Greater prosperity has not led to a more equal society

In Inequality: What can be done, the author's prescriptions for a fairer society are bold but unlikely to be swallowed, says Howard Davies.

by Howard Davies
Last Updated: 01 Feb 2016

We now live in an age of celebrity economists. This year's headliner is Yanis Varoufakis, a hunky game-theorist from Essex whose spare time job is finance minister of Greece. Last year's must-have speaker at any conference was Thomas Piketty. His Capital in the Twenty-First Century brought the recent remarkable growth in income and wealth inequality to the attention of a wide audience.

Tony Atkinson might be forgiven for resenting Piketty's sudden global prominence. He has been ploughing this furrow for decades, even at times when it was a lonely occupation. I was deputy chairman of a Rowntree enquiry into the distribution of income and wealth in the mid-1990s and at that time an interest in the subject was regarded as a slightly dangerous eccentricity. The general assumption was that a rising economic tide would lift all boats, however unseaworthy they might appear, and that explicitly redistributive tax policies would damage incentives and reduce economic activity.

Twenty years on we are less sure about the boat theory. In most developed countries, and certainly in the US and the UK, the Gini coefficient, the best simple measure of inequality, has risen sharply and, in particular, the incomes of the top 1% of the distribution has broken away from the following pack. In the US, around 20% of income now accrues to the top 1%, compared with around 8% 40 years ago. The figures for the UK are 15% and 5% respectively.

As Atkinson puts it, while average educational attainment has risen, with almost 50% of young people attending university, only a small proportion of the educational elite has joined the economic elite.

But there is much less agreement on whether governments should even try to reverse the trend. In the recent election campaign only faint echoes of the academic debate could be heard. The Labour party advocates a 50% tax band at a high level of earnings, though with some doubt about how much additional income it would actually raise. Both Labour and the Liberal Democrats advanced the notion of a mansion tax, in Labour's case explicitly to fill a funding gap for the NHS, rather than directly to address imbalances in earning power. And of course everyone is in favour of taxes on bankers' bonuses.

These are milk-toast interventions, in Atkinson's view. He believes we need a far more extensive set of policy measures if we are to have any chance of a fairer society, as we might observe in Scandinavia or indeed in France, where inequality has not risen in the past two decades. His book offers a detailed set of proposals, which could reverse what he calls the 'Inequality Turn' we observed around 1980.

He begins with the case for a Social and Economic Council, with unions and employers on board. In my first week as director-general of the CBI in 1992 I received a letter from the then Chancellor of the Exchequer, Norman Lamont, abolishing the National Economic Development Council, a somewhat similar body. I took it rather personally, as I was about to attend my first meeting, but I cannot say its passing was widely regretted.

More significantly, in my view, he argues for the Bank of England to have an explicit objective for employment, to sit alongside the inflation target. This radical measure would put the Bank on a par with the Federal Reserve in the United Socialist States of America. I support that idea, but the US parallel does not encourage one to think that in itself it would do much to reduce income inequality.

From here on, his proposals become less likely to be embraced. He would push up the minimum wage to the level of the living wage and advocates a job guarantee scheme, a capital endowment paid to 18 year-olds and a universal basic income. The costs of these measures would be met by much increased inheritance tax, a fully graduated property tax, a wealth tax and a top rate of income tax of 65%. Phew.

However persuasively Atkinson writes, and Inequality is a model of clarity (though the charts and graphs are poorly drawn) it is hard to imagine a major political party advocating such a programme, and even harder to imagine it being elected having done so. If Atkinson is right that nothing less will turn the tide and put the Gini back in the bottle, it seems we will have to get used to a more sharply divided society. Perhaps there may be some dishes on his menu that the electorate could be persuaded to choose. But we will need braver politicians than were on offer in the most recent campaign.

Howard Davies is the chairman of the Airports Commission. Follow him on Twitter at @howardjdavies

Inequality: What can be done? by Anthony Atkinson is published by Harvard College at £16.95

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