Is inequality really worse than it used to be, and if it is, does it really matter? This was the very issue that came under debate at the Resolution Foundation today, among the panellists, the Lib Dem leader, Vince Cable, and Kate Bell, the head of Economics and Social Affairs at the TUC.
It may all boil down to definition. What do we mean by inequality? It has been rising steadily in the US, but in the UK, at least if you look at one measure, inequality shot up in the 1980s, but has not changed significantly since then.
But then it depends how you measure these things. The classic measure of inequality used by economists is called the gini coefficient, which divides distribution of income into different segments – top 10 per cent, next 10 per cent, etcetera, and looks at how average income in each segment varies from the overall average. If everyone has the same income, the ratio is zero, at the other extreme if one resident earned all of the country’s income and everyone else earned zero, the ratio would be one.
And by this definition, and looking at pre-tax income, the ratio was around 0.43 in 1977, rose to around 0.54 in the early 1990s, has been more or less flat since then, but has fallen a little in recent years, and right now is about 0.50.
Compare with other countries and the ratio is marginally lower than in the US and France, slightly higher than Sweden.
But it is when you look at post tax income that things change. The UK’s ratio is around 0.345, compared to 0.378 in the US, but just 0.293 in France and 0.259 in Sweden.
But then that does not even tell the full story. There are two problems with the gini coefficient. For one thing, it is not very reflective of a certain type of income inequality, for example, when the top one or five per cent see their share of total income rise.
For another thing, it takes no account of wealth distribution.
But does it matter? Mr Cable said that there was a time when fretting about inequality was more the kind of thing idealists did – but there is now evidence that it can do wider damage, namely can lead to asset bubbles, can lead to reckless behaviour as some people become focused on their bonus, but above all seems to be linked to lower demand across the economy – as a general rule of thumb, the richer you are, the more you save, so inequality can be linked to demand being sucked out of the economy – which may explain ultra-low interest rates being unable to knock much life into the economy.
In the UK, one of the big issues is property ownership, but dealing with that, either via some kind of wealth tax or higher inheritance tax is, as Vince Cable said, “politically fraught.”
Many top US business people, the likes of Bill Gates and Warren Buffett are quite pro-large inheritance tax.
Vince Cable’s remedy is altogether less radical, maybe not radical enough, he favours introducing more council tax bands and putting greater emphasis on ensuring the bands are more reflective of each property’s worth.
Kate Bell, as you might expect, argued that trade unions are part of the solution: suggesting that there is evidence that collective bargaining can help alleviate wage inequality.
The herd of mammoths in the cloakroom is property – dealing with the inequality this creates is politically massively difficult, but moving across the hall to the sitting room, it does seem there is an elephant – and that is technology and the way it seems to be creating a small number of winners and a lot of people working on the minimum wage.
Vince Cable said that inequality helped create the mood that led to Brexit, if it gets any worse, it may lead to much darker moods than that.
