Image: Homeless person's tent in Piccadilly, London, 2017. Credit: David Holt/Flickr, CC 2.0.
In a dismissive and sarcastic review of a book Economics for the Many, edited by Shadow Chancellor John McDonnell, the Economics Editor of the Financial Times, Chris Giles, claimed that its messages were based on a false premise of growing inequality. According to him, ‘in fact UK wealth and income gaps have been stable for a generation’ (1). Earlier in 2018, in an article headed ‘Britain’s social ills cannot be blamed on rising inequality’, he elaborated on this claim, adding that ‘wealth inequality has also been stable for a decade’.
This opinion would not merit particular comment were it not for the fact that the FT is the most reputable newspaper dealing with economic issues in the country and probably in the world. The opinion of the Economics Editor would be taken seriously by a lot of people, here and abroad. And we may anticipate that the topic of changes in inequality will figure prominently in any General Election that may come in 2019.
So, is Giles correct? Well, for starters, he seems to have an old-fashioned view of a generation, since he does admit that income inequality is much higher today than in the 1980s. His preferred measure - the Gini coefficient for income after housing costs - rose from 0.26 in 1980 to 0.38 today, a huge increase. His claim is that the coefficient has remained stable at the higher level for the past two decades and has not risen since 2008, the onset of the Great Recession. The cause of current economic discontent, he argues, is not rising inequality but the fact that the vast majority have seen no increase in living standards since the financial crisis. ‘We have all been in it together’, he concludes. The word ‘all’ has a very clear meaning in the English language. By exaggerating his claim, he reveals his prejudice.
Intuitively, for an economist, the claim that inequality has not increased in the austerity era is strange, since we know that since 2008 average real wages have stagnated, welfare benefits have been cut (with more people unable to obtain their entitlements), profits and share prices have boomed, the precariat has expanded, and private debt has reached record levels. According to the ILO’s Global Wage Report 2016/17, between 2006 and 2015 average real wages fell much more in the UK than in any other G20 country. If those other countries had growing inequality, as Giles and others accept, then something very odd would have had to have happened for it not to have done so in the UK. In the same period, in the UK public social spending as a percent of GDP was lower than in the rest of the European Union, at 21.5% in 2016, compared with, say, 31.5% in France and 25.3% in Germany.
Another indicator of inequality is the labour share of national income. In a paper in the Bank of England in early 2017, Andy Haldane presented data from the Office of National Statistics and the Bank that showed the labour share of GDP had dropped from 58% in 2008 to 52.5% in 2015. Similarly, the ILO report showed that in the post-crisis period of 2007-15, the labour share shrunk in the UK unlike in, for instance, the USA, France and Germany, where the secular decline seemed to slow. These are not the sort of statistics that suggest inequality was unaffected in Britain by comparison with what was happening in other countries.
Elsewhere, I have argued that Britain, along with the global economy generally, has entered an era of rentier capitalism, in which growing inequalities are driven by the ability of the plutocracy and multinational capital to extract rentier income from possession of financial, physical and so-called intellectual property (2). Rentier income is rising relative to both profits from production and income from labour. A recent study concluded that in the past three decades the top 300 publicly quoted British companies reduced the extent to which they shared rental income with their workers (3). This too points to growing income inequality between owners of capital and those relying on income from labour.
growing inequalities are driven by the ability of the plutocracy and multinational capital to extract rentier income
The plot thickens when one sees that the statistics on which Giles relies are those collected by the Department for Work and Pensions (DWP), in the form of the Family Resources Survey of households. These are reputable, but have significant limitations. Giles touches on one, but does so disingenuously. He says, ‘Naturally, it is possible to search and find data showing elements of rising inequality…the net income share of the top 0.1 per cent of the population almost doubled between 1990 and the eve of the crash. This rise could be the cause of our discontent but, if it were, it would suggest that differences among 999 out of every 1,000 people are irrelevant to British society and only the super-rich matter. That is highly unlikely.’(4)
Actually, the sources he cites to support his claims omit the top 1% and top 3%, not the top 0.1%. We are talking about a large number in the top 3%, surely part of the ‘all’ Giles refers to. Omitting them in a narrative on inequality is equivalent to Hamlet without the Prince. The income share of the top 1%, after tax and before housing costs, more than doubled from 3% in the mid-1970s to about 8% in 2015, and this is likely to be a substantial underestimate due to under-recording of top incomes.
The very top has done rather well. In 2017-18, the UK had the dubious distinction of having the person with the world’s highest salary. In a blow for ‘feminism’, it happened to be a woman (raising the mean average for women relative to men rather misleadingly). She is the chief executive of BET365, who received (one baulks at the word ‘earned’) a salary of £220 million for the year, supplemented by dividends from her company of £65 million. Giles is unworried about inequality, but should take note that her earnings had jumped from the previous year, when her salary was merely £199 million, implying an annual increase of 10%, give or take.
This leads to the claim made in a good study using other data that better reflect top incomes, which show that the top 5% has bounded ahead to take a growing share. But the researchers claim that the relative stability of the Gini coefficient implies that inequality has fallen ‘across the large majority of the income distribution’ over the past decade (5). Even if true, this should not lull us into complacency. The same may have prevailed in France in the years before 1789; if attention had focused on that, nobody would have predicted the revolution (6).
Another awkward finding for Giles is that last year the Swiss bank Credit Suisse reported that the ranks of the ultra-rich in Britain swelled by 400 in 2017-18, taking the number of people with wealth of over £38 million to nearly 4,670, an increase of 8.5%. The bank reported that there were many more hovering just below that arbitrary amount. Reportedly the richest man in the country with a self-revealed wealth of over £22 billion, Jim Ratcliffe, just after receiving a knighthood, announced he was off to live in a tax haven, Monaco, so as to avoid paying tax.
the ranks of the ultra-rich in Britain swelled by 400 in 2017-18, taking the number of people with wealth of over £38 million to nearly 4,670
This leads to the biggest weakness in Giles’ case. Wealth inequality in the UK is much greater than income inequality, and is much above the OECD average. As total wealth has risen much faster than income, and has risen from 300% of GDP in 1970 to 600% now, the shift from income to wealth must have raised total inequality, even if wealth inequality and income inequality had stayed the same, which is doubtful. So, wealth and income inequality combined must have increased.
Therein lies another problem with Giles’ sanguine view. Since the Big Bang of Margaret Thatcher, Britain has become much more reliant on the financial sector, which now accounts for over 300% of GDP, up from about 100% in the 1970s. This has been a factor in the growth of financial wealth, which has led to a phenomenon ignored by Giles. This is the huge growth in concealed wealth through use of tax havens. This must be a principal reason for the appearance of limited growth in wealth inequality.
A conscientious study of international tax evasion and avoidance showed that unrecorded offshore wealth has grown rapidly since the 1980s and by significantly more than recorded onshore wealth (7). As there are good reasons for believing that the propensity to conceal wealth rises with people’s wealth, there are equally good reasons for believing that growth of unrecorded offshore wealth has concealed substantial real growth in wealth inequality.
The UK has almost double the amount of offshore wealth as a share of GDP as the average for all countries, coming to almost 20% –much more than most European countries where observed inequality has increased considerably in recent years. The differences are so striking that one is inclined to conclude that it is the greater use of tax havens that primarily explains Giles’ view. Supporting that intuition, one intriguing aspect of the famous Panama Papers, which exposed the global use of tax havens to a glare of publicity, was that the UK was an extreme outlier in the number of rich people using shell companies to avoid tax and to conceal their wealth (8). Britain’s Prime Minister at the time had made use of one, as had his father and father-in-law and sundry other very wealthy people living in the UK (9).
The UK has almost double the amount of offshore wealth as a share of GDP as the average for all countries
There are other puzzling trends that Giles neglects. Going back to the database he preferred, the DWP’s household survey, there is a little footnote to the graphs in which it is stated that the data exclude not only the top 3% of the distribution system but also the bottom 3% (10). While it is clear the top 3% have gained and are quietly written out of Giles’ account, the omission of the bottom 3% is also distorting. There are reasons for thinking their absolute income and relative income have fallen. Indeed, if more of the lowest income earners in the bottom decile have slipped into homelessness, which has grown enormously, they could have drifted out of the household survey altogether and raised the mean average of the bottom decile of those measured, thereby tending to lower the inequality artificially (11).
Then there are demographic trends to take into account. Everybody should welcome the fact that women’s earnings have increased relative to men, reducing one form of inequity. But this partly reflects a decline in men’s average real wages, while male earnings inequality has increased. As these trends have broadly offset each other, measured earnings inequality across individuals has not changed much. But low-wage men have lost out, with obvious political implications. Moreover, it is not the men whose incomes have fallen who have benefited from women’s rising incomes. High-earning women tend to link up with high-earning men, so the two trends combined have increased household earnings inequality (12).
Meanwhile, the young have lost relative to older citizens. This is partly because more young people have been entering the precariat, with volatile stagnant wages and intermittent earnings, exposed to zero-hours contracts and so on. And it is partly because of the government’s ‘triple-lock’ policy of protecting pensioners’ incomes, so that workers have lost income relative to pensioners (13). If one removed pensioners from the calculations, we could more easily see how the production and employment system is fostering more inequality.
This leads back to the growth of wealth inequality, since the elderly have been benefiting disproportionately from property price rises. Wealth has been boosted enormously by the sustained rise in land values. Land now accounts for 51% of UK’s measured net worth, higher than in any other G7 country. This has fuelled the rise in property prices, and the value of property inheritance. George Osborne in his 2015 Budget increased the tax-free allowance for inheritance tax in stages from an already generous £650,000 for a couple, which from 2020 will enable the tax-free inheritance of a property worth up to £1 million. This represents a gift worth £140,000 to wealthy people – removal of a 40% tax on £350,000. How can Giles say that ‘we have all been in it together’ in the light of such giveaways to the rich?
The inheritance bonus is related to another trend – greater inter-generational transfer of inequality. The so-called ‘baby boomer’ generation born after the Second World War has done well out of the property market and is now beginning to fade out. The Resolution Foundation found that 83% of those in their 20s and 30s who own homes have parents who own homes, whereas almost half of the younger generation who do not own a home have parents who do not own one either (14). So, living standard inequality is accentuated by the transmission of wealth.
There are also several trends where we have incomplete data but which are well documented, with regressive implications. What has been happening to non-wage enterprise benefits, such as paid holidays, paid medical leave, subsidised housing, transport and food, and occupational pensions, or deferred income? There is anecdotal evidence that the precariat has been losing what few of these they had, and that the precariat has been growing. Meanwhile, those in the salariat have been gaining more of them.
While some effort is made in national income statistics to take account of the value of state benefits, few data exist on the value or distribution of non-wage enterprise benefits, although the Income Data Service has done valuable work. Even the erosion of state benefits has surely worsened inequality. Household income inequality has traditionally been mitigated by the welfare system, but benefit cuts have put that into reverse (15).
There is also a drift to more work that is not labour. The precariat must spend more unpaid time doing activities that are work but not counted as such. And over a million workers are doing unpaid overtime hours. This means that average hourly wage rates are lower than they appear. If, as is likely, it is lower-earning workers who are mainly affected, this would widen wage rate inequality.
The precariat must spend more unpaid time doing activities that are work but not counted as such
And the cost of social services has risen, mainly due to austerity cuts in subsidies, more restricted availability and rising prices. This trend has hit lower-income earners disproportionately, because the costs represent a higher proportion of their earnings and because they need them to a greater extent.
Finally, the tax system has become less progressive. According to the Office for National Statistics, in recent years ‘overall, taxes had a negligible effect on income inequality’ (16). That is a far cry from what used to be the case. Even changes in personal tax allowances have been regressive, as have huge cuts in corporation tax. Since 2010, over one hundred new tax reliefs have been added to the edifice of over 1,100 regressive tax reliefs. For instance, entrepreneurs tax relief has reduced tax paid by affluent entrepreneurs, and is set to rise further. Pension freedom reforms have allowed rich people to pass on their pension pots free of inheritance tax, while employer national insurance tax breaks for pension contributions have benefited the salariat. What possible counter trends have there been, Mr Giles?
In sum, the perception that inequality has increased is based on reality, contrary to what Giles and the government claim. We have not all been in it together. Those on lower incomes and with negligible assets have done very badly, and the affluent have been helped to do very well. Beware oncoming ‘fake news’.
(1) C. Giles, ‘Review: ‘Economics for the Many, edited by John McDonnell’, Financial Times, September 24, 2018. I should declare an interest, as I wrote a chapter in the book.
(2) G. Standing, The Corruption of Capitalism: Why Rentiers thrive and Work does not pay (London: Biteback, 2017).
(3) B. Bell, P. Bukowski and S. Machlin, ‘Rent sharing and inclusive growth’, Centre for Economic Policy Research DP13408, December 2018.
(4) C. Giles, ‘Britain’s social ills cannot be blamed on rising inequality’, Financial Times, March 29, 2018.
(5) C. Bellfield, R. Blundell, J. Cribb, A. Hood and R. Joyce, Two decades of income inequality in Britain: The role of wages, household earnings and redistribution (London: Institute for Fiscal Studies, Working Paper W17/01, 2017), p.6.
(6) I am indebted to Danny Dorling for this analogy. He has taken the opposite view to Giles and others. See, e.g., D. Dorling, ‘Peak inequality’, New Statesman, July 4, 2018.
(7) A. Alstadsaeter, N. Johannesen and G. Zucman, ‘Who owns the wealth in tax havens? Macro evidence and implications for global inequality’, December 2017.
(8) Ibid, Figure 7.
(9) The most notorious tax haven is a British territory -- the Cayman Islands.
(10) The exact wording is ‘Percentiles 1-3 and 98-100 are excluded because of large statistical uncertainty.’
(11) It is unclear to what extent the homeless are taken into account in measuring inequality.
(12) Bellfield et al, 2017, op. cit.
(13) Department for Work and Pensions, Households Below Average Income: An Analysis of the UK Income Distribution: 1994/95-2016/17 (London: HMSO, March 2018), p.10.
(14) P. Collinson, ‘Millennials set to reap huge rewards of inheritance boom’, The Guardian, December 29, 2017.
(15) F. McGuinness, Income inequality in the UK, House of Commons Library briefing paper 7484, August 2018.
(16) Office for National Statistics, Effects of taxes and benefits on UK household income: financial year ending 2017 (London: HMSO, June 2018), p.11
Guy Standing is Professorial Research Associate, SOAS University of London, a council member of the Progressive Economy Forum, and an economic adviser to John McDonnell, Shadow Chancellor of the Exchequer.