is to strengthen the bargaining power of labour. The decline in union membership in the US and the UK since the 1970s has demonstrably led to lower salaries: as the number of unionised workers in the private sector in the US fell from 34 per cent of men in 1973 to 8 per cent in 2007, wage inequality rose by over 40 per cent. In the UK, union membership has halved since 1980; in the private sector, only 14 per cent of workers were in a union in 2011. Reversing this trend would not only help labour, it would lower the rate of return on capital (not many economists agree with Piketty’s suggestion that its indefinite increase is a ‘fundamental law of capitalism’). Further measures would be needed to discourage the unfair advantages that large corporations can enjoy through, for example, government subsidies and monopoly power. One of the most important tasks would be to decrease the profitability of finance and to shrink its share of the overall economy. Since the 1970s, the growth of finance has been a powerful driver of increased inequality in both the UK and the US – as a proportion of national income, the City is actually much larger than Wall Street. As finance increases relative to the size of the economy as a whole, capital takes more and more of the national income from labour: according to one recent study by the sociologists Ken-Hou Lin and Donald Tomaskovic-Devey, financialisation in the US may have been responsible for more than half the fall in labour’s share of national income between 1970 and 2008. Exorbitant pay levels at the top further widen the gaps: today, nearly 14 per cent of the top 1 per cent in the US work in finance, and take home roughly 3 per cent of total national income.
Taken together, these reforms would amount to what Lansley and Mack call ‘a major departure from the existing Anglo-Saxon model of capitalism’. Taken alone, any one of them is unlikely to make enough of a difference. That’s why discussions of inequality that focus only on technical fixes don’t get very far: finding lasting solutions will require political transformations in the relationship between capital and labour, the role money plays in politics, and the duties of the state in governing national economic life. Yet as inequality becomes a mainstream issue again, politicians debate technical details while avoiding discussion of the political choices – deunionisation, for example, and financialisation – that have made the situation so bad. Piketty too has been charged with proposing a solution to inequality – a global tax on wealth – that seems divorced from practical politics. Not only is implementing it politically unfeasible, but there is no authority or institution to which demands for its implementation could be addressed. Piketty’s ‘useful utopian’ proposal could only ever be realised through the enlightenment of elites over the long term; democratic pressure is irrelevant.
Narrowly technical solutions to inequality overlook the forms of popular mobilisation that have, in the past, made possible muscular forms of redistribution. The widespread protests and labour militancy in the West between the end of the 19th century and the 1940s laid the intellectual and political foundations for the welfare state. Every successful step taken against the excesses of capitalism was the result of conflict (not just class conflict: mobilisation for total war also tended to have a powerful levelling effect), not of technocrats and politicians gradually discovering and implementing the right policies. Lansley and Mack advocate ‘pressure from below’ on the scale of the hunger marches of the 1930s. Others have cited the mass strikes and boycotts deployed by movements for the eight-hour day, unemployment insurance and the minimum wage at the turn of the 20th century. The competing view, which puts its faith in technical solutions imposed from above, has its own historical narrative, focused on the thirty or so years between the end of the Second World War and the early 1970s, when rapid growth came together with high employment and low inequality across the West. At that time Western states gave labour a prominent seat at the negotiating table, kept top income and wealth taxes high, and prioritised ‘productive’ economic activity, like manufacturing, over finance. The problems of economic and financial globalisation were kept in check by the multilateral rules and institutions of the Bretton Woods system. Serious crises were few; the welfare state was secure. Until the 1970s, this system enjoyed widespread democratic legitimacy.
Danny Dorling, an Oxford geographer and a leading public commentator on inequality, turns to a more unexpected historical analogy. By the end of the 16th century, the codpiece – once a sign of great prestige – had come to be seen as absurd and embarrassing. As soon as it went out of style, it all but disappeared. This is the way the rich should be made to feel about their wealth, Dorling writes: that it is less an object of social distinction than a mark of shame. What’s needed is a ‘slow revolution in attitudes to greed’ and a ‘gradual, almost imperceptible’ transformation in public attitudes towards money and the collective good. To help bring this about, Dorling calls for a Kulturkampf against the rich – a ‘non-violent war of attrition against concentrated wealth’. Since inequality is primarily a problem of avarice, the fight against it must be waged at the level of values. The rich lack ‘self-restraint’, Dorling writes, and it is ‘up to the rest of us to control these people – for their own good as well as ours’.
It isn’t clear how one joins Dorling’s cause – except perhaps by shaming the wealthy in public or admonishing them in private. Nor is it obvious what’s to be expected at the end of the ‘slow revolution’ Dorling calls for: he counsels patience in the face of a drawn-out cultural struggle, but seems unconvinced that his campaign will have any effect on mainstream policy-making. Inequality and the 1 Per Cent skates lightly over the politics and economics of the problem. It is instead a moral, even prophetic work: the ‘end is nigh because of greed,’ Dorling writes, ‘and all will not end peacefully’. He is not alone in adopting a minatory tone. It is now commonplace to hear that over the long run, rising inequality will fatally weaken democracy or lead, at the very least, to widespread social unrest. (If left unchecked, Piketty writes, its consequences will be ‘terrifying’.) Many are eager to point out that social breakdown has occurred throughout history with cyclical regularity when disparities in income and wealth have approached today’s levels. The question, long dormant, of capitalism’s finitude has re-emerged: ‘It is high time, in the light of decades of declining growth, rising inequality and increasing indebtedness,’ the German sociologist Wolfgang Streeck wrote last summer, ‘to think again about capitalism as a historical phenomenon, one that has not just a beginning, but also an end.’ Inequality has joined climate change on the list of apocalyptic problems we know how to fix but may not be able to.