Inequality and Labour Markets with Ben Etheridge

It has been said that Ed Miliband has grasped the nettle of inequality by reframing the debate around the cost of living crisis meme. For some, this represents a final hope of justice – social justice, that is.

Before considering the merits of the case I asked Ben Etheridge what had actually happened with respect to inequality since the 2008 crisis. Ben acknowledges the public discourse over the gap between the extreme top and extreme bottom he says that in fact overall inequality has gone down since the crisis six years ago.

The big story for Ben is that inequality has increased between the generations. Pensioners have done okay, but the young – regardless of their original earnings position – have suffered greatly. (I clarified this with Ben, pensioners have not improved their lot, they have merely suffered less)

Kristian asks whether the position of pensioners is uniform for pensioners that are, or are not homeowners, and if perhaps the reason for pensioners’ better position is timing – did they buy their assets before the crisis happened? Ben clarified that in fact the statistics he was thinking of related to current incomes, so housing is less of an important issue. One group that has done unusually well is older workers (something, I note, that Sam Bowman mentioned as a possible consequence of minimum wage rises). Ben explained that employment rates for workers over 55 have gone up, with people not wishing to retire and a relaxation of compulsory retirement over the last 5 years feeding that desire.

Ian volunteers that there is a curious phenomenon of the top 1% have done unusually well, but that once stripped out the ratio between the bottom and the remaining top incomes is surprisingly low – just 1:40 – and that this ratio is much more acceptable to him (there is simultaneous surprise at each end of the panel that a figure has been put to what would be acceptable inequality).

Ben replies that there was a long term trend for the top 1% to stretch ahead of the rest, but at the beginning of the crisis they did particularly badly and since there is no noticeable trend for them compared to anyone else – a statistical observation that differs wildly from the popular narrative.

Ian confesses to be quite seduced by Rawl’s argument that inequality ought to be tolerated to the extent it serves the interests of the poorest people in society. As such, he says, that the relative position of the 1% ought to be considered a problem because it cannot be demonstrated to serve people in the bottom income quintiles. Ian asks Ben whether there is evidence that the rise of the 1% does serve the poor.

Ben confines himself to further details of how the bulk of additional wealth in the US has gone to the 1% but considers the redistribution of that to be a political matter. He does not, however, have a problem saying that some of it should be distributed, only that the amount to distribute is a political question and not an economic one.

I ask Yaron, as a proponent of his own favoured moral theories, whether the Rawlsian position is one he identifies with. He does not. He does not believe that we measure our success according to the effect we have on others. He believes that there are sound rational reasons why the top 1% (in fact the top 0.1%) had got richer. They have not been exploiting the poor, instead it is because they are more productive – mainly because they have access to a global population as a market. For Yaron inequality is justice, because people are rewarded by the market based on their productivity. Unless it can be shown that the wealth of the rich was stolen, coerced or fraud has been committed then the income distribution is the result of voluntary transactions and it is therefore morally acceptable.

I turn to Kristian to introduce the topic of monetary policy. Kristian explains that quantitative easing – money printing, in effect – inflates the wealth of those who are already wealthy. Kristian is more interested, however, in the question of why it is the very top 1% of the income distribution who benefit from global markets and not the top 2%, for example.

Ben suggests there are many explanations that have been put forward but the answer is not properly known. He expands on the explanation offered by Yaron earlier that “superstars” – Jack Nicholas, Rory McElroy, leading brands – are known to global audiences now and to demand converges globally for those particular names or brands. Kristian wonders whether this fully explains that the trend is isolated to the very top, and whether the tax system may have a role. Ben is sure that nobody knows for sure. I press for names of people working on the problem and am given Thomas Piketty (whose work was discussed here recently) and Emmanuel Saez (who has worked with Piketty).

Yaron has, I understand, actually read Piketty and is keen to describe some of the problems. Piketty starts his book by describing inequality as immoral – something Yaron regularly disputes, in fact he had just done so. Yaron also claims that Piketty misunderstands the nature of capital, seeing it as an undifferentiated and passive actor in the economy that earns 8% return without effort, and his pricing of capital assumes an effective market for it, which is not a safe assumption. Yaron gives a perspective on the problems of the US tax system and how changes have not been reflected in Piketty’s treatment of the data, and references problems in the data that other commentators have picked up. Yaron is frustrated that this flawed book is given any credibility at all.

I turn next to the subject of Kristian’s research – the measurement of poverty as a relative thing – and whether this means there will always be some people who are poor. Kristian says that in fact it is possible to, mathematically to have an income distribution in which the lowest paid are within 60% of the median. To do it, you need an income floor and to compress the distribution. He says no society has ever done this, including progressive examples such as Sweden and Denmark. Instead he suggests that you measure living standards directly by measuring consumption, and avoid the use of a median.

Kristian explains that the conventional relative measurement of poverty tends to produce effects such as poverty declining during financial crises because the rich have become less rich, not because the poor have done better and improved their living standard. This quirk means that the recession under Labour reduced poverty more than their welfare largesse.

Yaron agrees, adding that World War II did a lot to reduce inequality because blowing up the assets of the rich tends to shift the wealth and income distribution that way (as does signing up the lower classes as soldiers and killing them). For Yaron inequality and relative poverty are not the right questions, for him the problem is one of freedom. He says there are lots of reasons that a larger global pool of employees, especially one that has brought in lots of developing nations. The most extreme talent is relatively rare in such a pool – Yaron gives the example of China creating demand for the “rare talent” of CEO’s that is unmatched by any additional supply from that country (for the time being). For Yaron this is a “reflection of justice” in which people are rewarded for their particular skills and abilities.

Kristian volunteers that “extreme egalitarian” such as the authors of the Spirit Level, are fond of the war-time economies. Yaron adds that Piketty has made the same reference to the same period of falling inequality but repeated that the war and destruction which caused that fall should not be encouraged.

I offer the last word to Ben Etheridge who speaks up a little for the idea of worrying about inequality. He says it is equality essential for prosperity. To nods from the panel he mentions equality before the law and in front of civil institutions. Nods cease when he gets to mentioning universal healthcare and education as part of the same category as equality before the law. Finally, Ben worries that we ought to worry about the 1% stretching away because this will put the institutions he just mentioned under threat.

This last point proves a little too contentious to leave alone, so I challenge Ben to describe how the rise of the 1% is a threat to these institutions, “will they go and knock them down?”. Ben clarifies that he was talking about the capture of political institutions in particular and suggests that there are precedents in history for societies breaking down when elites take over.

Kristian asks Ben whether he felt that there would be less of a problem if politics was simply less important (an obvious libertarian solution to the corruption issue). There is much drawing of breath when Ben suggests “politics is always important”.

Yaron comes in because he feels the cause of potential breakdown is not at the top but at the bottom. He thinks the main issue there is that public education consistently fails the poor. Richer families are always able to afford a better education, but public schooling let’s down the poor and does not equip them with the kind of technological skills in particular that they need.

Ian Dunt smells a rat and asks if Yaron would abolish all public schools? Yaron says he “absolutely” would.

Suddenly there is intense debate again – we are not looking like finishing yet! Ian Dunt asks how people will afford to get to these schools. Yaron refers to fellow Micklethwait mentoree James Tooley’s “Beautiful Tree” which describes the systems of private education in surprisingly poor districts and says there “he does not think there is such as situation” in which the poor would be unable to afford a private education that pulls them up. This amazes Ian Dunt who speaks of the kind of person living in London working for Tescos on 16,000 a year who has difficulty surviving. Yaron says that the slums of Calcutta and Nigeria people do in fact afford education.

Yaron pulls out his trademark iPhone and, while qualifying that he would not simply privatise education and leave everything else alone, he would love to see the kind of melting pot of innovation that goes on in the App Store applied to the education industry. Cue applause from this audience!

One Comment

  1. Some inequality is moral – in fact lot of it is, There is nothing morally wrong with leaving large scale property to your children so “equality of opportunity” is wrong (Paul the “Old Whig” is not going to pretend to be an egalitarian). However some inequality is wrong – the product (for example) of monetary expansion (lending being financed by credit-money expansion rather than by real savings – the actual sacrifice of consumption), This has been denounced since the days of Richard Cantillon in the 1700s.

    As for the British labour market – it is perhaps the least bad of the major nations of the European Union (the German labour market was better – but they are starting to mess it up, but Austria may still be O.K. ish) a low standard indeed, but still better than a high labour tax, high regulation model. Those who wish to push big government (French style) policies on the United Kingdom are no friends of the poor – although they may pretend to be.



Leave a Reply to Paul Marks Cancel reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s