Men still clean up and other fables of fairness

Without really trying, UK policymakers have failed to close the gap between the nation’s rich and the poorest members of society. Hanna Szymborska advises.

With growing outcry in academic journals, newspaper headlines and broadcast media, rising inequality has been pushed high up the public agenda. The discussions take in disparities in health, education housing and jobs. Overarching all of these are the economic inequalities: In the UK, the richest 10% owned more than half of all wealth and earned nearly 40% of all income in 2013. And at the global level, the most affluent 1% of the world’s population own more than 80% of global wealth. This concentration of economic resources is a challenge to our society.

It threatens democracy because a small group of voters have a disproportionate financial influence over political outcomes which discourages political participation among the wider electorate. Economic inequality is also instrumental in shaping the broader quality of life by adding to poorer physical and mental health and a range of social problems such as crime and violence.

 Even though there is increasing awareness of inequality and its political and social consequences, government policy is making it worse. Current UK policy solutions to address growing disparities in income and wealth are not fit for purpose. Instead of acting to distribute income and wealth more fairly, policy measures implemented in the UK in the recent years have contributed to rising economic inequality. How has that happened?

“This concentration of economic resources is a challenge to our society.”

The most immediate answer is found in the UK’s experiment with austerity since 2008. It was implemented in the name of achieving a budget surplus – prudence which is justified not so much by evidence but by ideology. Cuts to public funds hurt poor and vulnerable families the most and public spending on the poor has plummeted by nearly a quarter since the launch of austerity policies in 2008. Women and ethnic minorities have borne a disproportionate burden of these “efficiency savings”. Cuts made in schools and in communities have been linked to rising violence in the streets of London. International organisations from Oxfam to the United Nations, International Monetary Fund, and Organisation for Economic Cooperation and Development, have shown that austerity breeds economic inequality.

But policymakers’ role in raising economic inequality goes beyond 2008. Since the 1980s the powers of trade unions have been reduced, and regulation of labour markets and financial operations has been gradually rolled back. It has been justified by the promise of economic resources eventually trickling down to the society through redistribution and jobs created by higher investment. But decades later tax revenues declined from their peak of 36.7% of GDP in 1982 to 33.2% in 2016, and UK’s productivity levels have lagged behind other high-income economies. Rather than reducing economic inequality, austerity policies have boosted profits among increasingly fewer business owners and financial executives at the cost of stagnant real wages for the majority of the working population.

“Even though there is increasing awareness of inequality and its political and social consequences, government policy is making it worse.”

The contribution of policy to economic inequality also extends to measures which, on paper, should be designed to alleviate disparities in wealth. Housing is the key wealth-building tool, providing not only a stable shelter but also a significant boost to net worth amid falling household saving rates. Promoting home ownership is an important method of reducing wealth inequalities. But wealth-building policies that rely on markets to supply housing can have the opposite impact on economic inequality.

This faith in the good of markets has underpinned the policy of Help to Buy implemented in the UK since 2013. On paper, it provides extra support for the average Jane and Joe to get on the home-ownership ladder. But in reality, it has made housing an investment instrument for the already well off. It has helped upper middle-class families, who can already afford ever-rising house prices through their savings and earned incomes that secure favourable mortgage conditions. And the reliance of this policy on private developers to provide low-cost housing has added insult to injury. A private developer’s motivation to maximise profits is not aligned with the goal of social inclusion. It has, however, generated ways of effectively bypassing the affordability criteria to keep revenues high.

Although riddled with complexities, the dynamic at hand is as simple as the law of supply and demand – there are not enough houses available to satisfy the growing demand for housing, so prices rise. These demand pressures are coming not just from within the UK, but also from abroad. Overseas investors have been buying up properties in the London housing market, which has driven up local house prices. In September 2018, there was only one house in London on sale for less than £100,000.

“Wealth-building policies that rely on markets to supply housing can have the opposite impact on economic inequality.”

So Help to Buy has made housing less and less affordable in the true meaning of this word. Truly affordable housing remains beyond the reach of low-income families in the UK, whose finances have been squeezed by austerity and sluggish wage growth. And household debt is at its record high, which is manifested not only in the £200-odd billion consumer credit bubble but also in the estimated £19 billion in hidden debt from unpaid bills and benefits.

These policies have not been born in an ideological vacuum. Economists have been complicit, providing theories that justify the market-oriented, “hands off” political agenda. And the profession has been hamstrung by its lack of gender and ethnic diversity, which has limited variety in the perspectives and scope of economic investigation. Economic theories, publications, and job appointments have been dominated by white, often old, men, while women and economists of colour have scored worse on all these fronts.

New evidence from different countries shows that women economists face tougher judgments in getting their work published and on the job market. More research is needed to reveal the precise scale of racial discrimination in economics, but available evidence from the USA shows that ethnic minorities have been underrepresented in the field. More diverse perspectives among economists would broaden our understanding of the causes of economic inequality and adequate remedies.

What’s more, despite the increasing amount of new empirical evidence on the past and present trends of economic inequality, the current discourse in academia and in the media has a tendency to conflate two sides of the economic inequality coin – income and wealth. Insufficient appreciation of the distinct features of income and wealth in understanding inequality is not a unique to economics. The Polish economist Michal Kalecki said that economics was “the science of confusing stocks and flows”.

“A private developer’s motivation to maximise profits is not aligned with the goal of social inclusion.”

The flow of income is ruled by different dynamics than the accumulation of the stock of wealth. Each carries a different implication for economic prosperity. While income is more empirically observable than wealth, it mainly conveys current financial conditions. In turn, wealth is more informative about the past and future living standards because it is much less mobile across generations. Targeting income disparities will not necessarily address wealth inequality, especially because almost 8% of all household financial wealth in the world is held in offshore tax havens, largely unreported. Policy needs to consider these differences explicitly if it is to be effective in reducing economic inequality.

Seminal work by Thomas Piketty has earned its status because it shows that to shed light on the causes of rising economic inequality, it is necessary to understand the differences within income and wealth and the interactions between them.

His conclusion is followed by a bold policy proposal to introduce a progressive global tax on the stocks of wealth. Current tax infrastructure is not suited to capture the owners of the highest wealth in the world where capital gains accumulate, largely tax-free and financial wealth concentrated among the rich can move overnight to low-tax jurisdictions. Piketty proposes that net wealth between $1.35 million and $6.75 million is taxed at 1% of its value, rising to 2% for larger net wealth holdings. This tax needs to be global – recognising that the wealth of the rich can cross borders and requires a coordinated international effort.

“Instead of indulging the prevalent culture of tax avoidance, why not make taxation a tool of displaying status for the rich?”

Piketty’s proposal is seen by many as unrealistic and impractical. It goes against the recent trend of countries abandoning wealth taxes. But the late Sir Tony Atkinson noticed the merit of such a global wealth tax, reaching back to Thorsten Veblen’s idea of consumption as a tool of status. Instead of indulging the prevalent culture of tax avoidance, why not make taxation a tool of displaying status for the rich? Qualifying for the minimum level of net worth of the global wealth tax could be akin to becoming listed on the Forbes 400 list. Such globally conspicuous taxation could actually provide incentives to pay taxes.

But the proposed solutions should go beyond taxes alone and focus on shaping market outcomes themselves. The proposed £2 billion investment in social housing announced by the UK government in September 2018 and the end to ‘Help to Buy’ in 2023
are welcome but far from enough to reduce wealth inequality. A much larger overhaul of current policy is needed. Examples might include: closer regulation of the rental sector; an immediate lifting of spending cuts in other sectors of the economy; a long-term strategy to lift wages for low-to-middle income earners; and baby bonds.

These policies need to consider the impact of Brexit which, although challenging, may prove to be an opportunity to test bold policies to reduce economic inequality by giving a much more proactive role to the British government. Examples from around the world show potential starting points for implementing bold wealth building policies. New Zealand has recently imposed a ban on certain forms of foreign ownership of housing. Poland has embarked on a large-scale social housing programme, following a successful introduction of a national child subsidy in 2016.

These examples show that where there’s a will, there’s a way. The UK needs a government who is willing to commit to a long-term progressive policy programme. What’s more, we ought to “go after the hearts and minds to get to the pockets” and nurture a society that cares for its most vulnerable members. We need collectively to recognise these feelings of social responsibility for future reductions in economic inequality to be sustainable.

Hanna K. Szymborska is a lecturer at The Open University

Hanna Syzmborska

Hanna is a lecturer in economics at the Open University.

Read More »

Leave a Reply

Your email address will not be published. Required fields are marked *