Winner of the New Statesman SPERI Prize in Political Economy 2016

Sunday, 15 December 2013

Inequality and the Left

In the debate over inequality and priorities set off by Ezra Klein’s article, Kathleen Geier writes (HT MT) “the policy fixes for economic inequality are fairly clear: in no particular order, they include a higher minimum wage, stronger labor unions, a more progressive tax system, a more generous social welfare state, macroeconomic policies that promote a full employment economy, and much more powerful government regulations, particularly in the banking and finance sector.” And part of me thought, do we really want to go back to the 1970s?

Maybe this is being unfair for two reasons. First, in terms of the strength of unions, or the progressivity of taxes, the 1970s in the UK was rather different from the 1970s in the US. Second, perhaps all we are talking about here is swinging the pendulum back a little way, and not all the way to where it was before Reagan and Thatcher. Yet perhaps my reaction explains why inequality is hardly discussed in public by the mainstream political parties – at least in the UK.

The 1997-2010 Labour government was very active in attempting to reduce poverty (with some success), but was “intensely relaxed about people getting filthy rich as long as they pay their taxes.” This was not a whim but a strategy. It wanted to distance itself from what it called ‘Old Labour’, which was associated in particular with the trade unions.  Policies that were explicitly aimed at greater equality were too close to Old Labour [1], but policies that tackled poverty commanded more widespread support. Another way of saying the same thing was that Thatcherism was defined by its hostility to the unions, and its reduction of the top rates of income tax, rather than its hostility to the welfare state. 

I think these points are important if we want to address an apparent paradox. As this video illustrates (here is the equivalent for the US), growing inequality is not popular. Fairness is up there with liberty as a universally agreed goal, and most people do not regard the current distribution of income as fair. In addition, evidence that inequality is associated with many other ills is becoming stronger by the day. Yet the UK opposition today retains the previous government’s reluctance to campaign on the subject.

This paradox appears all the more perplexing after the financial crisis, for two reasons. First the financial crisis exploded the idea that high pay was always justified in terms of the contribution those being paid were making to society. High paid bankers are one of the most unpopular groups in society right now, and it would be quite easy to argue that these bankers have encouraged other business leaders to pay themselves more than they deserve. Second, while Thatcherism did not attempt to roll back the welfare state, austerity has meant that the political right has chosen to paint poverty as laziness. As a result, reducing poverty is no longer an uncontroversial goal. [2]

What is the answer to this paradox? Why is tackling inequality not seen as a vote winner on the mainstream left? I can think of two possible answers, but I’m not confident about either. One, picking up from the historical experience I discussed above, is that reducing inequality is still connected in many minds with increasing the power of trade unions, and this is a turn-off for voters. A second is that it is not popular opinion that matters directly, but instead the opinion of sections of the media and business community that are not forever bound to the political right. Politicians on the left may believe that they need some support from both sectors if they are to win elections. Policies that reduce poverty, or reduce unemployment, do not directly threaten these groups, while policies that might reduce the incomes of the top 10% do.

This leads me to one last argument, which extends a point made by Paul Krugman. I agree with him that “we know how to fight unemployment — not perfectly, but good old basic macroeconomics has worked very well since 2008.... The causes of soaring inequality, on the other hand, are more mysterious; so are the channels through which we might reverse this trend. We know some things, but there is much more room for new knowledge here than in business cycle macro.” My extension would be as follows. The main reason why governments have failed to deal with unemployment are accidental rather than intrinsic: the best instrument available in a liquidity trap (additional government spending) conflicts with the desire of those on the right to see a smaller state. (Those who oppose all forms of stimulus are still a minority.) In contrast, reversing inequality directly threatens the interests of most of those who wield political influence, so it is much less clear how you overcome this political hurdle to reverse the growth in inequality.

[1] This association is of course encouraged by the political right, which is quick to brand any attempt at redistribution as 'class war'. 

[2] The financial crisis did allow the Labour government to create a new top rate of income tax equal to 50%, but this was justified on the basis that the rich were more able to shoulder the burden of reducing the budget deficit, rather than that they were earning too much in the first place.  


  1. You guys might not be feeling the pain as much in terms of economic dislocation yet compared to the US. It took a while for inequality to become a front-burner issue here, and we have a much weaker safety net compared to the British.

  2. Simon.
    "...reversing inequality directly threatens the interests of most of those who wield political influence, so it is much less clear how you overcome this political hurdle to reverse the growth in inequality."

    We found two ways to do this very successfully in the period 25-70 years ago. They were called "WWII" and "The Fear of the Working Class Going Commie".
    As Piketty & Saez's data show clearly, income inequality fell dramatically during WWII. And it stayed low for more than a generation after that. It picked up slightly in the first rush of the Thatcher revolution, but it wasn't really let off the leash until the wall of The Wall.

    These could all be co-incidences, and there may be more complex reasons but I prefer Occam's Razor.

  3. «the political right, which is quick to brand any attempt at redistribution as 'class war'.»

    That's absolutely false: the political right are always consistent to brand any attempt at redistribution from parasitic, improductive, low IQ, low paid workers to progressive, productive, high IQ, high income property owners as a growth strategy for fairness, not as "class war". :-)

  4. I would be interested in comparing these methods for reducing inequality as some of them appear to have quite large (and negative) side effects.

    For example, while a higher minimum wage would probably be very beneficial in the United States, in the UK it's already high enough that a further rise would increase unemployment. The same goes for most european countries.

    Stronger labour unions would decrease inequality but they're only useful if they are able to find workable compromises with the employers. The British know the potential downsides that come with strong unions.
    Considering the strong trend towards de-unionization across almost all of the developed world, I also have my doubts about how workable unions are in todays world economy.

    A more progressive tax system and generous welfare seem like good alternatives with relatively small downsides. Better macroeconomic policies and proper financial regulation are obvious wins and should be implemented even if we don't care about inequality.

    I would love to read what SWL believes to be the best way towards more equality, or are they all roughly equal?

  5. «growing inequality is not popular. [ ... ] Yet the UK opposition today retains the previous government’s reluctance to campaign on the subject.»

    Because the polls tell them that whatever they *say* about inequality, *voters* have been voting with great consistency and enthusiasm for policies that are are based on or result in inequality.

    The voters that swing, which are the ones who matter, especially the middle class, middle aged or retired, property owning, South East ones, often female, often divorced or widowed, want:

    * higher asset prices to get tax-free cash via remortgages;
    * lower wages as "good help is hard to find today"
    * lower social insurance, except for women and the elderly.

    The Labour opposition may be fully aware that lots of Northern voters care for equality, for example, from a civil and religious tradition, but it can take their votes entirely for granted; viceversa it knows that South East upper-middle and upper class voters will never vote for them.

    Elections are decided by the South East lower-middle and middle classes, and the tory (with a little "t") voters of the South East middle belt are in general actual or wannabe petty rentiers totally seduced by the dream of becoming ladies (or gentlemen) of quality, living comfortably off the hard work of their properties and the northern english or east or southern european immigrants that pay rent for them or work in them.

    The aspirational dream of the South East tory voter (whether they vote New Labor, LibDem or Conservative) is a Kuwaiti or at least Swiss style economy, in which incumbents lead a worry free life, while metic workers work hard for the comfort of the ladies (and lords) of the manor. A bit like northern, and later scottish and irish immigrants made comfortable the lives of the 18th and 19th century did.

    1. Thanks for this analysis; I'm swayed by almost all of it.

      It supplies another terrific reason to find effective ways to neutralise the damaging effects of the blackhole called London on our society.

  6. «Thatcherism was defined by its hostility to the unions, and its reduction of the top rates of income tax, rather than its hostility to the welfare state.»

    In the popular memory the very defining aspects of Thatcherism were:

    * Right To Buy, to buy public asset houses for in general 1/3 of market value;
    * government policy to push up house prices via abolition of the "corset" and
    ever bigger and cheaper mortgages, and remortgages.

    And perhaps the Falklands. Sure trade unions overreached and the memory of voters is mostly that Thatcherism was right to repress them, but I think that the reduction of top rates of tax was something that most voters barely remember as it did not remotely impact them.

    But the impact of Right To Buy and the endless mortgage boom, oh yes, they surely remember with enormous enthusiasm and gratitude, as it gave the aspiration to a life dream of becoming hard working, productive rentiers :-).

  7. Modern Labour / Democrat Governments seem to have universally agreed that divisiveness is not an appropriate when you aspire to govern an entire nation. And I think there is some wisdom in that.

    I don't think it is necessarily linked to trade unions, but a desire to be inclusive.

    Because, even if you are only attacking a section of the population now, you are attacking the vast majority of the populations aspirations.

  8. “The main reason why governments have failed to deal with unemployment are accidental rather than intrinsic: the best instrument available in a liquidity trap (additional government spending) conflicts with the desire of those on the right to see a smaller state.”

    Granted the employment raising effect of increased public spending are more predictable than the employment raising effect of attempts to raise private spending. But attempts to raise private spending are far from totally ineffective even in a liquidity trap (e.g. Help to Buy, cutting taxes, or raising the state pension). I.e. a right wing government ought to be able to raise employment without expanding the size of the state.

    I suggest the main reason for "failure to deal with unemployment" (particularly in the US) is debt and deficit phobia.

  9. OK, thanks Simon. This post drives me nuts, in a good way. Let's go with the idea that dealing with inequality is still mysterious and that we don't want to go pre-Thatcher/Reagan and relive the 70s.

    How does this not suggest an enormous intellectual void? Reaganomics is a punchline - and yet still 30 odd years later he gets the last laugh? no one has come up with a better model? Reagan and Thatcher told a simple story - the economy was doing poorly because of the Government. They reduced government (sort of) and... the economy grew more slowly. It's hard not to look at the data and think that the starting hypothesis is that the Reagan/Thatcher agenda was (as criticized at the time) clearly about distribution, not growth.

    I don't see how government isn't part of the solution - but its complicated. surely if more debt is the solution to a credit bubble - more government can be the solution to the 70s. How is it that economics doesn't have a central argument and understanding for how that can be so.

    I don't think this should be a pendulum swing - it should be about advancing the ball down the field. Clearly government is demanded by a modern economy to fill a vital role - just because socialism had an inchoate understanding of 'government' doesn't make the demand for government by a modern economy any less true.

    Progress please, not dizzying undulations.

    1. So basically what you're saying is that quality is more important than quantity. Making the government better is more important than changing it's size even though that's what a lot of the political debate (especially in the US) is about. Sounds fair enough!

      One thing that bothers me about this kind of discussion though - the way Reagan and Thatcher are constantly grouped together.

      Yes they were both right-wing, yes they often worked together in international matters and yes they both implemented reforms that had far-reaching effects on their respective countries. There's one crucial difference between them however: Reagan was bad for the US while Thatcher was good for the UK.

      As an obvious example, take debt and deficits, considering these two leaders governed during times when a higher national debt did not help the economy. Reagans administration happily increased debt, arguing that "deficits don't matter" and with the extremely cynical (covert) motivation that more debt would make later democrat administrations less popular as they would be forced to either raise taxes or cut spending in order to decrease this deficit.
      For Thatcher on the other hand, having a low debt deficit was a matter of principle - she was (at least sometimes) able to put what she thought was good for her country above what was good for her politically.

    2. Never mind quality or quantity, the point is a modern economy depends on government. Just as obviously as the idea that better corporations are better, so too better government is better - yes, of course. Lets start with the argument over what government must do, and then sure, I'll support doing it well with less rather than poorly with more.

      But this also raises an interesting juxtaposition. Don't want to go back to the 70's? How about going back to the 00's? The awe-fullness of the 70's is legend, but on the numbers the 00's are worse.

      But the aim isn't to reprise the past, but rather to have a more glorious future. This seems to me to be the basic problem - econ has lost it's imagination and vision for how things can be better and is rather mired in the stew of examining past historical relationships.
      And yes, 'reversing inequality directly threatens the interests of most of those who wield political influence, so it is much less clear how you overcome this political hurdle to reverse the growth in inequality.' But that's the problem at hand, economists set themselves too easy a task by avoiding political realities. Time to step up to the plate.

  10. I am interested in your thoughts on the price-fixing effects of a government-mandated minimum wage. The debate is always predicated on the notion that the minimum wage raises the cost of workers. What if the opposite is true? What if the minimum wage is set below the market-clearing level thus confining low-skilled workers to poverty while providing employers with excess profits protected by law? More on this here:

    1. What, precisely, is the mechanism that 'keeps' workers at the low wage if the market-clearing wage is higher?

  11. "And part of me thought, do we really want to go back to the 1970s?"

    In many ways, very much so. I miss public schools to which the middle class felt comfortable sending their children, more support for college, greater equality, and greater mobility.

    Concerning "conflicts with the desire of those on the right to see a smaller state", at least here in the USA I don't think the right really cares about the size of the state. They simply want to reduce their own taxes. The don't care about the consequences, because they will not suffer any consequences. The Republican political philosophy is "Each man for himself and the devil take the hindmost." The use of "man" rather than e.g. "person" is deliberate.

    As to overcoming the political influence of the powerful, I don't have any idea. Revolution,
    even if it's a good idea (I don't know whether it is or not) seems most unlikely.

  12. Simon, you write "...a higher minimum wage, stronger labor unions, a more progressive tax system, a more generous social welfare state, macroeconomic policies that promote a full employment economy, and much more powerful government regulations, particularly in the banking and finance sector.” And part of me thought, do we really want to go back to the 1970s?,

    This will not take us back to 1970s.

    I grew up in the 1970s and its problems were not directly related to these policies, which may have looked similar but I would imagine were nothing like their realisation would be today.

    For example, 'stronger labor unions' does not necessarily equate, in my mind, to Jo Gormley and Mick McGahey dictating to Wilson and Heath, or the 1973 power cuts, or Winter of Discontent or Scargill.

    Instead, it would mean moving the balance of power back towards the ordinary employee (99% of the working population) to redress the erosion of rights by the conservatives e.g. give up your employment rights for shares in the company.

    These are all elements in a civilised society. I really don't want to live in the very unequal, piratical, 'dog-eat-dog' society we have now.

    If these principles go some way to improving things, then let's have them.


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