The Cost of Inequality: Three Decades of the Super-Rich and the Economy

December 22, 2011

Many people would agree that a society in which a chief executive officer earns not five or 10 but 100 times as much as the average full-time worker is not a fair society. A series of recent studies have argued that fairness is just one of the many costs of inequality - most notably Richard Wilkinson and Kate Pickett's 2009 book The Spirit Level: Why More Equal Societies Almost Always Do Better, which suggests that unequal societies are less healthy and more crime-ridden. On the other hand, defenders of unfettered markets and low taxation tell us that inequality is worth the price because it makes us all better off: the chance to get richer than everyone else is what motivates innovators and entrepreneurs, and we all gain from a society in which Bill Gates has a reason to go to work in the morning.

Stewart Lansley's argument in his new book is that the current high level of inequality isn't keeping to its side of the bargain. Far from assuring steady economic growth, inequality is directly responsible for the current recession, Lansley argues, and he fears it may become a permanent economic state.

There are two lines of argument here. The first is about the absurd extent of deregulation of the financial sector since the early 1980s, and the perverse incentives that the lack of controls created - for CEOs to pursue short-term shareholder value rather than long-term growth and investment, and for investors to gamble with other people's money. Much of this argument has been rehearsed many times over in recent years. John Lanchester's 2010 book, Whoops! Why Everyone Owes Everyone and No-one Can Pay may explain some of the complexities with greater clarity for readers without a background in economics.

In this part of the story inequality is not really itself the root cause of current economic instability, but a consequence of policies (namely financial deregulation) that also had wider implications for the economy. But the resulting inequality had knock-on consequences of its own, and here Lansley adds value, making the forceful case that the rapid rise in wages and profits in the financial sector crowded out other forms of private-sector growth. Why invest in an industry with steady but slow-growing returns when there is a quick buck to make in finance? And why take your engineering degree to work for James Dyson if you can earn four times as much in the City? "Crowding out" is the charge that right-wing economists have long made against the public sector - it's Chancellor George Osborne's reason for the savage public sector cuts of Plan A. That this has happened within the private sector - that financial services may not be our economic saviour as other industries inevitably decline, but may be itself responsible for that decline - is a crucial point to highlight.

Lansley's second line of thought is equally compelling. There is no mention of Karl Marx, but Marx might have recognised the thesis that the capitalist system is essentially doomed unless it ensures that workers have enough money to buy the goods they are producing.

A striking graph towards the start of the book shows the falling share of GDP going to wages rather than profits. Steady at around 59 per cent of GDP in the post-war period, the share leapt briefly to 64 per cent in the mid-1970s and has been in decline ever since. This is in part a consequence, Lansley argues, of harsh reductions in union power in the 1980s. While in the post-war period the gains from productivity growth were equally shared between wages and profits, from the early 1980s almost all the gains were captured as profits. The result: on the one hand, huge flows of cash into the pockets of the rich, who need something to do with the money; and on the other hand there is a reduced incentive to invest in production because of the lack of a market. This feeds the financial sector and contributes to destabilising flows of money around the world.

This book has a lot of numbers in it, and a reader could start to feel a little swamped by facts and figures. There are also too many places where a key part of the story is backed up with quotes from a newspaper or a footnote reference to another book (sometimes written by the author himself), and this can be frustrating to the reader who wants rigour without having to consult another book first. Nevertheless, the central arguments of Lansley's book - and the solutions he proposes - deserve a wide hearing and an urgent place on the policy agenda.

The Cost of Inequality: Three Decades of the Super-Rich and the Economy

By Stewart Lansley. Gibson Square, 320pp, £17.99. ISBN 9781908096067. Published October 2011

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