INEQUALITY: A BASIC GUIDE

A New Commons publication

Why does inequality matter?

The World Economic Forum
which hosts the Davos
meetings has described
Inequality as one of the key
challenges of our timei and
the most significant of the top
ten trends facing the world in
2015. Their concern chimes
with widespread disquiet
about the adverse impact of
inequality on both society and
economic stability. The extent
of global inequality has been
documented by Oxfamii which shows that almost half of the worlds wealth is now owned by
just one percent of the population. The poorest half own less than one percent.

Vast inequality at the global level is mirrored at the national level: in the UK the richest 1%
of households in the UK now holds more wealth than over half of the population making it
one of the developed worlds most unequal nations. The richest 1,000 people alone own
more wealth than 40% of the population, or 25.6 million peopleiii. Meanwhile, over a million
people are reliant on food banks, 22% of whom struggle with insecure work, low wages
and high living costs.iv

Is inequality a necessary price for economic development?

While many on the left point to the immorality of a system that can give rise to such vast
disparities of wealth and income, supporters of the free market economy point out that
such a model has transformed our world for the better: freed from government restrictions
on trade and investment, the economies of developing countries such as India and China
have moved closer to the market societies of the west, lifting millions out of poverty. In the
two decades since 1990 the global rate of absolute poverty has halved. How is that
immoral?v Inequality is not a useful measure of anything. What matters is poverty reduction
and the Capitalist model has been supremely successful in this.
But has it? And is such a model sustainable? A growing global middle class, aspiring to emulate
the high-income lifestyles of the west is expected to push up demand for water by nearly a third by
2030, and demand for both food and energy by half as much againvi. The growth in carbon emissions
from international transport alone is set to skyrocketvii. How does that square with the need to
avoid ecosystem collapse and catastrophic climate change?
And what of the social tensions that accompany vast inequalities in the benefits of growth? India,

an exemplar of the free market model, is plagued by a Marxist inspired lethal insurgencyviii
that has grown as rapidly as its economy, one described by the former prime minister
Manmohan Singh as the countrys biggest internal security threat. The insurgency draws

INEQUALITY: A BASIC GUIDE

A New Commons publication

strength from the deep sense of grievance and anger felt by many rural Indians who have
seen little benefit from Indias rapid economic growth. Some 42% of its 1.21 billion people
remain on less than $1.25 a day while Inequality has doubled in the last 20 yearsix . Caste
and other related factors also play a role in the conflict and it is clearly facile to assert that a
free market model can be left to get on with solving the problem of poverty without any
state intervention to both mediate conflict and ensure fair distribution of the benefits of
growth.

What is the impact of Inequality?

The most complete body of evidence presented so far is by The Equality Trust whose ground
breaking research shows that more equal societies experience a whole range of benefits
from longer life, better mental health, higher levels of trust and improved child wellbeing as
well as reduced obesity, drug abuse and violence. A composite index in the form of a line
graph is shown below while more data and line graphs produced by the Equality Trust for
each of the social dimensions can be accessed by following this link>>>

Right wing commentators often argue that inequality drives competitive individualism and
aspirational values that lead to material improvement for oneself and wider society. Yet the
findings of the inequality trust are the opposite: beyond a certain point inequality reduces
social mobility and opportunities for advancement in contrast to more equal societies such
as Norway, Sweden and Denmarkx.

INEQUALITY: A BASIC GUIDE

A New Commons publication

The economy itself may also be subject to instability and financial collapse. Studies by two
senior research officers at the IMF found that once a country had entered a period of
growth, income distribution was by far the most important factor associated with how long
that growth lasted; the more equal the distribution the longer the growth period lastedxi. A
separate paper by the same authors concluded that extreme inequality not just shortened
periods of economic growth but could trigger financial collapse. As the authors put it The
recent global economic crisis, with its roots in U.S. financial markets, may have resulted, in part at
least, from the increase in inequalityxii.

Another major report Fair Society, Healthy Livesxiii by professor Marmot also brought
together a wealth of data linking inequality and health in the UK. The report highlighted the
social gradient in health - the lower a persons social position, the worse his or her health.
This proved to be the case at every grade, including middle and upper stratas of society,
not just those who were least well off. The report concluded that action should focus on
reducing the gradient in health and not just focus on poverty reduction experienced by the
bottom tenth of the population.
The report also highlighted the impact of inequality in illness on the economy: productivity
losses of 31-33 billion per year, lost taxes and higher welfare payments in the range of 2032 billion per year and additional NHS healthcare costs well in excess of 5.5 billion per year.
If no action is taken, the cost of treating the various illnesses that result from inequalities in
the level of obesity alone will rise from 2 billion per year to nearly 5 billion per year in
2025.

What are the drivers of inequality

The Inequality Trust cites a number of factors which contribute to inequality such as
globalisation and technological advancement. Campaigning organisations such as Positive
Money point out that inequality is embedded in debt based money creation by the banks,
while the New Economics Foundation cites a dysfunctional financial services sector that
invests in complex financial products and property bubbles rather than the real economyxiv.
Two of the factors cited by the Equality Trust, family and early childhood are also identified
by right wing commentators as contributing to poor educational and employment. The
difference however is that while the Equality Trust highlights structural inequality, the latter
tend to emphasis culture: it is poor parenting, low aspirations and a culture of worklessness
and welfare dependency that must be addressed.
In reality, attitudes, values and aspirations cannot be separated from the opportunities and
life chances afforded by the material circumstances into which we are born. Can you really
isolate poor parenting from low paid, part time work on zero hour contracts that barely

INEQUALITY: A BASIC GUIDE

A New Commons publication

cover high rent, poor quality accommodation? The struggle, stress and insecurity of such a
lifestyle, inevitably affects all relationships but particularly those of family.

Family income and wealth

Up to half of the gap between what you and others make in society is accounted for by the
family you grew up in. In the UK 50% of a parents pay advantage is passed on to their
children. Whether or not you can start a business or own your own home depends in large
part on access to family assets and social connections. In the UK, this inequality of wealth is
being bolstered by increases in house prices increasing the wealth of property owners while
diminishing the chances of others to buy their own property9.

Childhood
The home learning environment has the strongest single effect on educational outcomes for
children at age 10. A poor HLE is associated with a low level of mothers education, larger
families and living in areas of higher deprivationxv. This further adds to the inheritability of
inequality. The effects of primary school are also much more important for disadvantaged
students than advantaged ones and later educational success is strongly influenced by your
level of attainment at 11, underlying the importance of primary schools to reduce
inequality.

Globalisation
Research highlighted by the Equality Trust suggests that global trade and immigration drive
economic inequality by causing a wage decrease for those with a low level of education
while causing a wage increase for others with a high level of education. However the effect
of global trade on the wage distribution is substantially larger than the influence of
immigration. Globalisation also increases the scope for tax avoidance which can increase
financial fragility and inequality.
In a separate report by the Tax Justice Network, the degree of expanding global inequality
through tax avoidance and evasion is far greater than any estimate captured by the Gini coefficientxvi and other measurements that necessarily rely on official government dataxvii . The
report conservatively estimates off shore wealth between $21 trillion and $32 trillion of
financial assets owned by High Net worth Individuals in tax havensxviii (compare this to UK
GDP for 2014 which was $3.06 trillion, for USA $17.42 trillionxix). These estimates do not
include the value of real estate, art or jewels. Assertions about the unaffordability of a
welfare state for the UK or indeed any government simply do not bear scrutiny when
compared to the staggering size of wealth extraction now taking place through tax evasion
and avoidance.

Technological advancement
Technological advancement is the explanation for income inequality proposed by orthodox
economic thinking. Rapid technological change automates work once done by skilled trade jobs as
well as low skilled workers, while increasing demand for high skilled new technology workers leads

INEQUALITY: A BASIC GUIDE

A New Commons publication

to higher pay.. In effect technology hollows out the middle which leads to the observed increasesxx
in the number of high wage and low wage jobs as seen in the UK between 1975 and 1999. New
Technology also makes possible the creation of new businesses with low start-up costs, employing
few people but generating vast income. At the bottom end, technology has no effect on low skilled
workers who do non routine work such as cleaning, care work and other service industry
occupations.

Political systems and institutions

The Equality Trust points to cross country analysis which suggests that democracy and trade unions
help reduce economic inequality by increasing the number of stakeholders that people in power
are responsible to, leading to policies which favour economic redistribution. Separate researchxxi
suggests that electoral systems such as proportional representation also enhances the redistributive
effect.
But this begs the question of why, in that case, economic inequality has increased over the last 30
years across industrialised countries with well-established democracies.
The Equality Trust highlights US research that suggests clear limits to economic redistributionxxii with
elected representatives more inclined to listen to the preferences of high and middle-income voters
than low-income voters. Party donations and influential lobby groups that bolster the influence of a
wealthy elite further widen the democratic deficit, as does low income voters lower propensity to
vote.
The mechanisms by which inequality undermines democracy are explored by more recent IPPR
research whose key finding is that 63% of poorer voters believe that democracy addresses their
interests "badlyxxiii and is the basis for the widespread voter disengagement in recent times.
Separate research that looks at political inequality and economic inequality in 24 democracies across
Europe confirms the finding that greater economic inequality accelerates the political capture of the
democratic processxxiv.

Debt based money creation

Research by the campaign group Positive Money clearly shows inequality as embedded in a
dysfunctional system of money supply and creation based on debt: 97% of the money in todays
economy is created by banks in the form of loans to people and businesses in effect digital I.O.U.s
used to buy goods and services with our credit card - while just 3% is in the form of paper money
and coins created by the Bank of Englandxxv. The common misconception, even taught in economic
text books is that banks lend out deposits that savers place with them. Yet even the Bank of England
has admitted that Most of the money in circulation is created, not by the printing presses of the
Bank of England, but by the commercial banks themselves.whenever they lend to someone in the
economy.xxvi
That is why while the total money in the UK is currently 2.1 trillion, the current debt is 2.4 trillionthe money owed plus interestxxvii. In effect we collectively rent our money from the high street
banks and for every pound of pound of money in the economy there will be a pound of debt plus
interest owedxxviii.

INEQUALITY: A BASIC GUIDE

A New Commons publication

This gross distortion of the economy is multiplied by the use to which such debt based money is put:
around 31% goes to residential property which pushes up money supply faster than wages, a further
20% goes to commercial real estate (office buildings and other business property) and around 32%
goes into financial products and services. Only 8% goes to the real economy of non-financial
businessesxxix.
At the heart of this dysfunctional system is a self-serving financial sector which is both a driver and
beneficiary of inequality. 60% of the rise in income share between 1998 and 2008 of the top decile
accrued to finance workers while pay for lower and middle income earners stalled, resulting in
increased household borrowing that encouraged the growth of the financial sectorxxx. Household

debt alone now stands at a record level of 1.4 trillion greater than the current national
debt - with nearly nine million Britons going into debt just to cover their bills xxxi.

What can we do to reduce inequality?

Perhaps the single biggest difference any government can make to improve the wellbeing
of both society and the economy is to reduce income and wealth inequalities.
Policies directed at piece-meal improvement childrens education, vocational training, tackling
obesity levels or mental ill health will never gain real traction and sustained improvement unless
these fall within an over-arching aim to tackle fundamental economic inequality.
The evidence to support such a claim is overwhelming but the political will to do so is weak and in
many cases works against the interests of the majority in favour of the affluent few. Some of the
suggestions set out by policy experts working on this issue include:

A robust and progressive taxation system. The size of the challenge is set out in a report on
tax evasion by the tax expert Richard Murphy which estimated that in 2014 alone, the tax
gap of 120 Billionxxxii more than the total annual cost of the NHS.
Decrease the wage gap through introducing low pay ratios, a ceiling on top rates of pay and
a living wagexxxiii
Promote trade union and employment rights by extending industrial democracy and worker
representationxxxiv.
Fundamental monetary reform that removes the power to create money from banks and
instead, give this to Bank of England or a new committee that decides whether to create
money it must be accountable to Parliament and protected from abuse by vested
interests. Just as importantly money creation should be free from debt and spent in the real
economy to create jobs.xxxv

What are your suggestions?

What can be done at the national level? Or at the local level? Are the above suggestions tenable?
Can this issue be addressed purely through tax and welfare reform or is there a broader cultural
change required that must move in sync with proposed legislation? And what kind of legislation are
we talking about? Finally, what are the next steps?

INEQUALITY: A BASIC GUIDE

A New Commons publication

World Economic Forum: Reports, Top Ten Trends

Oxfam: Working For The Few Jan 2014
iii
The Equality Trust: Equality Trust Wealth Tracker 2015
iv
The Trussel Trust: Food Bank Use Tops One Million for First Time
v
Telegraph: Why you should stop worrying and learn to love inequality, James Bartholomew 27 April 2015
vi
Raworth, K. (2012). A safe and just space for humanity: Can we live within the doughnut?
vii
Vox CEPR Policy Portal: Trade and greenhouse-gas emissions: How important is international transport?
viii
Global Peace Index year 2014 report
ix
BBC news 7 Dec 2011: India income inequality doubles in 20 years, says OECD
x
Equality Trust: Social Mobility and Education
xi
Berg and Ostry: Inequality and Unsustainable Growth: Two Sides of the Same Coin?
xii
Berg and Ostry: Equality and Effciency: is there a trade off between the two or do they go hand in hand?
xiii
Professor Marmot: Fair Society Healthy Lives 2010
xiv
New Economics Foundation: Mythbuster The City is vital to Britain
xv
Equality Trust website: What factors have lead to this increase in inequality in the UK
xvi
Ripped Off Britons: OPINION: BAILED-OUT BANKS FACILITATE $21TN OFFSHORE CASH HOARD
xvii
Tax Justice Network: Inequality: You Dont Know The Half Of It 2012
xviii
Tax Justice Network: The Price Of Offshore Revisited 2012
xix
Wikipedia: List of Countries by GDP(nominal)
xx
Rafal Kierzenkowski, Isabell Koske: Less Income Inequality and More Growth Are they Compatible? Part 8.
The Drivers of Labour Income Inequality A Literature Review
(referenced by the Equality Trust)
ii

xxi

VICKI BIRCHFIELD & MARKUS M.L. CREPAZ: The impact of constitutional structures and collective and
competitive veto points on income inequality in industrialized democracies (referenced by the Equality Trust)
xxii
Larry Bartels: Economic Inequality and Political Representation
xxiii
Institute of Public Policy Research: Political inequality: Why British democracy must be reformed and
revitalised
xxiv

Rosset, Giger, Bernauer: More Money, Fewer Problems? Cross-Level Effects of Economic Deprivation on
Political Representation
xxv
See Positive Money website: How Banks Create Money
xxvi
Bank of England: Money Creation in the Modern Economy, quarterly bulleting 2014 Q1
xxvii
Positive Money: Fixing Our Broken Economy A Simple Guide for the Rest of Us
xxviii
Positive Money: Debt
xxix
Positive Money: Financial Crises and Recessions
xxx
New Economics Foundation: Mythbuster the City is vital to Britain
xxxi
Centre for Social Justice: Future Finance report June 2015
xxxii
Richard Murphy: The Tax Gap (2014), tax evasion in 2014 and what can be done about it
xxxiii
Centre for Labour and Social Studies (CLASS): Why Inequality Matters
xxxiv
xxxv

Centre for Labour and Social Studies (CLASS): Why Inequality Matters
Positive Money: What We Need