Inequality hurts everyone apart from the super-rich

Ideas, as well as interests, matter in politics. They shape the debate and determine plausible policy prescriptions. From the 1970s onwards, the intellectual and political current has run strongly against equality. The Reagan-Thatcher consensus on low taxes, and their suspicion of redistribution, has been remarkably powerful. The Blair-Brown government had a lower top rate of income tax for all its 13 years than Thatcher did for nine. Greater inequality has often been seen as a price worth paying for economic gains.

The intellectual tide may, however, be turning. There are two important pieces of evidence weighing in for the egalitarians. The first is Thomas Piketty's Capital in the Twenty-First Century, which made the front page lead of Le Monde this week because his 685-page tome has topped the best-seller list on Amazon in the United States. That is unprecedented for any economist, let alone a French one.

Piketty has written a marvellous, persuasive book that breaks with modern economics' love affair with mathematics. It is in the same literary tradition as JM Keynes's The General Theory of Employment, Interest and Money and Adam Smith's The Wealth of Nations, with an impressive sweep and grasp of economic history. Most important, it is rooted in the facts of inequality that cry out for explanation.

He challenges the conventional postwar view that capitalism was developing in a balanced way so that "growth would float all boats". This complacent assumption was true of the postwar reconstruction, but only as a "consequence of war and of policies adopted to cope with the shocks of war". The physical destruction of wealth by war was followed by the further destruction of private wealth as governments reduced their own war debts through inflation.

Piketty has revived Marx's belief that capital would accumulate and become concentrated in ever fewer hands, a contention that was always suspect, both because Marx set out in Das Kapital to prove the conclusions he had previously reached in The Communist Manifesto of 1848 and because of a lack of anything approaching adequate economic data to make his case. By contrast, Piketty, arguably the world's leading expert on tax and wealth data, bases his argument on analysis of wealth going back two centuries and on tax statistics in many countries going back to the first progressive income tax under the Liberal government in Britain in 1909. "There is," he says, "no natural, spontaneous process to prevent destabilising, inegalitarian forces from prevailing permanently".

Piketty shows that in rich countries at the frontier of technology and skills, the growth of incomes is between 1% and 2% a year. Meanwhile, the rate of return on capital averages about 4% to 5% a year. So those who draw their income from capital returns will outstrip wage earners and "inherited wealth grows faster than output and income".

In the period since 1970, aided by the Reagan-Thatcher consensus, inequality has returned to the pre-1914 levels of France's belle époque and the US robber barons. The figures are breathtaking.

Piketty says of the United States: "From 1977 to 2007, the richest 10% appropriated three-quarters of the growth. The richest 1% alone absorbed nearly 60% of the total increase of US national income in this period." The squeezed middle does not enter into it. A democratic society will not, and cannot, tolerate such trends.

The second piece of evidence for my contention that the tide is turning is also important, as it shows that this rising inequality, far from being a price worth paying, actually slows down growth. This research is not from some group of flaming radicals but the International Monetary Fund, an intrinsically conservative institution.

Its report Redistribution, Inequality and Growth compares different countries' growth and their degree of redistribution (through progressive taxes, benefits, and universal services like health and education). The conclusion is that "lower net inequality is robustly correlated with faster and more durable growth". There is only weak evidence that even exceptionally large redistributions hamper growth.

The political implications can hardly be overestimated. It will surely no longer be easy for moderate social democrats like Peter Mandelson to argue they are "intensely relaxed about people getting filthy rich". Market efficiency and sound finance still matter, but Croslandite redistribution is back. For liberals, Piketty is a wedge between the classical and the new liberals: he makes it hard to argue that government should only be concerned about equality of opportunity rather than equality of outcome. When outcomes become so divergent, equality of opportunity is bound to follow. Meritocracy is dead. Birth matters far more.

One of the biggest battles in most developed countries' politics turns out to be wrong. The right was meant to be nasty and selfish, but good for growth. The left was soft and kindhearted, but a threat to prosperity. However, the evidence strongly suggests that the only people who win from low-redistribution policies are the super-rich. The rest of us lose. Even under the British and American voting system, the top 10% are only about one-quarter or one-fifth of the number needed to win a majority. If the others wake up to what is really going on, conservative parties are going to have a big electoral problem.

<source theguardian>