The rich versus the super-rich
Insofar as it is possible to distinguish these programmes from one another, ‘The Price of Inequality’ was a slightly more upmarket version of the almost comically one-sided ‘How Rich Are You?’ (Channel 4) and ‘The Super-Rich and Us’ (BBC). Although Peston’s documentary included a range of views, he often concluded with sweeping generalisations such as ‘more or less everyone agrees that the very wide gap between the super-wealthy and the rest is bad for pretty much all of us’.
When it came to empirical evidence, Peston had a habit of subtly switching to American data when statistics from Britain failed to support his overarching hypothesis that the rich are getting richer while the poor get poorer. He did at least concede that global inequality has fallen and that an unprecedented number of people have been lifted out of poverty in developing countries, but by the end of the second episode, the programme had descended into a left-wing call-to-arms, with Peston concluding that:
‘The stagnation of incomes of the majority when the tax-avoiding wealthy are scoffing a growing share of the cake means it’s becoming harder and harder pay for governments to pay for the public services we take for granted. The future of the State, or at least as we commonly know it, may depend on closing the gap between rich and poor – on giving hope to the majority that their incomes can and will rise again.’
This apocalyptic view simply does not stand up against the facts. If you’ve read my monograph Selfishness, Greed and Capitalism, the graph below (from the Office for National Statistics) will be familiar. It shows a rise in income inequality in the 1980s that peaked 25 years ago and has since declined.
You may also be familiar with this graph – again, from the ONS – which shows the long-term growth in UK incomes for all five quintiles. Of course, this growth halted and fell back somewhat as a result of the financial crisis, but incomes remain around twice as high as they were in 1977 (in real terms) and, as more recent data have shown, they are now rising again.
It seems unlikely that the BBC’s economics editor is unaware of these facts. How, then, can he maintain that inequality is a growing problem which demands urgent action to ensure ‘the future of the State’? The answer is that he ignores standard measures of inequality such as the Gini and 90/10 in favour of focusing on the income and wealth of the top one per cent. Indeed, at one point he concedes that since the early 1990s, ‘it’s really only the top 1% and the top 0.1% who’ve pulled away from the pack’.
It’s easy to forget just how recent is the preoccupation with the incomes of the one per cent, as opposed to the general distribution of income. It was not mentioned in the best-selling book on inequality, The Spirit Level (2009), for example (its authors preferred to use the 80/20 measure), but in recent years Thomas Piketty, Oxfam, Danny Dorling, the Occupy movement and others have put this percentile centre-stage. According to Dorling, in his book Inequality and the 1%, ‘only a tiny number of people – the 1 per cent – can really get rich at the expense of the rest’.
It is not difficult to guess why left-wing writers in the UK have virtually abandoned the Gini coefficient in favour of focusing on the amount earned by the very richest. It is not easy to paint a picture of spiralling inequality when the main measure of inequality peaked before many of your readers were born. But there are problems with this approach, not least the fact that the Office for National Statistics doesn’t collect much data on the one per cent, and figures from other sources are not very robust. Nevertheless, if Thomas Piketty’s income database is any guide, the incomes of the top percentile do indeed seem to have grown faster than most at a time when the Gini coefficient has been flat or falling. In 1990, they had 9.8 per cent of all income. In 2007, they had 15.44 per cent.
This is presented as a problem because the one per cent are, according to Dorling, getting richer ‘at the expense of the rest’. The clear implication from Peston’s programme, and others like it, is that the one per cent’s gains are the 99 per cent’s losses. But this is not what has happened historically and it is not even what happened during the recent recession. Contrary to popular belief, the one per cent’s share of income fell between 2007 and 2011 (from 15.44 to 12.93 per cent).
Let us forget about the Gini coefficient for a moment and see how income is actually distributed. The chart below, again from the ONS, shows the percentage of national income taken by each of the ten deciles since 1990.
The most striking aspect of this table is how little change has taken place over the last 25 years. The poorest five deciles have seen their share of income increase by one percentage point, with the exception of the bottom decile whose share has remained constant at 3 per cent. The richest five deciles have lost one percentage point, apart from the sixth decile which has remained constant and the top decile which has lost two percentage points.
This is hardly indicative of sky-rocketing Victorian inequality. On the contrary, there has been a modest shift in the distribution of income from the richest half to the poorest half. We can argue about whether the current distribution is ‘fair’ or not, but the distribution has clearly become slightly more, not less, equal.
Moreover, we know that even the deciles that are getting the same share of income as they did in 1990 are getting a lot more cash. The median disposable income in 1990 was £16,587 in 2011/12 prices. By 2011/12, despite the recession, it had risen to £23,208, a 40 per cent increase. Five per cent of income in 2015 amounts to a lot more than five per cent of income in 1990. Unless Peston is talking about the very recent past – ie. since 2008 – there has been no ‘stagnation of incomes [for] the majority’.
So what about those in the 1 per cent and the 0.1 per cent who are ‘scoffing a growing share of the cake’, as Peston puts it? Whose slice have they been eating? The table above shows that, even if you imagine that the cake hasn’t been growing, they haven’t been taking from the nine deciles below them. These other deciles has seen their share of income risen slightly. And yet we know – at least we think we know – that the top one per cent has been taking a disproportionately larger and larger share of income, so why hasn’t the top decile become larger? Only two answers present themselves. Either Piketty’s figures for the one per cent are wrong (not impossible) or the one per cent’s increased share of income is coming at the expense of the rest of the top decile.
If we look at Piketty’s figures along with those of the ONS, we can calculate that the one per cent had 10 per cent of income in 1990 while the rest of the top decile had 18 per cent (total: 28 per cent). By 2007/08, the one per cent had 15 per cent of income and the rest of the top decile had 11 per cent (total 26 per cent). Overall, the share taken by the top decile fell slightly, and all the other deciles had the same share as they did before (+/- 1%). Therefore the movement is all within that top decile, with a much larger share of income shifting from the rich to the super-rich.
To be clear, nobody is snaffling anybody’s cake. The cake has been getting bigger for all, including those in the rest of the top decile. But whilst inequality has not risen in the nation as a whole, it has risen sharply within the upper echelons. It is not the richest ten per cent who have ‘pulled away from the pack’. It is is the very rich who have pulled away from the rest of the top 10 per cent. It is, then, the upper-middle classes who may feel that they are having their cake scoffed. If so, it may explain why there is currently such a sense of resentment and antipathy from the wealthy (a group that includes politicians, professors, television presenters and BBC editors) towards the very rich.
This leaves a question for those of us who are in the bottom 90 per cent. So long as the cake is getting bigger and our share of it is not getting smaller, why should we care about the rivalries and resentments of those who earn a lot more than us?