Damning statistic follows damning statistic on wealth inequality. The latest, from the House of Commons, is that by 2030 the richest 1% will own two-thirds of global wealth. The distribution of wealth – or rather the lack of it – may well prove to be the defining issue of our age. Such inequality has provoked revolution and revolt in the past. It will do so again, unless we fix it.
It’s true that wealth inequality has always existed, no matter what the design of the society. Whether capitalist or communist, democratic, autocratic, or plutocratic, it will exist. Yet many of the extremes we see today are avoidable. They come as a result of an unlevel playing field, the direct consequence of certain government policies.
Here, in my eyes, are the top 10 causes of wealth inequality, in reverse order.
The tax code
George Osborne and Gordon Brown are the chief architects of a tax code that is now the longest in the world – in excess of 10m words and 21,000 pages. (Too long by about 20,500 pages, I’d say). The few have the resources to find the loopholes, of which there are many, and exploit them. The many don’t, so end up paying more on a proportional basis. Do we really need 12.5 times the number of words in the Bible to explain how much tax people should pay?
Bank bailouts
If I manage my business imprudently, I go bust. Why should banking get special favour? It’s an example of one rule for some, another for the many.
Quantitative easing
Money printed as part of quantitative easing (£435bn in the UK and counting) is created out of nothing. It goes straight into the financial sector, pushing up the prices of financial assets. Great for those who own said assets, or work in related sectors, but not for most people. Who actually voted for quantitative easing and bailouts anyway? No one. Central banks are unelected bodies.
Planning laws
Like the tax code, planning laws are so onerous that only the few have the resources to navigate them. Thus housebuilding has mostly become the preserve of a few large corporations. I’d love to build my own house. Wouldn’t you? Tough luck.
Not measuring inflation properly
In the 47 years since 1971, the money supply has increased by 67 times, growing at around 11.5% a year. The Bank of England uses a measure of inflation called CPI, which tracks the prices of certain everyday consumer goods, to set interest rates. But CPI only measures the effects of around 10% of this newly created money. It ignores property and financial assets, where 77% of newly created money has ended up, so prices have risen unchecked. It’s one reason we have seen such runaway house price inflation in recent decades. Great if you own property or financial assets. Not so great if you don’t.
Government subsidies
We tend to measure a subsidy’s success in terms of the benefits gained by those who receive it. Rarely do we consider the unseen costs and unintended consequences. For example, help to buy was meant to help young housebuyers; instead, it became a cash cow for building companies, and pushed house prices further out of reach for those not yet on the housing ladder. Housing benefit is meant to help the poorest; yet it pushes up the cost of renting and lines the pockets of landlords. However well-intentioned, subsidies create special interest groups, who then lobby for more subsidy.
Even something like agricultural subsidy has gone wrong. Landowners are actually paid to own farmland and can avoid inheritance tax on it. So investors pile into farmland, prices become unaffordable for local farmers and the market is distorted. It’s a straight transfer of wealth from the taxpayer to the landowner.
Debt-based money
Here’s a little known fact: banks create money when they lend. Excluding QE, 97% of money has been created through lending. When somebody borrows money – even just by spending on a credit card – new money is created. No wonder our economy is so geared around finance.
The more money there is, the higher prices will rise. But this doesn’t happen evenly. Prices rise first closest to where new money is created. By the time this newly created money has trickled down to everyone else, prices may have risen, but wages usually haven’t. If you own the assets or operate in the sectors that have benefited from all this newly created money – the financial sector and the London property market – you’ve made spectacular gains. Otherwise not.
Zero interest-rate policies
When we suppress interest rates, we effectively lower the cost of debt. We might associate debt with poverty, but cheap debt is in fact a luxury of wealthy corporations, families and governments. And they’re the ones who benefit most when interest rates are kept low.
Cheap debt just encourages taking on more debt, which ultimately leads to higher asset prices, which those prudent folk who avoided excess debt (or were unable to borrow) must now incur. Why are we subsidising debt, anyway?
Income tax
If you have nothing, the only way you can narrow the gap between you and those at the top is by working, but you are constantly and heavily taxed on your labour. The wealth of those at the top, meanwhile, doesn’t derive from their salaries, but from the appreciation in price of their companies, their real estate, their bonds and so on, which largely go untaxed, unless they sell (so most don’t). Our society is geared to owning assets. Hard work and productivity are penalised. Successive governments claim to be “supporting hardworking families”. Really? Don’t tax labour so heavily, then. Tax something else – such as land.
The decline in the purchasing power of money
For a host of different reasons, the purchasing power of money has fallen by 99% in the past 100 years. That’s an average decline of 5% a year. Wages have not risen by the same amount. Those who rely on their salaries to get by have suffered an inexorable erosion of their wealth. Those who own assets have made good.
All of these causes of inequality are within the power of government to put right. Ultimately wealth is created by hard work and endeavour, not by reallocation and redistribution. Yet we penalise labour and subsidise both debt and the ownership of assets. All that is required is a level playing field for everyone. Honest money and a simpler tax system, which doesn’t pander to special interest groups, would fix most of the above.