1 October 2016

Do we need larger slices, or a bigger cake?


This article was taken from CapX’s weekly briefing email. Sign up to get the most interesting stories of the day delivered straight to your inbox

This week on CapX, we’ve been arguing about inequality. Are the global rich pulling away from the global poor? And if they are, how do we stop it? We’ve had contributions from the head of Oxfam, from the economist Linda Yueh, and Tim Knox of the Centre for Policy Studies, ahead of a CPS event on the subject at the Conservative Party Conference.

But inequality isn’t just about income gaps between countries, or even within them. It’s becoming the ruling theme of the age. In his speech at Labour Party Conference, Jeremy Corbyn claimed “rampant inequality has become the great scandal of our time, sapping the potential of our society, and tearing at its fabric”. Labour’s goal, he added, “isn’t just greater equality of wealth and income, but also of power”.

Theresa May, in her own speech to the Tories this week, will almost certainly touch on the same themes, at least if her inaugural address from the steps of Downing Street is anything to go by. While her political and economic ideas are obviously very different from Corbyn’s, her promise to voters has been similar: that opportunity, and prosperity, will be more widely shared.

In fact, wherever you look in British politics – and across the world – the issue of inequality rears its head. This week, CapX highlighted a report from the Institute for Fiscal Studies showing that Britons in their thirties are half as rich as the previous generation.

If you were born in the early 1980s, you’re likely to have £27,000 in net assets (including property, savings and private pension). Ten years ago, the equivalent figure was £53,000. It fits a pattern of inequality between generations that has become a hugely important, and hugely vexed, issue.

Then there is inequality of place. The Nobel laureate Robert Shiller suggested recently that the next great intellectual crusade will be against “birth injustice” – the fact that some people are born in rich nations and others, no less deserving, are born in poor ones.

But again, geographical inequality applies within nations as well. The annual party conferences in Britain have seen Labour and the Tories visit Liverpool and Birmingham respectively – and in the process highlighted the gulf in political importance and economic might between those cities and the political class’s more usual haunt.

Indeed, Theresa May must be thanking her lucky stars that the Tories won’t be back in Manchester until next year, given the outcry that has followed her seeming downgrading of George Osborne’s “Northern Powerhouse” project, the resignation of the minister responsible for the issue, Lord O’Neill, and the continued hesitation over the HS2 rail project linking North and South.

This focus on inequality – of whatever kind – is both natural and commendable. Yet it can also be dangerous.

For one thing, it can blind us to the ways in which things are getting better rather than worse – a point made implicitly this week by an excellent essay (again highlighted by CapX) that sought to debunk Donald Trump’s apocalyptic rhetoric about America’s trajectory.

For another, this kind of focus can also distort our political priorities, and the policies we adopt.

When we see that some people’s lives are better than others’, one natural impulse is to try to use government to correct the situation. Yet all too often such interventions make things worse for everyone.

It was hard not to be struck in Corbyn’s speech, for example, by the fact that his universal remedy for the problems he decried was state intervention. His diagnosis for society’s ills was that the free market had been allowed to run untrammelled; his prescription, in every area, was to reinject the state.

There was, by contrast, precious little discussion of stimulating enterprise and employment – in other words, of enabling people to escape poverty via their own actions, He spoke of offering a “deal” to business. Here it was: every firm would pay “a little more in tax”. And in return? Other, multinational firms would pay an awful lot more. Not exactly an attractive bargain.

I was most struck, however, by his ideas on immigration. Corbyn, almost uniquely in British politics, does not see excessive migration as a problem: his idiosyncratic vision for Brexit appears to be free movement without the free markets.

To prevent people coming over, he says, he would make sure wages and working conditions were harmonised across Europe (the very same Europe that we’re leaving because we dislike so many things being harmonised…).

There isn’t room here to address the staggering economic illiteracy of this proposal, let alone its political impossibility. But it’s the logical end point if your political viewpoint is purely about curbing inequality rather than bringing about prosperity – especially if you are obsessed with equality of outcome rather than opportunity.

There are obviously many inequalities in the world, and there is an urgent need to tackle them. But as Tim Knox pointed out on CapX, the most effective and morally desirable way to reduce income inequality, for example, is simply to reduce poverty – and the best way to do that is via the “magic formula” of free trade, property rights, democracy and the rule of law.

Or, to put it another way: let’s not get so focused on dividing the slices of the cake that we forget about making it bigger.

Robert Colvile is Editor of CapX