IMage: bisgovuk

A conspicuous development in Britain over the years since the 1970s is the massive increase in inequality that has occurred. It is not just that incomes and wealth distribution have become much less equal. So have life chances on almost any relevant measure. Rich people live longer than those who are much poorer. They are much less likely to suffer from most sorts of crime. They generally have much more secure jobs. Their health is better, partly because they can afford much better diets. While inequality slowly decreased between 1945 and 1970 in the UK, nowadays the top 10% have incomes 12 times higher than the bottom 10% - up from 8 times in 1985. The top 1% of income earners now earn 14.3% of total remuneration, compared to 7.1% in 1970. Nor is inequality just an average income phenomenon for the whole country. Some areas of the UK are much richer than others for clearly identifiable reasons.

How much of this is to do with the exchange rate? While of course there are other factors at work, consider just how much impact the highly over-valued exchange - rate which Britain has had at least for the last forty years - has had in causing inequality to rise:

High Unemployment 

The UK’s over-strong pound has undoubtedly been directly responsible for the country’s chronically weak current account balance of payments position. During the last ten years, the average annual deficit has been over £30bn. The size of this deficit and fear that expanding demand in the economy would make it even bigger has been a major constraining factor on economic expansion. As output per head among those still in work has risen, the result has not been the rise in national income which this could have produced. Instead it has been reflected in rising unemployment, especially among young potential entrants to the job market. The headline total unemployment figure is now about 2.5m, of whom over 1m are aged between 16 and 25, but the real number of those who could work and would be willing to do so at any reasonable wage or salary is much higher. If all those who are able-bodied enough to work but on long term incapacity benefit, all who are caught in benefit trap problems, all those who have got demoralised and have given up hope of ever finding a job are included, the total number of unemployed is nearly 5m.

Those who are out of work suffer from far lower livings standards than those in employment. They also have many more social, health and psychological problems than those in work. Long term joblessness also appears to transmit generationally; those without work have children more likely to be jobless, reproducing another cohort of people who struggle to enter the job market.

De-industrialisation

The  very high exchange rate we have had for many years now has also been directly responsible for the continuing de-industrialisation of the UK economy. As recently as 1990, 5.2m people in the UK worked in manufacturing. Now only 3.1m do so - a fall of about 40% in two decades, as further swathes of industries in the UK have been run out of business by their inability to compete in world markets. I am only too familiar with this process myself. The business of which I am the Chairman gets most of the products it sells produced in China for barely half the price we would have to pay for them in the UK. This is almost entirely an exchange rate issue, as the UK economy charges out to the rest of the world all its locally incurred costs at far too high a rate to be competitive. The consequence has been a massive reduction in the number of stable, high quality blue collar jobs available in the economy. Where they have been replaced at all, the alternative forms of employment available have tended to be far less skilled, much more insecure and lower paid. The result has been that not only are there nearly 5m people with no work at all but that a much larger number – perhaps one third of the total UK labour force – is now employed in low productivity, insecure service sector jobs seldom paying much more than the minimum wage. Although manufacturing now employs only 8.5% of the UK’s workforce it produces 12% of national output, because productivity is nearly 50% higher in what is left of UK manufacturing industry than it is on average in services.

Finance

The impact of the high pound on the distribution of employment opportunities in the UK has been hugely to favour services over manufacturing, but in a very lop-sided way. While the vast proportion of service sector jobs are poorly paid with little scope for productivity and output opportunities, this has not been the case for finance. The City has certainly been helped by factors such as the use of the English language, London’s position in the time zones between the Far East and New York, and by a range of cultural and institutional considerations. Crucially, however, the demand for financial services – unlike manufactures and many other services - is peculiarly insensitive to what is charged for them. This has allowed London’s financial service industries to have boomed while the rest of the economy has wilted as a result of the over-valuation of sterling which has done everyone else in the UK so much damage. The City has always tended to favour a strong pound – and low inflation - and its increasingly dominating political role has had a major impact on ensuring that policies to keep inflation down and the pound strong have been implemented without reserve.

Much of the increase in inequality which has been visible in the UK – and the USA – has stemmed directly from the strength of financial services vis à vis the rest of the economy. The enormous sums of money which, in particular, people such as bankers and hedge fund managers have been able to extract from their employers, investors and shareholders has been a major factor in increasing disproportionately the incomes earned by those in financial services and particularly those in senior positions.

Regional Impacts 

The collapse of so much manufacturing industry in the UK has also had a significant impact on the relative prosperity of different regions in the UK. During the hey-day of British manufacturing in the nineteenth century – when Britain was the ‘workshop of the world’ – living standards were considerably higher in the North of England than they were in the South. This has now completely changed. London is now about 20% richer on average than the UK as a whole and almost 40% better off than the poorest region in the UK: the North East, which used to be the shipbuilding capital of the world.

The reasons for this enormous turn around are not difficult to see. The prosperity of the regions of the UK outside the South East was always heavily dependent on industries which have now largely disappeared as a result of unmanageable competition. This has left these regions with relatively little to sell to the rest of the world, leaving them with corresponding difficulties in paying their way. Some of the gap has been filled with public expenditure, which is much more heavily concentrated in these regions than it is in the South East, but with the risk that current cut-backs are going to leave them even worse off than they are now. If this happens, unemployment, which is already much greater than it is in the South East, is likely to rise even higher. Even before the current round of cuts was implemented only 67% of the potential labour force in the North East was in work compared with 75% in the South East. Hardly surprisingly, the corresponding unemployment rates were 11.5% and 6.2%. Proportionately, nearly twice as many people were out of work in the North East than the South East.

Trade Unions and Employee Bargaining Power 

Yet another major source of inequality, which in turn is the direct consequence of the high levels of unemployment caused by the over-valued pound, has been a huge weakening in the bargaining power of both organised labour and employees, especially those not in trades unions. The result has been a massive reduction in the proportion of the national income going to wage earners, which has fallen from 64% in 1975 to barely 55% now.

Some of this reduction in bargaining power has been reflected in falling trade union membership, which peaked at just over 13m in 1979 and which has now dropped to barely 7m – a reduction of nearly half. Most of the remaining trade union membership is in the public sector, however, where working conditions and pay scales have been relatively well protected. It is in the non-unionised areas of the economy that the position of employees vis à vis employers has been most gravely weakened by high levels of unemployment, meaning that there are often far more applicants for jobs than employment opportunities available.

These circumstances have clearly driven down wages and conditions, leaving a huge proportion of the nation’s workforce dependent on casual, insecure and poorly paid jobs (where there is any employment available at all). Although, it might be argued that increasing the cost of labour would make the economy less competitive there is little evidence that this is correct. Labour scarcity spurs investment while an excess of cheap labour does the reverse, reinforcing the fact that it is wage costs per unit of output which are crucial for competitiveness not the absolute levels of wages on their own.

Those who do not care about mounting inequality may not be too concerned about these trends. Those who take this view are, however, an increasingly small proportion of the population across most of the political spectrum. Both the outrage expressed across the board recently about the excessive amounts paid to bankers and the impotent anger manifested by both those engaged in the riots in London and elsewhere during the summer of 2011 – however much what they did is to be condemned - are symptoms of mounting unease that inequality in the UK is much greater than it could or should be.

Some of this concern is directed at trying to make the division of the national income fairer through the tax system. Unfortunately, however, for those who would like to see the situation ameliorated in this way, the prospects for using taxation and spending to make the post-tax distribution of income much fairer do not look good. With the sums which need to be raised, too much of the tax payments to be made fall on those with relatively low income while it is too easy for those with high incomes to avoid – or evade – paying all the tax which the tax codes say they should. This is not an argument for not making the tax system as fair and efficient as it should be. It is, however, important to recognise that changing the tax system is never going to unwind all the inequality which has built up over the last forty years.

There is only one way to do this, which is to rebalance the economy so that the major cause of all the inequality which currently manifests itself is removed. Only by making the UK sufficiently competitive to be able to pay its way in the world, and removing the constraint currently provided by our huge balance of trade deficit, will it be possible to provide the keys to making life chances in the UK much more even. A strong devaluation is needed:

- To get unemployment right down,

- To bring back much more manufacturing industry to the UK with the high quality, well paid and highly productive blue colour jobs it can provide,

- To rebalance the economy away from being as dependent as it is now on the service sector, and particularly on financial services, and move towards having a more substantial manufacturing component (not least to provide us with the larger volume of exports which we desperately need to enable us to pay our way in the world).

- To supply the regions of the UK which currently lack them with export generating revenues, and

- To restore the bargaining power of labour, so that it can secure a higher proportion of the national income.

No other policy prescription will work without a strong devaluation. We therefore have a choice if we want to do something effective about inequality. We either tackle the root cause of the British economy being as uncompetitive as it is by getting the exchange rate down to a level which will enable us to compete in international markets, or we will have to live with present levels of inequality for the foreseeable future.

John Mills is a donor to openDemocracy.