It’s simple, really, or so we keep being told by people who should know better. Inequality is surging, and this is the root cause of the revolutionary political change that we see all around us, from the Brexit vote to Donald Trump’s terrifying success in the race for the White House. Some even blame the Islamist terrorist atrocities that have defiled France and Germany on this supposedly widening gap between rich and poor.
Yet it’s all nonsense. Inequality isn’t increasing, at least not in the conventional sense, which means that one of the prevailing political and cultural narratives of our time is utterly wrong-headed. Inequality has fallen since the financial crisis in Britain and, on some sensible measures at least, in America. The gap between countries has also shrunk, with vast growth in emerging economies dramatically narrowing the gap with rich nations.
The reality is shockingly at odds with the received wisdom from politicians of all parties including, sadly, the Tories. Take the UK: it turns out that income inequality hasn’t really changed at all since 1990. Just as remarkably, the top 1 per cent’s share of income hasn’t increased since 2000, and is a little below its peak.
All in all, inequality remained stable last year. There wasn’t even any of the middle-class hollowing-out that so many professionals constantly worry about: incomes grew slightly faster towards the middle of the income distribution than at either the top or the bottom. As for the period since 2007–08, the trend is for a pronounced reduction in inequality: the bottom
10 per cent have enjoyed a 7.7 per cent growth in incomes, against 2.2 per cent for median earners and roughly zero change for the top tenth of earners.
There are several reasons for this surprising trend. High-earners’ incomes tend to be the most correlated with the strength of the economy, while the fact that employment is at an all-time high has been very helpful for millions of families. Pensioners, once relatively impoverished, have done well. As to wealth patterns, the vast majority of households still own their own homes, and thus enjoy the benefits from rising asset prices. By contrast, societies with lower homeownership rates – such as Germany – are characterised by greater inequality of wealth.
America, contrary to Trump’s rhetoric, is also becoming more equal, though the case there is less clear-cut than in the UK. Last year, the top 1 per cent of income earners still made 13 per cent less than they did in 2007 before the recession, according to Emmanuel Saez, a professor at Berkeley. The bottom 90 per cent made around 8 per cent less, which means that the gap between the two – a key modern measure of income inequality – has shrunk significantly.
These figures don’t include government benefits: when they are included, inequality falls further, as Gary Burtless of the Brookings Institution points out. The Congressional Budget Office’s latest calculations suggest that inequality was almost 5 per cent lower in 2013, the latest year for which figures are available, than it was in 2007.
The data have just discredited an entire school of Left-wing thought: the so-called “spirit level” theory of happiness, which argues that inequality makes people miserable as they covet other people’s possessions. But if differences have diminished, why is the public lashing out?
The answer is that obsessing about inequality blinds us to genuine problems in our society. Even if inequality were going up, this wouldn’t necessarily be a bad thing: imagine how much better off we would all be if an extra 500,000 jobs paying £100,000 a year were created in Britain tomorrow. The budget deficit would fall and productivity would jump. Or consider how much more prosperous the world would be if there were far more very successful entrepreneurs. Yet this would imply a more unequal society, and would thus be condemned.
The real, most substantial economic problem is insufficient absolute levels of income and wealth. Pay has grown too slowly in recent years or taken an actual hit, partly because GDP per capita and productivity growth have been far too slow. The problem is not that incomes are too unequal – it is that they are too low. In Britain, the issue for young people in their twenties is that they still earn 7 per cent less than their predecessors did prior to the recession, and that housing costs have surged as a result of inadequate supply of homes: the fact that older workers have done better is irrelevant. Theresa May needs to focus on economic growth almost at any cost: it is one way that real wages will start to grow more quickly again.
The genuinely problematic inequality that does exist in our midst does not show up in the usual income statistics. Large groups of people across the West are suffering from inadequate education, family and community breakdown and a deep, tragic cultural poverty. Others are alienated in ways that cannot primarily be explained with reference to material factors, leading to the rise of Islamist extremism.
In Britain, the underperformance of many from traditional working-class backgrounds is terribly concerning; their children are doing poorly at school, and while they still work they no longer have access to the well-paid manufacturing jobs of yore. In the US, employment rates for poorer workers have collapsed. In 1964, 97 per cent of working-age men with just a high school education were in the labour market; today, it is just 83 per cent. For the first time, life expectancy has started to fall for white Americans, partly as a result of suicide and alcohol abuse. Much of this doesn’t show up in the traditional inequality metrics: one can simultaneously be earning a reasonable wage while suffering from extreme cultural impoverishment and a declining standard of living.
These are the sorts of massive, crippling and complex problems that our politicians must now turn their attention to. We will need hugely improved education for children and adults alike, a cultural and social renewal, an entrepreneurial rebirth and a pro-growth economic policy. Will that be enough? I don’t know, but it will certainly achieve far more than the usual, counter-productive rants against the 1 per cent.