“Not growing inequality”

What do we want? “A fairer sharing of rewards not growing inequality.” Well said, Ed Miliband (in Sheffield last week). Growing inequality very bad. Widening gap between rich and poor one of Labour government’s greatest failings. “For the five years before the last recession, the economy grew by 11%, but the wages of everyone earning less than average incomes stayed the same,” said the Labour leader, bravely trashing the record not only of the hated Blairites but of the Not Flash Just Gordon Party too.

But there was more trashing to do:

The kind of capitalism we have seen for the last thirty-odd years has simply stopped delivering for the vast majority of working people in this country — the famous squeezed middle.

So it is not just the Brownites and the Blairites who presided over growing inequality, but the Majorites and the Thatcherites too, back to 1982-odd. All one long unhappy story of capitulation to neo-liberal, grind-the-faces, enrich-the-bosses economics.

Very bad.

There is just one teensy weensy baby problem. It is not true.

The graph shows inequality of income as measured by two different data sets from 1977 to 2010, taken from The Effects of Taxes and Benefits on Household Income, 2009/2010, page 26. The higher the line, the more unequal the distribution.

The “Effects of Taxes and Benefits” series (ETB, solid line) suggests that incomes became slightly more equal under the Labour governments of 1997-2010; the “Households on Below Average Incomes” series (HBAI, dashed line) suggests they became slightly less equal (when Gordon Brown was Prime Minister).

As you can see, inequality increased sharply on both measures between about 1984 and 1990. For the past 20 years, therefore, the trend has been roughly flat, while real GDP per head has increased by around 40 per cent (even after the correction of the past three years).

I do not want to blame the Labour leader for not realising this. There is a self-sustaining ecosystem of academia and commentary that feeds on the evils of growing inequality. Good people such as my friend Stewart Lansley have written books devoted to describing and condemning the phantasm.

Stewart summarised the thesis of The Cost of Inequality in The Independent last month:

“From the late 1970s, successive governments have allowed, indeed encouraged, the gains from growth to be increasingly colonised by a small business, financial and corporate elite. This has set the workforce adrift from economic progress and left ordinary citizens with a continually shrinking share of the economic cake. As a result, average real wage growth has been falling behind the rate of output of the economy, and at an accelerating rate.”

It is all asserted with great confidence and a big historical sweep, but it is nonsense.

There is one part of the income distribution, the top 0.1 per cent or so, which is untypical and which has enjoyed untypical income growth for the sort of 30-year period described by Miliband. But those incomes are part of a global capital market, which has grown over that time, hugely enriching the whole British economy and everyone in it — unequally, of course, but no more unequally than before.

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