Almost everything the Left tells you about inequality is wrong
At the weekend, the left-wing firebrand Polly Toynbee lamented the “extraordinary growth of inequality”. She has previously described it as “soaring”. The Observer columnist Will Hutton has said that the income gap is “ever-increasing”. It has become a factoid that the income distribution is widening year-on-year, especially after the financial crisis. And yet, these claims are just not true. To uncomfortably paraphrase Ronald Reagan and Mark Twain, the trouble with our left-wing friends is not their ignorance about inequality in the UK, but that they know so much that ain’t so.
The ONS’s “Effects of taxes and benefits on household income” publication last week showed once again that the Gini coefficient (the most conventional measure of inequality) for disposable household income has not exceeded its 1990 level. The ratio of total income received by the top 20 per cent of households to the bottom 20 per cent and the P90/10, the ratio of the top household decile to the bottom, show similar stories.
So despite everything that we hear about the exploding gap between rich and poor, inequality hasn’t risen above the level seen when Gazza was crying at the Italia 90 World Cup and Bombalurina had a UK number one single with “Itsy Bitsy Teeny Weeny Yellow Polka Dot Bikini”. Sure, inequality did increase significantly in the 1980s before that, but there’s nothing in recent trends to suggest that inequality is going up.
In fact, since 2006-07, inequality has fallen, which highlights well the absurdity of the position that many egalitarians articulate. Following the election of a Conservative-led government in 2010, many predicted dire consequences for the distribution of income. And they were wrong.
Actually, income inequality went down, which is in part a reflection of largely stagnant incomes for much of that period. The recession saw the rich get relatively poorer than the poor, albeit from a much higher base. This is hardly something to celebrate, but for those who worship at the shrine of a more equal society, it should be.
The Conservatives are just as bad here. So imbued are they with the desire to be seen to be fair, they actively celebrate this fall in the income gap, making a rod for their own backs if inequality rises somewhat as income growth picks up again. The Resolution Foundation believes that this likely trend, coupled with tax and benefit changes, will widen the gap again by 2020.
But surely the real lesson of recent times is that inequality as a summary statistic is not useful for measuring the health of the economy at all. China, for example, has become more unequal as the country has developed, but few would wish to turn back the clock to much higher levels of absolute poverty and misery.
If all this is so, then why have these myths and factoids taken hold? Here’s one tongue-in-cheek thesis. Though it has fallen in recent years, the one group whose income share did rise significantly up to the financial crisis was the richest 1 per cent, and in particular the richest 0.1 per cent. At the same time, the income share of the top 10 per cent overall remained largely unchanged. Logically, those who are inside the top decile but outside the top 1 per cent were the main group who saw their share of income fall.
These are the people who earn between £50,000 and £150,000 before tax. They are, as my colleague Chris Snowdon says, “the natural aristocracy of white collar professionals, academics, politicians, senior journalists, broadcasters and public sector bosses.” In other words, the class of people we hear moaning most often about inequality and the behaviour or consumption habits of their nouveau rich peers in business, finance and show business. Ironically, perhaps we hear so much about inequality in the press because the fairly rich are obsessed with the wealth of the super-rich.
Ryan Bourne is the IEA’s Head of Public Policy, and Director of the Paragon Initiative. This article was first published by City AM.