Greed Is Not Good

As we enter another year under Conservative-LibDem coalition, there are many stories I could highlight as my story of 2013. I could talk about the UK’s credit-rating downgrade and how it underlines the government’s (willing or unwilling) misunderstanding of what determines their borrowing rate. I could talk about how the government should take no credit whatsoever for the signs of economic recovery we have started to see. I could talk about how the government’s policy on immigration is, at best, completely ignorant of the widely available evidence on the subject. I could even forget politics and economics and talk about taking photographs of herons if you want to give me a moment.

However, in my current state of reflecting on 2013 whilst simultaneously looking to our future, there is one story that I feel needs to take precedence and that story is the story of inequality.

In November, Boris Johnson gave the annual Margaret Thatcher Lecture. You can read the full transcript if you can bear it but here’s a snippet:

Like it or not, the free market economy is the only show in town. Britain is competing in an increasingly impatient and globalised economy, in which the competition is getting ever stiffer.

No one can ignore the harshness of that competition, or the inequality that it inevitably accentuates; and I am afraid that violent economic centrifuge is operating on human beings who are already very far from equal in raw ability, if not spiritual worth.

Whatever you may think of the value of IQ tests, it is surely relevant to a conversation about equality that as many as 16 per cent of our species have an IQ below 85, while about 2 per cent have an IQ above 130. The harder you shake the pack, the easier it will be for some cornflakes to get to the top.

…the income gap between the top cornflakes and the bottom cornflakes is getting wider than ever. I stress: I don’t believe that economic equality is possible; indeed, some measure of inequality is essential for the spirit of envy and keeping up with the Joneses that is, like greed, a valuable spur to economic activity….

When Margaret Thatcher came to power in 1979 they faced a top marginal tax rate of 98 per cent, and the top one per cent of earners contributed 11 per cent of the government’s total revenues from income tax. Today, when taxes have been cut substantially, the top one per cent contributes almost 30 per cent of income tax; and indeed the top 0.1 per cent – just 29,000 people – contribute fully 14 per cent of all taxation….

I proposed that we should fete them and decorate them and inaugurate a new class of tax hero, with automatic knighthoods for the top ten per cent. Well, my friends, I am proud to say I have often been accused of being out of touch, but hardly ever have I produced so frenzied and hate-filled a response. People aren’t remotely interested in how much tax these characters pay. That does nothing to palliate their primary offence, which is to be so stonkingly and in their view emetically rich.

When George Osborne gave his speech about welfare cuts in April, I labelled it the worst speech ever made. I didn’t expect it to hold that record for such a short period of time. Let me take Boris’s points one by one.

The high and ever-increasing level of inequality is inevitable in a competitive economy

In a free and competitive economy, the laws of economics say that workers’ wages are set by supply and demand. That is we would expect workers with skills for which demand is high compared with supply, to receive higher wages than their counterparts. If there is a demand for apples and I am better at growing apples than the average apple grower such that I grow on average 10% more apples each year, then I would expect my wages to reflect this. In fact, if my wages didn’t reflect this, I probably wouldn’t bother growing the extra 10% and instead work fewer hours. Therefore it is fair to say some level of inequality of inevitable in a competitive economy.

However, that level of inequality is very far removed from the wage disparity that we see today. The wages received and the wealth held by the richest 1% dwarf that of the average worker by such a degree that it cannot be explained simply by the supply and demand of their skills. In 1998 the average remuneration of FTSE100 CEOs was 40 times that of their average employee. Just 13 years later it had ballooned to 140 times that of their average employee. This is the scale of inequality we are talking about and it is simply not explainable by supply and demand for skills – it’s not as if the number of people with the skills to be a CEO massively declined between 1998 and 2011. Something else is going on here.

The high and ever-increasing level of inequality is a natural result of varying intelligence

Firstly, it’s worth noting that the intelligence explanation of inequality is completely at odds with the explanation of our current government. David Cameron and George Osborne have for the past couple of years been pushing the explanation that people who do well, “go out and work hard” and being poor or unemployed is a lifestyle choice.

That’s clearly nonsense but Boris’s explanation doesn’t work either. The gap between the super rich and everyone else has increased at such a pace that it simply cannot be linked to intelligence in any significant way. How can the dramatic rise of CEO wages in such a short period of time be explained by “different people have different IQs”? It can’t.

Additionally it is worth asking why, if you accept that there is naturally a variation in ability, you should use that as a reason not to tackle inequality. Surely if you understand that some people are born with a natural advantage it is all the more reason to form policy to support those less lucky.

Let’s look at a couple of other examples of inequality from the US and see if these seem to be linked to a variation in IQs among workers.

In the US, the Walton family (I’m referring to the 6 heirs to the Wal-Mart empire not John Boy etc.) command a wealth of $67.9bn – equivalent to the combined wealth of the entire bottom 30% of US society. That must be one smart family!

In case you think by using the example of one family I am cherry-picking, let’s go macro. This recent paper from UC Berkely showed that between 2009 and 2012, the earnings of the top 1% of Americans grew by 31.4% compared with just 0.4% for the other 99%. Or to put it another way, 95% of the increase in US earnings between 2009 and 2012 went to the top 1%.

Can that possibly be explained by intelligence? No. Something else is going on.

Inequality is necessary to motivate people to work harder

To a point. Going back to my original example, it’s a fair possibility that my apple growing neighbour will see my apple haul is larger than her’s and work hard to increase her output next year.

As I have already stated though, this is just not the scale of inequality we are talking about and the idea that such a motivational effect exists when inequality is high is purely wrong. A small level of inequality might make me see an opportunity for increased wages by working harder but a high level of inequality will have the opposite effect. When a worker in a FTSE100 company sees the pay of their CEO increasing astronomically year on year, while their own pay stagnates, are they more and more motivated? Of course not, it is throughly demotivating.

Worse still, those at the very bottom living in poverty see the gulf they must cross to get out of poverty becoming greater and greater and the chance of crossing it becoming less and less. In South Africa the rich live in luxurious, gated communities surrounded by razor-wire and armed security guards. The poor live around them in shanty towns. If extreme inequality is an extreme motivator then we should expect to see high numbers of South Africans that were born in extreme poverty moving out of it. But we don’t.

The higher inequality becomes, the harder it is to solve.

Margaret Thatcher looked out for the rich and in doing so made things fairer

This one is half right in that Maggie did look out for the rich but the idea that she made things more fair or more equal is (in Boris terms) balderdash and piffle.

The Gini Coefficient is a standard measure of inequality in a country. A Gini Coefficient of 0 means everyone is equally well off. A Gini Coefficient of 1 means one person holds all of the wealth and the rest of the population have nothing. The lower the Gini Coefficient the more equal the society.

This graph shows (in blue) how the Gini Coefficient changed during the period of government over which Maggie was in charge. I’ve included the years back to 1961 (in green) to show that this wasn’t just an existing trend.

UK Gini Coefficient (1961 - 1990) Source: IFS

UK Gini Coefficient (1961 – 1990) Source: IFS

And this graph shows how real income changed during her time in charge for each fifth percentile:

Real Weekly Incomes 1979 & 1990 Source: IFS

Real Weekly Incomes 1979 & 1990 Source: IFS

As you can see the income of the poorest went down, while the richer you were, the more your income went up!

As Boris says, it is in large part due to Maggie that today the richest are paying a higher proportion of the total income tax than ever before. While that’s true he has failed to mention RedEaredRabbit’s Law of Income Inequality:

If you give the rich all of the income, the rich pay all of the income tax.

That doesn’t make it fair.

The rich should be lauded for the amount of income tax they pay

This one might be the worst of the lot.

A rich person who pays income tax (without trying any dodgy tricks to avoid it) is obeying the laws of the land. They are obeying them every bit as much as a poor person is who is paying their taxes. No one is paying income tax to be philanthropic – they are simply obeying the laws of the land as set by the politicians.

More than that though, are we seriously trying to say that someone in severe poverty would rather be where they are now, watching every penny just to put food in front of their children but paying a small amount of tax, rather than being a millionaire who pays much more? I leave you to choose your own heroes here.

Income tax is a government policy. It is they who decide who pays how much income tax. To say that heroism and knighthoods should come with the 45% bracket is worse than ridiculous.

The 99% hate the 1% for being rich

This is the always the last refuge of the right in this discussion. If you are concerned about rising inequality you’re just a nasty jealous person. This is not the case. The 99% do hate something but it isn’t the 1%.

The 99% hate the system that sees the wealth of the 1% accelerating away from everyone else. They hate the fact that the same system that caused the 1% to go from rich to super rich simultaneously caused their own pay to stagnate. And they hate the fact that this system caused a global economic crisis for which they are paying the price.

People don’t hate the individuals, they hate the system that causes the inequality. Why is it hugely convenient for right-wing politicians to push the case for the former? Because the responsibility of the latter lies solely with politicians and it is a system that those on the right seem to rather like the way it is.

Summary

It’s easy to say that inequality is inevitable in free market economics but that is simply not the case. Inequality did not suddenly balloon under Margaret Thatcher because the laws of economics were different in the 1980s – inequality ballooned directly because of the policies of her government.

Boris would like us to believe that the laws of economics exist in a vacuum but they don’t. They exist in a world dominated by politics. While the laws of economics help us to understand what the outcomes of different government policies might be they do not decide the policy that a government chooses to go with. Economics doesn’t define economic policy any more than economics decides the laws of the land. These are determined by politicians and those politicians absolutely have the power to reduce inequality if they choose to implement measures to do so.

CEOs of FTSE100 companies are allowed to give themselves large increases in remuneration not because of economics but because the politicians have set laws on corporate governance that allow them to do so. Companies operate monopolies not because of economics but because the laws of the land set by politicians allow them to do so. Banks were allowed to lend irresponsibly in the run up to the financial crisis, not because of economics but because politicians relaxed banking regulations to allow them to do so.

The problem with allowing inequality to increase forever might seem fine to Boris, (who we should remember, described his second salary of £250,000 for his Daily Telegraph column as “Chicken Feed”) but it has really serious implications.

Today we live in a country in which a child born into a rich family has a significantly greater chance of receiving a high income later in life than a child of equal intelligence born into a poor or average family. That is not the sign of a well functioning society.

We live in a country in which a child born into a family at one end of the income spectrum has a significantly higher life expectancy than a child born into a family at the other end. That is not the sign of a well functioning society.

As I have said, the laws of economics do not exist in a vacuum. Our politicians have every opportunity to reverse this trend, not just by implementing controls at the top but also by investing seriously in state education in the poorest areas and reducing poverty, especially child poverty.

We do not employ our politicians simply to tell us that it is “inevitable” that the profits from everything we produce should go the richest few. We employ them to look after every one of us, rich or poor, and don’t ever let them tell you that doing so is not feasible because of economics or free markets.

Boris has his sights set on being Prime Minister. You have seen the rise in inequality that occurred under the leader he idolises and you have heard his abdication of political responsibility for inequality.

One day he will run for PM.

When he does, you know what to do.

RedEaredRabbit