by Ian Randall/September 27, 2016

I live in Brighton, a wealthy, vibrant, liberal city; and yet I have dear friends who sometimes end the month without enough money to buy food. They have no assets to draw upon and, despite earning salaries around the national average, there seems little hope of this changing. Meanwhile, each year, I manage to get a little richer. I cannot easily explain or justify the scale of this divergence. We all work hard and purposefully. In the Monopoly game of life, in my 20s I was lucky enough to start accumulating capital whilst they never have. This arbitrary and seemingly inevitable inequality seems profoundly unfair and damaging.

In trying to understand why this disparity seems inevitable, I have concluded that rising inequality will emerge as a defining complex challenge of the 21^st Century. Unless the global community acts intentionally to temper this long-term economic trend, then highly destructive social forces will emerge to do so. Wasafiri’s growing understanding of how to manage complex change offers important insights on how to turn the tide on extreme inequality.

Inequality is bad and rising

In developed economies, as much as poverty, it is strong inequality that drives social ills. In “The Spirit Level” Kate Pickett and Richard Wilkinson  present strong evidence that more unequal societies have worse health, crime and social cohesion. The stress and behaviours caused by people trying to keep up economically are bad for rich and poor alike. Less equal societies are also expensive for the public purse, as the state struggles to prop people up when housing and nutritious food are less affordable; crime is higher; and communities care for each other less. More equal societies, such as Denmark, are those in which citizens are happiest. Even environmental performance is worse in less equal countries, as consumption habits are driven by materialistic pressures to keep up; and people are less willing to support concessions in favour of long-term public goods.

Meanwhile, decade on decade, inequality is rising across the developed world. In his seminal text, “Capital in the 21^st Century”, Thomas Picketty shows this empirically, and demonstrates that the simple mathematics of economic growth is inexorably shifting global wealth into the ownership of fewer and fewer people. In the USA, which is the most unequal developed economy, the top 10% earn close to half of total income. This compares to a third in the 1950s. Wealth inequality is even more eye-watering, with the bottom 50% owning almost no capital and the top 10% owning 75%. Whilst the USA is the most unequal major economy, all developed countries from Sweden to Australia are showing the same steady rise in inequality.

Most fundamentally, inequality is rising because the average rate of return from capital, which remains historically steady at about 5%, is greater than the rate of GDP growth achievable by developed economies over the long-term. Whilst incomes from labour are not keeping up with incomes from capital, those people who have capital will steadily accumulate more and more. This is exacerbated further by the very rich achieving higher rates of return than the merely wealthy; and inheritance ensures this wealth stays within the same families. Without significant compensatory measures in place, we have an economic system that is hard-wired to make an increasingly small elite richer, relative to the rest of the population.pay

This trend is also significant for developing economies. During their demographic and economic transition, the growth rates for population and GDP provide a countervailing trend so that inequality is more likely to reduce or remain steady; and reduction of extreme poverty will offer more significant social progress than a focus on reducing inequality. Nonetheless, the recently adopted Sustainable Development Goals (SDGs) included a goal to reduce inequality, citing evidence that income inequality increased by 11% in developing countries between 1990 and 2010 and that, beyond a certain threshold, inequality harms growth and poverty reduction, the quality of relations in the public and political spheres, and individuals’ sense of fulfilment and self-worth. All the development rhetoric, effort and investments regarding inclusive growth will only secure temporary gains, if, as economies mature, the inevitable historic outcome is extreme inequality.

If extreme inequality is both bad and inexorably rising, then we have a problem. One does not need to believe in the need for equality, to recognise that at some point extreme inequality becomes unjust and damaging.

In the USA and Western Europe, inequality last peaked in the early 20^th Century, at which point it took the disruptive impact of two World Wars and the Great Depression to diminish the extreme capital accumulation and drive socially progressive reforms such as the welfare state, access to education, and labour rights. The rise of populist and divisive rhetoric from politicians like Donald Trump, Marine le Pen and Nigel Farage, has grim echoes from a century ago. Nonetheless their messages resonate with a mass of people who feel excluded from any economic recovery; hear of CEO bonuses and multinational tax bills with resentment; and feel threatened by the forces of globalisation. Arguably, a similar sense of exclusion is a contributing factor to the rise of violent extremism

Inequality is complex

Rising inequality presents a complex challenge on a scale matched only by climate change. It is an outcome of a highly-entrenched and interconnected set of dynamics within our economic system. The problems it creates are emergent and unpredictable. The whole system is the product of the daily norms and actions that underpin the economic life of billions of people. Power lies disproportionately with those actors who benefit from inequality the most; and many of us hold a worldview that justifies inequality as the rightful outcome of aspiration, hard work and talent.

What do we know about delivering change in complex systems that might help?

1. Set a target:

The climate change response has benefitted enormously from the target of limiting temperature rises to 2%. Similarly, partners have collaborated to transform African agriculture because of an AU target to achieve 6% growth in the sector. A target becomes a rallying call to interested parties. It simply defines a compelling common ambition without people and institutions having to agree on the best way to respond. It starts the debate and holds everyone to account.

If each G8 country set a high-profile target cap for inequality, it would positively drive public discourse and inspire policy reform. Imagine that a UK Government committed that the top 20% should not earn more than ten times more than the bottom 20%. No future government would ever dare raise the target cap, and more likely they would feel compelled to lower it. At some point, as extreme inequality rose toward the target, political pressure would mount for the government to lead policy reforms that would have systemic consequence.

Tantalisingly, the SDGs have set a globally agreed target that by 2030 each country should “progressively achieve and sustain income growth of the bottom 40 per cent of the population at a rate higher than the national average”. There are two problems with this target though. Firstly, it is a weak target because it only addresses the bottom end of rising inequality, so it could be achieved whilst the top 1% continue to accumulate ever greater wealth. Secondly, whilst unlike their predecessors the Millennium Development Goals, the SDGs are meant to apply globally and they are largely being ignored by developed countries. Government committees in the UK, USA, Germany and elsewhere have considered their role in achieving the SDGs; but seem to assume the goals are irrelevant domestically, or will be easily achieved through existing policy measures. Nonetheless, the SDG target could offer a starting point around which to create a movement for change and hold governments to account.

2. Create an inclusive movement:

Extreme inequality is ultimately bad for everyone. Higher crime, poorer health and less cohesive communities impact all –  and cost more to manage. Arguably, the 2008 economic crisis was precipitated by vast accumulated capital seeking returns from lending to people who did not have the incomes needed to pay for their debt. At some level of inequality, the political and economic elite cannot sustain their position without risking calamity. Tackling extreme inequality will also require leadership from them. The historical alternative is revolution. If Marie Antoinette had understood this, then perhaps she could have kept her head.

Hence building an inclusive movement is vital. Participation and leadership from across the political, economic and social spectrum will be needed. Fairness Commissions offer an interesting model that could be replicated at national level. These cross-sector leadership bodies have been formed by progressive councils in the UK and USA to identify the drivers of inequality in their areas and identify interventions that can address the worst problems. They include leaders from across the private sector, public sector, voluntary bodies and religious groups. Together they bring enough different perspectives to understand their city’s economic and social dynamics, propose solutions and provide a mandate for action.

3. Experiment:

From across the ideological spectrum, people champion very varied interventions to tackle rising inequality, for example investing in education to drive social mobility; a citizens’ income; land value tax; capping the ratio between top and bottom salaries within companies; and a global wealth tax. Sweden has comparatively low inequality because of higher taxation, whereas Japan has comparatively low inequality because of cultural norms on pay scales.

Work on complex change tells us that silver bullets are rare, and we must experiment and iterate to discover the interventions that work in any given time and place. Compelled by national targets to act, supported by a growing and inclusive movement advocating change, countries will need to learn what works and take interventions to scale at a pace that allows economic and social norms to adjust incrementally. The alternative is traumatic shocks such as economic depression, or even war, as inherent tensions build to the point where the economic system violently leaps from one state to a new more balanced one.

4. Seize the moment:

The existing status quo in any system will resist change. However, there is always flux and every so often a window of opportunity opens up, during which change becomes more possible. British Eurosceptics have been shouting in the wind for decades, but the combination of Cameron’s promise of a referendum, the immigration crisis, and an empty economic recovery, all aligned for the nation to choose Brexit. Similarly, political windows of opportunity will fleetingly emerge, in which historic progress can be made to reverse the tide on rising inequality. If targets exist, if an inclusive movement has formed, and experimentation is underway, then we will be ready to seize those moments when they come.

 

Have hope. Be ready. My friends need not always worry about affording food in the days before pay day.

Ian Randall

September, 2016

https://www.equalitytrust.org.uk/resources/the-spirit-level