Income inequality is a problem – but don’t expect a revolution

There was an unofficial theme running through the Edinburgh Festival this year. It came up in practically every event I went to or discussed with anyone else.

Joseph Stiglitz focused on it in his talk. So did Danny Dorling in his and John Lanchester in his. So much did the subject seep into the week that even when I went to see a sweet student play on politics and love, the main thing that jumped out at me was the headline on the copy of The Socialist the main male character carried everywhere. “Fight elitism and austerity,” it said. So that is that.

The idea that inequality is both rising and very dangerous has become consensus. Everyone agrees. So much so that according to Lanchester, author of Capital and Whoops, we are nearing an “inflection point”.

There will soon be enough “rage” around the issue that we are about to see a huge political shift away from our current system and its endless pandering to the rich. It will be like 1979 – just in the other direction.

This, I think, is absolute nonsense. We’ve written a lot about inequality. We have raged against rising wealth inequality (caused by quantitative easing (QE) and super-low interest rates) and we have endlessly campaigned against the corporate talent myth, against the oligopolistic powers that allow banks to make the regular superprofits that finance their bonus payments and for institutional investors to take a stand on corporate pay.

But that doesn’t mean that we are prepared to go along with the idea that income inequality is growing at the speed – or indeed, is the revolution-inspiring problem – the festival-goers like to think. Here’s why.

All the numbers you read on income inequality look at pre-tax and pre-benefit income. But we have a redistributing welfare state that makes those numbers by the by.

What we actually want to look at is post-tax and post-benefit income – what you have every month after you have paid your taxes and then collected your child benefit, housing benefit, tax credits, refund for child care vouchers and so on.

In the UK, the top two quintiles of earners pay more in tax than they get in benefits and the bottom three get more in benefits than they pay in tax.  On this basis, income inequality in the UK is actually narrowing rather than widening.

Look at the latest report out from the Office for National Statistics only a month ago and this is very, very clear: since 2007/8 the richest fifth of households have seen their income fall by 5.2%. That of the poorest fifth by contrast has risen 3.5%.

That’s not to say there isn’t a big gap between them. Of course there is. But it isn’t rising. It is falling, just as it has been for the last six years. And that’s a fact.

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40 Responses

  1. 27/08/2014, Boris MacDonut wrote

    Merryn. Danny Dorling’s new book on the 1% is eagerly anticipated on 1st September.
    I agree with you. Inequality is a massive problem ,not just for the majority who are deprived, but for capitalism which cannot function without widespread spending. The top 1% now have 24% of all wealth and 17% of all income ,the same as in the last year of the Great War. Perfect timing for the centenary.
    I also agree, no revolution.the mainstream media has done well in persuading ordinary folk that the handful of rich and famous are to be admired, envied and given full rein to do as they please under the false pretence that it may help others. It doesn’t. It never has.

    • 28/08/2014, benji wrote

      ONS and HMRC data vastly underestimates the wealth of the top 1%.

      ONS figures don’t even confirm their own data. Their wealth survey shows total UK residential property wealth to be £4.8trn, whereas their property data says average UK house prices are £265,000. i.e £6.2trn.

      This is because of faulty methodology. Most homes in London worth over £1m are either in a trust or foreign owned. This doesn’t get picked up in the WAS survey.

      • 28/08/2014, Boris MacDonut wrote

        I don’t think that is correct benji. Of the 26 million homes in the UK ,4 million are social housing so do not come into the private wealth equation. 22 million times £265k is £5.8 billion less mortgage loans0f £1.2 billion is £4.6 billion.
        But i agree the 1% are probably much richer than we are told due to their money being offshore.

        • 28/08/2014, Boris MacDonut wrote

          Correction to above Dorlings book is out on 1st October.

        • 28/08/2014, benji wrote

          I already took the mortgage loans of £1.2trn off. ONS put UK property wealth at £3.5trn net.

  2. 27/08/2014, benji wrote

    Housing Benefit increases make up a fair chunk of that 3.5% increase for the poorest fifth (£16bn in 2008 now £23.8bn) . Which only increases the discretionary incomes of landlords not the recipients.

  3. 28/08/2014, Greg wrote

    “In the UK, the top two quintiles of earners pay more in tax than they get in benefits and the bottom three get more in benefits than they pay in tax. On this basis, income inequality in the UK is actually narrowing rather than widening.”

    What?! That is what income redistribution is for – of course the top earners are going to pay more tax than they get in benefits and the bottom get more benefits than they pay in tax – otherwise the whole thing would be pointless?!

    However, Merryn, I believe you are wrong with your conclusion that the gap is falling, it’s rising by a massive amount – more than it has ever risen before, due to house and land prices and low interest rates – the rich have benefitted the most from historically low interest rates (they have more disposable income) and capital growth from property portfolios and other assets – also the income derived from these investments.

    Benji correctly points out that you have not allowed for the fact that housing benefit actually goes to landlords – i.e. the wealthy – it, along with Buy-To-Let, also contributes to house price inflation and capital growth.

    So you can’t just look at income, taxation and who receives benefits you need to take into account interest payments, who the benefits actually benefit and capital growth – only then you will see how inequality is increasing.

    • 28/08/2014, Greg wrote

      *disposable income after interest payments

    • 28/08/2014, 4caster wrote

      A lot of landlords are not rich. Many bought in 2006-2008 on 100% interest-only mortgages and are still struggling to emerge from negative equity. Others are unwilling landlords who couldn’t sell their old houses when they needed to move, so let them instead. During this period, rents will barely have covered mortgage payments, repairs and insurance.

      • 28/08/2014, Greg wrote

        Granted, however, many/most homeowners with mortgages have arguably benefitted hugely from Government and BoE policies since 5th March 2009 at the expense of savers who do not own property nor have any debt (particularly pensioners in rented accommodation without assets and young people without access to a “bank of Mum & Dad”).

      • 28/08/2014, benji wrote

        When you say many, what % of total UK private rented housing are we talking about.

        I’ve never heard of a 100% interest only BTL. They usually require 25-40% deposit.

        So to be in negative equity must be as rare as hens teeth.

        Of, course unlike normal business, BTL is as safe as it gets. Unearned capital gain is the icing on the cake.

  4. 28/08/2014, mr clyde wrote

    Never thought I would say this, but I can’t disagree with Greg on this one. Yes, the tax and benefit system closes the superficial gap in disposable incomes between rich and poor, however the longer term outcomes have widened considerably. The fiscal drag created by educational distortions to job opportunity, student debt, and property prices, will seriously impact all those not fortunate enough to be able to rely on the bank of Mum & Dad and ensure that the rich stay rich whilst everybody else struggle along.

  5. 28/08/2014, dave21kj wrote

    I see socialism is alive and well and on the pages of Money Week!
    One myth to shoot. Printing money destroys wealth. If I have 10 pounds and I print 10 more the value is halved. People then try to minimise their loss and we get the rush to equities, and a PAPER increase in value.
    The winners are not the rich, they stand to lose proportionally more when the music stops. The share value is the price you realise when you sell and this game has a bit to go yet.
    Destroy the value of money, increase inflation, eliminate the debt. A bit like the labour governments of the 70s! We are all losers..

    • 28/08/2014, Clive wrote

      dave21kj

      you should never under-estimate the desire of people to grab other peoples money under the heading of ‘fairness’ (as in, “it would be much fairer if I took n% of your wealth and allocated it to myself”)

      • 28/08/2014, Greg wrote

        but is it (taxation) actually grabbing ‘other people’s money’? You could argue that low interest rates, funding for lending and QE have effectively ‘grabbed’ savers’ money and given it to those who have debt, including those who have large mortgages and those with Buy To Let portfolios, and taxation is needed to redress the distortion/unfairness created by these policies?

        • 28/08/2014, Clive wrote

          grep

          when building society rates dropped significantly when QE came in, I moved about half of my savings to risk assets (in the market, or peer-to-peer lending). Can’t see why, if I grow my money I should have to give a portion to those who were capable – but unwilling – to take the risk themselves.

          with the wider issue of inequality in society, it seems to me that we’ve built health, education and benefits systems on the basis of £XX contribution per person on average, knowing full well that those on lower incomes can’t afford to contribute £XX.

          I’m OK with the idea that those on higher incomes should contribute more than they receive.

          The problem comes with the fact that society keeps ratcheting upwards the expenditure needed on these systems (more go to university, ever more expensive drugs, benefits for basically everybody). That necessarily means more people can’t pay their share and “the rich” have to fund ever more. There’s no limit to the health, education, benefits system that one could design, but there are limits to what people are willing to contribute.

          • 28/08/2014, Greg wrote

            I appreciate people wish to protect their savings from inflation and make as much interest as possible, that’s only natural, however most savers -particularly pensioners and young people saving for a deposit for a home – are understandably unwilling to risk the few savings they have in peer-to-peer lending or in stocks and shares. Why should they be penalised the most where as more wealthy investors benefit from low mortgage interest payments and can afford to take risks with some of their savings?

            Yes, escalating costs of running a free-for-all NHS and education system for a forever growing population is an issue – I don’t see why you feel people people can’t “pay their share” – everyone should only pay their “fair share” based on their ability to contribute – it does not need to be the same amount – and the rich can easily afford to pay much more as they have arguably benefitted the most from the way capitalism works and made the most money often by luck rather than judgement, and due to FIAT money – they benefitted the most from house price inflation whereas salaries have not kept up – why should the poor be penalised through no fault of their own?

            There may be limits what the rich are willing to contribute but there are also limits to what the rest of society are prepared to let the rich exploit them.

            • 29/08/2014, Clive wrote

              “there are also limits to what the rest of society are prepared to let the rich exploit them”

              That made me laugh. What “exploitation” is that ?

              So Mr Rich pays (say) 20 times what Mr Poor pays, with Mr Rich paying far in excess of what he receives and Mr Poor receiving far more than he pays.

              Once Mr Poor has been told it’s OK for him to receive in excess of what he pays for, as long as he can send the bill to somebody else, there’s absolutely no limit to what he’ll ask for (unlike those who pay more than they receive).

              Want drugs that cost £100K per patient per year ? Why not.
              Want 99% of kids to go to Uni, paid for by the state ? Why not.

              Perhaps we should have block voting rights, 1 vote per £1 of tax you contribute to society. That would be “fair” in my book.

              • 29/08/2014, Greg wrote

                ‘Exploited’ as in the rich expect people to do what might be regarded as menial work for low wages (i.e. below a ‘living wage’, with annual wage increases below what they reward themselves), even though the rich have pushed up house prices in that area, forcing these workers to move out to cheaper areas and commute or live in substandard accommodation, and generally make their cost of living more expensive, however they still expect their lattes, brunches, cleaners and gardeners.

                Of course the rich will always feel hard done by as they are expected and can afford to contribute more to society, yet why is that not fair? Why should only the rich afford health care and education? Why should only the wealthy have a right to vote, or more rights to vote as they have more money and therefore pay more taxes? We should strive for an egalitarian society – not hark back to Victorian times!

                • 29/08/2014, Clive wrote

                  With regard to the lack of a ‘living wage’, I suspect if we doubled or trebled the wages of those at the bottom end, it would only be a matter of a year before they were lagging behind. As we all know, there’s a viscous inflationary spiral – wages up, prices up or prices up, wages up. Problem isn’t due to the rich, neither is the solution.

                  Even ‘poor’ people in our society have a fantastic lifestyle by world standards. Often see people trying to smuggle themselves into this country for precisely that reason. Don’t ever see people trying to smuggle themselves into (say) Somalia.

                  • 29/08/2014, Clive wrote

                    p.s. I’m not saying there are inequality issues that should be addressed in our society, just that some people forget how very fortunate we are.

                    • 29/08/2014, Clive wrote

                      oops…I’m not saying there AREN’T inequality issues….

                    • 29/08/2014, Greg wrote

                      I think a wealth tax based on all assets would be totally impractical, invasive and unfair – people would store wealth in things that would be extremely difficult to trace and value.

                      That’s why I think a Land Value Tax is the only fair way of taxing wealth – i.e. only tax wealth stored in land – it would mean that in general those with wealth would be willing to pay the extra tax to live in a large house with large garden in a desirable location – of course they could choose to pay less tax by living in a much smaller house in a less desirable location.

                  • 29/08/2014, Greg wrote

                    I agree a ‘living wage’ or increasing the minimum wage would be inflationary – which I thought was what both the Govt. and BoE want?

                    I also agree that in terms of living standards, apart from the homeless the poor are better off than the poor in many other countries, I just think that the gap between those at the top and those at the bottom is expanding and needs to be addressed – it can only be done by income redistribution which will not be popular – but then neither will high inflation.

                    • 29/08/2014, Clive wrote

                      I’m currently reading Piketty’s Capital in the 21st Century (on Kindle).

                      Much as it goes against my right-wing nature, the guy does make some of his points well. Especially that the more assets you have, the easier it is to grow them faster.

                      I can see why he favours a wealth tax. Problem I have with that is not one of principle, it’s one of trust, in that I wouldn’t trust any government to bring in a wealth tax at a ‘modest’ level and leave it at that.

                      Rather, I think they’d go “heh, these billionaires can easily cough up not just 2-3%, we could sting them for 10%, 20%, 30%…..never ending cash cow”.

                      I think that would be immoral, for governments to plan improvements in health, education etc. knowing the cost would essentially fall only on (say) 1% of the population. Nothing to keep those who don’t pay “honest” in their aspirations.

                    • 29/08/2014, Greg wrote

                      I think a wealth tax based on all assets would be totally impractical, invasive and unfair – people would store wealth in things that would be extremely difficult to trace and value.

                      That’s why I think a Land Value Tax is the only fair way of taxing wealth – i.e. only tax wealth stored in land – it would mean that in general those with wealth would be willing to pay the extra tax to live in a large house with large garden in a desirable location – of course they could choose to pay less tax by living in a much smaller house in a less desirable location.

    • 28/08/2014, Greg wrote

      But the Government and BoE will do all they can to prop up house prices – low interest rates, funding for lending and QE have supported those in debt – inflation will do that too.

      What I can’t understand is that some economists go on about the benefits of a free market when things are going well, minimal state intervention and relaxed regulations, yet these same people rush to jump in to interfere with the market using money printing, low interest rates etc when the market fails…. arguably they should have had done things completely differently – more state intervention and regulation to start with which could have prevented the current problems that we now face.

  6. 28/08/2014, LincsBob wrote

    The main problem is that the 47 commercial banks in the UK literally have the power to create money. When a bank makes a loan they basically create the money out of thin air. These days the only constraint on that lending is whether or not they think they will get repaid (at which point the money they created ceases to exist). Banks naturally like to lend to what they perceive as low risk borrowers – against property being a favorite – hence the ramping up of house prices.

  7. 28/08/2014, IanB wrote

    Mostly irrelevant. The gains the better off have made, which are leading towards a significantly more unequal world, come from asset appreciation, rather than what HMRC would see as ‘income’. That’s the real story.

  8. 28/08/2014, Boris MacDonut wrote

    The depressing fact is it is unlikely to change much. There are reports onlty this week on how the UK is still a hugely elitist society with most of the top jobs retianed by privately educated kids. Asa many as 79% of Judges and 63% of senior army officers etc… Check out the book by Gregory Clark, The Son Also Rises. It shows that social mobility is a myth in the UK many of the top lawyers and accountants, even today, are descendants from the Norman aristocracy who fought at Hastings and it takes generations for this to be reversed.

  9. 29/08/2014, Natalie wrote

    I see the gap growing where the top of an organisation votes themselves a % pay increase, that is not replicated in the bottom of that organisation.

    Martin Sorrell, Philip Green, The House of Commons to name a few.

    • 29/08/2014, Boris MacDonut wrote

      Sorrell got his annual £30 million pay agreed a week before WPP anounced a big fall in profits. He pays himself the equivalent of £15,000 an hour or 2,440 times minimum wage. Because he is worth it?

  10. 29/08/2014, Critic Al Rick wrote

    The longer a suitable revolution is delayed the greater the risk of Armageddon; and that’s more than likely an optimistic point of view.

    • 29/08/2014, Boris MacDonut wrote

      Rick .You are correct. I think because the pace of changei s so quick most even disadvantaged folk see themselves as advancing ,they just do not see how much more slowly than the rich.
      The media feeds a stream of new and novel “latest” fashions and gadgets. One of the worst recent ones is the ridiculous “ice bucket challenge”. Supposedly for charity ,but actually merely a social media trend designed to select those who are in from those who are out. Watch the celbrities ,sports stars and politicians fall over themselves to be included. Listen to the keeners telling us they are taking the challenge. Not one is doing it for any reason other than selfish self aggrandisment and reassurance.

      • 30/08/2014, Critic Al Rick wrote

        My definition of Religion – a medium through which a relatively small hierarchy of devious individuals control the masses to the parasitic benefit of the hierarchy.

        Worship – idolisation (amongst others)

        The masses seem to have a propensity to Worship something and Religion takes advantage of that weakness. Celebrity Worship, Academia Worship, Status Symbol Worship, etc.

        Now we have a grossly unsustainable existence and unless a timely and suitable new Religion appears which encourages a much more sustainable (commonsense) existence then mankind is totally doomed.

        Some say: “Bring on the Revolution”.

  11. 01/09/2014, dave21kj wrote

    As usual we are all debating who pays the bill instead of the size of the bill. My view is shaped by the following-
    1. when one party pays and another does not, then we do not share the same interest in getting the bill under control. This is where we are today.
    2. It is difficult to collect tax beyond a given point. This is proven and where we are today.
    3. The country is bust.
    There is an urgent need to get the bill under control. Should the UK be a Nuclear state? Why is half the country on disability? Do we need library’s in the digital era? Should I be able to have cosmetic surgery on the NHS? Do I need a Scottish parliament? Is the EU adding value or cost? How do w deliver teaching in the modern era? How do we stop cartel’s in energy sector? etc..

    Be good to discuss things that will actually address the issue.

    • 01/09/2014, Clive wrote

      Unfortunately, over the last few decades, a huge number of people have got it into their heads that they’re entitled to live beyond their means, having a lifestyle they’re simply not paying for. Rather than attribute this correctly to not working hard enough and not being willing to pay for their lifestyle, they ascribe it to basically anything/anybody else (the rich, the government, the immigrants …..).

      You have only to look at the far east, e.g. China, to see why this country is going down the rankings. The Chinese work far far harder than us and get far less in return, yet they keep going because they can see their lives are getting better each year that passes. We do the reverse, work less each year, hand ourselves more benefits and “rights”.

      • 01/09/2014, Greg wrote

        It’s not surprising when the Government sets such a bad example of ‘living beyond it’s means’ and creates policies such the 1996 Housing Act, which gave rise to Buy To Let mortgages, leading to ever-increasing demand for housing and house prices and housing benefit – meaning that buying houses actually makes more money than working, resulting in a plethora of lazy wealthy but arguably unproductive landlords and a lazy despondent workforce with little hope of ever owning a home of their own. It’s not surprising we now have such low productivity.

  12. 09/09/2014, SteveG wrote

    To Merryns comment: ‘What we actually want to look at is post-tax and post-benefit income ‘

    … What we need is employers to state the full value of salaries and benefits on contracts of employment – including pension costs.
    This would begin to expose the real elephant in the room of income inequality between public and private sector – and perhaps start to get the firemen off their soap boxes when they realise they are by far the best paid skilled workers bar none

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