We don't need inequality to get richer

News releases this week remind us that the rich are getting richer and the rest of us... are not. The Institute for Fiscal Studies reveals that the median British income fell 3 per cent last year, while the High Pay Commission tells us the richest 0.1 per cent of Britons (that’s just 47,000 individuals) now take home almost 5 per cent of the entire national income. If the trend continues, we will soon return to Victorian levels of inequality.

Everybody knows that developed societies have become much more unequal in the past 30 years, but it is still surprising how exponential the transformation. Yes, the top 10 per cent income is growing much faster than the bottom 90 per cent—but within that top 10 per cent, it is the top 1 per cent that is getting the lion’s share. And within the top 1 per cent, it is the top 0.1 per cent that is the big winner.

And even within that rarified group, the average millionaire’s income growth is trivial compared to those at the very, very top. Recent US data indicates that in 2007 the 400 richest Americans captured 9.2 per cent of the entire society’s capital gains. Out of 140m American taxpayers, just 400 appropriated a staggering 1.5 per cent of adjusted gross income.



Back in the 19th century, the great classical economists rationalised the need for inequality as the only way to provide investible funds. The poor, thinkers like David Ricardo and John Stuart Mill reasoned, spent all their income on necessities. Only the rich could save and thus provide capital, which could be transformed into machinery that would ultimately make us all more prosperous. But these days, increasing inequality does not accompany increased productive investment. In the past 30 years, real investment as a share of GDP has actually declined, even as inequality has skyrocketed. And growth has stagnated as well: the western economies grew much faster when the benefits of prosperity were more evenly shared.

So no matter what your banker friends tell you, increasing inequality is not primarily an economic outcome. It is in large part due to political decisions. The cutting of marginal tax rates, the evisceration of labour unions, the coddling of the financial sector, the disregard for the unemployed: all contribute to our increasingly stratified society. It makes our world harsher, meaner, less fair, poorer. So the question becomes: why do those of us not in the top 0.1 per cent put up with it?