Saturday, February 28, 2009

Things could only get better...

This week, LSE's John Hills and his co-authors published an assessment of inequality in Britain under New Labour:

Their conclusions are, in the end, disheartening. Although the Labour government has followed a number of pro-poor policies and there have clearly been some benefits for the poorest sections of British society, overall levels of inequality have barely improved since 1997. Morover, the study does not cover the impact of recent events, which can be expected to affect the poor - and particularly the working poor - disproportionately.

So, was new Labour just a gigantic bluff?

A blog post is hardly enough space for a balanced analysis, but a couple of points spring to mind.

First, it is probably easier to provoke a sharp increase in inequality than a sharp decrease in inequality. The collapse of manufacturing industry and the assault on trade union power, allied with efforts to contain welfare spending despite rising unemployment, brought a rapid growth of income inequality in the 1980s. But how to reverse that? The simplest way would be to increase public spending by a large amount and redistribute the sums to the poorest through welfare benefits and tax exemptions. But Tony Blair didn't try that. Why?

Two obvious reasons. The first is that New Labour was an electoral strategy, designed to win over Conservative-leaning middle class voters and create a middle-poor alliance against the Conservatives. Any extensive programme of redistribution would have burdened the middle-class with higher taxes which would have disproportionately benefited the poor. If Labour had proposed this, the middle classes may well have stayed loyal to the Conservatives, as Iversen and Soskice's theory of electoral systems and redistribution would predict.

However we may object to this strategic thinking, it has to be admitted that Labour could do nothing for the poor without getting elected, so this may have been the price to pay for power.

The second reason is perhaps more depressing. Key Labour leaders - Blair, Brown and Mandelson - seem to have positively embraced the inegalitarian implications of the UK's liberal, free market model. Their idea seems to have been that markets must be left deregulated in order for wealth to be created, and only then can government intervene to redistribute some of the fruits of that wealth. In particular, the City of London was seen as the cash cow which would pay for Labour's social policies, so outrageous City bonuses would have to be tolerated as a necessary part of the wealth creation process.

There a couple of obvious shortcomings to this reasoning. The first is that it assumes that more unequal societies are more productive, and that attempts to curb inequality will hinder economic performance. This might make sense for the US, but high inequality in Britain has meant lower productivity than in the more egalitarian European countries. In other words, there are ways of increasing both economic performance and equality, but Labour did not take these alternatives seriously. Now that the growth of the last decade has been revealed to be largely a mirage, that decision is not looking good.

Second, inequality has a self-perpetuating logic. Contrary to the 'American dream' of individuals pulling themselves up by their bootstraps, all the evidence suggests that high inequality diminishes social mobility and that the poor can find themselves trapped in a hopeless existence. Poor children end up in the worst performing schools, have poor diets and more health problems, and tend to remain poor. The rich accumulate ever greater advantages for themselves and their offspring. An economic system which allows pre-tax inequality to run wild leaves government with an almost impossible task in reducing post-tax inequality. There is simply too much to do, and the political costs of redistribution place limits on how much governments can keep post-tax inequality down.

New Labour hasn't exactly failed. But the poverty of its ambition has left poverty as the UK's number one problem, after nearly three full terms of majority Labour rule. I for one do not expect anything to improve under the Conservative government which is likely to follow this one.