Politics and Economics

World-wide wealth inequality is growing – is there a realistic solution?

Thomas Piketty’s bestseller Capital in the Twenty-First Century has been hailed by the political left, in America and now in Britain, as a closely argued vindication of what they have been proclaiming for decades.  That inequality is the great injustice of modern politics.

The gap between the rich and the poor is rising again, after a hiatus marked by the gap between the two world wars. The wars eroded inherited, dynastic wealth and brought forth progressive policy through the State i.e. Socialism.  These changes now look like a mere hiccup as capitalism, Piketty says, has resumed its usual inexorable path towards greater and greater inequality.  In Europe, the wealthiest 10 per cent take about 35 per cent of the income but 70 per cent of the wealth.  The richest 1 per cent of Americans took a scandalous 60 per cent of the growth in national income.  The wealth of the richest 85 people in the world is greater than that of the 3.5 billion people who make up the bottom half of the world’s population.

The Financial Times has suggested that Piketty’s work contains a series of errors that fatally undermine large parts of his proposition. This prestigious and respected newspaper claims that some of the data Piketty uses to support his arguments about dramatic and growing wealth inequality in Britain and Europe are dubious or inexplicable.  Piketty cited a figure showing the top 10 per cent of British people held 71 per cent of total national wealth. The Office for National Statistics (ONS) latest Wealth and Assets Survey put the figure at only 44 per cent. Some of this, the paper suggests, may be down to straightforward transcription errors. More damningly, the FT claims, “some numbers appear simply to be constructed out of thin air”.

Piketty responded to the FT: “I have no doubt that my historical data series can be improved and will be improved in the future … but I would be very surprised if any of the substantive conclusion about the long-run evolution of wealth distributions was much affected by these improvements.” Piketty made the data freely available so that others could check his work and influential publications and think tanks have given him their backing.

The Economist newspaper has concluded: “analysis does not seem to support many of the allegations made by the FT, or the conclusion that the book’s argument is wrong”.

Yet even Piketty’s figures show that British wealth inequality is only back to where it was in the mid-1960s, when the top 10 per cent of people held about 70 per cent of the wealth. The figure dipped to about 60 per cent in 1980, having peaked at 90 per cent in 1910. So it is not true that we are back to Edwardian levels of wealth inequality. In Britain wealth inequality probably did increase between 1980 and 2010, but not by as much as Piketty has claimed.

This is not surprising as during these three decades the government encouraged asset bubbles in house prices; lightly taxed wealthy non-domiciles; gave tax breaks to pensions; poured money into farm subsidies; and severely restricted the supply of land for housing, pushing up the premium earned by those who already owned a house and those involved in property development.   Consequently property and land owners saw their relative wealth increase.   So much of the increase in wealth concentration since 1980 has been driven by government policy, which has systematically redirected earning opportunities to the rich rather than the poor.  A good example is energy policy. The left-of-centre UK energy secretaries Ed Miliband and Ed Davey were prepared to pay double or treble the going rate for land-hungry projects such as wind, wood and solar energy, in the name of “carbon friendly policies”, all of which results in rewards going to the owners of property.  This also extended to subsidised “payback” on wood-chip boilers, solar panels or mini-hydroelectric power if you had the correct resources on your land. This amounts to subsiding landowners.

So there is some truth in Piketty’s assertions and many socialist political commentators believe this book vindicates their position and proves that Capitalists are in denial in justifying their system.  They urge their local governments to adopt “progressive” policies to tackle these issues of inequality. They say the gap is widening between the political Right and reality.

The use of the word “reality” in this context is interesting. Many would claim the Left has lost reality in believing there is a solution.  History shows us that the remedies are worse than the disease and Piketty’s solutions exist in the realm of theoretical political fantasy.  He wants a global wealth tax and a levy of 80 per cent on incomes above half a million dollars.

Why would anybody believe that a future UK Government led by the left-leaning Labour party, for example, could have even the tiniest influence on worldwide wealth inequality?  Anyone who believes they can has lost touch with reality. It seems that even its leader, Mr. Miliband, is not that stupid, as he has made no comment regarding Mr. Piketty’s remedy.

As a future leader of less than 1% of the world’s population Mr. Miliband could address this disgusting inequality in wealth by heavily taxing and redistributing it.   The few UK based super-rich would soon leave and take their wealth with them.  Others would not come to the UK.  They would flee and spend their wealth in Dubai, Switzerland, Monaco, the USA or the Caribbean. The only alternative is to convince the vast majority of the world’s countries to adopt a similar policy.  A global State with a global tax regime.  Good luck with that.

The issue of inequality is hardly new.  Since the beginning of history man has sought to exert and maintain an advantage over his fellow man in terms of power and wealth.  But in historical terms we are now in a sweet spot as far as human rights and access to health, education and opportunity are concerned.  This is particularly so in the Western world, but life is also much better for the vast majority of the developing world, where obesity is now a bigger health risk than starvation.

Whilst wealth inequality in the UK has increased, income inequality has significantly reduced. The government has systematically redistributed money from the rich to the poor by taxing the rich at higher rates and by providing benefits to the poor. In the UK the gap between the well paid and the poorly paid has been going down in terms of disposable income. When you take into account tax and benefits, the ONS confirms that the Gini coefficient (an income distribution index) shows inequality in the UK is actually lower now than it was 25 years ago. The recent ONS bulletin entitled The Effects of Taxes and Benefits on Household Income, 2011/12 finds that the highest-earning 20 per cent of British households earned 14 times as much as the lowest earning 20 per cent before tax and benefits — but just four times as much after tax and benefits. These measures cut the average income of the top 20 per cent from £78,300 to £57,300, while they raise the average income of the bottom 20 per cent from £5,400 to £15,800. Thus, even though government may enact policies that help the wealthy to increase their wealth, it also redresses the balance through the tax system. As it should.

Global income inequality is also declining rapidly even before taking into account tax and benefits. For 25 years people in poor countries have been getting rich faster than people in rich countries have been getting richer. Thanks to the recent recession in rich countries and continuing rapid growth in poor ones that discrepancy has accelerated. Mozambique’s economy is 60 per cent larger than it was in 2007 whilst Italy’s is 6 per cent smaller.   The UK economy has only just rebounded to where it was in 2009.  And nowhere in the world, with the possible exception of North Korea and Somalia, are the poor getting poorer. The percentage of the world’s population living on $2 a day (corrected for inflation) has halved since 1990 — a welcome and unprecedented change. Any increase in wealth inequality or pre-tax income inequality in Britain or America is caused by the rich getting disproportionately richer, not by the poor getting poorer. The gaps that are opening up in the West are mostly in the ability to afford luxuries, not necessities. The Left genuinely seem to care about the unfairness of unequal income as much as or more than they care about poverty. But they think in terms of relative wealth, not absolute wealth, which is why they seem to believe inequality reduction is an end in itself. They would rather that the poor were poorer, provided that the rich were less rich.

The fact that some people are ludicrously and immorally wealthy has to be balanced with the improvement in the standard of living of everybody.  I’m sure the Right see the dangers of the inequality of wealth distribution, but perhaps are even more concerned about naïve, well meaning schemes that seek to address it and put these universal economic gains at risk.  This is not even exploring the potential risks to personal freedom and economic liberty.  Remember Communism was seen as a solution to inequality.  And it too may have worked if the whole world had adopted it.

The real lack of reality is amongst those on the Left who believe that a few “progressive policies” in their own tiny little fiefdoms will make a difference to the rest of the world.

So the real “reality” is that we must live in the real world.  When Mr. Piketty and Mr. Miliband have got all the world’s major economies on their side they may be able to implement these remedies without merely unilaterally disadvantaging one country.