We live in one of the most unequal societies in the developed world, and the government’s response to a series of financial crises has deepened the gulf. Quantitative easing was supposed to prevent economic collapse, to increase investment and stimulate exports. But because the money had nowhere to go, it made the rich richer and the moderately well off rich, and our very unequal society less equal.
In the last decade, the Bank of England has put an additional £3 trillion into circulation. This is equivalent to £50,000 for every man, woman and child in the country. If you have not seen your £50,000 you might reasonably want to know who has it.
I got some of it. I didn’t ask for it. I didn’t want it. And it is not fair.
So what happened, and what could be done to put it right?
An unequal society
Two books have helped me to understand inequality.
In 2013 the economist Thomas Piketty published a ground-breaking history of capitalism, Capital in the Twenty-First Century. He proposed that, although most debate on inequality focuses on income, the most significant difference is not income, but wealth. He argued that, over time, people can always earn more from owning capital – savings, land, investments – than from paid employment. Unlike wages, capital keeps on growing, and accumulates as it passes down the generations through inheritance. He showed that inequality in developed countries rose to a peak in 1914, but then fell, for a variety of reasons, until the 1980s, after which it returned to its upward course.
The second book is The Spirit Level, Pickett and Wilkinson’s 2009 study of income inequality across 23 countries. They examined the relationship between levels of inequality and eleven social indicators: levels of physical health, mental health, drug abuse, education, imprisonment, obesity, social mobility, trust and community life, violence, teenage pregnancies, and childhood well-being.
In every case, the outcomes were poorer in countries with higher levels of inequality. And this was bad for the rich as well as the poor, because inequality increases crime, decreases social cohesion and depresses growth. As Henry Ford once said, “if I don’t pay the workers enough, they can’t afford to buy my cars.”
Is inequality a bad thing?
Not everyone thinks that inequality is a bad thing, and some inequality is inevitable. But the issue divides the political right from the left.
On the right, people generally see inequality as unavoidable. Many see it as desirable, because it drives competition, which generates economic and social growth. We work harder in order to raise our relative position. So people on the right tend to attribute economic success to personal merit.
On the left, people believe that we do not start life with equal chances, and that inequality of opportunity persists through life. Much success comes from inheritance, luck, and hidden subsidies. So, for people on the left, inequality is unfair, and the state should try to even out those chances.
By definition the two positions are incompatible, which is why the divide defines much of our politics.
What causes inequality?
It is common on the left to attribute inequality to simple greed: some people want to be rich, and are prepared to do anything in their power to achieve it. Conspiracy theories abound about corrupt politicians manipulating law in order to advance their personal interests. More commonly, people believe that politicians only succeed if they advance the financial interests of their core constituents.
Of course money matters to people. Those who don’t have much, seek to become comfortable. Those who have it, fear losing it, to government, corrupt politicians or criminals. Pensioners hoard for fear of an uncertain future. Some see money as a token of “winning”. As a City trader, commenting on large bonuses, once observed, “it’s not about the money. It’s the game. They could pay me in coconuts as long as I get more coconuts than the bloke at the next desk.”
But underpinning us all is a host of public services, paid for collectively and allocated democratically. This provides a base which everyone benefits from. And they make a larger contribution to the life of the poorest. When the state shrinks, as it has been doing, the poor get poorer fastest, and the gap widens.
The last decade has seen a widening of the gap between richest 10% and the rest. A host of government policies have contributed, but quantitative easing, which flooded the economy with money, played a major part. Rather than stimulating investment in economic activity and growing exports, it made the rich richer, and the moderately prosperous rich. And it froze out the poor, and especially the young.
An ordinary middle-class career
My personal situation is not uncommon and illustrates the problem. I began with advantages. I was born into an ordinary progressive middle-class family. My parents instilled in me the belief that one should try to leave the world a better place than one found it. An aspirational school and a respectable university confirmed the belief that I could do that.
My career provided the means. Work was demanding, but interesting and mostly enjoyable. My career gave me the chance to repay the community for the advantages it had given me. Money was tight in the early years, but we were never cold or hungry, and my career choices were never driven by money. I was lucky in mentors, friends and colleagues who gave me advice, contacts and opportunities which might not have been available to other people. I was paid enough to live a decent, but not extravagant, middle-class life. My income never took me into the higher-rate income tax bracket until my last full time job, as a University senior manager.
I become a rich capitalist
The critical change happened in the mid 2000s. My employer decided to reorganise and offered me early retirement. I left with a decent public sector pension, of the kind which used to be normal (and which I had contributed to since the age of 25). We had, at last, finished paying off the mortgage. My parents died, leaving me a small inheritance. So when the financial crash of 2008 happened we had some capital. We owned our house outright, with enough savings, mostly invested in ethical and green funds, to cover the possible costs of a couple of years of residential care if we should need it at the end of our lives. My annual income was around the national average, and like most pensioners, our living expenses had reduced. We were comfortable, but hardly rich.
Since then the inequality gap has widened dramatically. Public services have shrunk. Inflation of 45% means that wages have stagnated in real terms, while pensions have tracked inflation upwards. But the change in wealth has been even more dramatic. The flood of money into the economy has driven up asset prices. The Nationwide index suggests that my house is now worth 80% more than when we bought it 12 years ago. Our investments are worth 160% more than when I retired. Then Covid stopped holidays, travel, meals out and the theatre. So the money kept piling up. With absolutely no effort on my part, my wealth has grown dramatically.
So I retired as a fairly comfortable pensioner. But the system, quantitative easing, and low levels of taxation, made me rich, by accident.
A broken system, not greed
This is a broken system. If you ask where the money created by quantitative easing went, it went to people like me, who, in 2008, had relatively modest capital. When risk averse banks did not invest the new money in business growth, the money had nowhere to go except into housing, land and shares, all of whose values rose dramatically. One of the most obvious results is a dysfunctional housing market, which drives up homelessness, rents and mortgage costs.
As the state retreats, services on which we all depend are increasingly being funded by voluntary effort and charities. Because I really don’t need all the money, I give nearly as much to charity as I do to the Inland Revenue. I give money to homelessness charities, because I believe that homelessness is an evil which must be tackled. But that should not be necessary. Eliminating it is a duty of government, on behalf of the whole community. If we need more money to do it, then it should be paid for by the community (taxation), not the whims of well-intentioned people like me.
A modest proposal
I did not ask to be rich. I have always voted for a party which aimed to reduce inequality, although that was rarely in my personal financial interest.
So we need to pay more taxes, in ways which contribute to that goal. But politicians believe that voters will always resist tax rises, especially when the media dramatise the effects. However, to suggest that an increase in taxation would be a disaster for people like me is absurd and immoral.
So here are three proposals.
The first is income tax. When Margaret Thatcher left office after years of tax cutting, the basic rate was 25%. Restoring 1990 levels would generate something like £35 billion a year for public services. Because the poorest pay no income tax, but depend most on public services, this would significantly narrow the gap for the poorest. Income tax should also apply to investment income, which would simplify the system and reduce the windfall effect of capital growth.
The second is a wealth tax. The only wealth tax we have is Council Tax, based absurdly on a 30 year old valuation of houses. Wealth taxes should include all wealth, including housing, land and investments. It should be paid by the owner (not as happens with Council Tax, by the tenant). Taxing investments at 0.5% (the equivalent rate to Council Tax) would generate significant sums.
If those changes were made, people like me might pay 10% more in tax. I would barely notice it. But the impact on the quality of life of the whole community would be immense.
The third change concerns inheritance, which is one way in which wealth and advantage concentrate over the generations. At present, inheritance tax is designed in a way which means that hardly anyone pays it. So we should extend its reach, but make it more progressive, so people with modest resources pay modestly, and the very rich pay more. My children would still be better off when I die, but a significant part of what I have accumulated would go to the wider community, without which I could not have achieved it.
Finally, if government finds itself forced into another round of quantitative easing, the money should be paid to everyone. The money they gave to the banks, and through them to people like me, could have funded a universal basic income for all. We would all be better off now.
Millions are struggling, while some get richer, not by design but by accident. I want a more equal society and I am very willing to pay for it. I believe there are many like me. Politicians need courage.