This article traces the history of ‘crowding out’, and its use as a justification for austerity and state deflation from its origins in the 1920s to its latest post-2010 incarnation. It examines why governments have kept turning to austerity and continue to justify it on the grounds that public sector activity crowds out more productive private activity, despite the accumulated evidence that this traditional pro-market formulation has failed to deliver its stated goals. It examines three other embedded forms of crowding out that have been highly damaging—leading to weakened social resilience and more fragile economies—but which have been ignored by both governments and mainstream political economists.

THE IDEA OF ‘crowding out’ has long been one of the central canons of pro-market economic theory. The concept was first promoted at an international conference of officials in Brussels in 1920 to discuss ‘sound economic policy’ in the postwar years. Given limited capital, asked the British delegation, will ‘Governments or private industry’ use it more productively? ‘The answer is … private industry’.¹ This argument was then placed at the heart of a strategy of state-imposed austerity through cuts in public spending and wages applied in Britain and other nations in the early 1920s.

Following the short-lived boom at the end of the 1914–18 war, Britain, along with much of Europe, faced growing economic turbulence and surging dole queues, along with high levels of public debt from funding the war. With heightened public expectations of social reform, the coalition government Prime Minister, David Lloyd George, initially promised social reconstruction through higher state spending, especially on homes and schooling. Simultaneously, the Prime Minister faced demands from the owners of capital for a return to the pre-war status quo.

During the war, large chunks of the economy had been taken under state control, with the subordination of private profit to steer resources to the war effort. While the public was calling for a better society in return for the sacrifices of war, business leaders were demanding the dismantling of the heightened state intervention of the war years, lower rather than higher public spending, and the reversal of the strengthened bargaining power labour had enjoyed during the war years. Political and industrial clashes were the inevitable outcome.

Deepening recession and the fear of mounting unrest, fuelled by the shadow of Bolshevism, induced panic among the ruling political and corporate classes. In response, the government dropped its commitment to social renewal in favour of a programme of austerity, or state induced deflation. This involved severe cuts in public spending, including reductions in pay for police, teachers and other public servants—cuts dubbed the ‘Geddes axe’ on the advice of a committee chaired by Sir Eric Geddes, the Minister of Transport.

Economic revival, it was argued, depended on lower spending by the state, lower wages and a return to a balanced budget, with state spending matched by tax revenue. If the state had borrowed more to meet its high-profile postwar pledges on housing and education, it was argued, more efficient and more pro-value private activity would have been ‘crowded out’. The measures, based on the idea of an automatic trade-off between state and private activity, were, it was asserted, simply sound economics based on fundamental laws—and not to be tinkered with—of how the economy worked. These ‘laws’ drew on the doctrines of the early classical economists that free markets and minimal state intervention would bring equilibrium, stability, and optimal growth.

Austerity Britain

Since the 1920s, governments have repeated this strategy of austerity—based on the doctrine of crowding out—on several occasions. These include the early 1930s, the 1970s, the 1980s and the post-2010 decade. Despite the time gaps, these episodes have been marked by almost identical justifications and remarkably similar impacts.

One of the constant themes has been a replay of the balanced budget theory of the 1920s and 1930s. Another has been that public spending cuts and lower wages would release scarce resources for the private sector. In 1975, two Oxford economists, Roger Bacon and Walter Eltis, argued in Britain’s Economic Problem: Too Few Producers that Britain’s economic plight stemmed from too many social workers, teachers and civil servants and not enough workers in industry and commerce. Buying into this argument, the new Chancellor of the Exchequer, Geoffrey Howe, told the House of Commons in 1979, ‘[we need to] roll back the boundaries of the public sector’ in order ‘to leave room for commerce and industry to prosper’.2 In June 2010, launching another rolling programme of spending cuts in his first budget, the Chancellor, George Osborne, repeated this claim that public spending ‘crowds out’ private endeavour.

Again, the presumption was that a more robust economy requires more private and less state activity, along with the counter-intuitive idea that austerity was the route to growth and enterprise. The somewhat crude ‘private sector good, public sector bad’ mantra was widely echoed. ‘The next government is going to have many challenges’, wrote the Times in 2010, ‘but tackling a public sector that has become obese … is going to have to be a priority’.³ Channel 4 went a step further with a programme describing state spending as a ‘Trillion pound horror story’, while The Spectator magazine called it ‘the most important programme to appear on British television this year’.⁴

So, does the austerity/crowding out theory stand up? And if not, why has it been so widely applied? The accumulated evidence shows that it is at best a significant oversimplification of the way economies work. Crowding out of private by too much public sector activity might apply when an economy is operating at full capacity and employment, but the doctrine has only been applied in situations of economic crisis, high unemployment and inadequate demand. Even at full capacity, there is still a choice to be made about the appropriate balance between public and private activity.

Heterodox economists, such as John Hobson in the early twentieth century, had offered an alternative route to growth and out of crisis. His work, which had an important influence on J. M. Keynes, showed that recessions were the product of a shortfall of demand stemming from ‘under-consumption’ and ‘over-production’ triggered in large part by a lack of purchasing power among low- and middle-income households arising from extreme levels of wealth and income inequality.⁵

In the 1920s and early 1930s, slamming on the public spending brakes proved counter-productive. It cut demand and slowed recovery, with private as well as public activity ‘crowded out’. The strategy had minimal effect on improving the state of the public finances, but led to a retreat on social programmes, while unemployment never fell below one million in the inter-war years.

A hundred years on, the Osborne cuts have had a very similar, and predictable impact. They also came with a new label: ‘expansionary austerity’, but an identical message—that a smaller state would generate greater stability via lower interest rates, greater confidence and faster growth. In the event, the strategy turned out to be an additional assault on an already weakened economy, with the cuts in public spending having little or no impact on expanding private activity, while damaging the quality of Britain’s social infrastructure and weakening its system of social support.⁶ One critic, David Blanchflower, a former member of the Bank of England’s Monetary Policy Committee, concluded that, by destroying productive capacity and making households worse off, the austerity programme simply ‘crushed the fragile recovery’.⁷ In one estimate, rolling cuts in public spending were said to have shrunk the economy by £100 billion by the end of the decade.⁸ Another study showed that if real-terms growth in public spending at the 3 per cent level inherited in 2010 from the previous Labour government had been maintained and paid for by matching tax rises, Britain’s government debt burden would still have been lowered by 2019.⁹

None of this means that crowding out never occurs. It just takes very different forms from the process advanced in neoliberal thinking. There are three alternative and distinct types of crowding out at work that have consistently had a malign effect on both the economy and wider society, yet have not been systematically addressed in the mainstream economic literature or by relevant government departments.¹⁰ First, the idea that markets know best in nearly all circumstances has shifted the balance between private and public activity too far in favour of the former, thus crowding out the latter. Second, an increasing share of private activity has been geared less to its primary function—to building economic strength and creating new wealth—than to boosting personal corporate rewards in a way which fuels inequality, weakens economies and crowds out economic and social progress. Third, there is the way the return of the ‘luxury capitalism’ of the nineteenth century (triggered by the application of pro-inequality neoliberal policies) has come at the expense of the meeting of essential material and social needs.

The balance between private and public activity

The simple notion—private good, public bad—has long been overplayed by neoliberal theorists. Both have a role to play and the real issue is getting the right balance between the two. State spending plays a crucial role not just in meeting wider social goals, but in supporting economic dynamism and stability. Private corporations do not operate in a vacuum. The profits they make, the dividends they pay and the rewards received by executives stem from a too-often unacknowledged interdependence with wider society, including the state. Business provides jobs and livelihoods, while responding to consumer demand. Society provides the workforce, education, transport, multiple forms of inherited infrastructure and often substantial state subsidies.

History shows that while bad decisions are too common, carefully constructed and evidence-based state intervention can have a highly positive impact. Government responsibility lies in helping to shape markets, prevent market abuse, support innovation, share the burden of risk-taking in the development of new technologies, promote public and private wealth creation and protect citizens. It is now time to ask if these functions—from market regulation to citizen protection—have been underplayed.

Britain is a heavily privatised and weakly regulated economy. Among affluent nations, it has a comparatively low level of public spending, including social spending and public investment in infrastructure, relative to the size of the economy.¹¹ A relatively low portion of the economy is publicly owned.¹² With the cut-price sell-off of state assets, from land to state-owned enterprises, the share of the national wealth pool held in common has fallen sharply from a third in the 1970s to less than a tenth today. This ongoing privatisation process has also greatly weakened the public finances. Britain is one of only a handful of rich nations with a deficit on their public finance balance sheet, with net public wealth—public assets minus debt—now at minus 20 per cent of the economy. The balance stood at plus 40 per cent in 1970. This shift has greatly weakened the state’s capacity to handle issues like inequality, social reconstruction and the climate crisis.¹³

The emphasis on private capital as the primary engine of the economy has failed to deliver the gains promised by its advocates. Since the counter-revolution against postwar social democracy from the early 1980s, and especially since 2010, levels of private investment, research and development, and productivity—key determinants of economic strength—have been low both historically and compared with other rich countries. Several factors account for Britain’s relative private ‘investment deficit’. They include Britain’s low wage history, with abundant cheap labour dulling the incentive to invest, and the perverse system of financial incentives that makes it more attractive for executives to line their pockets than build for the future. There is also the preference given to capital owners—an increasingly narrow group—in the distribution of the gains from corporate activity. In the four years from 2014, FTSE 100 companies generated net profits of £551 billion and returned £442 billion of this to shareholders in share buy-backs and dividends, leaving only a small portion of these gains to be used for private investment and improved wages that support economic strength.¹⁴ With UK corporations increasingly owned by overseas institutional investors, such as US asset management firms, little of this profit flow has ended up in UK pension and insurance funds and back into the domestic economy.

Some forms of financial and business activity have played a destructive role. In a remarkable parallel with the 1929 stock market crash and the Great Depression, the 2008 financial crash and the financial crisis that followed were classic examples of the impact of uncontrolled market failure. They were the product of tepid regulation of the financial system that turned a blind eye to a lethal cocktail of excessive profiteering and reckless gambling by global finance. It was only public intervention on a mass scale to bail out the banks—and many of the architects of the crash—that prevented an even greater crisis.

Claims about the overriding benefits of the outsourcing of public services to private companies have been exposed by a succession of scandals involving large British companies like G4S and Serco and by damning reports of the consequences of outsourcing in the NHS, the probation service and army recruitment.¹⁵ Such claims were also undermined by the collapse of two giant multi-billion-pound behemoths—the UK construction company Carillion and the public service supplier Interserve (which employed 45,000 people in areas from hospital cleaning to school meals). In the ten years to 2016, Carillion, sunk by self-serving executive behaviour and mismanagement, liked to boast about another malign form of crowding out—of how it raised dividend payments to shareholders every year, with such payments absorbing most of the annual cash generation, rather than building resilience.

Extraction

A second form of crowding out stems from the return of a range of extractive business mechanisms aimed at capturing a disproportionate share of the gains from economic activity. While some of today’s towering personal fortunes are a reward for value-creating activity that brings wider benefits for society as a whole, many are the product of a carefully manipulated, and largely covert, transfer of existing (and some new) wealth upwards. Early economists, such as the influential Italian economist Vilfredo Pareto, warned—in 1896—of the distinction between ‘the production or transformation of economic goods’ and ‘the appropriation of goods produced by others.’¹⁶ Such ‘appropriation’ or ‘extraction’ benefits capital owners and managers—those who ‘have’ rather than ‘do’—and crowds out activity that could yield more productive and social value. It delivers excessive rewards to owners and executives at the expense of others, from ordinary workers and local communities to small businesses and taxpayers.¹⁷

Extraction has been a key driver of Britain’s low wage, low productivity and growth sapping economy. Many large companies have been turned into cash cows for executives and shareholders. A key source of this process has been the return of anti-competitive devices described as ‘market sabotage’ by the American heterodox economist Thorstein Veblen over a century ago’.¹⁸ In contrast to the claims of pro-market thinkers, corporate attempts to undermine competitive forces have been an enduring feature in capitalism’s history, contributing to erratic business performance and economic turbulence.

Far from the competitive market models of economic textbooks, the British—and global—economy is dominated by giant, supranational companies. Key markets—from supermarkets, energy supply and housebuilding, to banking, accountancy and pharmaceuticals—are controlled by a handful of ‘too big to fail’ firms. The oligopolistic economies created in recent decades are, despite the claims of neoliberal theorists, a certain route, as predicted by many distinguished economists, from the Polish economist Michal Kalecki, to the Cambridge theorist, Joan Robinson, to weakened competition, extraction and abnormally high profit. This new monopoly power, according to one study of the US economy, has been a key determinant of ‘the declining labor share; rising profit share; rising income and wealth inequalities; and rising household sector leverage, and associated financial instability.’¹⁹

Although they helped pioneer popular and important innovations, the founders of today’s monolithic technology companies have turned themselves from original ‘makers’ into ‘takers’ and ‘predators’. Companies like Google and Amazon have entrenched their market power by destroying rivals and hoovering up smaller competitors, a form of private-on-private crowding out of small by more powerful firms. Multi-billionaires in large part because of immense global monopoly power, the Google, Amazon and Facebook founders can be seen as the modern day equivalents of the American monopolies created by the ‘robber barons’ such as J. D. Rockefeller, Andrew Carnegie and Jay Gould through the crushing of competitors at the end of the nineteenth century.

The House of Have and the House of Want

The third type of crowding out follows from the way the growth of extreme opulence for the few has too often been bought, in effect, at the expense of wider wellbeing and access to basic essentials for the many. Today’s tearaway fortunes are less the product of an historic leap in entrepreneurialism and new wealth creation than of the accretion of economic power and elite control over scarce resources. It is a paradox of contemporary capitalism that as societies get more prosperous, many fail to ensure the most basic of needs are fully met.

In Britain, elements of the social progress of the past are, for a growing proportion of society, being reversed. Compared with the 1970s, a decade when inequality and poverty levels were at an historic low, poverty rates have more or less doubled, while both income and wealth have become increasingly concentrated at the top. Housing opportunities for many have shrunk and life expectancy rates have been falling for those in the most deprived areas. Mass, but hit and miss, charitable help has stepped in to help fill a small part of the growing gaps in the state’s social responsibilities. While Britain’s poorest families have faced static or sinking living standards, the limits to the lifestyle choices of the rich are constantly being raised. The private jet, the luxury yacht, the staff, even the private island, are today the norm for the modern tycoon.

In heavily marketised economies with high levels of income and wealth concentration, the demands of the wealthy will outbid the needs of those on lower incomes. More than one hundred years ago, the Italian-born radical journalist and future British MP, Leo Chiozza Money, had warned, in his influential book, Riches and Poverty, that ‘ill-distribution’ encourages ‘non-productive occupations and trades of luxury, with a marked effect upon national productive powers.’²⁰ The ‘great widening’ of the last four decades has, as in the nineteenth century, turned Britain (and other high inequality nations such as the US) into a nation of ‘luxury capitalism’. The pattern of economic activity has been skewed by a super-rich class with resources deflected to meeting their heightened demands.

While Britain’s poorest families lack the income necessary to pay for the most basic of living standards, demand for superyachts continues to rise. The UK is one of the highest users of private jets, contributing a fifth of related emissions across Europe. The French luxury goods conglomerate, LVMH—Louis Vuitton Moët Hennessy—is the first European mega-company to be worth more than $500 billion. Resources are also increasingly directed into often highly lucrative economic activity that protects and secures the assets of the mega-rich. Examples include the hiring of ‘reputation professionals’ paid to protect the errant rich and famous, the use of over-restrictive copyright laws, new ways of overseeing and micromanaging workers, as well as a massive corporate lobbying machine.

The distributional consequences of an over-emphasis on market transactions is starkly illustrated in the case of the market for housing. Here, a toxic mix of extreme wealth and an overwhelmingly private market has brought outsized profits for developers and housebuilders at the cost of a decline in the level of home ownership, a lack of social housing and unaffordable private rents. The pattern of housebuilding is now determined by the power of the industry and the preferences of the most affluent and rich. Following the steady withdrawal of state intervention in housing from the 1980s—with local councils instructed by ministers to stop building homes—housebuilders and developers have sat on landbanks and consistently failed to meet the social housing targets laid down in planning permission. Instead of boosting the supply of affordable social housing, scarce land and building resources have been steered to multi-million-pound super-luxury flats, town houses and mansions. In London, Manchester and Birmingham, giant cranes deliver top end sky-high residential blocks, mostly bought by speculative overseas buyers and left empty. The richest crowd out the poorest, or as Leonard Cohen put it, ‘The poor stay poor, the rich get rich. That’s how it goes, everybody knows.’

There has been no lack of warnings of the negative economic and social impact of economies heavily geared to luxury consumption, most of them ignored. Examples include the risk of the coexistence of stark poverty and extreme wealth: of what the radical Liberal MP, Charles Masterman, called, in 1913 ‘public penury and private ostentation’, and what the American radical political economist Henry George had earlier called ‘The House of Have and the House of Want’.²¹ Then there was the influential 1950s’ warning from the American economist, J. K. Galbraith, of ‘private affluence and public squalor’.²² ‘So long as material privation is widespread’, wrote the economist, Fred Hirsch, in the 1970s, ‘the conquest of material scarcity is the dominant concern.’²³

For much of the last century, policy makers have seen wealth and poverty as separate, independent conditions. But that view has always been a convenient political mistruth. If poverty has nothing to do with what is happening at the top, the issue of inequality can be quietly ignored. Yet, the scale of the social divide and the life chances of large sections of society are ultimately the outcome of the conflict over the spoils of economic activity and of the interplay between governments, societal pressure and how rich elites—from land, property and private equity tycoons to city financiers, oil barons and monopolists—exercise their power. In recent decades, the outcome of these forces has favoured the already wealthy, with the shrinking of the economic pie secured by the poorest. As the eminent historian and Christian Socialist, R. H. Tawney, declared in 1913, ‘What thoughtful people call the problem of poverty, thoughtful poor people call with equal justice, a problem of riches.²⁴

Conclusion

These three alternative forms of crowding out have imposed sustained harm on social and economic resilience. Despite this, governments have continued to apply a long-discredited austerity-based theory of crowding out, while ignoring other, arguably more damaging forms of the phenomena. The latest application of the original theory since 2010 has inflicted ‘vast damage on public services and the public sector workforce’, without delivering the declared goal of ‘crowding in’ through faster recovery and growth, or improved public finances.²⁵

Britain is currently being subjected to yet another wave of austerity, with the 2022 Autumn Statement announcing a new package of projected public spending plans, higher taxes and lower public sector real wages, again in the name of fixing the public finances and boosting growth.²⁶ It’s the same short-term, narrowly focussed strategy that, by digging the economy into a deeper hole and cutting public investment, has failed time and again over the last 100 years.

Meanwhile, other damaging forms of the crowding out of key public services, value-adding economic activity and the meeting of vital needs, driven by over-reliance on markets, excess inequality and dubious private-on-private activity, are simply ignored or dismissed.

Notes

¹ C. E. Mattei, The Capital Order, Chicago IL, University of Chicago Press, 2022, p. 156. ² House of Commons, Hansard, 12 June 1979, col 246. ³ J. Tomlinson, ‘Crowding out’, History and Policy, 5 December, 2010; https://www.historyandpolicy.org/opinion-articles/articles/crowding-out⁴ J. Delingploe, ‘Britain’s trillion pound horror story’, The Spectator, 13 November, 2010. ⁵ J. A. Hobson, The Industrial System, London, Longmans, Green & Co., 1909. ⁶ C. Breuer, ‘Expansionary austerity and reverse causality: a critique of the conventional approach’, New York, Institute for New Economic Thinking, Working Paper no. 98, July 2019. ⁷ D. Blanchflower, Not Working, Princeton NJ, Princeton University Press, 2019, p. 172. ⁸ A. Stirling, ‘Austerity is subduing UK economy by more than £3,600 per household this year’, New Economics Foundation, 2019; https://neweconomics.org/2019/02/austerity-is-subduing-uk-economy-by-more-than-3-600-per-household-this-year⁹ R. C. Jump, J. Michell, J. Meadway and N. Nascimento, The Macroeconomics of Austerity, Progressive Economy Forum, March 2023; https://progressiveeconomyforum.com/wp-content/uploads/2023/03/pef_23_macroeconomics_of_austerity.pdf¹⁰ See S. Lansley, The Richer, The Poorer, How Britain Enriched the Few and Failed the Poor, Bristol, Policy Press, 2022. ¹¹ K. Buchholtz, Where Social Spending is Highest and Lowest, Statistica, 28 January, 2021; https://www.statista.com/chart/24050/social-spending-by-country/¹² OECD, The Covid-19 Crisis and State Ownership in the Economy, Paris, OECD, 2021; https://www.oecd.org/coronavirus/policy-responses/the-covid-19-crisis-and-state-ownership-in-the-economy-issues-and-policy-considerations-ce417c46/¹³ L. Chancel, World Inequality Report, World Inequality Database, 2021. ¹⁴ High Pay Centre/TUC, How the Shareholder-first Model Contributes to Poverty, Inequality and Climate Change, TUC, 2019. ¹⁵ National Audit Office, ‘Transforming Rehabilitation: Progress Review’, National Audit Office, 1 March 2019; https://www.nao.org.uk/reports/transforming-rehabilitation-progress-review/¹⁶ V. Pareto, Manual of Political Economy, New York, Augustus M. Kelley, 1896. ¹⁷ Lansley, The Richer, The Poorer. ¹⁸ T. Veblen, The Theory of the Leisured Classes, New York, The Modern Library, 1899; T. Veblen, The Engineers and the Price System, New York, B. W. Huebsch, 1921. ¹⁹ I. Cairo and J. Sim, Market Power, Inequality and Financial Instability, Washington DC, Federal Reserve, 2020. ²⁰ L. Chiozza Money, Riches and Poverty, London, Methuen, 1905, pp. 41–3. ²¹ C. Masterman, The Condition of England, Madrid, Hardpress Publishing, 2013; H. George, Progress and Poverty, New York, Cosimo Inc., 2006, p. 12. ²² J. K. Galbraith, The Affluent Society, Boston, Houghton Mifflin, 1958, ch. 23. ²³ F. Hirsch, The Social Limits to Growth, Abingdon, Routledge & Kegan Paul, 1977, p. 190. ²⁴ R. H. Tawney, ‘Poverty as an industrial problem’, inaugural lecture at the LSE, reproduced in Memoranda on the Problems of Poverty, London, William Morris Press, 1913. ²⁵ V. Chick, A. Pettifor and G. Tily, The Economic Consequences of Mr Osborne: Fiscal Consolidation: Lessons from a Century of UK Macroeconomic Statistics, London, Prime, 2016; G. Tily, ‘From the doom loop to an economy for work not wealth’, TUC, February, 2023; https://www.tuc.org.uk/research-analysis/reports/doom-loop-economy-work-not-wealth²⁶ Chancellor of the Exchequer, Autumn Statement, 2022, Gov.uk, 17 November, 2022; https://www.gov.uk/government/topical-events/autumn-statement-2022

This article was first published in The Political Quarterly 

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Biography

• Stewart Lansley is the author of The Richer, The Poorer: How Britain Enriched the Few and Failed the Poor, a 200-year History, 2021. He is a visiting fellow at the University of Bristol and an Elected Fellow of the Academy of Social Sciences.

picture credit flickr

The post Rethinking ‘Crowding Out’ and the Return of ‘Private Affluence and Public Squalor’ appeared first on The Progressive Economy Forum.

Ten Years and Counting…

In 2009, we wrote The Spirit Level, based on our work as epidemiologists researching the social determinants of health and wellbeing. We showed, emphatically, that greater equality – a smaller gap between rich and poor – is the fundamental basis of a better society. The more equal of the rich, developed countries have resoundingly better physical and mental health, which is part of the reason why they weathered the storm of Covid-19 better than more unequal countries.

But economic inequality, and its intersection with inequalities related to ethnicity, gender, disability, language, religion and more, is not just a health issue. In The Spirit Level we showed that all the problems that are more common at the bottom of society, that have a social gradient, get worse with greater inequality. And that body of evidence has continued to grow in the years since, based on our own research and the work of many others across the world. In addition to shorter life expectancy, higher death rates and levels of chronic disease, increased obesity, mental illness and poor child wellbeing, more unequal societies suffer from more violence, including homicides, domestic violence, child maltreatment and bullying. Children and young people do less well in school and have lower chances of social mobility and higher rates of dropping out and teenage births. Drug and alcohol abuse, problem gambling, status consumption and consumerism also rise with inequality, while levels of trust and solidarity, and civic and cultural participation decline.

Countries that tend to do well on any one of these measures tend to do well on all of them, and the ones that perform badly do badly on most or all of them. And not only is the impact of inequality wide-ranging, differences between countries are large; and although the poor are worst affected, inequality affects almost everybody.

And that means that the UK is trailing behind the countries to which we usually compare ourselves, on that long list of problems, and that all of us – young or old, male or female, in the North or the South, rich or poor – ALL OF US, are damaged. We are each at higher individual risk, and our whole society is ground down and trapped by inequality: we, and it, fail to thrive.

We’ve used a robust framework analysis to show that this is a causal problem and we’ve done a lot of work to understand the pathways through which inequality does the damage.³ We know that tackling inequality is the central task in responding to the multiple crises we face: the climate crisis, the cost of living crisis, the North-South divide, food insecurity, the gig economy, threats to our democracy.  Inequality is at the heart of it all.

The lost decade

When The Spirit Level was published we were at first heartened by the political response to the research. Politicians across the political spectrum seemed to understand the evidence and inequality seemed to take its rightful place on the political agenda.

But what has happened in the UK since then – a decade of austerity, followed by a global pandemic, and now a cost of living crisis, means we’re just as unequal now as we were then. And every crisis that comes along seems to be another engine of increasing inequality. 

Who suffered from the Global Financial Crisis? Average real incomes declined, and that was particularly true for the youngest and lowest paid workers.  Who were most likely to be exposed to Covid, to be infected, to be really sick, to die? Death rates were twice as high in the most deprived areas of the UK as in the most affluent. And we know who is already suffering most from rising prices, rising interest rates in the cost of living crisis – those on low incomes, on benefits, families with children, especially lone parents and everyone living outside of London and the south east.

And in all three of these crises, it hasn’t simply been a matter of the poor getting poorer.  In these big existential crises, the rich have got richer, a lot richer.  In the years following the Global Financial Crisis, the world’s richest 1% increased their wealth until they owned more than the bottom half of the world’s entire population. Top investors made billions by buying up shares in failing banks, betting against housing markets that were foreclosing on the mortgages of the poor, basically “buying when there’s blood in the streets” to realize massive gains during recovery. The pay of the FTSE 100 chief executives has sky rocketed, unlike that of their workers. During the pandemic, the rich accumulated wealth, including from government procurement under emergency regulations with lowered scrutiny for corruption. Oil and gas companies have made huge profits since the energy crisis began, and their chief executives continue to be paid millions, some of them many millions.- Huge pay and benefits packages and dividends have enriched the chief executives and shareholders of the UK’s water companies despite their abysmal record on tackling leaks, pollution and investment in new reservoirs.

We need the right (left) kind of active government

The Coalition and Conservative governments have certainly been active since 2010. They have actively failed to tackle inequality; they have acted to benefit the rich and harm the rest of us. Their actions speak much louder than their hollow words on levelling up.

An Active Labour Government could do so much to transform our society from the failing, unproductive, harmful state it is in, to one that promotes and, crucially, achieves the welfare and wellbeing of all its citizens. An active government that puts wellbeing first through tackling inequality would see spin-off benefits and savings across health, education, social care, law enforcement and more.

The courage to change

Labour should take heart from the progressive preferences of British citizens. When polled, the large majority of the public are in favour of progressive policies that are too often dismissed as radical, utopian, or unfeasible by the press or the Westminster bubble.

Close to 80% of the British public believe that the gap between those on high and low incomes is “too large” and this has been a consistent trend (varying between 72-85%) over the four decades that the British Social Attitudes (BSA) survey has been running. In 2018, the BSA concluded that “the public are likely to have more of an appetite for policies aimed at addressing poverty and inequality than they did a decade ago.”

The majority of the British public want water, energy, rail, buses, Royal Mail and the NHS to be run in the public sector, and that includes the majority of Conservatives.

Recent academic research on public opinion research in “red wall” constituencies found consistently high levels of support for Universal Basic Income, even when the policy was presented to voters in terms used by its opponents. There is little evidence that voters with conservative social values – those in left behind communities in Labour’s former heartlands – won’t actually support radical social policy.

The vast majority of the public support action on climate change and they are much more worried about the costs of doing nothing than they are about the cost of tackling the problem.

The triple-win manifesto

So what should the Labour Party do?  We are not politicians, or even political scientists or policy experts.  But we do know that Labour needs a bold and compelling vision that brings people onside by painting a picture of a society that can respond to the climate emergency while at the same time transforming people’s lives for the better and creating sustainable  growth.

What follows is by no means an exhaustive list, but six triple-win active policy options include:

• Joining WEGo, the Wellbeing Economy Governments (currently Canada, Scotland, Iceland, New Zealand, Wales and Finland), a collaboration of national and regional governments promoting sharing of expertise and transferrable policy practices for building wellbeing economies.  It is growth in wellbeing that we need, not growth in GDP.
• Committing to actually tackling inequality by taxing wealth, top incomes and financial transactions
• Giving people resilience and stability through a universal basic income and a proper living wage.
• Enacting the Socioeconomic Duty of the 2010 Equality Act
• Promoting fair work and economic democracy within a Green New Deal
• Putting children and young people at the centre of policy: recommit the country to ending child poverty; end selective education and remove charitable status from private schools; properly fund the comprehensive education system; enshrine in law universal free school meals and free holiday meals for families on benefits; and close the digital divide

Labour needs to act fast and boldly, with energising urgency, to make sure that the policies needed to tackle the climate emergency are politically acceptable to the public because they can see that they are part of a transformation to a fairer, better society in which they and their children and grandchildren can flourish.

What inspired progressive political change in the past was a vision of socialism, embodying the belief that a better society is possible for all of us.  The loss of that ideal has meant political hope has dwindled for so many.  Labour must build a new vision, firmly built on the foundations of an egalitarian and sustainable society.

Kate Pickett is a social epidemiologist, co-author of ‘The Spirit Level’ and ‘The Inner Level’ and co-founder of The Equality Trust.

Richard Wilkinson is Professor Emeritus of Social Epidemiology at the University of Nottingham Medical School, Honorary Professor at University College London and Visiting Professor at the University of York.

This article is published with permission from Labour Tribune MPs. It first appeared in a collection of essays published by Labour Tribune MPs in 2022 entitled “THE CHANGE WE NEED : How a Starmer Government can Transform Britain”

Further Reading

Wilkinson RG, Pickett K. The Spirit Level: Why Equality is Better for Everyone. London: Penguin; 2010.

Pickett KE, Wilkinson RG. Income inequality and health: a causal review. Social Science & Medicine 2015;128:316-26

Wilkinson R, Pickett K. The Inner Level: How more equal societies reduce stress, restore sanity and improve everybody’s wellbeing. London: Allen Lane; 2018.

Greater Manchester Independent Inequalities Commission. The Next Level: Good Lives for All in Greater Manchester, 2020: https://www.greatermanchester-ca.gov.uk/media/4337/gmca_independent-inequalities-commission_v15.pdf

Pickett K, Wilkinson R. Post-pandemic health and wellbeing: putting equality at the heart of recovery. In: Allen P, Konzelmann SJ, Toporowski J. The Return of the State: Restructuring Britain for the Common Good. London: Agenda Publishing, 2021.

Wilkinson R. If it doesn’t work for people, it won’t work for the planet. Club of Rome, 2021: https://www.clubofrome.org/blog-post/wilkinson-inequality-sustainability/

Reed H, Lansley S, Johnson M, Johnson E & Pickett KE. Tackling Poverty: the power of a universal basic income, London: Compass, 2022. Available at: https://www.compassonline.org.uk/publications/tackling-poverty-the-power-of-a-universal-basic-income/

Johnson M, Nettle D, Johnson E, Reed H & Pickett KE. Winning the vote with a universal basic income: Evidence from the ‘red wall’. London, Compass, 2022.

Picture credit: flickr

The post Kate Pickett and Richard Wilkinson: Spirit Level Lessons appeared first on The Progressive Economy Forum.

We are living in an age of chronic uncertainty, in which crises pile into one another, plunging millions of people deeper into insecurity, impoverishment, stress and ill-health. There was the financial crash of 2008, a decade of austerity, a series of six pandemics culminating in Covid, with more to follow, and now the ‘cost-of-living’ crisis as inflation mounts, possibly reaching an incredible 20% by the winter.

Nassim Taleb coined the term ‘black swans’ to designate shocks that were rare, unpredictable and had devastating consequences. Now, they are not rare. But they are uncertain in terms of when, where and why they occur and who will be adversely affected. As such, you and I cannot be confident that we will not be among the victims.

There is something else too. It looks as if a large proportion of the population will be affected. It is predicted, for example, that 45 million people in Britain will be suffering from fuel-related hardship this coming winter, bringing more deaths and ill-health. Natural disasters could hit numerous communities, and being in a job is far from a guarantee of escaping poverty or economic insecurity.

Three deductions should flow from this bleak scenario. First, feasible economic growth will not overcome the threats. Second, old policies are not valid for tackling the new crises. Third, we need to build societal resilience, a new income distribution system and a new social protection system. ‘Targeting’ on a minority would be futile and inequitable.

The post-war welfare state was built on a presumption of Full Employment of men in full-time jobs earning family wages, in which there was a need for compensation for ‘contingency risks’ or ‘temporary interruptions of earnings power’. It was always sexist. But the essence was ex post compensation. This is inappropriate today where the core challenge is chronic uncertainty, for which one cannot devise a social insurance system. What is needed is an ex ante protection system, one which gives everybody guaranteed basic security.

But our politicians are failing to appreciate the nature of the challenge and are resorting to yesterday’s answers to yesterday’s problems. First, the Conservative leadership contenders and the Labour leadership are making overriding commitments to maximising economic growth. Keir Starmer says that the Labour motif for the next General Election will be ‘Growth, Growth and Growth’, and that he will only consider policy proposals from the Shadow Cabinet if they promote growth. Meanwhile, an adviser to several Tory Chancellors says the next Conservative Prime Minister will commit to an ‘absolute priority of maximising growth’.

A phrase that comes to mind is the one used by Michael Gove to characterise Liz Truss: they are taking a holiday from reality. Both the Conservatives and Labour are misdiagnosing the nature of the recurrent crises. Both are chasing the mirage of high GDP growth, wishing away the awful ecological implications. Starmer says the free market has failed. But we do not have a free market. It is rentier capitalism, in which most income flows to the owners of property – financial, physical and ‘intellectual’. Economic growth has to be unrealistically high for the precariat and other low-income groups to gain anything. This is why real wages have stagnated over the past three decades, and why earnings have lagged GDP growth, the difference made up by rising debt.

The income distribution system has broken down. Across all OECD countries, financialisation has accelerated, and is fuelling inflation for its benefit. In the UK, financial assets of financial institutions have risen to over 1,000% of GDP, with most finance used for speculative activity rather than for productive investment.

A rising share of income is going to capital, and more is going in rent, in excess profits. Within the shrinking share going to labour, more has gone to the top, again in forms of rent. The value of wealth has risen sharply relative to income, while wealth inequality is much greater than income inequality.

All the time, the precariat grows. What should exercise progressive politicians is that for a growing proportion of the population income instability and insecurity have grown by more than is revealed by trends in average real wages. A result is that millions of people are living on the edge of unsustainable debt. People lack income resilience. Desirable as that is, raising the minimum wage will not solve that, and nor will trying to be King Canute in banning flexible labour relations.

So what are our politicians proposing in this context of chronic uncertainty, a broken income distribution system and a daunting ecological crisis? What marks all of what they are offering is ad hoc window dressing that seems deliberately intended to avoid the reality that we have a transformation crisis on our hands. Tax cuts would benefit the relatively secure, price freezes would cost the public finances and distort markets, raising the minimum wage would bypass the precariat and those outside the labour market, and targeting more benefits to those receiving Universal Credit would merely bolster an unspeakably punitive and inequitable scheme.

It brings to mind what William Beveridge wrote in supporting his 1942 Report that led to the post-1945 welfare state. ‘It’s a time for revolutions, not for patching.’ So far, our mainstream politicians seem to lack the backbone. The strategy should be one of dismantling rentier capitalism and recycling rental incomes to everybody. Above all, in the foreseeable future of chronic economic, social and ecological uncertainty, the base of social protection should be the provision of ex ante security. People – all of us – must know that, whatever the shock, we will have the wherewithal on which to survive and recover.

This is when politicians should be looking at ways of introducing a basic income for every usual resident. It would not replace all existing benefits, and would have to involve supplements for those with special needs. It would have to start at a modest level, but would be paid to each man and woman, equally and individually, without means-testing or behavioural conditionality. Legal migrants would have to wait for a period, which does not mean they should not be assisted by other means. And to overcome the objection that it should not be paid to the rich, tax rates could be adjusted to make them more progressive.

Before coming to how to pay for it, I want to emphasise the reasons for wanting a basic income for all. The fundamental justification is moral or ethical.

First, it is a matter of common justice. Our income owes far more to the contributions of all our ancestors than to anything we do ourselves. Even Warren Buffet admits that. But as we cannot know whose ancestors created more or less, we should all have an equal ‘dividend’ on the public wealth. After all, if we allow the private inheritance of private wealth, there should be a public equivalent. The Pope has come round to that rationale for his support for basic income. It is also a matter of ecological justice, since the rich cause most of the pollution while the poor pay most of the costs, primarily in diminished health. A basic income would be a form of compensation.

Second, it would enhance personal freedom, including community freedom. Although paid individually, that would not make it individualistic. Experiments have shown that when everybody has basic income, that induces stronger feelings of social solidarity, altruism and tolerance.

Third, it would enhance basic security, in a way that means-tested, conditional benefits cannot possibly do. Politicians seem reluctant to offer ordinary people basic security, which they would always want for themselves and their families. Insecurity corrodes intelligence and induces stress and loss of the capacity to make rational decisions. We are experiencing a pandemic of stress and rising morbidity. None of the existing policy proposals would reduce that.

Finally, there are instrumental reasons. Experiments with basic income around the world have shown it results in improved mental health, less stress, better physical health, more work, not less, and enhanced social and economic status of women and people with disabilities.   

Basic income is not a panacea, but it should be part of a transformational strategy, complemented by putting public utilities, most notably water, back in public hands and by rent and energy price controls. There must also be fiscal reform that would help in the fight against the ecological decay while helping to overcome chronic uncertainty. Progressives should accept that taxes on income and consumption should be raised, because they are relatively low in this country and because more revenue is needed to pay for our public services, and in particular reverse the privatisation of our precious health service.

The call for Universal Basic Services is state paternalism and would not help with the nature of the crisis. People need financial resources to overcome the economic uncertainty and lack of resilience. No government can know the particular needs of particular people, and so subsidising some services would be both arbitrary and distortionary.

However, in addition to higher taxes on income to pay for services, we should think of ‘the commons’, that is, all that inherently belongs to every citizen of the UK, beginning with the land, air, water and sea, and the minerals and energy underneath. Over the centuries, they have been taken from us illegitimately, without us or our ancestors being compensated. This includes all the land that has been ‘enclosed’, the forest and public spaces that are being ‘privatised’, the seabed that is being auctioned off, and the oil and gas sold for windfall gains given away in tax cuts for the wealthy.

This line of reasoning leads to the proposal that levies should be put on elements of the commons that we have lost, with the revenue put into a Commons Capital Fund, which would be charged with making ecologically sustainable investments, from which ‘common dividends’ would be paid out equally to every resident citizen.

The initial base for paying for a basic income would be conversion of the personal income tax allowance, which benefits higher-income earners and contradicts the view that in a good society everybody should be a taxpayer. If the revenue from that were put into the Fund, it would provide enough for £48 a week for every adult. Then add a 1% wealth tax, justifiable because wealth has risen from three times GDP to seven times, wealth inequality is much greater than income inequality and over 60% of wealth is inherited, unearned. A 1% wealth tax would be sufficient to pay a modest basic income. And more revenue could be raised by rolling back on many of the 1,190 subsidies and tax breaks given mostly to wealthy people. A modest Land Value Tax, based on size and value of land, is also justifiable on common justice grounds, especially as the value of land has grown from an already high 39% of non-financial assets in 1995 to 56% in 2020.

Then add a Carbon Tax, vital if we are to reduce greenhouse gas emissions and global warming, but which will only be politically popular and feasible if all the revenue from it is recycled as part of Common Dividends. Other levies into the Fund could include a Frequent Flyer Levy and a Dirty Fuel Levy on all those cruise liners and container ships that keep their engines going all the time they are in port, poisoning the atmosphere and causing widespread throat cancer.   

Here we have the basis of an income distribution system suited to the era, with supplements for all those with extra needs. It is an approach that would open up a vista of multiple forms of work, unpaid as well as paid, putting care at its centre. It would be an era in which basic security was regarded as a fundamental right, and it would be one in personal freedom would be enhanced while precarity would be reduced, the precarity that comes from dependency on a discretionary state and undignified charity. At this moment of omni-crisis, we need to march in that direction.            

Postscript:

In their response to the cost-of-living crisis, the New Economics Foundation proposes ‘free basic energy’ for all households. Besides penalising those outside households, this presumes that all households’ poverty and insecurity is due to high energy prices. For many that will be so, but for some other factors may be more important.

It would also raise moral hazards. Some people may not need the full free allocation, but would be inclined to waste what they did not need, because it was free. The amount given free would have to be based on some ‘average’ household. But many are in non-average households, or are outside them more, for whom the free allocation would be too little or exceed our basic need.

Some people might prefer to cut energy use a little if given the choice of spending on food, debt reduction or extra clothing. Better to enable them to make the choice that suits their particular needs.

The NEF also propose to top-up Universal Credit and legacy benefits. But we know these do not reach many of the poor, due to sanctions, the humiliating application process and long delays. What about the millions in need who would be excluded? Much better than relying on paternalistic measures and behaviour-conditioned targeted benefits would be a basic income, with supplements for those with special needs, coupled with a modest wealth tax and land value tax. 

Guy Standing is a Professorial Research Associate, SOAS University of London and a council member of the Progressive Economy Forum. His new book is The Blue Commons: Rescuing the Economy of the Sea, published by Pelican. He is a technical adviser to the basic income pilot being conducted by the Government of Wales.  

photo credit flickr

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