Neither inequality nor poverty

Was Blair right? Miles and Simon have been debating this.

Blair said (pdf):

I don’t care if there are people who earn a lot of money. They’re not my concern. I do care about people who are without opportunity, disadvantaged and poor.”

He walked the talk. Tax credits, more generous pensions, fuller employment and the minimum wage helped reduce poverty whilst his government did little to restrain the rise in very top incomes. Miles approves of this. And he has a good point: poverty is a great evil.

This, though, misses something – the maths. If the rich are getting richer and the poor are getting better off, then for a given level of income, somebody must be getting worse off. The “Blairite society” of super-rich but little poverty is one in which the middle class is relatively poor.  

This has its drawbacks – especially perhaps from a conservative point of view. As Deirdre McCloskey has argued, a bourgeois society embodies virtues of prudence, justice and regard for others. A Blairite “winner take all” society jeopardizes these: why work hard at school and university (and incur massive debt) when it’ll only get you grunt-work and no hope of a decent home? And an insecure and embittered middle class also threatens political stability. Back in 2013 Fraser Nelson wrote:

Our middle classes — the great stabilising force in our society — are falling fast. It’s hard to imagine the British bourgeoisie taking to the streets, but someday soon they might turn around and say: ‘Sorry, but we’re really rather mad and we’re not going to take it any more.’

Perhaps Brexit. Ukip and the rise of insular, anti-market sentiment vindicates him: inequality can be bad for economic freedom.

Of course, my concerns would be irrelevant if the Blairite society were to lead to faster economic growth and hence a growing pie for all. But this hasn’t been the case. Quite the opposite. Since the mid-90s, growth in GDP per head has slowed.

And it might have done so because of the Blairite shift. Simon’s right to say that the super-rich engage in rent-seeking. But this isn’t confined to the likes of Arron Banks meddling in politics. It also happens in the workplace: rising CEO pay has come at the expense of shareholders and workers. And there are several reasons to suspect that a big take by the super-rich reduces economic growth. Not least of the mechanisms here is that it leads to worse politics by reducing trust.

Miles might be right that it’s better to have a society of super-rich and no poverty than one in which there’s poverty and no super-rich. But this is a close call. And it omits a third option – a society in which there is both no poverty and no super-rich. It is this that we should be striving for.

Another thing: Yes, I know the Gini coefficient has fallen in recent years. But this tells us little: the Blairite society might have a low Gini because there’s a low gap between the middle class and the poor even if the rich are very rich.  

Comments

[gastro george]

Re Gini, not might, isn't it exactly as you suggest. Haven't median wages stagnated/dropped, so lifting people out of poverty (compared with the median) while 1% pay is through the roof?

[Mark]

For a start, Gini is a poor measure of inequality. It is often cited post-tax and transfers, whereas the true measure of the distribution of economic power and the potential for social mobility require a market (pre-distribution) measure. It is also very sensitive to small movements among large numbers of people around the centre point in the distribution.

That aside, I strongly disagree with the Blairite notion that we should be unconcerned with extreme wealth, for the following reasons:

1. Extreme wealth drives up asset prices. In the early 1990s, when I was young, it was a viable option for people from outside the capital to start their careers in London, because housing wasn't obscenely overpriced. Today, that has changed, reducing geographical and hence social mobility

2. Rent-seeking means someone must pay rents. It could be argued that the nominal quantum of a poor person's income matters less than its purchasing power. The price of some of those assets is dependent on the incomes of the rich. So if, for instance, a person on a low income has been wronged and requires the services of a Queen's Council, it matters very much how many hours (or, more accurately, days) that prospective client would have to work to pay for an hour of the QC's time. Tackle rent-seeking at the top and you enhance standard of living at the bottom

3. Social mobility. If the difference between the incomes of (a) the top 10 percent and (b) the bottom 10 percent is a-b, it is self-evident that even if both groups increase their earnings by 10 percent, the quantum of a-b rises, increasing the chasm someone would have to bridge to move from the bottom decile to the top

4. Further to fall. By the same token, the greater the advantage of the rich, the less likely they or their children are to descend into the abyss of poverty. And with little evidence of further expansion in the professional classes, only by the poor but thick or lazy descending can the intelligent but poor ascend

5. Social proof. If people see plenty of evidence of people moving between, say, the second and eighth deciles, they will believe the system is fair and that energetic participation is worthwhile. Deny them that social proof, excepting the occasional case of material advancement through skills in footballing, singing or participation in structured reality TV formats, and they're likely to turn against the system. I'm convinced this is a major factor in the underperformance of the poorest children in the school system.

The Blairite model was simple: allow the rich to get richer, asking no questions about how they did it, provided the state could cream off a few quid in taxes to pay the poor to sit at home watching increasingly outsized plasma TVs. Apart from causing a financial crisis, an obesity epidemic and, as employers needed to import low-skilled labour to replace the indigenous working class, which realised it was better off watching Jeremy Kyle than grafting, Brexit.

What's needed now is a government that makes it very much harder to become filthy rich - crack down on rent-seeking at both the organisational and the individual level - and very much easier for the poor to sell their labour at attractive rates (yes, that includes ending freedom of movement for low-skilled labour). Who will do this? Theresa May talks a good fight on Red Toryism but has yet to deliver. New Labour is too tainted by its banker and oligarch links to regain influence, while the Momentumites are too Dave Spart to let go of the tax and spend model of big-state dependency.

[Bob]

A large middle class is fickle and I for one welcome the return of rich and not rich.

[Bob]

"Class war" cannot occur with "middle class" - that is why Chris supports it. Yes we can do both - boost at lowest end with JG.

[reason]

Mark
"What's needed now is a government that makes it very much harder to become filthy rich"

- I'm not so sure that is right. What we need is for it to be much harder to STAY filthy rich.

[nicholas]

Presuming 'Rent Seeking' is bad is lazy- surely there is good rent seeking and bad rent seeking.
Suppose the rent seeker invents a new technological innovation ( say a new drug, or labour or energy saving device) and patents that technology. He benefits from the rent the patent affords him, but society benefits as well.
By contrast, suppose professionals such as solicitors succeed in excluding outsiders from undertaking certain types of work. They become able to charge higher prices and obtain an economic rent. Their gain is another part of society's loss.
The importance of this is that by deterring rent seeking across the board society may loose. Rather we need to distinguish between various types of rent seeking, encourage some and discourage others.

[Mark]

@ Reason, I think both are true: harder to get filthy rich, and also harder to stay that way. It's not enough to achieve the second, because it implies erosion of wealth through taxation. Taxes can be avoided, and are resented by those who suffer high rates due to the fallacy that wealth is achieved through individual genius and hard work.

Making it harder to get rich could also make our economy a lot more productive. Currently, if we believe we live in anything even remotely approaching a meritocracy, some very able people run big companies and occupy the key seats in investment banks. Very quickly, they amass more wealth than they could possibly leave. The rational ones leave, open organic farms and generally twat about. The egomaniacs continue to strive for more. The former represent a deadweight loss to society, the latter and existential danger. Make such work less well paid and they'll keep their noses to the grindstone for longer.

@ Nicholas, agreed that there should be attractive returns for genuine innovation. But if, for instance, the returns to those who develop patents exceed those needed to incentivise the discovery of new technologies, society loses out. Very difficult to judge how much rent is sufficient and how much excessive.

[Jim Harrison]

Concern for the poor is a dollars and cents issue for the very well off. Consider, for example, the scam that make Walmart possible. The giant retailer couldn't get away with paying its umpteen workers so poorly without the social safety net that supplements their incomes with health care assistance and food stamps. Because the tax system that supports the safety net has become less progressive over the years, the net effect is that middle class tax payers subsidize Walmart.

[SimonB]

There are political aspects that are critical: at some point wealth becomes power. Similarly for many people poverty becomes disenfranchisement. We see today the distortions in democracies this has created.