The Cost of Inequality by Stewart Lansley

by Stewart Lansley

With the gap between the rich and the poor in Britain and America back at pre-war levels, even investors such as Bill Gross and Warren Buffett agree that inequality is out of control. However, did the wealth and income gap also help cause the economic crisis? Stewart Lansley thinks so. He claims that inequality was a major factor behind the housing and credit bubbles, with stagnant wages encouraging those on low incomes to take on huge levels of debt to compensate.

But why were wages stagnant in the first place? The author thinks the financial system played a large part. "Short-termism is endemic to the role played by the City." Companies were encouraged to focus on making quick profits at the expense of both workers and long-term value.

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Meanwhile, financial innovations, such as securitisation, made it cheap and easy to borrow large amounts of money for personal uses, or to buy a house. Large wages and bonuses for City workers in turn created a new group of super-rich. The huge rewards from banking sucked talent from industry towards hedge funds and trading floors.

Lansley's book is certainly easy to digest. The narrative is clear, and while he provides statistics to back up his arguments, and quotes from various studies, he does not drown the reader in data. He also writes with evident passion. Kitty Stewart in Times Higher Education describes the book as "forceful", with ideas that "deserve a wide hearing and an urgent place on the policy agenda".

However, there are better books on the subject. For example, Richard Wilkinson and Kate Pickett explore the impact that poverty has on society and the economy in more detail in The Spirit Level. Set against the cream of this crop, Lansley's paperback comes across as simplistic.

The author also downplays any evidence that doesn't fit with his arguments, one reason why The Times's David Smith finds it "at best irritating, at worst downright misleading". For example, there is strong evidence that the penal top rates of income tax in the 1950s, 1960s and 1970s discouraged wealth creation. They also caused people to leave Britain.

In his haste to bash the City of London, Lansley forgets the crazy behaviour of the state-owned German land banks and the Asian sovereign wealth funds. Although he admits that private equity has made some firms stronger, this accounts for a few lines out of several pages on the industry. When he calls for a "Tobin tax" on financial transactions, he overlooks that economists of all political stripes have serious doubts about such a scheme.

This is a pity, because Lansley's basic argument that inequality extracts high societal costs is correct. Disparities in wealth and income reduce support for pro-growth policies, such as lower trade barriers. Latin America shows what can happen when extreme poverty pushes politics in a direction hostile to business. Tax evasion means that the burden is shifted to honest taxpayers at all income levels. All of this means that everyone should be worried about a trend towards a less equal society. Sadly, the book doesn't make these types of arguments instead taking a more conventional approach that is unlikely to convert the non-believers.

The Cost of Inequality: Why Economic Equality is Essential For Recovery by Stewart Lansley is published by Gibson Square, price £8.99.