With the new Tory government not only cutting benefits to the working poor, but also redefining poverty itself, income and wealth inequality remains the central question of UK politics.
Bill Gates and Thomas Piketty make for strange bedfellows – the former a world-famous behemoth of the free market worth $80bn, the latter a French academic whose work on wealth and income inequality has made him a minor celebrity. So when Gates blogs that he’s not only read Piketty’s 2013 book, Capital in the Twenty-First Century, but that he also agrees with several of the Frenchman’s arguments about the effects of inequality, and possible solutions, people sit up and take note . Like Piketty, Gates thinks inequality distorts economic incentives, allows certain vested interests to capture power, and can be combated by government action should politicians choose to get involved. Where the two men differ are their thoughts on what causes inequality in the first place.
Piketty’s book maintains that most developed countries have seen the gap between rich and poor widen over the last 35 years. His hypothesis is that those who were already rich have simply got richer by renting out their assets. Gates disagrees. He claims it’s just as likely for wealth to decay and collapse over time, citing the entrepreneurs who make up half of the Forbes 400 as perhaps rather thin evidence that the US is not dominated by a rentier class who arrived on the Mayflower and have been getting rich off others ever since.
As far as the UK is concerned, growing inequality has been driven by a shift from wages to profits. Or so says Stewart Lansley, a leading commentator on poverty in the UK and co-author of Breadline Britain.
Given the forceful data and arguments in Breadline Britain, I’m struck by how laid back Lansley is when we meet. He looks at me over modest wire-framed specs and calmly outlines how the richest 1% of UK earners have gone about capturing more of the country’s income and wealth. I’m soon to see his fiery side, though.
‘Over the last 35 years the wage-share has been reduced from 59% of national income to 53%,’ he tells me.
6 percentage points? That doesn’t sound like much.
‘It’s like wiping out the education budget!’ Lansley’s voice rises, revealing the passion of a man who’s spent his career charting increasing levels of social deprivation. He carries on, his voice quieter but still heartfelt. ‘It’s a difference of £90bn a year. That’s £90bn less in the pocket of the workforce every year.’
He explains that it’s gone to two main areas: ‘One is the huge boost in executive pay. The other is speculation in assets such as property and financial restructuring. Top earners don’t consume as much as the rest of the workforce, so they don’t build the productive base of the economy. They mainly just inflate asset values.’ This is the distortion of incentives on which Piketty and Gates concur – the pursuit of short-term gains rather than the kind of consumption and investment that grow the real economy and drive up productivity and average incomes. Lansley is clear on the end result of this process: ‘It unbalances the economy and creates short-term speculative bubbles.’
Recent years have seen a flurry of similar speculation about the cumulative effects of rising inequality. Some point to a growing number of severe financial crises , while others maintain that the top 1%’s share of UK GDP jumped from 6% in 1980 to 15% in 2010 , making them as rich as the bottom half of the British population. Following Bill Gates’s lead with the Forbes 400, one only need look at the doubling of wealth since 2009 by members of the Sunday Times Rich List , and compare it to the inertia of average UK incomes over the same period , to see the very wealthy have accumulated vast fortunes while everyone else has stood still. An examination of the top ten multi-billionaires on the same Rich List also backs up Piketty’s rentier hypothesis. Only one of them – Roman Abramovich, who started his business empire selling rubber ducks from his Moscow apartment – can be considered a truly self-made man.
Among such shocking stats and eye-catching headlines is the sobering claim that since 2009, in the same time it took the richest 1,000 Britons to double their wealth, UK food banks have increased distribution of emergency food aid by 4200%.
Food is certainly on Theresa’s mind when we meet for a cuppa in a greasy spoon near Canning Town tube. She’s 23, lively and articulate, and lives in a centre for 18-24 year-olds in east London. She was made redundant recently and is struggling to get by on job seeker’s allowance (JSA) and housing benefit. She has personal debts of £3000.
‘I’m not able to by enough food. It’s emotional.’
Whatever the image of undeserving, work-shy scroungers politicians, tabloids, and Benefit Street promote, Theresa isn’t it. She spends every spare minute looking for work. To her, employment and education will lead to increased independence and improve her day-to-day life.
‘My aims are to get a job ASAP, find myself my own place so I can get out of the hostel, and go back to college. Those are the things that will stabilise me, that will make my life better.’
But the minimal benefits she receives aren’t helping her turn over a new leaf. JSA doesn’t even pay her food and fuel bills, let alone allow her to cope with her debts, or cover what the rest of us might consider essentials when looking for work such as transport costs and interview clothes. These shortfalls push Theresa deeper into debt, causing stress between her and her family, as now she can only borrow from close relatives.
‘I get £57.90 a week. I spend £15-£20 on electricity on the key-card. But it goes so quick sometimes I turn it off at the switchboard so I can’t use it. The rest goes on food. I go to the cheaper places, but it’s not enough if I want to eat a proper breakfast, lunch and dinner everyday. I borrowed £100 off my auntie a few weeks ago for electricity and food, so I can’t ask her again. I’ll have to ask a different member of my family.’
Food poverty, fuel poverty, debt poverty – a situation where a person is paying more than a third of their income on any of these – Theresa suffers from them all at different times. Her indebtedness echoes a sharp increase in average UK household debt, which more than tripled from 45% of annual income in 1981 to 157% in 2008 . It’s extra debt that Lansley insists has been largely taken on to pay for necessities like food and rent rather than to buy luxury consumer goods. ‘It’s another way the 1% enriches itself,’ he claims, adding further credence to Piketty’s rentier hypothesis. ‘They take a bigger share of GDP as profits and lend some of it back at interest to the bottom 60% of earners.’
Above Theresa on the UK income scale is John. He’s mid-30s, works in media, and earns an average London salary of £35k. We meet at the Clerkenwell food stall where he starts each week day with a £2.50 coffee.
‘I grab breakfast at the office canteen,’ he tells me. ‘I’ll have yoghurt and fruit and a smoothie. It’ll cost about £5.’ He’s never taken a packed lunch to work and dinner is often a takeaway from his local Chinese restaurant. He does the numbers and realises he sometimes spends as much as £30 a day on food – the same amount Theresa has to feed herself with for a whole week.
John’s lucky. He has a white collar job with collective pay bargaining, which according to Lansley means he’ll get paid 9% more than someone in a non-unionised workplace. He’s also from a middle-class family where higher education and a professional career were expected and encouraged. Reflecting on these advantages, John has remarkable insight and modesty about how his background has helped him, and a sense of responsibility to give something back: ‘I don’t feel guilty, but I am aware that in part I’m affluent through no work of my own. I’m set to inherit a bit of money when my parents pass away. I know there are ways to avoid inheritance tax, but I think that’s morally wrong.’
John combines this feeling of duty with attempts at frugality that seem all too rare these days: ‘There are times when I feel I’ve spent too much that month. I’ll stop eating from places near work where lunch is £7 or £8, and go to places where it’s £4 of £5. But I never really have to worry. Then again, I haven’t got very expensive tastes.’
Such restraint is certainly not on the menu when I meet Alice at a bougie café bar in Notting Hill Gate. Eggs on toast is £7 and expensive tastes are very much on the agenda. The conversation turns to the problems of putting together an outfit for a friend’s wedding.
‘I remember when expensive shoes would cost £350, but now you can’t get shat on for that kind of money.’
‘I remember when expensive shoes would cost £350, but now you can’t get shat on for that kind of money.’
Alice is in her late 20s, went to an exclusive girls’ boarding school, and lives a peripatetic life, bouncing between London, New York, LA and Berlin. She works in film, TV and theatre. Her typical day starts with an exercise class at glitzy gym Frame, and she gets her nails done every one to two weeks. ‘I’m really high maintenance and not apologetic about it,’ she tells me. ‘Looking this good takes time and money.’
Despite the trappings of wealth, Alice is charmingly down to earth and thinks that the top 1% should be more generous. She exhorts her father for ‘hoping to maximise that whole non-dom thing’, rants about how the super rich should be more philanthropic, and like John says it’s right to pay the tax you owe rather than to avoid it. But how has Alice come by this lifestyle in the first place? Where £350 doesn’t even buy you a fancy pair of shoes?
Her father runs a multinational conglomerate. The company was founded by her grandfather who also gave Alice money towards the flat she owns in central London. Is this yet more evidence for Piketty’s rentier hypothesis? Is Alice rich because her dad is rich just as her grandfather was rich? Or, given that she’s chosen an arts career over a more lucrative position in her father’s corporation, is this the point where her family’s wealth begins to decay and collapse as Gates might predict?
‘I go out for dinner quite a lot. Really foodie places especially. I spend a lot of money. Dinner can easily be £30.’
Journeying east to west across London, from greasy spoon to coffee stall to bougie bar, we travel up the UK income scale and Theresa’s £30 a week for food turns into John’s £30 a day which morphs into Alice’s £30 a meal. It’s easy to see a huge disparity between the lives of those struggling on benefits and low incomes, and those nearer the top, nearer the 1%. But it’s hard to see how, as academics such as Piketty and Lansley claim, that wealth is being siphoned from people at the bottom and in the middle to those at the top, from Theresa and John to Alice. Indeed, there are those who say this is not happening at all.
Chris Snowdon, Director of Lifestyle Economics at neo-liberal think tank the Institute of Economic Affairs (IEA), is one such commentator. He can’t meet with me in person so I’m unable to comment on his manner, food budget, or taste in shoes, but he informs me via email that any redistribution is ‘almost entirely from the rich to the poor [as] the incomes of the bottom 20% mostly consist of money that has been transferred to them through the tax system.’ He goes on to tell me that while the top 1% of UK earners have increased their share of GDP, the top 10% as a whole haven’t, and that each decile of the population is taking home pretty much the same amount of national income as they were in 1990. He points me in the direction of an IEA blog where he claims, in part using figures from Piketty’s World Top Incomes Database , that the top 1%’s recent enrichment is a sign of growing inequality only in the top 10% of UK earners, rather than across the population as a whole .
It’s a plausible argument, but not wholly convincing. In an attempt to prove his point, Snowdon merely subtracts Piketty’s figure for the top 1%’s share of GDP from the UK Office of National Statistic’s figure for the top 10%’s share of GDP. Not really the done thing when what the two datasets measure is quite different – Piketty’s is ‘concerned with gross income before tax’ while the ONS show net income after deductions and benefits. Also, are the assets and earnings of Britain’s top 1%, and the way they amass this wealth and income, really so disconnected from the vast majority of Brits? Have members of the Sunday Times Rich List doubled their wealth by simply extracting it from those immediately below them on the UK income scale? Or, as Lansley claims, has this happened because the top 1% have managed to suppress the wages of everyone below them, transforming more of the nation’s GDP into profits for the few rather than income for the many?
Indicators of shifts in the distribution of wealth and income in Britain – the reduction of the wage share, the doubling of wealth by the very richest, the skyrocketing number of emergency food parcels handed out – imply a divergence is taking place. It’s one that, according to the OECD, will mean that by 2060 the UK will be as unequal as the US .
In its 2014 report Shifting Gear: Policy Challenges for the Next Fifty Years, the OECD claims this will put significant strain on public sector finances. They talk of the need to ‘[review] tax structures to account for rising global integration’ – code for clamping down on tax havens, avoidance and evasion. They suggest taxes should be focused on ‘less mobile tax bases such as property [and] natural resources’, and that ‘better redistributive policies’ are key to dealing with inequality. All suggestions which will ruffle the feathers of homeowners, big business, and the super rich.
Lansley has his own ideas about how to minimise the effects of growing inequality in Britain: ‘You could raise the minimum wage and raise the tax rates of those at the very top. You could abolish mortgage tax relief for landlords on buy-to-let properties. You could set up a social investment bank financed by a sovereign wealth fund.’
Taxing natural resources, interfering with the banking sector, raising tax rates for the highest earners – these policies might seem like a big deal, and certainly for them to happen politicians would need to challenge vested interests in a way they aren’t presently prepared to do. Such proposals, though, merely echo Gates’ agreement with Piketty that ‘[g]overnment can play a constructive role in offsetting the snowballing [of inequality]’. And given the willingness of those nearer the top 1% like Alice to step up and give something back when required, these ideas might not prove as unpopular and difficult to implement as they at first sound.
To Lansley these suggestions are small beer. As far as he’s concerned the real opportunity is much bigger – the chance to create a new, fairer socio-economic model.
‘To really bring inequality down you need more than tinkering,’ he tells me as our interview draws to a close. ‘You need a socially responsible form of capitalism and to get that you need a historic turning point. Many on the Left thought 2008 would be such a point, but it wasn’t. For big shifts like that you need four things: an economic shock on a big scale, the discrediting of the current intellectual model, public disaffection, and a readymade alternative. We’ve had the first three but not the last. We don’t currently have a coherent alternative. But that’s in the process of coming together. These things take time.’
A new, more responsible form of capitalism? Watch this space.
2) Rajan (2010), Kumhof et al (2011).
8) P.186. Breadline Britain. Lansley and Mack. Oneworld. 2015.
10) http://www.iea.org.uk/blog/the-rich-versus-the-super-rich http://www.iea.org.uk/blog/the-rich-versus-the-super-rich.
12) P.7. Shifting Gear: Policy Challenges for the Next 50 Years. OECD Economics Department. 2014.