The IMF is the last place that one would expect to hear the argument being made that inequality has gone far too far. So the recent detailed research from the citadel of capitalism has to be taken seriously. What they found was that raising the income share of the poorest fifth of the population increases growth by as much as 0.38% over 5 years, whilst increasing the income share of the richest fifth by 1% actually reduces growth by 0.08%. On that basis the argument that enriching the rich yet further benefits everyone collapses. Trickle-down which both Thatcher and Blair devoutly believed in is therefore seen for what it is – merely a rationalisation to justify their hold on power and wealth.
The IMF also seeks to justify its unexpected conclusion. The poor tend to spend more of their income rather than save it like the very rich, and thus increase demand within the economy and therefore growth. If on the other hand their income stagnates or falls, they are likely to borrow more, leading to a dangerous build-up of debt, which is exactly the situation in Britain today where household debt is now tipping £2 trillions – a likely cause of the next financial crisis. And with lower taxes and lower public expenditure in a rich-dominated world, it is likely there will be under-investment in education, health and infrastructure – all the elements which boost productivity and growth.
Another study just published also tells a similar story. Called (sardonically) ‘In it together: Why Less inequality Benefits All’, the OECD authors point out that the rise in income inequality between 1985-2005 knocked 4.75 % off cumulative economic growth between 1990-2010. They conclude that “if the bottom is losing ground, everyone is losing ground”, and they even assert that “redistribution via taxes and transfers………contributes to more equality and more growth”.
Even the high priests of British capitalism take a similar view. Simon Walker, director-general of the IOD, has recently argued that “routine excessive pay has become too common in Britain” and that “there is a strong case for wholesale reform”. David Pitt-Watson, an executive fellow at the London Business School, is more precise: “It is a very big problem that we can observe little correlation between company success and high pay”.
The only part of the political class keeping mum on inequality is the Labour Party. That needs to change, and fast. Talking about a banker’s bonus tax, raising the top income tax rate to 50%, and putting a shop-floor representative into the remuneration committees in the boardroom is not enough. Time for the Labour leadership contestants, not just to talk about fairness, but telling us exactly how they would bring it about.