That inequality has reached unacceptable heights has become increasingly widely accepted, even at the highest levels. Stewart Lansley FRSA, author of The Cost of Inequality, argues that a new battle line has been drawn over the relationship between inequality and growth. Stewart will be speaking about the Cost of Inequality at an event at the RSA on 21 February.
According to President Obama: “Inequality is the defining issue of our time”. Last month, the head of the IMF, Christine Lagarde, went further: "Excessive inequality is corrosive to growth; it is corrosive to society… the economics profession and the policy community have downplayed inequality for too long”. Yet while inequality is now an increasingly hot political issue, action has yet to follow. As a result, the global billionaire class has got richer through the economic crisis while most of the rest of the world has got poorer.
This failure is in part down to the dominating influence of one of the central rules of economic orthodoxy: that there is a trade-off between inequality and economic progress. You can, it is claimed, have a more equal society or more prosperity but not both. It is an idea that originated with the pro-market right, but came to be accepted across the political spectrum, including by the new Labour leadership and the Democrats under Clinton.
This theory – for theory it is – was central to the real-life experiment in pro-market capitalism applied in the US and the UK in the last three decades. As a result, inequality has soared with the share of income in the UK taken by the very top increasing threefold since 1979. This rise in the income gap has been driven by the way the fruits of growth have become increasingly unevenly divided: the wage share has shrunk, profits and personal fortunes have boomed while the proportion of the workforce that is low paid has doubled since the 1970s.
This trend is far from unique to the UK. Across the nations that make up the OECD, the wage share had fallen by 5 percentage points since 1990. Yet the promised economic pay-off from this profit-led strategy had failed to materialise. The global rich have used their growing muscle not to create more wealth and a bigger pie, but to grab a larger share of it for themselves. This power shift from labour to capital was meant to unleash a new era of enterprise and faster growth. Yet, in the UK, post-1980, profit-led market capitalism has a poorer record on investment, productivity, growth and unemployment than its more managed and much maligned predecessor.
The accumulated evidence is now overwhelming that the trade-off theory is wrong and needs to be dumped. Sharing the cake more evenly is associated with improved not lower rates of growth, and less not more turbulence. Rather, prosperity depends on divvying up the cake more proportionately. Last week the Labour leader, Ed Miliband, added his voice to the swelling ranks of those – from Obama to Lagarde – who are now arguing that greater equality and economic resilience go hand in hand. As Miliband put it: “Economic recovery will be made by the many not the few”.
Recognising this is one thing, steering economies according to this opposing rule is another. The global billionaire class shows no signs of acquiescing in an erosion of its muscle, privileges and wealth. Governments continue to dance largely to the tune of Wall Street and City financiers.
Nevertheless, the public, political and intellectual mood is hardening, apparently even in the most unexpected of quarters. “Capitalism may not have it quite so easy in the next phase”, writes one of Europe’s leading financial strategists, Albert Edwards of Société Générale. “Labour will fight back to take its proper (normal) share of the national cake, squeezing profits on a secular basis.”
For the first time for decades, the distribution question is back on the political agenda. There is now a newly emerging consensus, one that has started to capture a few significant and surprising voices outside the traditional left, that accepts that economic progress and stability depends on a more equal distribution of the cake. Achieving this would require moving beyond lofty speeches to a set of radical policies to rebalance bargaining power in favour of labour, steer profits to the productive side of the economy, impose a much tougher cap on unjust rewards at the top and initiate a sea-change in boardroom culture.
Against this there is an equally, if not more powerful lobby built around an entrenched and powerful global corporate and financial elite. This group – the winners from the last thirty years – remains wedded to the status quo, unwilling to concede anything more than token reform. The next phase of economic history – more of the same or one which yields labour a larger share – will be shaped largely by which of these opposing forces emerges on top.