The Inequality Problem

‘What​ do I see in our future today you ask? I see pitchforks, as in angry mobs with pitchforks, because while … plutocrats are living beyond the dreams of avarice, the other 99 per cent of our fellow citizens are falling farther and farther behind.’ Who said this? Jeremy Corbyn? Thomas Piketty? In fact it was Nick Hanauer, an American entrepreneur and multibillionaire, who in a TED talk in 2014 confessed to living a life that the rest of us ‘can’t even imagine’. Hanauer doesn’t believe he’s particularly talented or unusually hardworking; he doesn’t believe he has a great technical mind. His success, he says, is a ‘consequence of spectacular luck, of birth, of circumstance and of timing’. Just as his own extraordinary wealth can’t be explained by his unique talents, neither, he says, can rising inequality in the United States be justified on the grounds that it is a side effect of a broader economic success from which everyone benefits. As Henry Ford recognised, if you don’t pay ordinary workers decent wages, the economy will lack the demand to sustain economic growth.

Hanauer is in the vanguard of the ‘Fight for 15’, the campaign for a $15 minimum wage. Like Bill Gates and Warren Buffett, who have also issued loud warnings about inequality, he is heir to a long tradition of social concern among the wealthy in the US. They have reason to be worried. The last time inequality reached comparable levels was shortly before the Wall Street Crash. As Anthony Atkinson shows in Inequality: What Can Be Done?, inequality in the US fell for decades after the crash, before beginning to rise again in the 1970s.1 Since then the gap between the wealthy and the rest has grown steadily wider. The top 1 per cent now has nearly 20 per cent of total US personal income. In the 1980s, inequality in the UK went up even more sharply than in the US. Since then, overall UK inequality has been relatively stable but the income share of the top 1 per cent has increased significantly and now accounts for about 12 per cent of UK personal income. The important factors are rising inequality in wages, a decline in the share of the national income that wages represent as more money goes to corporate profits and dividends, and a reversal of redistribution from the rich to the poor.

The rise in inequality should not, Atkinson insists, be brushed aside as an inevitable effect of irresistible forces such as globalisation or developments in technology. It is driven by political choices. He puts forward 15 proposals on issues ranging from wages to overseas development. He puts a good deal of faith in the tax system as a means of reducing inequality but he acknowledges that it isn’t enough. Much of the evidence from around the world suggests that by the time you get to tax and benefits the battle has already been lost. In the US and the UK inequalities of market income (wages, income from self-employment, dividends etc) carry through to inequalities of income after tax and benefits. In practice, it’s hard to alter this through redistribution alone: the key is to change the way the rewards of economic success are distributed in the first place. The last Labour government succeeded in keeping inequality in check. But it didn’t reduce it. If you don’t change the nature of the economy itself, redistribution on its own will have you running up the down escalator.

Joseph Stiglitz, whose essays and articles of the last ten years – since just before the onset of the financial crisis – are gathered together in The Great Divide, is another writer who resists the argument that increased inequality is a corollary of economic success.2 In the US in 2010, the top 1 per cent accounted for an extraordinary 93 per cent of the growth in incomes; in this situation, he says, the ‘middle class is too weak to support the consumer spending that has historically driven our economic growth’. The consequence is that millions of people end up borrowing beyond their means, which makes the economy more volatile and vulnerable to shocks. ‘The fact is the economy in the years before the current crisis was fundamentally weak,’ Stiglitz writes, ‘with the bubble, and the unsustainable consumption to which it gave rise, acting as life support.’ He also rejects the received wisdom that greater trade flows will always increase general welfare: not, he says, when the removal of trade barriers is a euphemism for getting rid of decent regulation – all that will do is undermine wages and working conditions. His principal target, though, is corporate ‘rent-seeking’: profiteering in the financial sector and elsewhere which, far from contributing to economic growth, restricts it. He discusses many harmful practices, from loose regulation of the financial sector to corporate tax avoidance.

One of the strengths of Stiglitz’s analysis is that it goes beyond talk of Gini coefficients to address people’s everyday lives: the wages they earn, the debts they face and the opportunities their children will or won’t have. Robert Putnam’s Our Kids: The American Dream in Crisis is even more closely attentive to the changes that economic and social transformation have forced on families, schools and communities.3 Putnam presents a series of case studies of parents and their children, starting in Port Clinton, Ohio, the town where he grew up, then proceeding through middle America. He visits Bend, Oregon, which in the 1950s was a small logging town but by the 1990s had lost its mills. Bend has survived and indeed grown because its natural beauty and sunny climate have encouraged a construction and real-estate boom. It is now a town divided between those who are benefiting from the boom and those whom prosperity has passed by.

Putnam focuses on two young people, one from each side of the tracks. Andrew is the son of Patty and Earl, who run a construction business. He has security and access to resources; he has made it to college, and can plan his future with confidence. Kayla is the son of Joe and Darleen, who met as ‘low-wage refugees’ at Pizza Hut. Kayla’s childhood was marked by economic hardship; her parents broke up, and she now lives with her boyfriend and sick father, trying to deal with his illness and a fear of ‘everything kind of falling apart’. Putnam supplies a series of ‘scissors graphs’ comparing the socioeconomic experiences over the last few decades of the children of parents who left education at 18 or earlier with those of children who go on to get a college degree. Whichever measure you choose – family breakdown, amount of time spent with children, the availability of informal mentoring networks – the pattern is the same: thirty years ago, the two groups were close together; since then, they have steadily grown further apart. Putnam doesn’t dismiss the cultural shifts that might have contributed to these trends, but he insists that a significant part of the blame lies at the door of economic policy: ‘Poverty produces family instability, and family instability in turn produces poverty.’

My experience as a politician fighting on these and related issues – both in areas where I succeeded in making the case and those where I didn’t – taught me several things. First, the terms of the case against inequality have changed. I have always believed that inequality divides people, deprives many of the chance to succeed and makes us all worse off. But now there is good reason to believe that inequality isn’t just unfair but that it actually inhibits economic growth. ‘Widening income inequality is the defining challenge of our time,’ the IMF announced in a report last year: ‘We find an inverse relationship between the income share accruing to the rich (top 20 per cent) and economic growth … the benefits do not trickle down.’ Last May, the OECD published a study entitled In It Together: Why Less Inequality Benefits All. All this makes it possible for us to talk about equality not only in terms of fairness, but also as the means to prosperity. The UK is deeply unequal and has an unproductive economy when compared to its major competitors. There are good grounds for thinking the two facts are connected: a low-wage economy, which doesn’t invest properly in its workforce, is an unproductive economy. The mechanism that links low growth to inequality is still debated: some say that low wages for the majority cause low demand and low growth; others say that the social exclusion of a large segment of society has a depressive effect. But what is clear is that inequality must be tackled not just because it is important to distribute resources fairly but also in order to secure higher growth, from which everyone can benefit.

Second, it’s too common to hear the mid-20th century talked about as if it were a ‘golden age’. ‘I hadn’t realised,’ Stiglitz writes, ‘when I was growing up in Gary, Indiana, an industrial town on the southern shore of Lake Michigan plagued by discrimination, poverty and bouts of high unemployment, that I was living in the golden era of capitalism.’ It’s true there was greater income equality at the time – but what about gender equality, gay rights and civil rights? It would be wrong, too, to romanticise the working conditions of the period. The wish to return to an imagined 1950s is partly driven by the rapid rate of change in present-day working conditions, including the increase in self-employment based on new technology – what has been called the ‘Uber economy’. According to a recent study by the Freelancers Union in the US, 53 million Americans are now self-employed, including 38 per cent of millennials. In the UK, rates of self-employment are soon likely to overtake public sector employment. For some, this could mean greater control and autonomy. But for others it brings the prospect of greater inequality and insecurity, especially where self-employment is another name for casualised labour. The imperative must be to shape an agenda adequate to this extraordinary wave of change, championing the needs of this new workforce and setting out a fair division of risk between employer, individual and government. Further along the road, we’re told, we will enter a ‘second machine age’, in which jobs will be lost to automation in ever larger numbers, further widening the income gap.4 On the other hand, automation and the increase in productivity to which it leads create the opportunity to take unpleasant work out of human hands and, in the long term, to reduce working hours from their current very high levels. Some Swedish companies are already experimenting with a six-hour working day. This may be a long way off in the UK, but what we need to do is clear: avert the possibility of greater inequality that technological revolution carries with it, and instead share out the benefits of the higher productivity it will bring.

Third, tackling inequality demands that we act on all fronts. When I was the leader of the Labour Party, I said that we needed to talk not just about redistribution but also about ‘predistribution’. The word is ugly, but the idea was right. You can only do so much with tax and transfers: the more wildly imbalanced the economy and earnings, the harder it is, especially in a globalised economy, to do anything about inequality. And the more unbalanced the initial distribution of income, the harder it will be to win political support for progressive taxation, given the strength of the forces opposed to change. The living wage and the introduction of proper rules on executive pay are at least as important as rates of income tax. We need, too, a much more open discussion about the top 1 per cent. We should acknowledge the contribution they make as well as the burden they place on everyone else. The entrepreneurs, inventors and software designers who reap big rewards often make a big contribution to the creation and sustaining of jobs, but what balance should be struck between how much they are rewarded – and how much more than others in their companies – and how much they are taxed? Until quite recently, people would ask why it mattered that those at the top were doing so well, as long as everyone else was prospering too. But it can’t any longer be denied that the scale of the rewards reaped by the 1 per cent has the effect of denying others. The scale of the effect is, of course, particularly visible in the London housing market, with wealthy buyers, many of them from outside the UK, pushing up prices and putting London out of reach for a great many people.

Fourth, there is, as always, the political question: who supports change? Labour’s focus, under my leadership, on the squeezed living standards of those in the middle was an attempt to make the point that inequality isn’t just an issue for those at the bottom: it’s something that affects the majority. But more has to be done to show middle-class voters why inequality matters. People have to be persuaded of its long-term impact on median wages and living standards, as well as its growth-dampening effects. There is a growing body of evidence that income inequality and unequal opportunity are linked – it isn’t a coincidence that social mobility has ground to a halt in the UK and the US at the same time as income inequality has grown – and the effects are psychological as well as material. It’s clear that even the more affluent families Putnam interviews have a deep sense of insecurity about the future. Inequality isn’t just a matter of income: it affects, among other things, opportunity, security and people’s ability to shape their own lives. Businesspeople in the UK, in contrast to those in the US, have tended to be reluctant to speak out on inequality. But some do support the living wage, not just as a matter of social justice but on the grounds that it increases productivity by improving staff retention and motivation. People in the private sector with views like this have to be mobilised in the campaign against inequality.

Fifth, and finally, there is the question of how political change happens, and how to mobilise the millions of people needed to bring it about. Labour must make use of the opportunity afforded it by the remarkable number of new members it has gained since the general election. But it also needs to acknowledge the challenge it faces. The party emerged from the traditions of community organising, and some local Labour branches are now rekindling that spirit. To succeed, the party needs to be about more than knocking on doors, crucial though that is, and the passing of resolutions. Labour needs to use its expanded membership to build deeper roots in local communities, and to help people find the collective power to change things. In a way I didn’t manage, it needs to reinvent itself as a genuine community organisation.

This is a tough time to be a progressive in Britain, with the re-election of a government that seems determined to dismantle the progressive institutions that remain and to make inequality worse. Labour’s renewal must be built on ideas, the most underrated commodity in politics. Ideas create and sustain movements and inspire people – and indeed voters – to join a cause. The right can’t solve the problem of inequality because to do so would be to abandon too much of what they believe, from a belief in the small state to trickle-down economics. The deep injustices of modern capitalism compel us to find a better way of living together. The left should approach the coming years with a determination to renew itself but also with confidence in its values.