In today’s political climate, divisions run deep, and this is putting Britain’s social cohesion under jeopardy. The main culprit has grown too large – inequality. This is fuelling a sense of injustice and disillusionment. But it also hinders economic prosperity; it is a negative-sum game, being both economically inefficient and politically potent. Hence, I want to understand what trends are causing the dichotomy of rewards. And then, what are the best ideas to turn the tide?
Wealth inequality is a good place to start. In the UK, wealth inequality—the difference between the sum of land, property, stocks and shares individuals hold— is fives times worse than income inequality. The wealthiest 10% have a staggering 900 times more wealth than the bottom 10%.
More than that, wealth inequality feeds into a powerful sense of injustice and alienation. First, the sheer size of the disparity is disempowering for millions of people. Second, wealth is often unrelated to effort, usually inherited or due to rising asset prices. It is too rarely the rewards of risk in the name of entrepreneurship. Third, wealth inequality impedes inequality of opportunity. Those who inherit wealth inherit opportunity. It is not the result of a meritocratic system, it is the inhibitor of one.
Today, the UK is still being split along old dividing lines like gender, geography and class. All of these are entrenched by stark disparities of wealth and thereby opportunity. A retired man has four to five times the pension pot of a retired woman, a household in the North East has over half the wealth of one in the South East and stagnant wages at the bottom end of incomes sees the lowest-paid workers’ likelihood of upward mobility diminish.
Its impact does not end there, it is planting new dividing lines too. Noticeably, a generational divide. For the first time capitalism’s promise of each generation being richer than their parents is unlikely to hold. You have a one in four chance of owning a home by the time you are 35, your parents chances were twice as good. Forty per cent of your income is predicted to be spent on rent, your parents paid half as much. Why are young people being dealt such sorry cards?
Wealth is becoming more and more concentrated. Why? Capital – the money generated from owning assets – has been growing far faster than the rest of the economy. Causing those who already own assets to run even further ahead.
The second force is falling incomes. Over the last 30 years, a smaller and smaller percentage of all the money in the economy is going to our pay packets. As a result, we have seen a large shift in economic power from workers to capital owners. This imbalance of power cuts workers’ chances of seeing pay rises, whilst giving free rein to the top to navigate their own salaries. Thirty years ago, a FTSE 100 chief executive was paid, on average, 20 times the salary of the average worker in their company. Today the figure is 129 times. Such a rise can not be explained by the CEOs’ productivity or the firms’ performances but instead unbalanced economic power.
Skewed economic power and widening inequality is by no means inherent to a capitalist system. It is not a price we have to pay for prosperity, it is a price that we have chosen. And as time unfolds, it is a price that is only rising.
Hence, if we are to bridge the old dividing lines and heal the new, we must rebalance this economic power across the economy. We must squeeze the widening opportunity gap and we must ensure the system works for the growing number of disenfranchised. For this, we have work to do. It demands fundamental structural reform. What this might look like, I will leave for part two.
Sam is the President of Economics for Change.