From the TUC

Trickle down: last rites for Thatcher’s theory

29 Dec 2011, by in Economics, International, Society & Welfare

Apologies for not having commented on this until now, but earlier this month, the OECD issued “Divided we stand”, a seminal report on growing inequality that put the final nail in the coffin of the theory propounded in the 1980s by Thatcher and Reagan that the wealthier the rich got, the more money would trickle down to the lower paid. What the report showed was that over the last four decades, the rich have grown staggeringly richer in countries like the UK and the US (and the super rich have got even richer than that), but the poor have, well, sort of stayed where they were (which in terms of keeping up with the Joneses means they got poorer). In the UK, the gap between the richest 10% and the poorest has widened since the 1980s from 8:1 to 12:1 – and what’s driven this change has predominantly been the super-remuneration of the top 1% who have increased their share of national wealth from 7.1% in 1970 to 14.3% in 2008. There’s a lot more detailed information like that in the report.

Does this rise in inequality matter? Yes, for three reasons, two of them economic and one of them moral (the co-existence of conspicuous consumption and lavish lifestyles with poverty and squalor is, I think most people would agree, obscene).

The other two reasons are these. The GINI coefficient which the OECD uses to measure inequality in a country shows that the greatest equality exists in Scandinavia and Austria: ie the best performing economies, where the ratio of earnings among the top 10% to the bottom 10% is “only” 6:1, compared to the 9:1 ratio in the OECD as a whole or the 12:1 ratio in the UK and 15:1 in the USA (only Turkey, Mexico and Chile scored worse than the US). Secondly, that extreme inequality of income has had huge impacts on the global economy – as I have argued before, the existence of ‘hot money’ in the pockets of the wealthy led them to adopt increasingly risky investment strategies such as lending the money to poor US workers who could only afford a home by borrowing money they couldn’t repay, and thus sparking the Global Financial Crisis. So, inequality isn’t only morally bad, it has catastrophic economic and social effects.

So what is to be done? The OECD advocates redistributive tax and benefit policies, and labour market intervention to provide more highly skilled jobs – fairly classical social democracy. They accept that without redistribution, the growth in inequality would have been even worse, although the falling levels of benefits for the unemployed, and more tax breaks for the rich in the 90s and 00s have made redistribution less effective over the second half of the time under consideration. But what they don’t say is that what would really redress the inequality is to resurrect the collective bargaining which persists in those more equal societies like Scandinavia and Austria, but which has declined severely in those unequal societies like the US and the UK.

Worrying footnote: the data series in the OECD report end in 2008, since when we know that highest earnings initially slumped in the Global Financial Crisis but have since bounced back, while lower paid workers have suffered wage freezes and worse, and many lost their jobs, meaning that the trend to inequality has probably continued to grow in the last three years.

One Response to Trickle down: last rites for Thatcher’s theory

  1. Davos told that stimulus and social protection vital for growth | ToUChstone blog: A public policy blog from the TUC
    Jan 27th 2012, 1:42 pm

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