Beyond Redistribution—Confronting inequality in an era of low growth | An Economy That Works, Briefing Paper No 2

Beyond Redistribution— Confronting inequality in an era of low growth | Tim Jackson

Tim Jackson
October 2018

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The second in our series of briefing papers on building An Economy That Works explores inequality in the UK. It examines the evidence for rising inequality over the last fifty years, estimates the economic welfare lost to society from an unequal distribution of incomes and addresses the critical question of managing inequality in the context of declining growth rates. It finds that:

  • when measured using the Gini coefficient, income inequality increased by 50% between the 1970s and the financial crisis;
  • measured using household income ‘after housing costs’, the Gini coefficient rose even further (60%) during the same period;
  • the share of income going to the top 1% of households almost tripled between 1977 and 2009;
  • in the immediate aftermath of the financial crisis, income inequality fell slightly on all three measures but the trend has since stabilised or reversed and income inequality remains substantially higher than it was four decades ago;
  • wealth inequality in the UK is even higher than income inequality, suggesting that further rises in income inequality are likely;
  • property wealth inequality and financial wealth inequality have increased substantially since the financial crisis;
  • the richest 10% of households now own 61% of all financial wealth, while the poorest have substantial financial debts (negative financial wealth).

These inequalities generate other significant welfare inequalities in society. People in the richest areas have 20 more years of healthy life than those in the most deprived areas. Meanwhile, the richest households have a carbon footprint up to 30 higher than the poorest.

Recognising that inequality imposes significant welfare costs on society, this paper uses the Atkinson Inequality Index to measure the welfare losses associated with today’s level of inequality. It finds that:

  • the welfare lost through inequality rose from a low of 6% of the GDP to almost 12.5% of GDP in 2016;
  • in money terms, this equates to a five-fold increase in lost welfare over the last half a century;
  • the absolute value of the welfare lost through inequality in 2016/17 was around £240 billion—almost double the annual budget of the NHS.

Finally, the paper addresses the challenge of reducing inequality in the context of declining growth rates. It finds no evidence to support the claim that inequality inevitably rises as GDP growth declines. On the contrary, empirical data show that lower growth rates are as likely to be associated with declining inequality in recent UK history. Further analysis reveals that the impact of declining growth rates on inequality depends critically on market conditions. The paper briefly discusses the implications of these findings for changes in technology and the world of work.

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About the Series

An Economy That Works | Ten years after the financial crisis, sluggish growth, faltering labour productivity and persistent inequalities are creating huge uncertainties for the future of advanced economies such as the UK. Under these conditions, it is challenging to meet the investment needs associated with improving people’s health and wellbeing or to honour our obligations under the Paris Agreement on climate change. The implications for social and political instability are profound. Is a return to high levels of GDP growth the only way to meet these combined challenges? Is such a return even possible? A series of briefing papers from the All-Party Parliamentary Group on the Limits to Growth aims to explore these questions and to create the space for a vital conversation aimed at building An Economy That Works – for everyone.


Understanding the ‘New Normal’—The Challenge of Secular Stagnation | An Economy That Works, Briefing Paper No 1

Tim Jackson, Post-Growth, Productivity Puzzle, Secular Stagnation, Inequality, An Economy that works

Tim Jackson
July 2018

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This first in our series of briefing papers on building An Economy That Works explores the underlying phenomenon of ‘secular stagnation’ – a long-term decline in the rate of growth of the Gross Domestic Product (GDP). The paper examines the evidence, explores the causes and discusses the implications of what some now call the ‘new normal’. It finds that:

  • trend growth rates in GDP across the OECD declined from a peak of 4% per year in the mid-1960s to a little over 1% half a century later;
  • trend growth rates in labour productivity declined from 4% per year to 0.6% per year over the same period;
  • in the UK, there is a clear rise and fall pattern in labour productivity growth since the early 20th Century, with a peak in 1967 and a sustained fall since that time;
  • over the last five years, trend labour productivity growth has remained below 0.3%, lower than at any time since records began in the mid 19th Century.

Perhaps most surprisingly, this analysis suggests that the rise of digital technologies has neither reversed nor even halted this long-term decline in labour productivity growth in the UK. The paper identifies four potential causes of the decline:

  • an increasing price volatility in vital economic resources such as crude oil;
  • a decline in the underlying quality of such resources – as measured for instance by the energy required to extract them and make then useful to society;
  • a structural shift in advanced economies away from mining and manufacturing and towards services; and
  • changes in the structure and organisation of the financial sector.

The first three could help to stimulate the transition to a sustainable economy: services are typically less damaging than mining and manufacturing activities and a decline in the use of crude oil could contribute to our carbon reduction targets. The final item on the list is troubling for two reasons. Firstly, there is evidence that these shifts in financial architecture have contributed to higher levels of inequality within advanced economies. Secondly, the changes themselves were motivated by the desire to stimulate economic growth. In other words, the very policies designed to prevent economic instability have ended up contributing to it.

Faced with this conundrum, it is clear that ‘more of the same’ will not deliver an economy that works for everyone. This paper argues that in order to make progress it is useful to re-frame four fundamental foundations on which the economy is built: enterprise, work, investment and money. Though it is beyond the scope of this paper to elaborate on these foundations in detail, we propose here the broad directions of travel, in which we frame:

  • enterprise as a form of service
  • work as a vital means of participation in society
  • investment as a commitment to the future; and
  • money as a social good.

Future briefing papers in this series will develop these themes in more detail.

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The Policy Paper can be downloaded in  1pdfthumbnailpdf (3MB).


About the Series

An Economy That Works | Ten years after the financial crisis, sluggish growth, faltering labour productivity and persistent inequalities are creating huge uncertainties for the future of advanced economies such as the UK. Under these conditions, it is challenging to meet the investment needs associated with improving people’s health and wellbeing or to honour our obligations under the Paris Agreement on climate change. The implications for social and political instability are profound. Is a return to high levels of GDP growth the only way to meet these combined challenges? Is such a return even possible? A series of briefing papers from the All-Party Parliamentary Group on the Limits to Growth aims to explore these questions and to create the space for a vital conversation aimed at building An Economy That Works – for everyone.

 


 

Briefing: Precautionary Principle

Rupert Read and Tim O’Riordan
October 2017

Uncertainties over which EU environmentally-related policies are likely to be culled in the process and aftermath of the ‘Great Repeal Bill’ should be cause for concern regarding the long term health of both humans and the ecosystems on which we all depend. The APPG briefing focuses upon the risk to the viability of Precautionary Principle from the lengthy and involved process of repatriation of EU Law. The Precautionary Principle offers a comprehensive defence against policies which favour ‘growth’ at the cost of potentially irreversible or catastrophic risk. The Precautionary Principle remains on the frontline of the legal-environmental defence and should not be downgraded, but actually if possible enhanced.

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LINKS

  • A short video introduction into the precautionary principle is embedded below, and can be accessed on Youtube directly.

Spring Budget 2017 | Response by the APPG on Limits to Growth

Budgets are routinely analysed by people who believe there is nothing problematic about economic growth. Forecast rates of GDP growth play a key role in the Budget calculations, and Budgets are praised or criticised based on the effect they are deemed to have on future growth. In our view, such analysis misses a critical aspect of the contemporary debate: namely the prospect that there may be environmental, social and secular limits to economic growth.

The principal aim of the All Party Parliamentary Group (APPG) on the Limits to Growth is to provide a platform for cross-party dialogue on economic growth in a time of environmental and social transition. In this capacity, the APPG has decided to submit short, formal responses to periodic Budget statements with the aim of highlighting where the Government is or is not responding effectively and appropriately to the challenges of long-term environmental, social and economic sustainability. Thus, our responses are likely to cover issues related to climate change, biodiversity, resource bottlenecks and scarcities, resource efficiency, social wellbeing and secular stagnation.

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Limits Revisited: A Review of the Limits to Growth Debate

Tim Jackson and Robin Webster
April 2016

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Four and a half decades after the Club of Rome published its landmark report on Limits to Growth, the study remains critical to our understanding of economic prosperity. This new review of the Limits debate has been written to mark the launch of the UK All Party Parliamentary Group (APPG) on the Limits to Growth. It outlines the contents of the Club of Rome’s report, traces the history of responses to it and dispels some of the myths surrounding it. As Prof Tim Jackson summarises the report in his recent CUSP blog, if the Club of Rome is right, the next few decades are decisive: One of the most important lessons from the study is that early responses are absolutely vital as limits are approached. Faced with these challenges, there is also clearly a premium on creating political space for change and developing positive narratives of progress. A part of the aim of the APPG is create that space.