I hope that people aren’t getting too bored with discussions of inequality, because this is another blog which touches on 2 familiar themes; how income is distributed; and how governments produce the statistics that we use to inform political and economic debates.

There is a common assumption that over last few decades the economic performance of different parts of the UK has diverged, with London and the Home Counties out performing the rest of the Country.   I wrote recently about income inequality and I wondered if the picture would look different if we thought about it geographically – rich areas and poor areas rather than rich people and poor people.

Lets start with Gross Domestic Product (GDP).  It is the most commonly used measure of how the economy is performing and allows international and historical comparisons, although it does have it’s critics.

David Cameron flirted with the idea of measuring happiness, but abandoned it when it turned out that no-one was happy, and lots of people blamed their unhappiness on his Government:

I like the way the Guardian’s photo editor picked a photo of Cameron with a sad face to illustrate the story.

Most people will have gathered from the Media that growth in GDP has been slowing since the Brexit vote.   This from the BBC recently is typical:

In fact while it is true that GDP growth is lower than it was before June 16 it has actually been slowing since David Cameron announced there was going to be a referendum:

This isn’t a surprise.

The referendum increased uncertainty for businesses, which in turn reduced investment, which impacts on the rate of growth.   This is however part of a longer term trend in GDP, as this graph from the ONS shows:

 

GDP growth has been slowing for decades, although it has become more consistent with smaller peaks, but fewer troughs.  The cycles of boom and bust may not have actually ended (as Gordon Brown foolishly claimed) but the busts have got much less frequent.

If we try and make sense of the squiggly graph we can break up the last 60+ years into a number of periods and see some patterns.

Eden-MacMillan-Hume 1955 – 1964

Nearly 10 years of Conservative rule, and GDP grew by an average of 3.1% per year. Wage rises for working class jobs were still low, but if you were middle class you hadn’t had it so good for a very long time.  Growth was patchy as this rather odd set of results from 1958 illustrate:

Patchy growth was the consequence of the Government trying to grow the economy without letting the trade deficit get too big.   At one point exchange controls were so tight that the Treasury had to approve the transfer of Jimmy Greaves from AC Milan to Spurs because the fee – a colossal £100,000  – might affect the delicate balance of trade.

Wilson – Heath – Wilson – Callaghan 1964 – 1979

A mix of Labour and Conservative administrations on either side of the oil price shock and the economic turmoil of the 1970s. Despite all of this GDP grew by an average of 2.96% a year.   GDP growth is very bumpy, with big swings from growth to contraction; 1965, 66, 68, 69, 70 and 71 all saw 3 quarters of growth and 1 quarter of contraction.   Both Labour and Tory followed variants on “stop/go” policies trying to balance growth, inflation and a trade deficit.

The Thatcher years 1979 – 1992

I am afraid that this is more bad news for the remaining Thatcher fans.   GDP grown was markedly lower in her years in office.  Despite the boom years under Lawson in the mid-80s GDP growth averaged 1.83%.  Given that Thatcher reaped the benefits of the oil boom this is a dreadful set of results.

Major and Blair 1992 – 2007

Major comes into office with continuity Thatcherite policies, but a sharp recession and Black Wednesday soon change his mind.  From Black Wednesday to the Credit Crunch GDP growth is back to 3% a year on average.  Unemployment falls during this period, and inflation is low and stable.  Blair even manages to reduce Government debt as well.  This is the era of NICE economics (Non-Inflationary Consistent Expansion).

Brown-Cameron-May 2007 onwards

GDP Growth is sharply negative in the immediate aftermath of the Credit Crunch, and recovers only slowly.   Average GDP growth is a 1.9% a year, only slightly better than the Thatcher era.  Inflation is low, but unemployment also low.   If we split out data from after the Referendum we growth is even lower – a meagre 1.5% –  like the early 80s but with worse pop music.

This, however only really tells us about information at a National level, it doesn’t tell us much about what is happening in different parts of the Country.

To work out what is happening regionally we have to use the ONS Gross Value Added (GVA) dataset.  This is a new way of looking at Regional economics and until a couple of years ago was treated as an experimental statistical method, although the data exists right back to 1999.  It takes a long time to produce and we won’t see the 2017 data until the end of 2018.

Experimental statistical methods – does it get more exciting than this?

We can start by looking at GDP growth by Nation:

England and Scotland are growing much faster than Scotland and Northern Ireland.

We can break down England further into Regions:

Since the records started all English regions have below average GVA growth except London. If we look at the post Credit Crunch years the variation is even larger:

This is total GVA not per capita, and it is also a chained value series so inflation effects have been adjusted out to show actual change.    The results for the North East and for Yorkshire and Humber are shocking.

There are 2 other things we can do with the data.  We can look at GVA per capita:

This shows that disparities in wages between London and the rest of the country reflect that the GVA per capita is  much higher in London than the rest of the country.  In fact the gap between London and everywhere else is great than the gap between the areas of the UK excluding London with the highest and lowest levels of GVA.

The second interesting thing that we can do is  look at changes within Regions by zooming in on data at Local Authority level.  At this point you should notice that the data changes, and the differences between London and the rest the UK doesn’t look as stark.   That’s because we are no longer dealing with a chained value series, so inflation effects are included, and because we are looking at GVA per capita, so population changes have an effect.  The growth in population in London balances out some of the total increase in GVA.   This is the Income based approach to GVA.

This is the data for Yorkshire and Humberside which shows how GVA per capita growth fell after the Credit Crunch.  The period 1998 to 2007 showed healthy levels of growth well above inflation right across the region.   Post Credit Crunch growth levels are well below inflation which means a real terms fall in GVA, and a real terms fall in average income.

The numbers for areas like North Lincolnshire are shocking – a fall in GVA before inflation adjustments.  I think of York as a pretty place full of tourists, but in terms of GVA it has more in common with the stagnant Northern Cities than the more dynamic bits of the North.   Or maybe an economy based on tea shops doesn’t create as much wealth as we thought?

These are the same numbers for the North East:

It’s not hard to see a pattern of big falls in growth in places like Newcastle, Redcar, Barnsley, Sheffield, and Doncaster.

This is the data for London:

Not only are the affluent parts of London a lot richer to start with, but the falls in GVA growth overall aren’t as stark as their Northern Cousins.  Overall however London’s average is held down by the huge disparities between the more prosperous and fast growing Boroughs and the worst.   Which leaves the obvious question:

What the fuck is happening in Croydon?

Now we have the Local Authority level GVA data some interesting correlations start and emerge.

There is a clear correlation between GVA growth at Local Authority level and the EU Referendum results.  I can’t claim credit for this analysis as it came from the Financial Times.  This is their rather nifty graph:

I am sure that there are cultural aspects which underpin the Leave vote too, but the link between Regional GVA and the EU referendum is pretty stark.

There is however another link that stood out to me – the link with life expectancy.  While life expectancy across the UK continues to improve the rate of improvement has slowed noticeably, and in some parts of the country it is starting to reverse.

I blogged about these falls in life expectancy and the relationship with austerity economics a while back:

Does Austerity really kill? If so how many? How can it if we are all living longer?

It isn’t an exact correlation but there are clear signs that the areas which show the biggest growth in GVA are among the areas where life expectancy is increasing the fastest, and the areas where GVA growth is lowest are the ones with the slowest growth in life expectancy or even falls.

These are the tables for the same regions showing changes in life expectancy.

Life expectancy across the region is still increasing,  but the rate of increase is slowing, and in some areas is starting to decline.

The North East is even worse:

Life expectancy at birth is falling, but is only increasing for women at age 65.

Where there are declines it is the familiar list of names: Middlesbrough, Newcastle, Redcar, Barnsley, Doncaster.

The data for London is predictably a lot better, with increases in all catagories

If you squint carefully you will see that the awful GVA data for Croydon is reflected in a declining male life expectancy at birth.

We need to be a bit careful in describing a rigid relationship between economic change and life expectancy; while Scotland’s economy is growing faster than Wales and Northern Ireland it’s life expectancy is the lowest of all the Nations, and the gap is getting bigger:

Too many deep fried Mars Bars.

It is also clear that it takes a long time for economic changes to feed through into changes in life expectancy.  Sadly this probably means that even if things start to improve over the next few years it will take a long time for this to reverse the trend in health status.

There are some pretty easy conclusions that we can draw from all of this.

The period up to the credit crunch saw growth in GVA and life expectancy across the UK.  London did better than parts of the North, but not at the expense of the North.  Since the credit crunch not only has growth been lower, but the balance of growth has been much more uneven, and the gap between London and the rest of the UK has been much more severe.

Some of these changes in GVA have clear links to the austerity policies of the Cameron and May Governments.   I haven’t gone through the Industry by Industry data here but the cuts in Government spending were a major cause of changes in GVA in the North.  It is harder to map the impact of QE and low interest rates through the data, but it does look rather like lots of the extra money that the Bank of England printed didn’t get much further than the M25.

It is also clear that the prolonged slump in GVA and GDP growth in the North is having an impact on life expectancy.   These are small changes, and they are forecasts, but they are driven by an increase in mortality rates over the last few years.

We have been used to being told that we are all living longer.   For some of us this is no longer true.

What all of this reminds me of is this paper by on mortality and morbidity in the USA by Deayton and Case:

http://wws.princeton.edu/faculty-research/research/item/rising-morbidity-and-mortality-midlife-among-white-non-hispanic

I’m not too bothered about inequalities in income.  I am bothered more by poverty.  I would rather live in a country where no-one is poor but someone people have gold hats, than a country where no-one has a gold hat but there is lots of poverty.

But these regional datasets really bother me.  It looks like parts of the North of England are starting to follow the pattern of economic decline, falling life expectancy and political volatility which we have seen in big chunks of the States.  Trump was driven to victory by white voters in areas with declining economic fortunes and sharply declining life expectancies.   

We are creating the exact same explosive mix in the UK too. 

And just like America the people living in these areas are largely absent from the national debates about politics and economics, and are cultural invisible to lots of people.

“Two nations between whom there is no intercourse and no sympathy; who are as ignorant of each other’s habits, thoughts, and feelings, as if they were ….. inhabitants of different planets.”

https://www.ons.gov.uk/economy/grossvalueaddedgva/bulletins/regionalgrossvalueaddedincomeapproach/december2016

https://www.ons.gov.uk/economy/grossvalueaddedgva/datasets/regionalgvaibylocalauthorityintheuk

https://www.ft.com/content/37944828-e586-11e7-8b99-0191e45377ec

https://www.theguardian.com/inequality/2017/dec/23/health-gap-between-uk-rich-and-poor?CMP=twt_gu&__twitter_impression=true

https://www.theguardian.com/politics/2010/nov/14/david-cameron-wellbeing-inquiry

https://www.ft.com/content/cf51e840-7147-11e7-93ff-99f383b09ff9

Thanks to the Health and GVA team at ONS for pointing me in the right direction for some of the data.

 

 

 

 

I have written previously about why the current system for measuring unemployment might not giving us an accurate picture:

Unemployments rising in the Chigley End of Town

People will have read in the media that UK unemployment is at it’s lowest since the 1970s.    This from the BBC is typical:

 

I thought that it might help to share the actual definition of unemployment being used to measure this huge fall:

One hour.

https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/methodologies/aguidetolabourmarketstatistics#employment

 

 

Another micro-blog, this time on PFI, and a not very hot take on Carillion and Capita.

I was going to avoid talking about the collapse of Carillion.  I get a bit frustrated talking about PFI because lots of people strongly dislike it without knowing much about it, which makes for a less than fun debate.   The same is true of Government outsourcing, which isn’t the same as PFI, but tends to get bundled together with it because lots of PFI schemes involve the outsourcing of some or all facilities management services as part of the PFI deal.

I’m not as hostile towards PFI as some people, partly because I worked on a couple of Hospital PFI schemes.   It’s not a bad capital sourcing route when the Treasury cost of capital is very high, but when the interest rates the Government can borrow at are as low as they are right now there is no point in PFI at all.

I do however have a big problem with off balance sheet accounting, which is a technique associated (but not the same as) PFI where Governments hide the amount of debt they have run up.  The reason why PFI and other off balance sheet wheezes continue to be popular with Labour and Tories is because Politicians don’t want to be honest about the amount of debt they want to incur.

I don’t have a problem with outsourcing either – I just believe that there are some bits of the public sector like basic administrative tasks which work well on an outsourced model, and lots of bits of the public sector which should never be outsourced; including all of Criminal Justice.  I also think that there are lots of parts of the public sector where the costs of administering outsourcing are so high they outweigh any advantages outsourcing might have – the NHS for example.

One of the main factors with PFI and any kind of outsourcing is the extent to which the Government or the NHS transfers risk to the Private Sector.   There a lots of good reasons why the State would outsource work or sign a PFI deal – they need short term but not long term capacity, or they want specialist skills in building or managing a project.  Whatever the reason for the PFI project or the outsourcing decision the contractual arrangements should always show a transference of risk.  The private sector takes on work because it wants profit, and any profit/reward should reflect the degree of risk the contractor takes on.

While I was sad that Carillion collapsed this is essentially the consequence of PFI working properly.  It’s not meant to be risk free.  The problems with Carillion aren’t a sign that PFI has failed. The show that it is working.  Carillion either got greedy, or it failed to appreciate the degree of risk it was taking on over the 400+ Public Sector contracts they took on.

This is a graph showing Carillion’s income from PFI contracts when they went bankrupt:

This is a graph which shows total PFI payments past and present across the whole industry:

The 2 graphs aren’t exactly the same shape, but the similarity is striking.  Carillion was pretty typical slice of the PFI market.

All this really tells us is the size of the reward. The question is – did Carillion simply have more risk than other companies?  Was it just badly run?  Or is there more systemic risk in the PFI market than we thought?

I changed my mind about writing about Carillion because I saw the headlines on Capita.   They issued another profit warning this week, disclosing a £513.1m pre-tax loss due to £850.7m of “specific non-underlying items” which dragged on its performance.  This compares with an £89.8m loss in 2016.    Capita have over 1000 public sector contracts and their collapse would be much messier.

I visited some of Capita’s outsourcing sites a few years ago when I was assessing potential outsourcing partners for the DWP Quango I was working for.   They have lots of high profile, mission critical, outsourcing work, including the Congestion Charge, Teachers Pensions, TV Licensing and lots of NHS back office work.  Some of their work in criminal justice is scary stuff – offender tagging, and 999 systems.    Notably they haven’t been awarded any new Government contracts this year, which suggests that there is a growing reluctance to give them work.   Knowing a bit about the rigid thinking of public sector procurement teams there must be something very scary in the financials to put them off.

The shape of the 2 graphs above and the scary state of Capita suggests that Carillion’s problems might actually be systemic across the industry, rather than just the result of poor risk management.

When Carilion went under there was an obvious solution to their problems.  HMG could have borrowed cheaply, bought out the PFI contracts from Carillion.  This would have given the remaining private sector division of Carlillion enough capital to keep it afloat, while cutting the long costs (because the PFI contracts would effectively had been refinanced more cheaply).  A clever person would have taken over all of Carillions PFI division and used it as a state owned infrastructure company which could have taken over other expensive or problematical PFI or outsourcing contracts from other contractors.

But that would have been ideologically impossible to either Political Party.

I was a Miner, I was a Banker/I was a Quantitative Analyst/Between the Wars/I played at Glastonbury/In time of austerity

A bit of a follow up from last weeks look at the ways property wealth, property tax and pension wealth interact and how monetary policy can change how wealth is re-distributed.  

While I was writing it Andy Haldane (did I mention he was my favourite Central Banker?) invited Billy Bragg to give a lecture on Monetary Policy at Threadneedle Street. This is the video of it:  

https://www.bankofengland.co.uk/events/2018/april/one-bank-flagship-seminar-billy-bragg

Just to manage your expectations he doesn’t do “Levis Stubbs Tears”.    Billy Bragg at the Bank of England may sound odd, but it was meant to expose Central Bankers to a broader range of views outside of their own bubble.  There was a predictably mixed response, with people liking or disliking his speech based mostly on where they were politically before the speech rather than the actual content of it.

Billy’s big point, I think, is that the lack of accountability by Institutions is driving support for authoritarianism.  This is spot on. This lack of accountability is a huge problem for public institutions and faith in democratic politics – politicians are mired in scandal and yet no-one resigns.  Since Gordon Brown made the Bank of England independent in 1997 there has been an assumption that interest rates and monetary policy are politically neutral, but when decisions are taken that re-distribute wealth that can’t be apolitical.   It’s worth reflecting on this next time someone suggests taking the NHS out of political control in the same way as the BofE.

He also talks about the way that the money spent on things like QE could have been spent more usefully on building schools or hospitals.  I think that Billy is actually describing 2 similar but subtly different approaches.

The first is that the Government could borrow money very cheaply and spend it doing things that would help improve society and the economy.  This is spot on.  Over the last few years we could have borrowed cheaply, fixed every pot hole, every leaky classroom roof, bought a brand new set of state of the art NHS diagnostic kit.  Not only would this have saved money in the long run, but it would have helped grow the economy too.

We could also have bought out any PFI deals signed at high interest rates before the Credit Crunch with a long time left to run on them.   A couple of the NHS Trusts I worked for have done just that, using low interest rates and some of the financial flexibilities available to Foundation Trusts to buy out historic PFI:

https://www.ft.com/content/490d42ae-2f0c-11e0-88ec-00144feabdc0

https://www.theguardian.com/healthcare-network/2011/feb/03/pfi-nhs-trust-paid-off-tees-esk-wear

https://www.ft.com/content/cc4f10b2-4951-11e4-8d68-00144feab7de

https://www.independent.co.uk/life-style/health-and-families/health-news/northumbria-nhs-trust-saves-67m-by-freeing-itself-from-pfi-deal-9517844.html

I like the way that the FT describes both of them as the first.   Just goes to show that even the best newspapers struggle to follow the boring detail of public borrowing and PFI deals. 

The second approach is the possibility of using QE style asset purchases to do something more ambitious than buy Bank Bonds.   We could, for example, issue Local Government Bonds, which the Bank of England could buy, and use this money to build Council Houses.  This idea was promoted by John McDonnell under the heading of Peoples QE.

I’m a bit more sceptical of Peoples QE.  The most obvious reason is that we could just use conventional public sector borrowing to achieve this, particularly when interest rates are low.  It’s a solution to a problem which doesn’t need another solution.   The reluctance to use cheap borrowing is because politicians don’t want to be honest about how much they are borrowing, and that doesn’t help improve accountability.

Both plans – traditional Government borrowing and Peoples QE – share some similar problems.  When the Government spends capital it almost always needs a flow of revenue to go with it.  A new Hospital needs on-going spend on Doctors and Nurses, Schools need Teachers, Roads have pot holes.   The only areas of Government capital spend which don’t have this problem are things like Council House building where the capital spend brings in rent.    

Having run public services myself there are very few uses for capital which doesn’t come with revenue consequences if only to fund the interest payments.

There is also an even nerdier problem with using Government spending or Peoples QE rather than traditional QE.   The traditional QE model benefits from the magnifying effect of fractional reserve banking.    The size of the lending that Banks can release into the economy is much greater than the size of the asset purchase. 

But peoples QE has a more profound problem.  While the Global economy is dependent on QE no-one knows when or whether it has negative long term consequences.   It may be that it distorts capital markets, increases volatility, or decreases long term growth.  It might even be that Andy Haldane is wrong and it increases inequality.

With conventional QE it is easy to reverse the process.   The Bank can sell off the bonds it purchased and reduce the amount of QE.   With unconventional or Peoples QE it is much harder to reverse the process if you need to reduce the amount of QE in circulation.  If you have used the funds to build Council Houses the only way to reduce the QE is to start selling off the Council Houses.   If you have used the funds to build Hospitals then they will have to be sold too.

It’s easy to see how this produces an almost impossible dilemma for a future Government.   If QE is causing inflation, or making the poor into paupers but the only cure was selling off Council Houses or Hospitals how would a Government act?  How would a Corbyn led Government survive this kind of dilemma?

This is a more conventional clip of Billy:

https://www.youtube.com/watch?v=wWjO9BTJhPc\\

More to come tomorrow….

https://www.theguardian.com/music/2018/apr/08/billy-bragg-to-give-speech-on-how-to-build-a-better-society-at-boe

https://www.opendemocracy.net/neweconomics/alternative-qe-billy-bragg-right/

http://www.cityam.com/284358/bragging-rights-city-heavyweights-flummoxed-popstars-bank

Last month I wrote about attitudes to inequality specifically why I think that recent headlines about Rampant Inequality are way off the mark.  The belief that we live in an era of great inequality is so prevalent that a lot of people reacted with disbelief when I wrote that wealth inequality in the UK was at a historic low, despite recent small rises.  For me it is poverty that matters more than inequality. 

The Golden Age of Equality

I wanted to balance that by writing about the changes in the way that the distribution of different forms of wealth accumulation – property and pensions  – has changed over the last few decades. 

Since the Credit Crunch there has been an accumulation of property wealth in fewer and fewer hands.  In the immediate aftermath of the Crunch house prices fell sharply but the lack of liquidity in the financial system made it difficult for anyone without a big deposit to get a mortgage.  First time buyers who would normally have benefited from cheaper prices were squeezed out, while people who could access lots of capital found it easy to amass big property portfolios.  That’s why they call it capitalism.

I will admit that I was a beneficiary of this.  I took a job in Leeds just after the Crunch and rather than sleep in hotels I bought a flat, whose value had fallen significantly, and which was conveniently situated near the bars on Call Lane.  In the years up to the credit crunch large numbers of flats were built in and around Leeds City Centre, possibly as many as 20,000.  By 2009 when I was shopping for a flat 10% of them were empty, many for over a year.   

These flats saw very big falls in value, in developments like Aspect 24.  As I travelled around the City viewing flats whose occupiers had bought them new and which had lost over 20% of their value, wiping out all of the cash buyers had put in.  People like me who could access capital were able to buy choice properties cheaply, with mortgages at very low rates.   

A recent speech by Andy Haldane from the Bank of England sets out the economics behind these experiences.   Andy is my favourite Central Banker.  I realise that having a fave Central Banker is an unusual thing, and marks me out as a bit of a policy nerd.

The Bank of England, like most Central Banks, reacted to the Credit Crunch with the most expansionary monetary policy in history.   Interest rates were cut to their lowest ever levels, close to zero.  Additional stimulus was provided through asset purchases – so-called Quantitative Easing or QE. These asset purchases by Central Banks are currently running at around a cumulative 15% of annual global GDP.  

This pushed an awful lot of money through the Banking system and into the economy, to counteract the affects of the Credit Crunch.  Bit by bit monetary policy changes helped to reflate the economy, and restart the housing market.  By 2010 house prices were rising again, and continued to rise in areas like London all the way through to the Brexit vote.  Those who had acquired additional properties during the Credit Crunch accumulated wealth as monetary policy pushed up prices. 

It is a common assumption that the people who made money in the years following the credit crunch were the top 1% with gold hats, but a much broader group of people with plenty of capital, a property portfolio or stocks and shares benefitted too from expansionary monetary policy.

Despite this Andy Haldane argues that 10 years after the credit crunch Bank of England actions hadn’t made inequality worse – income distribution and the Gini coefficient today are the same as they were 10 years ago. 

I am sceptical about some of the claims made about inequality but even I am baffled by Haldane’s views.   He argues that the impacts on jobs and wages in lower incomes groups balances the increase in property wealth, and he has lots of graphs to prove it:

There are 8 pages of graphs to illustrate his point.  I do like a good graph.

No matter how good the Bank of England’s graphs department are they can’t touch this graph from the Resolution Foundation, which is by far and away my favourite graph at the moment.  Yes, I know that having a favourite graph is as odd as having a fave Central Banker.

You can find this graph and a great money other fine diagrams in this report:

http://www.resolutionfoundation.org/app/uploads/2018/03/Council-tax-IC.pdf

When Harold Wilson became Prime Minister total property wealth was worth 3 times annual GDP.   Total wealth taxes brought into the Government a sum equivalent to just over 2% of GDP.   

Today total property wealth is 7 times GDP, but the taxes on property still only bring in just over 2% of GDP for the Government.

Without being hyperbolic this has been the biggest stealth tax cut of all time.   The tax cuts is partly caused by Governments fiddling with property taxes for political gain, but mostly due to the failure to reform or even rebase Council tax.  This failure to update Council tax is a wholly regressive policy which gives an effective tax cut to those in the most expensive properties

If the Government take from property taxes had kept up with the increases in property wealth there would have been no need for the age of austerity.

I have long advocated using the accumulated property wealth of richer older cohorts to help fund the care costs of the baby boom generation.   This is very unpopular, particularly where the care costs are as a result of an illness like Dementia.  The Conservatives proposed some moderately progressive proposals to use property wealth to fund care at the last general election.  Labour made hay opposing the “Dementia Tax” even though it put them in the position of defending inherited wealth.

Both parties in their own way are committed to defending inherited property wealth, largely because both main political parties are largely made up of people with property wealth.   Looking at the graph above not only has the property market been a source of widening inequality since the Credit Crunch, but this as actually been going on for a very long time, Labour and Tory.   

Even an inequality sceptic like me can see that housing and other assets like stocks and shares have become concentrated in fewer hands since the credit crunch.   Rates of home ownership are back were they were before Margaret Thatcher started selling off Council Houses, and rates of share ownership are back where they were before the same Prime Minister sold off shares in public utilities.  Stealth tax cuts just make this worse.  

At this point I had convinced myself that there was something I was missing about the view of wealth and inequality.    I am a big fan of Andy Haldane, but the size of wealth accumulation from property since the Credit Crunch, facilitated by BofE policy, must have increased inequality.   I couldn’t see how he could be right.

I checked his findings against the latest data from the Office of National Statistics.  This shows that even the recent rises in inequality has come to an end, and the current gap between rich and poor is static.  The BofE were right:

https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/bulletins/wealthingreatbritainwave5/2014to2016

What the ONS data sets shows is that the rise in wealth inequality due to property wealth is being offset by changes in pension wealth – over the last few years nearly £1tn has been added to the value of private pensions. Given that the total GDP of the UK is just under £2tn this is a huge amount.   

For most people of my generation the most valuable things we own are our homes and our pensions, given that our collections of rare Morrissey solo records are plummeting in value.   We tend to track the value of our houses much more carefully than the value of our pensions, despite the fact that as we get older some of us will have pension funds worth a lot more than our houses.  Senior Doctors in NHS Super An can easily hit the £1m tax free limit.

Most people I know didn’t really notice the 2008 pensions act when it was passed, or when it was implemented a few years afterwards   I certainly didn’t spot it, and I was working for a Quango sponsored by DWP.   Frankly pensions are boring and complex, and even I struggle to keep track of it.   For those who missed it the 2008 Act requires all employers to set up an occupational pension scheme, which employees are automatically enrolled in unless they opt out.  The Act also established the National Employee Savings Trust, a public pension provider for those who do not have an occupational pensions, which functions as a low-fee pension scheme in competition with existing funds.

Part of the reason why the 2008 Act passed un-noticed is because most of the people who I know work in big companies or the public sector where access to good quality pensions is still widespread.   We have grown used to reading pension horror stories, many of which are true, about the closure of final salary schemes .  This has created the impression that whole pensions system is in crisis, but for most of my generation we are still in really good schemes.   The people who are benefiting the most from the 2008 Act are low paid workers in the private sector, who for the first time are benefiting from the kind of occupational pensions that white collar public sector and private sector employees take for granted.

The impact of the increase in pension wealth for people on lower incomes following the 2008 Act is as great as the increase in property wealth for people on higher incomes since the Credit Crunch.   This is a huge and progressive re-distribution of wealth, which will continue for years to come.

The generally accepted story of the New Labour years is that they did lots of stuff about tackling poverty but largely didn’t really do much on inequality, despite passing progressive legislation like the National Minimum Wage.    Peter Mandelson’s view that he was “intensely relaxed about people getting filthy rich as long as they pay their taxes” has come to define our view of the New Labour era as one where tackling inequality wasn’t a priority.  

In retrospect the  2008 Act may well turn out to be one of the most significant pieces of redistributive legislation of the last few decades, worth more in total than the NMW.   I honestly find it incredible that such a huge change in wealth distribution could have happened without my noticing, but I don’t think I am alone.  After all pensions are boring, and most people I know aren’t affected by the changes in the 2008 Act.

In the meantime I new set of developers have announced another round of flat building in Leeds.  9,000 more flats on the Quarry Hill site, with unrivalled views of Britains finest example of neo-Stalinist architecture.  

What could possibly go wrong?

https://www.ft.com/content/4c5ce3fc-0753-11e8-9650-9c0ad2d7c5b5

https://www.bankofengland.co.uk/-/media/boe/files/speech/2018/how-monetary-policy-affects-your-gdp-speech-by-andy-haldane.pdf?la=en&hash=FCBD26BEE0C888B53856C099796780DED35190A4

https://www.bankofengland.co.uk/speech/2016/the-distributional-implications-of-low-structural-interest-rates-and-some-remarks-about-monetary

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/691917/households-below-average-income-1994-1995-2016-2017.pdf

https://www.theguardian.com/commentisfree/2018/apr/09/dementia-sell-home-britain-health-lottery?CMP=twt_gu&__twitter_impression=true&__twitter_impression=true

https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/methodologies/wealthandassetssurveywaswave5validationoffiguresagainstexternalsources

https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/articles/earlyindicatorestimatesfromthewealthandassetssurvey/previousReleases

https://www.opendemocracy.net/neweconomics/time-call-housing-crisis-really-largest-transfer-wealth-living-memory/

https://www.theguardian.com/social-care-network/2018/mar/21/jeremy-hunt-social-care-reform

http://www.resolutionfoundation.org/publications/home-affairs-options-for-reforming-property-taxation/

The two headlines above, one from the Washington Post, and one from the Guardian are typical of recent press stories about the rise in inequality . Inequality is apparently the defining characteristic of our current age.  The Guardian has an excellent series of articles chronicling how inequality shapes the modern world, while Oxfam have published some hard hitting recent reports which take aim at rising Global inequality.   The World Economic Forum included income inequality on their Global Risk survey, while even the IMF, who usually are pretty conservative in their outlook argue that too much inequality is reducing levels of growth:

http://www.imf.org/en/Publications/FM/Issues/2017/10/05/fiscal-monitor-october-2017

The source of this inequality is apparently a group of people called the Global 1% who are amassing more and more wealth than ever before.  To be in the global top 1% you need to earn £23,500pa, which means that a large number of people reading this blog are 1%ers. 

You evil bastards.   

Globally us 1%ers control about half of the worlds wealth, and that share is increasing.  Given that UK median personal income is about £22,000 nearly half of the population of the UK are in the global 1%

To be in the UK top 1% you would need an income of over £650,000 a year, which is probably a bit more than most people reading this.   You can stop worrying about the Occupy movement camping outside your house for a while yet. Within the UK the top 1% control about 25% of the countries wealth according to Oxfam.  There are other slightly lower estimates, but a range of 23-25% looks about right.  

The UK has Gini co-efficient of 73.2% compared to an OECD average of 72.8%, which means that we are pretty average in terms of income inequality.   If you compare the UK to similar economic such as the Top 30 developed nations we are in the bottom half for equality, although the way inequality is distributed means that the UK is closer to counties like  Sweden than it is the the USA or Mexico:

What is true is that things are getting worse.  Since the credit crunch most of the wealth created has gone to the richest 1% in the UK and globally, while the incomes of the poorest have stagnated or even fallen.

This would seem to substantiate the argument that inequality is worse than it has ever been, and that Capitalism has an inbuilt tendency to become more and more unequal over time as Thomas Picketty claims:

I have 2 basic problems with this.   The first problem is historical, the second geographical.

From a historical perspective these claims are ludicrous.  

Sorry if that sounds harsh, but the idea that income inequality is worse now than it was 100 years when the British Empire was at it’s peak strikes me as absurd.  Back then the top1% in the UK controlled not just the majority of the countries wealth, but a huge proportion of other countries wealth too.   The incomes of the top 1% were actually greater than the entire GDP of the UK. 

If we go further back it is just as bad.  Inequality was worse in the age of the transatlantic slave trade, worse in the era of the Highland Clearances and the Enclosure of the Common Land.

In fact if we look at  the  EINITE – Economic Inequality across Italy and Europe, 1300-1800 we can see that wealth inequality has been increasing in the manner predicted by Picketty from the Black Death onwards – it looks as if the shortage of Labour caused by the Black Death redistributed wealth away from the aristocracy. 

From the end of the Edwardian era and WW1 Inequality starts to fall, and continue for most of the next 100 years.   There has been a small uptick in the last few years, but inequality across Europe and in the UK is the lowest that it has been since the late C16th.

The EINITE dataset covers all of Europe, in the UK the rise of the Empire magnifies the effects, such that the peak of inequality in the Edwardian era is much higher.    Britain was also more unequal than mainland Europe during the Tudor era as the Crown amassed huge amounts of wealth through trade with the colonies and seizing the riches of the Church. 

If we take the last 1000 years of British History as a whole there are 2 notable periods of equality.  The first lasted from the Black Death and the abolition of serfdom in 1380 to the dissolution of the monasteries.   The second period of equality is the one we live in now.  To put this in simple terms in the last thousand years all of the years since the introduction of the welfare state have lower levels of inequality than all of the years before the introduction of the welfare state. 

Putting this into a neat chart, the wealth of the top 1% in the UK over time looks like this:

This is a pretty rough approximation, based on the sources below.   It is hard to work out whether the long periods where inequality is static are correct, or whether they reflect that some eras of economic history are more widely studied than others.

This doesn’t quite prove Piketty right or wrong.   There are eras with high demand for capital and low levels of inequality, and eras with low demand for capital and high levels of inequality.    There is however a discernible increase in inequality during the capitalist era. 

The second problem I have with the claims that we are living through an unprecedented era of great inequality is geographical.   I have visited India a number of times over the last 20 years.  During that time the gap between the living standards of Indians and the living standards of people in Britain has shrunk visibly.   Countries like India are closing the gap between their living standards and Europe faster than at any time since before Columbus and Vasco de Gama set sail.  

This isn’t unique to India.  Globalisation, or global free trade, is a dirty word among lots of people in the West, but around the world living standards, life expectancy and literacy are being transformed.    Poverty is falling globally, as is malnutrition, and infant morality.   Some of this is driven by global free trade, some by technological advances, some by political or social changes.   30 years ago 40% of the worlds population lived on less than $2 a day, today that is only 8%. 

For people in country like India and China this is an age of equality.   Across the globe inequality between countries is falling, while inequality within countries is increasing, particularly in the West.   The increase in inequality within countries is offsetting a lot of the improvement in inequality between countries, but overall the global Gini co-efficient is falling, not rising.

The data could support a different interpretation of inequality between and within countries.  Inequality within the UK takes off with the rise of the British Empire, which peaks in the Edwardian era.   As the Empire goes into decline inequality shrinks within the UK, and between the UK and it’s former colonies.   Economic relations with India for example start to change during WW1 when the UK stops exporting goods to captive markets to concentrate on the war effort.  After the war the Great Depression makes the UK too weak to recapture it’s market share.  The rise of London as a no questions asked financial hub maybe off sets some of that in the last few decades maybe reverses some of that, but not enough to make big difference.   The driver of inequality isn’t capitalism maybe but imperialism?  This is an argument that would make free marketeers and hardline Leninists happy in equal measure.

Why then do we fell that there is a crisis of inequalityif this is one of the most equal and egalitarian eras of the last thousand years?

Partly this is relative, I was born in the late 60s, probably the most equal year since the Black Death. Everything looks unequal measured from that point.

Partly it is because the way the internet filters news.  The headlines we read are a jumble of global, national and American news, which mix up what is happening here, with what is going on in the US where inequality is very much worse.   The Spirit Level, while a great read, draws the bulk of it’s data from the US, rather than the UK, which gives a misleading picture to UK readers. 

But largely it is because income distribution has changed within our peer group.  People who own property and have inherited property wealth continue to amass wealth albeit maybe a bit more slowly than the did a generation ago.   The millennial generation in particular have less property wealth and less accumulated pension wealth than recent generations at the same age.   This affects people who are mostly in the top 1% globally but not in the top 1% nationally.  Things are a bit worse for white middle class people compared to rich white people, a bit better for people in Latin America and Sub-Saharan Africa and loads better for people in China and India.

Don’t get me wrong, the current growth in inequality isn’t a good thing for someone who believes in progressive politics.   But the reality doesn’t match the headlines.  The problem in the UK is poverty more than inequality.

If we had asked progressive liberals back in the 1980s if they would accept a world in which our standard of living grew a bit more slowly, but our consumption of raw materials fell and people in the 3rd world did much better we would have seen that as a big triumph.

That is exactly what the last 20 years have delivered.   But apparently we don’t like it as much as we thought we would.

https://www.equalitytrust.org.uk/scale-economic-inequality-uk

https://policy-practice.oxfam.org.uk/publications/an-economy-for-the-99-its-time-to-build-a-human-economy-that-benefits-everyone-620170

http://www.resolutionfoundation.org/app/uploads/2017/06/Wealth.pdf

http://src-home.slav.hokudai.ac.jp/rp/publications/no02/P1-C1_Saito.pdf

https://www.equalitytrust.org.uk/resources/the-spirit-level

https://www.equalitytrust.org.uk/how-has-inequality-changed

https://www.weforum.org/reports/the-global-risks-report-2017

http://piketty.pse.ens.fr/files/Lindert86.pdf .  

https://www.theguardian.com/inequality

http://blogs.lse.ac.uk/businessreview/2017/04/27/the-long-run-tendency-for-wealth-to-concentrate-in-a-few-hands/

https://www.gc.cuny.edu/CUNY_GC/media/CUNY-Graduate-Center/PDF/Centers/LIS/Milanovic/papers/2009/palgrave.pdf

http://documents.worldbank.org/curated/en/914431468162277879/pdf/WPS6719.pdf

http://economics.ucdavis.edu/people/fzlinder/peter-linderts-webpage/papers/three-centuries-of-inequality/Lindert%20Inequality%20chapter.pdf

https://inequality.stanford.edu/sites/default/files/media/_media/pdf/Reference%20Media/Hoffman,%20Jacks,%20Levin,%20and%20Lindert_2002_History%20of%20Inequality.pdf

Distribution of taxable population and wealth in England during the early Sixteenth Century, Sheail, 1971

ENGLISH GROSS DOMESTIC PRODUCT, 1300-1700: SOME PRELIMINARY ESTIMATES; Apostolides,Broadberry,Overton,van Leeuwen,2008