On 26th March 2014 Lord Turner gave his annual lecture to Cass Business School on “Wealth, debt and inequality”. This is a summary of the main points for those with a primary focus on inequality. Full lecture notes and slides are available.
The lecture dealt first with inequality, referring to data showing how, since 1980 real incomes have flatlined for the bottom 20% whereas there has been a remarkable explosion of the income gap between the 1% and the 99%, and an even more remarkable explosion in the gap between the top 0.1% and the rest of the 1%; in other words, more and more income is being concentrated in fewer and fewer hands.
Turner says that the effect technological innovation in the economy has on levels of inequality depends on the type of technology; and that information and communications technologies are particularly likely to drive inequality, because they require business owners to invest relatively little in capital, creating higher profits; and because ICT employs few people relative to turnover, so little benefit accrues to workers. The effect of this will not be confined to ICT industries nor to the types of unskilled jobs that can most obviously be replaced by technology: for example, Frey and Osborne estimate there to be a 94% chance that computerisation will lead to job losses among accountants and auditors by 2030. In contrast, Turner thinks that there will be job growth in customer-facing roles in service industries.
As Thomas Piketty has recently demonstrated, the ratio of income from wealth to income from labour in our economy has been rising since the 1920s, with a major role being played by rising residential property values. Recently, this has been exacerbated by the fact that housing is increasingly seen as an investment, and by a feedback-loop of rising prices and expectations. This will tend to increase inequality between renters and owners, and between those who own multiple properties and everyone else.
We have also seen rising levels of private debt. As Turner pointed out, bank lending is not a zero-sum game: banks create money, and there is no limit to the amount of money they can create. Most of the money that banks create and lend does not create assets by funding capital investment, but rather fuels competition for existing assets (such as residential property) which again tends to inflate housing costs and therefore inequality because a minority rake in rising rents that others increasingly struggle to pay.
Unfortunately, not only does debt exacerbate inequality, but inequality exacerbates debt. Rich people spend a smaller proportion of their income than the rest of us, so concentrating money in their hands will tend to produce economic stagnation unless the rich lend to the poor, creating repayments which again exacerbate inequality and create unsustainable vicious circles that lead to financial crashes.
Turner is clear that these vicious cycles of inequality are incompatible with a productive and sustainable economy, and they are also damaging to society. He is also clear on the need for heavy-duty policy initiatives to contain the housing market, credit creation, capital accumulation and inequality itself. To achieve the latter goal, he says that up-skilling British workers is necessary but not sufficient, due to the nature of ICT, so he also advocates progressive taxation, inheritance tax and significant increases in the National Minimum Wage.
Duncan Exley, Executive Director of The Equality Trust.