TRENDS IN INEQUALITY
Inequality has risen in many, but not all, developed countries over the last few decades. Figures 16.1 and 16.2 show the widening gap between the incomes of rich and poor in Britain and the United States over a thirty-year period. The figures show the widening gap between the top and bottom 10 per cent in each country. Both countries experienced very dramatic rises in inequality which peaked in the early 1990s and have changed rather little since then. In both countries inequality remains at levels almost unprecedented since records began – certainly higher than it has been for several generations. Few other developed countries have shown quite such dramatic increases in inequality over this period, but only a very few – such as Denmark – seem to have avoided them entirely. Others, like Sweden, which avoided them initially, have had steep rises since the early 1990s.
Figure 16.1 The widening gap between the incomes of the richest and poorest 10 per cent in Britain 1975 (=1) to 2005–2006.
Figure 16.2 The widening gap between the incomes of the richest and poorest 10 per cent in the USA 1975 (=1) to 2004.
The figures showing widening income inequality in Britain and the United States leave no room for doubt that income differences do change substantially over time and that they are now not far short of 40 per cent greater than they were in the mid-1970s.
If things can change so rapidly, then there are good reasons to feel confident that we can create a society in which the real quality of life and of human relationships is far higher than it is now. But rather than change just happening, we must be constantly looking for the opportunities it presents to take another step towards a more inclusive society. We have already seen how the development of a sustainable economy lends itself to egalitarian policies. In the rest of this chapter we will move on, first to discuss ways of overcoming the democratic deficit in economic institutions which protects inequality, enforces hierarchy and damages our experience of work, and then to suggest ways in which current trends in technological change may help create the basis of a new kind of economy consistent with the development of happier and more egalitarian societies. But these are merely suggestions as to how our societies might be developed. Readers will have others of their own, and will no doubt see weaknesses in ours.
DIFFERENT ROUTES TO GREATER EQUALITY
Rather than suggesting a particular route or set of policies to narrow income differences, it is probably better to point out that there are many different ways of reaching the same destination. In Chapter 13 we showed that although the more equal countries often get their greater equality through redistributive taxes and benefits and through a large welfare state, countries like Japan manage to achieve low levels of inequality before taxes and benefits. Japanese differences in gross earnings (before taxes and benefits) are smaller, so there is less need for large-scale redistribution. This is how Japan manages to be so much more equal than the US, even though its social security transfers were a smaller proportion of GDP than social security transfers in the USA.362 Although, of all the countries included in our analyses, the USA and Japan are at opposite extremes in terms of inequality, the proportion of their GDP taken up by government social expenditure is small in both cases: they come second and third lowest of the countries in our analysis.
Similar evidence that there are very different routes to greater equality can also be seen among the American states.363 The total tax burden in each state as a percentage of income is completely unrelated to inequality. Because Vermont and New Hampshire are neighbouring New England states, the contrast between them is particularly striking. Vermont has the highest tax burden of any state of the union, while New Hampshire has the second lowest – beaten only by Alaska. Yet New Hampshire has the best performance of any state on our Index of Health and Social Problems and is closely followed by Vermont which is third best. They both also do well on equality: despite their radically different taxation, they are the fourth and sixth most equal states respectively. The need for redistribution depends on how unequal incomes are before taxes and benefits.
Both the international and US state comparisons send the same message: there are quite different roads to the greater equality which improves health and reduces social problems. As we said in Chapter 13, what matters is the level of inequality you finish up with, not how you get it. However, in the figures there is also a clear warning for those who might want to place low public expenditure and taxation at the top of their list of priorities. If you fail to avoid high inequality, you will need more prisons and more police. You will have to deal with higher rates of mental illness, drug abuse and every other kind of problem. If keeping taxes and benefits down leads to wider income differences, the need to deal with the ensuing social ills may force you to raise public expenditure to cope.
There may be a choice between using public expenditure to cope with social harm where inequality is high, or to pay for real social benefits where it is low. An example of this balance shifting in the wrong direction can be seen in the USA during the period since 1980, when income inequality increased particularly rapidly. During that period, public expenditure on prisons increased six times as fast as public expenditure on education, and a number of states have now reached a point where they are spending as much public money on prisons as on higher education.364
Not only would it be preferable to live in societies where money can be spent on education rather than on prisons, but policies to support families in early childhood would have meant that many of those in prison would have been earning and paying taxes instead of being a burden on public funds. As we saw in Chapter 8, pre-school provisions can be a profitable long-term investment: children who receive these services are less likely to need special education and, when they reach adulthood, they are more likely to be earning and less likely to be dependent on welfare or to incur costs through crime.365
POLITICAL WILL
It is tempting to say that there are two quite different paths to greater equality, one using taxes and benefits to redistribute income from the rich to the poor, and the other achieving narrower differences in gross market incomes before any redistribution. But the two strategies are not mutually exclusive or inconsistent with each other. In the pursuit of greater equality we should use both strategies: to rely on one without the other would be to fight inequality with one arm tied behind your back. Nevertheless, it is worth remembering that the argument for greater equality is not necessarily the same as the argument for big government. Given that there are many different ways of diminishing inequality, what matters is creating the necessary political will to pursue any of them. Whenever governments have really wanted to increase equality, policies to do so have not been lacking. Although discussion of policy alternatives must precede action, what is best will differ from one country to another.
The historical evidence confirms the primacy of political will. Rather than greater equality waiting till well-meaning governments think they can afford to make societies more equal, governments have usually not pursued more egalitarian policies until they thought their survival depended on it. In the early 1990s a World Bank report pointed out that rapid economic growth in a number of East Asian countries was underpinned by growing equality.366 In trying to explain why governments had adopted more egalitarian policies, the report said that it was because they faced crises of legitimacy and needed to gain popular support. The governments in Taiwan and Hong Kong faced rival claims from the Communist Chinese government. South Korea faced North Korea, and the governments of Singapore and the Philippines faced guerrilla forces. Describing policy in these countries, John Page, writing in a 1994 World Bank publication, said:
Very explicit mechanisms were used to demonstrate the intent that all would have a share of future wealth. Korea and Taiwan carried out comprehensive land reform programs; Indonesia used rice and fertilizer price policies to raise rural incomes; Malaysia introduced explicit wealth sharing programs to improve the lot of ethnic Malays vis-à-vis the better of
f ethnic Chinese; Hong Kong and Singapore undertook massive public housing programs; in several economies, governments assisted workers’ cooperatives and established programs to encourage small and medium-sized enterprises. Whatever the form, these programs demonstrated that the government intended for all to share in the benefits of growth.367
Japan owes its status as the most equal of the developed countries partly to the fact that the whole establishment had been humiliated by defeat in the Second World War, and partly to the support for political and economic reconstruction – including drawing up a new constitution – provided by disinterested, and remarkably far-sighted, American advisers working under General MacArthur.95
Other examples of increases in equality have similar origins. Bismarck’s early development of forms of social insurance were part of his attempt to gain popular support for his project of unifying the German states. Britain became substantially more equal during both the First and Second World Wars as part of an attempt to gain support for the war effort by making people feel the burden of war was equally shared. As Richard Titmuss put it: ‘If the cooperation of the masses was thought to be essential [to the war effort], then inequalities had to be reduced and the pyramid of social stratification had to be flattened.’368
Sweden’s greater equality originated in the Social Democratic Party’s electoral victory in 1932 which had been preceded by violent labour disputes in which troops had opened fire on sawmill workers. As prime minister almost continuously from 1932 to 1946, Per Albin Hansson was able, during Swedish rearmament and the war, to push through his aim of making Sweden ‘a classless society’ and ‘the people’s home’.
How do we create the necessary political will in our own societies? The strength of the evidence that a more equal society is a better society has a key role to play in changing public opinion. Many people have a strong personal belief in greater equality and fairness, but these values have remained private intuitions which they fear others do not share. The advantage of the growing body of evidence of the harm inflicted by inequality is that it turns what were purely personal intuitions into publicly demonstrable facts. This will substantially increase the confidence of those who have always shared these values and encourage them to take action. In addition, some people will change their views in the light of the new evidence. Many people are seriously worried about the many signs of social failure in our societies and search for explanations.
Political differences are more a reflection of different beliefs about the solution to problems than of disagreements about what the problems are. Almost everyone, regardless of their politics, would prefer to live in a safer and more friendly society. Everyone will agree that a good society would have fewer of all the health and social problems we have looked at. The argument is therefore about solutions. Although people have suggested many ways of helping individuals facing particular difficulties, the evidence presented in this book suggests that greater equality can address a wide range of problems across whole societies. And if greater equality is also an important component of policies to tackle global warming, there is much to recommend it.
For several decades progressive politics have been seriously weakened by the loss of any concept of a better society. People have argued for piecemeal improvements in different areas of life, campaigned against new environmental threats or for better treatment of asylum seekers, and have demonstrated against military interventions. But nowhere is there a popular movement capable of inspiring people with a vision of how to make society a substantially better place to live for the vast majority. Without that vision politics will rarely provoke more than a yawn.
Yet most people do want change. In the first chapter of this book we referred to a research report called Yearning for Balance, which showed that three-quarters or more of Americans felt that society had lost touch with what really mattered.1 Consumerism and materialism, they felt, were winning out over more important values to do with friends, family and community. Although politicians recognize a deep-seated malaise, and so campaign for votes, saying that they stand for ‘change’, they sometimes seem to have few ideas for change which go deeper than differences in the personal images they project. There is no suggestion that they have any view of how to begin changing daily life into something more joyful and fulfilling.
Public opinion polls suggest that there is a substantial desire for narrower income differences. In Britain over the last twenty years polls have shown that the proportion of the population who think that income differences are too big has averaged around 80 per cent and has rarely dipped below 75 per cent – even though most people underestimate how big income differences actually are. In the USA, the 2005 Maxwell Poll on Civic Engagement reported that over 80 per cent of the population thought the extent of inequality was a problem, and almost 60 per cent thought the government should try to reduce it. Gallup polls between 1984 and 2003 which asked Americans whether income and wealth were fairly distributed or should be more evenly distributed, found that over 60 per cent of the population thought they should be more evenly distributed.369
TRADE UNIONS
The rapid widening of income differences which took place from the early 1980s onwards was made possible partly by the declining power of trade unions. A study which analysed trends in inequality during the 1980s and 1990s in Australia, Canada, Germany, Japan, Sweden, the United Kingdom and the United States, found that the most important single factor was trade union membership.370 Although high levels of unemployment weaken the bargaining power of labour, in this study, declines in trade union membership were most closely associated with widening income differences.
Not only the extent of unionization but provisions for labour representation in companies are also likely to affect wage settlements. The Commission of the European Union requires minimum standards of representation and consultation for all larger companies but it is not clear how far practice in different countries conforms to what was intended. In Japan, however, there is often a much closer relationship between management and unions. Indeed, the Japanese Federation of Employers Association found that 15 per cent of the directors of large companies were former trade union officials.371 In the countries of the European Union the earnings of some 70 per cent of employees are covered by collective agreements, compared to only 15 per cent in the USA. At 35 per cent, the figure for the UK is among the lowest in the EU.
CORPORATE POWER – THE ELEPHANT IN THE LIVING ROOM
Part of the problem of political will is the feeling that we do not have the means to make any difference. We may all decry the vast wealth of the super-rich, but what can we do? Unions can, as the evidence suggests, make some difference, but it is hard to escape the conclusion that the high levels of inequality in our societies reflect the concentrations of power in our economic institutions. The institutions in which we are employed are, after all, the main source of income inequality. It is there that value is created and divided between the various gradations of employees. It is there that the inequities which necessitate redistribution are set up. And it is there that we are most explicitly placed in a rank-ordered hierarchy, superiors and inferiors, bosses and subordinates.
In 2007 chief executives of 365 of the largest US companies received well over 500 times the pay of their average employee, and these differences were getting bigger. In many of the top companies the chief executive is paid more in each day than the average worker is in a year. Among the Fortune 500 companies the pay gap in 2007 was close to ten times as big as it was in 1980, when the long rise in income inequality was just beginning.
Because the ratio of CEO pay to average worker pay varies so much between large and small companies and from one sector to another, it is difficult to compare like with like when making international comparisons. However, an attempt (from a respected source) to make such comparisons, suggests that ratios of CEO compensation to the pay of production workers in manufacturing might be 16:1 in Japan, 21:1 in Sweden, 31:1 in the UK and 44:1 i
n the USA.372
According to the annual survey of chief executives’ pay carried out by the Guardian, boardroom pay in the 100 companies included in the Financial Times Stock Exchange index in Britain has risen in successive years by 16 per cent, 13 per cent, 28 per cent and most recently (2006–2007) by 37 per cent at a period when inflation was rarely more than 2 per cent.373 The average pay (including bonuses) for the chief executives of top companies stood at just under £2.9 million. After reviewing empirical research, the International Labour Organization concluded that there is little or no evidence of a relationship between executive pay and company performance and suggested that these excessive salaries are likely to reflect the dominant bargaining position of executives.374
Top business pay has far outstripped anything in the public sector. In the USA, the twenty highest-paid people working in public traded corporations received almost 40 times as much as the twenty highest-paid people in the non-profit sector, and 200 times more than the twenty highest-paid generals or cabinet secretaries in the Federal Government.375
It seems likely that the denationalization of major industries and the privatization of large numbers of friendly societies, mutuals, building societies, provident societies and credit unions, which had been controlled by their members, may have made a substantial contribution to the widening income differences shown in Figures 16.1 and 16.2. It was common practice for CEOs and other senior managers to receive huge salary increases shortly after conversion to profit-making corporations. This probably explains some of the sharp rise in inequality which Figure 16.1 shows took place in Britain around the mid-1980s. British Telecom was privatized in 1983, British Gas in 1986, followed by a flood of major companies in 1987. The international extent of the widening of income inequality is also consistent with a contribution from privatization.
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