We have become used to hearing the phrase ‘levelling-up’ – in particular in the context of the government’s levelling-up agenda. This agenda recognises that many in the UK have been left behind, and aims to close the gap between the haves and the have-nots.
The idea of trickling down is also familiar – if we reward entrepreneurs generously enough, they will be incentivised to create wealth both for themselves and for the rest of society: their wealth will trickle down to the rest of the population and enrich us all.
Are we on track to level up by trickling down?
Unfortunately not: many recent and proposed policies will have the reverse effect – we risk creating a society in which wealth trickles up to the wealthiest while those sitting in the middle are levelled-down towards the poor: a trickle-up, level-down economy.
Fortunately, however, it is a choice, not a law of nature, to create a trickle-up, level-down economy. We can choose to build a much fairer economy, and we should do so.
Continued Trickling-Up is a Risk
Economists have a term ‘rent-seeking’ which relates to ways in which one individual or organisation can appropriate the benefits of the work of another. Rent is of course an obvious example.
If I am a landowner and I rent out my lands to a tenant farmer who works hard, tends the land and improves its productivity, I can raise the rent. The benefit of the farmer’s hard work accrues largely to me, and far less (if at all) to the farmer.
The same can happen if I am the landlord of a street of shops. If the shopkeepers do a good job making their shops individually and collectively more attractive, then more shoppers will come. And as the value of the shops rises, I can raise the rents – again, I can benefit from the innovation and hard work of the shopkeepers.
If the local school raises its standards, housing within its catchment area becomes more expensive – and the beneficiaries are those who own the houses; in general that is not the same people who improve the standards in the school.
But this is just the traditional approach to rent-seeking. Now there are many other forms. Software, which used to be sold as packages is increasingly provided in the form of ‘software as a service’ (SaaS). Instead of buying the software, under SaaS, we effectively rent it. If I have a small business, the software rental charge will initially be low, but if I’m successful and grow my business, the charge rises rapidly.
And our bank accounts are similar. If we remain in credit, most banks will give us so-called ‘free banking.’ But it is not really free: we deposit our money, and in return receive either no interest at all or a low rate of interest, far lower than the rate the bank charges us when we borrow. The gap between the rate that the bank pays on deposits and the rate it receives in return for its loans generates its profit. As we, hopefully, earn (and borrow) more, the bank takes its slice. In this case, the slice is a thin one: the bank benefits from our hard work, but it does not take so much that we ourselves cannot benefit from it.
But think about the case of a large employer who has managed to ban union activity among its workforce. The bargaining power of each worker is minuscule: the business can well afford to lose any individual worker. But the bargaining power of the firm is enormous: many employees cannot afford to lose their jobs. If the employees find a way to increase productivity, who will benefit? The answer is increasingly the employer.
The chart below is taken from the book 99% and illustrates how little of the economic growth in the US since 1980 has gone into the pockets of normal workers.
The story it tells is this. Since 1980, the size of the US economy has grown by almost 150%. But a declining proportion has been going in the form of wages to workers (and an increasing proportion in the form of profits to shareholders). Another big factor is that a lot of this economic growth has been driven by an increase in the number of workers rather than an increase in productivity: the population is larger, and a larger proportion of the population are part of the workforce. This means that the increase in wages has to be shared across more workers and the average wage growth is only 53%. But those wages are not shared fairly – almost all of the wage growth goes to highly paid managers and professionals, and only 1% has gone to the median wage earner (the person in the middle of the income distribution).
So of that 147% growth in the US economy, only 1% has gone to the typical worker: all the rest has trickled-up.
In the UK, the extent of the problem is less, but the issue remains.
Further Levelling-Down is a Risk
As well as trickling up, we have seen levelling down. This happens when part of the population is suffering particularly and government responds, not by increasing support to that group but by levelling down the support given to other groups in the interests of ‘fairness.’
This happened with benefits freezes during austerity (real-terms benefits cuts), public sector pay freezes (ditto), means testing (justified as being to ensure that ‘the money goes to where it’s really needed’), et cetera.
The BBC quoted David Cameron defending his benefit cuts as follows:
“I think it is fair to say benefits shouldn’t be going up faster than the earnings of people who are paying the taxes to fund the benefits.”
The BBC pointed out that this characterisation of benefits recipients as shirkers while the benefits are paid by workers is simply untrue.
More recently, The Times reported on Rishi Sunak’s plans for a public sector pay freeze,
“The chancellor is expected to say it is only fair that public sector wages are frozen when many of those in the private sector face significant pay cuts or the loss of their jobs.”
Of course, by this logic, no group should ever get a pay rise unless every other group simultaneously gets one.
And the dangers of means-testing benefits are becoming clear. Those who suffer are not the poorest, who are protected, or the richest, who do not notice the change, but those in the middle. And as the Child Poverty Action Group says,
“Partly because of the complexity and difficulty in claiming, take-up rates of means-tested benefits are often lower. Whereas child benefit has a take-up rate of 93 per cent, the take-up rate for housing benefit is only 59% for eligible couples with children. Lots of people in need are missing out. …
And finally, the poverty trap. For every pound you earn you lose a percentage through means-testing, which makes it hard to feel better-off. In universal credit, this is 63 pence in the pound and more once you include the council tax support taper. A pay increase is less cause for celebration if you know that your means-tested support will be withdrawn at such a high rate, making you not much better-off.”
As these examples illustrate, over the last decade in particular, we have seen a huge number of policies whose practical impact is to level down rather than to level up. That these are policies shows that the levelling down process is, in reality, a political choice.
Building a Fairer Economy
Five relatively simple steps will secure the future, creating an economy which genuinely does level up and where today’s under-30s can look froward to an attractive future instead of, as today, expecting to be the first generation in living memory to be poorer than their parents.
Step 1: Democratic Reset
Of course we need policy change. But even more fundamentally we need a democratic reset. We don’t have a written constitution in this country – and recent events in both the US and the UK have shown very clearly how precarious our rights are in the absence of such a protection.
It is not illegal for a government in this country to pass legislation that it knows will harm the interests of 99% of the population. And we may be witnessing the early days of a government that is happy to take advantage of that freedom.
Here are the key elements of that democratic reset.
Step 2: Fact-based Policy
And we need fact-based policy. There is a spectrum of truth from absolute truth to unfounded falsehood. And far too much policy is based on the right-hand end of that spectrum.
Since 2010, policy has been guided by the myth of unaffordability – that was the justification for austerity. When Theresa May wanted as her final act to commit the UK to carbon neutrality by 2050, Philip Hammond didn’t try to deny the science, but he claimed that it would cost £1 trillion, and it was taken for granted that this meant that we couldn’t afford to do it. Why not? Because of the ‘state of Government finances.’
But Government Debt:GDP even today is around its 300-year average, far below where it was before the Industrial Revolution took off, and even further below where it was before the Golden Age of Capitalism.
It is simply a myth that we couldn’t afford to protect the health of the economy and our environment. Without facts, there can be no sanity.
Step 3: Policy for Solidarity and Abundance
On the basis of this constitutional reform and a commitment to look at the facts, we can then expect government to formulate policy that will tackle and reverse mass impoverishment. Policy formulation is complex, but there are only fundamentally four types of policy.
Each policy either grows the pie (sustainably) or it doesn’t; and it either shares the benefits of that growth fairly or it doesn’t. That gives us these four types of policy: captured growth policies, shared growth policies, vulture policies and balancing policies.
We created a level down, trickle up economy because we have had far too many captured growth policies and vulture policies, and far too few shared growth policies and balancing policies.
And we can create an economy that works for everyone if we focus as much as possible on Shared Growth policies. and recognise that where we adopt captured growth policies, they need to be balanced.
First, the shared growth policies. Why not spend £100 billion over the next few years insulating every house in the country? Why not spend a few £ billion on R&D for battery technology or infrastructure for electric vehicles? Why not build a million eco-friendly social housing units? And why not fund the NHS properly?
And for the balancing policies, how about immediately ensuring a true living wage. Why not stop the roll-out of universal credit and replace it with something fit-for-purpose, and why not return to a taxation system that at least stops inequality growing?
Step 4: Invest in the Future
The fourth step is to invest wisely in the future. That is the Type II policies. We haven’t been wise, because of the narrative of unaffordability which has prevented all kinds of sensible investments. The chart shows the case of flood defences. And of course environmental investments would fall into this category, too. It is no more prudent for the Government to say that it cannot afford these things than it would be for me to ‘save’ money by not fixing a leaking roof in my house.
Step 5: Clean-up Capitalism
And the fifth step is to clean up capitalism. At the moment, the immensely powerful force that is the capitalist profit motive is too often fighting against solving the problems we are most concerned about. But it need not be.
In Appendix IX to the book 99% (you can download the Appendices free from the website), there is the story of a fictitious but quite realistic business, Alpha plc. The story goes like this:
In 1997, Robin Quickly was a young man with a dream. Working with two friends from rented premises in an out-of-town business park, using second-hand IT equipment funded by a loan from his parents and a small government grant, he founded a company which was destined to change the way Britons buy their clothes. In its first year of operation, the then unknown Alpha company had a turnover of just over £300,000 and made a small loss.
Today, Alpha plc is recognised as one of the UK’s most dynamic and successful companies. In little over 20 years, it has grown from nothing to a turnover of £1.5 billion and is still growing at over 10% per annum. Customers love Alpha. Because of its innovative business model, its costs are approximately 5% lower than those of bricks-and-mortar competitors – and it has passed this cost saving on to customers. Its service levels are consistently high. And Alpha was one of the pioneers in using algorithms to drive product selection. It has swept its competition aside.
And the reported profit of Alpha looks very healthy.
But underneath the surface, the picture is very different. Alpha externalises many of its costs. It gets us to pay for its pollution, for its underpayment of staff and its failure to pay its taxes.
Because it externalises its costs, it can outcompete more ethical businesses. Because it externalises its costs, it becomes an engine for mass impoverishment. And because it externalises its costs, it gets rewarded for destroying the environment.
But if it could no longer externalise all these costs, it would cease to have an advantage over more ethical businesses. It would not have grown. It would not have contributed to mass impoverishment or environmental destruction.
In a world without externalisation, ethical businesses would outcompete unethical ones and the profit motive would become a force for good.
In summary, we have a choice between living in a trickle-up, level-down economy (which is where we’re heading today) or living in an economy that works for everyone. We can make the change, but it would require those five actions to take place.
If you would like to help us ensure that we do take those actions, please do sign up and join the 99% Organisation.