"Inequality and Redistribution in the UK, 1983-2004"

Why don't increases in inequality bring about increases in redisribution?:

Spend it like Beckham? Inequality and redistribution in the UK, 1983-2004, by Andreas Georgiadis and Alan Manning, Vox EU: "I warn you that there are going to be howls of anguish from those rich enough to pay over 75% on their last slice of earnings", a gleeful Denis Healey, Labour Party Shadow Chancellor, 1973.

"The justice for me is concentrated on lifting incomes of those that don't have a decent income. It's not my burning ambition to make sure that David Beckham earns less money", Tony Blair, Labour Party Leader, 2001 Election Campaign.

One of the main activities of the state in democracies is to redistribute resources. The most common explanation for why the state gets involved in this activity is that the distribution of income is skewed with small numbers of large incomes so that average income is above median income. In simple models of democracy, it is the median voter who is decisive and the government effectively does what they want, and they will typically want to redistribute resources from the rich to themselves. More sophisticated models of democracy also tend to have the same prediction. According to this view, a rise in income inequality will lead to more redistribution as the median voter tries to get a slice of the extra pie going to the rich.

However this prediction about the relationship between inequality and redistribution does not fare so well when confronted with data. Perhaps the starkest comparison is between the United States and Europe. The United States has higher levels of inequality than Europe and less redistribution, the opposite of the views sketched above. (See Alesina, Glaeser and Sacerdote, 2001, for a good discussion of this comparison).

There are many other potential differences (e.g. racial divisions and the political system) between countries that muddy the link between income inequality and redistribution. While the existing studies do make serious attempts to control for these confounding factors, it is very difficult to do this in a way that is beyond reasonable criticism.

However, it is not just across countries but also over time that we see changes in inequality. Looking at how redistribution in a country responds to changes in inequality has the potential advantage that many factors that might be thought to be relevant to redistribution (e.g. the political system) are held constant so we might hope to get a better estimate of the impact of inequality on redistribution. That was the purpose of our research on the relationship between inequality and redistribution in the UK.[1]

The UK is a good country to consider because it has had large rises in pre-tax income inequality that are generally thought to be the result of the exogenous forces of technological change and globalisation. In particular, there has been a large rise in the share of pre-tax income going to those at the top of the income distribution. As discussed above, most models of the political process used by economists would predict that the political response to this would take the form of rising redistribution with rising marginal tax rates on the rich. But we show that this has not happened. In our research, we use a sophisticated way to arrive at this conclusion but the simplest way to see it is that the top rate of income tax fell from 83% in the late 1970s to 40% in 1988 since when it has not changed. There is now no major political party proposing rises in the top marginal rate of income tax.

Why has the rise in UK inequality been met with so little demand to increasing taxes on the rich? One possibility is that the models of the political process used by economists are all wrong. For example, if our democracy is closer to ‘one pound, one vote’ instead of ‘one person, one vote’ then a rise in the share of income going to the rich will also lead to a rise in their share of political power, hence potentially explaining the lack of a redistributory response. But it is also possible that other factors have been changing.

To investigate this we used data from the British Social Attitudes Survey to see whether attitudes towards redistributive taxation have been changing. The answer is that they have. The figure below shows the average response of individuals to the statement “government should redistribute income from the better-off to those that are less well-off” where a 1 represents strongly disagree and 5 strongly agree so that higher average values represent a greater demand for redistribution.

From the figure it can be seen that the demand for redistribution fell in the early 1980s but then rose from the mid 1980s to the mid 1990s. This was the period in which inequality grew fastest and it seems plausible to argue that the lack of redistribution by the Thatcher and Major governments was not particularly popular. Hence Tony Blair would seem to have inherited in 1997 a large unmet demand for redistribution. But, little happened to actual inequality or redistribution but the support for redistribution plummeted to the lowest level available. The bottom line is that inequality now is much higher than in the 1970s but the demand for redistribution is much lower.

Why the change?

Why might people’s attitudes to redistribution have changed so much? There are a number of possible explanations. First, if you care a lot about the poor or are very envious of the rich, it is quite likely that you support a lot of redistribution. Secondly, if you believe that high taxes discourage work then you are not likely to support much redistribution. If you think the government cannot be trusted you are less likely to support redistribution. We find evidence for all these predictions using the British Social Attitudes Survey as well as the standard prediction that the rich favour less redistribution than the poor.

But have any of these attitudes been changing over time? Our conclusion is over the last 10 years that changing attitudes towards incentives and changing attitudes towards the rich (fewer people now believe there is one law for the poor and one for the rich or that big business benefits owners at the expense of workers) can explain almost two-thirds of the decline in the demand for redistribution in the UK.

One way to summarise this conclusion is that what people believe is as important as the objective economic circumstances in explaining people’s attitudes to political issues like redistribution. And these beliefs can change fast. Such a conclusion is perhaps only a potential surprise to economists as it simply says that politics is a battle for ‘hearts and minds’. But where those beliefs come from is itself an interesting question that we cannot answer very easily – it may be that they themselves are a product of the economic fundamentals. For example it could be that the rise in inequality gives the rich more power to fight off demands for redistribution and the way in which they do this is to put resources into persuading people that incentives are very important or that big business is not all bad. The determinants of what people believe is an area where economists are only beginning to focus their attentions.

References

Alesina, Glaeser and Sacerdote, 2001. “Why doesn’t the us have a european-style welfare system?” NBER 8524.

Footnotes

1 'Spend It Like Beckham? Inequality and Redistribution in the UK', 1983-2004, http://cep.lse.ac.uk/pubs/download/dp0816.pdf

Comments

[A Matter of Political Power]

Over long periods of time, the political process tends to redistribute resources away from the politically weak to the politically powerful. Political power shifts.

[hari]

UK Opt-Outs from Bill of Rights under EU Reform Treaty!

UK opt outs for simple reason that its political establishment doesn't want to follow the labour relations act on the continent including work standards, etc. It also wants to be outside the EU Court jurisdiction!

Historically, UK was a classical class society - and still is - with the rich physically removed from working class homes and establishments. Under Blair and its New Labour programme of action, they tried to change the self-evident economic divide in society, but apparently failed based on this report.

PM/Brown (Scot) is not going anywhere close to these difficult issues simply because he's now caught with the real possibility of Conservative resurgence to government and power should an election be held right now! It's possible this current Labour Gov will be out voted sooner than later...

If you take the rhetorics of UK Gov - inside the EU Council - you get the impression that it's the EU that's backward compared to UK labour standards! The truth couldn't be far from the facts that libertarian economics is the centerpiece of the current regime in WhiteHall. Whereas social safety net is the fundamental part of EU common law now.

[Jay]

"In simple models of democracy, it is the median voter who is decisive and the government effectively does what they want, and they will typically want to redistribute resources from the rich to themselves."

Summed up in 2 words, mob rule!

Thankfully our Constitutional Republic here in the U.S. has kept our government in gridlock at many points in time. It's a shame the Democrats never bothered to read the U.S. Patriot Act. They missed an important opportunity to exercise the right of the minority to not be ruled by the mob.

[Blissex]

«Our conclusion is over the last 10 years that changing attitudes towards incentives and changing attitudes towards the rich (fewer people now believe there is one law for the poor and one for the rich or that big business benefits owners at the expense of workers) can explain almost two-thirds of the decline in the demand for redistribution in the UK.

Well my impression is that over the past 20 years the corporatist side of politics have successfully persuaded the suburban property owning middle classes (which have grown a lot both in the USA and the UK) that the class enemy are the poor and wage earners; the poor are a lazy, luxury-loving mob who use taxation to exploit brutally the productive, property owning citizens to secure themselves lives of indolent comfort.

The suburban middle classes therefore look to the wealthy as their natural class allies, as they too, and most, are exploited by the parasitism of the poor.

Therefore in both the USA and the UK the revolt of the middle classes, led by the wealthy, has resulted in reductions in the level of exploitation by the poor, and in increasing rewards for the deserving rich. As True Economics says, the level of income and wealth is directly proportional to productivity, so the higher the income, the more an individual contributes to the wealth of the country.

When 70% of population own houses (and mortgages), when the number of older people and retirees have increased a lot, and when people are even more segregated geographically by income (the rich in his country manor, the middle classes in their suburban pretend-manors, the poor in out of the way low class developments) than before, their own incentives and in particular their fears are going to be very different, and it is easy to persuade them that the class enemy are the poor and the low paid mobs, instead of the deserving, admirable rich.

[ken melvin]

Good piece. Good good comments. In a broader sense, it seems to be all about what to do with the redundants. Deniality, along with Ronnie's and Maggie's blame the victim, seems to be working up to this point, but there has to be a tipping point. Getting close here, isn't it?

Speaking of parallel universes, saw Ron Paul on Moyers last night. His own reality, doesn't he? The dems with their yapping about the middle class when talking about anyone who has a job paying minimum wage and above aren't a whole lot better. Think the article's right about the using and abusing of the middle class, i.e., they wind up paying for everything because the rich will never allow taxes on income other wages and salaries nor on property.

[Denis Drew]

The answer begins with "distribution" not "redistribution". If the distribution is fatally flawed in the first place -- as it is in the US with our almost complete de-unionization, and on the part of most labor, complacency about said de-unionization -- then disproportionate income goes to the top accompanied by disproportionate political influence.

The answer to so-called "inequality" (I prefer "race to the bottom") in the US is to completely revamp our labor market into the modern form of sector-wide labor agreements -- which is the logical answer to the race to the bottom, long ago adopted around the better paid OECD world.

If the concept were made widely known here (who would have thought two oceans could make a country blind and deaf in the electronic age), then, labor segments who the idea appealed to (supermarket employees come to mind) could demand their elected reps to enact the sector-wide system into labor law for at least their industry. It would represent such a gigantic financial advantage (for owners too, like overseas, where owners don't have to worry about unions putting them at a disadvantage with their competition under sector-wide -- sort of like the minimum wage actually affects business here) that those labor segments could be expected to put on a mighty gigantic push for it (and why would pols reject anything that their constituents were making a might push for).

[Bruce Wilder]

"The UK has had large rises in pre-tax income inequality that are generally thought to be the result of the exogenous forces of technological change and globalisation."

Thought by whom? I guess that Maggie Thatcher was merely decorative after all, eh?

Blissex: "Well my impression is that over the past 20 years the corporatist side of politics have successfully persuaded the suburban property owning middle classes (which have grown a lot both in the USA and the UK) that the class enemy are the poor and wage earners; the poor are a lazy, luxury-loving mob who use taxation to exploit brutally the productive, property owning citizens to secure themselves lives of indolent comfort."

Sounds about right.

I'd just add that economists have dutifully played their part, by adopting the highly prejudicial abstraction of "redistribution", while attributing all changes in distribution to "technology" and "globalization", stripping those factors of any political content. Marx would have no difficulty tracing the role of academic economists in manufacturing this ideology for the plutocracy.

[robertdfeinman]

There is strong evidence that the philosophy that wealth is good and the wealthy deserve their privileges in the US is the result of a concerted effort of a small group of super wealthy individuals to fund a pervasive propaganda campaign promoting this viewpoint.

All of the formal organizations pushing variations on this theme can be shown to have some financial support from this group.

It would be interesting to see if there has been a similar, below the radar, program in the UK. It took several decades for the information to become public in the US as to how this strategy has been implemented, but I've seen no signs of similar investigative journalism in the UK.

The UK is an especially interesting case since it had one of the only successful efforts at wealth redistribution during the earlier part of the 20th Century. The imposition of death duties and other measures broke up the hold (both political and economic) of the landed gentry. The results were a vast improvement in the economic conditions of the working classes. With this history one would think that people would be less complacent when the accomplishments were undone.

I think it has something to do with the disenfranchisement of the poorer classes. I don't know how this has been carried out in practice, but there is a huge difference between the lifestyles and attitudes of those in the countryside and those in London.

[Bruce Wilder]

rdf: ". . . a concerted effort of a small group of super wealthy individuals to fund a pervasive propaganda campaign promoting this viewpoint.

"All of the formal organizations pushing variations on this theme can be shown to have some financial support from this group."

As I recall, Krugman has complained that over half the private money available for academic economic research comes with a strings, requiring a right-wing viewpoint. One of most egregious cases was the now-defunct John M. Olin foundation, which was a big factor behind the rise of the law and economics movement, as well as a funder of Federalist Society activities. For a while, Olin Fellowships were free money available to sufficiently right-wing hacks. One of my prime examples of a thoroughly corrupt hack in a nominally prestigious position, Glenn Hubbard (Columbia) has two Olin fellowships on his vita.

[ScentOfViolets]

There is strong evidence that the philosophy that wealth is good and the wealthy deserve their privileges in the US is the result of a concerted effort of a small group of super wealthy individuals to fund a pervasive propaganda campaign promoting this viewpoint.

Most people in most places in most times (I would guess the overwhelming majority, in fact) think that Wealth Is Good. I'm one of them. However, the caveat has always been that the wealth must be deserved, i.e., fairly acquired. Thomas Edison, Paul McCartney, Bill Gates - the sanitized version - are all fine exemplars of earned wealth, and I don't think anyone begrudges them their millions or billions. It is _unearned_ wealth that the current fight is over. Inherited wealth, or wealth that is begotten through special treatment by the government, that is, wealth by 'connections', is most definitely, in most people's minds, not wealth that has been fairly acquired, and hence there is no moral stigmata associated with any redistributive policies.

And _that_ is what 'the rich' are fighting to retain, by any and all means. Quite simply, as the beneficiaries of inherited privilege, they are quite willing to use any means at their disposal to retain those privileges. Of course, having the means, they do it by funding 'think tanks', by capturing the media, by seeing to it that the proper officials are installed into officialdom: congressmen to write favorable laws, judges to see that significant rulings are favorable to them ('money is free speech', 'corporations are legal persons', etc.), police and presidents both to see that their wishes are faithfully executed.

All of the formal organizations pushing variations on this theme can be shown to have some financial support from this group.

Well, yes. And other interest groups try to do the same to further their own interests. I see nothing wrong with that. The question is, where do fair means of persuasion leave off, and unfair ones begin? I'd say that some sort of campaign finance reform is necessary, as well as reinstating in some form the Fairness Doctrine. But, as always, when trying to be fair, the devil is in the details.

[Bruce Wilder]

ScentofViolets: "The question is, where do fair means of persuasion leave off, and unfair ones begin?"

I don't think "fair" is the only issue. Where information and propaganda are concerned, we also ought to be concerned about integrity and objectivity.

The right-wing "think tanks" are often little more than a website, a fax machine, a fund-raising newsletter and a couple of glib refugees from academia on contract willing to make any argument they are paid to make, without regard to standards of reason or evidence. They pollute the public discourse. And, it is the right-wing think tanks, which predominate in mainstream news coverage and on C-Span.

The institutions, from the press to academia, which the public depends on to pay close attention and to discriminate and to "referee", have been corrupted to varying degrees. And, the consequences can be dire. People don't have health insurance as a result. Banking regulation was stymied, bankruptcy made more punitive, and predatory lending countenanced, so now the banking system will be sold to the Arabs and the Chinese, and millions will lose their homes. There's a constant political threat to Social Security. We are diddle-dawdling about climate change, which may be the gravest long-term threat to the planet since the A-bomb, because the news media touts the only marginally scientific claims of global-warming deniers, many of them financed by the likes of Exxon-Mobil.

I don't think of these as instances where "fair" quite covers the territory.

[robertdfeinman]

Since this wealthy "cabal" is one of my hobby horses I've collected some data on them.
Here's one I put together on their influence over George Mason University:
Charles Koch and Libertarianism - How to "Buy" a University

And here's a report on how 18 families propagandized for the abolition of the estate tax (not mine):
Report (PDF)

Much of the data comes from Source Watch or Media Transparency.

One of the things to notice is how the same donor names keep recurring. It really is a very small, very wealthy group.

The argument that both sides can fund think tanks breaks down in practice. One side has billions and is willing to spend millions and the other side has a few liberal donors and lots of nickel and dime contributors. Show me a "liberal" think tank as well funded as Heritage or Hoover.

It was revealing how apoplectic the right got when Soros threw a few million into liberal causes during the last election cycle. There had never been a single donor of this size for them to need to focus on before. Without exception everyone on the list of the 18 families is a descendant of the person who made the original fortune. Some have enhanced it greatly, but it's easier to get to the top of the mountain if you are helicoptered in to 10,000 feet first.

It's not a fair fight and the libertarians and conservatives who like to pretend that virtue and hard work is all that is required are either deluded or shills.

[ken melvin]

Koch is a libertarian and supports many free-market organizations such as the Cato Institute, which he founded together with Edward H. Crane and Murray Rothbard in 1977.

http://en.wikipedia.org/wiki/Charles_G._Koch

Fred Koch, the founder of the privately-owned company, helped to establish the John Birch Society. Koch Industries is also a major contributor to the right-wing "libertarian" Cato Institute, a Washington think tank.

In 2000, the company faced a federal indictment charging it with concealing releases of 91 metric tons of the carcinogen benzene from a Texas refinery. If convicted, the company faced fines of up to $352 million, plus possible jail time for its executives.
Under George W. Bush's presidency, the U.S. Justice Department dropped charges the day the case was scheduled to begin, in return for a one-time $20M fine -- less than 6% of what it could have been.

It goes on and on.

[gordon]

Denis Drew, Australia used to have a system very like the one you recommend. It was dismantled during the 1980s and 1990s under pressure from employers. See this paper.

[FT Woods]

I'm curious, why no mention of health care?

[anne]

http://www.aph.gov.au/LIBRARY/pubs/rp/1999-2000/2000rp21.htm

June 6, 2000

Australian Labour Market Deregulation: A Critical Assessment
By Chris Briggs and John Buchanan

[Well done Gordon and Denis.]

[gordon]

Well, Anne and Denis, if you liked that you might like some more detail here.

[Denis Drew]

Gordon,
Thank you; I like to get down to the real nuts and bolts of things and not just opposing summaries (even if I don't particularly enjoy absorbing all those black and white symbols).

I know that Australian unionization has dropped from 40% to 20% over the past 25 years. I am now reading in Polanyi's 1944 book The Great Transformation about how the race to the bottom had only begun with industrialization when theories already began appearing explaining away an economy producing more and more per person even as the persons who do most of the producing get less and less -- tying the need to science, like Malthus, for one instance (even though industrialization is what mooted Malthus). Newt Gingrich today, or what happened in Australia are more of the same old same old.

Something has to be done about economic education in such OECD countries -- the need for checks and balances in the economy must be stressed just as much as that need is taught for the political system.

If people only knew what was happening to them, then, in a democracy, it shouldn't be hard to get them to make things right. In the USA people neither know what is really wrong nor what to do about it (mandate sector-wide labor agreements -- at least in segments where labor demands it).

Our media will go crazy if any of its liberal SOCIAL agenda is threatened, but it can go decade in, decade out without so much as broaching facts like 25% of Americans now live below a realistic poverty line* (75 million Americans suffering serious economic deprivation when there is absolutely no need to is infinitely more important than even 1000 Americans being killed and a 1000 maimed every year in Iraq -- how many people does that kill through disease and crime?).

[ * See the 2002 book Raise the Floor for an attempt at realistic poverty parameters. ]

[gordon]

Denis Drew, I certainly agree with you about the "race to the bottom", and when I was working (I'm retired now) I was a convinced (though not blind) Union member. A combination of Social Darwinism and the atomisation of society is a potent ideological mix; it must appeal to the same obscure forces which lead to the purchase of tickets in lotteries in which the odds against winning are millions to one!

I would just like to correct the impression I probably gave that Australian industrial relations were exclusively organised on industry lines. That was more of a later development (though in some industries like (I think) insurance) it has a pretty long history. Fundamentally Australian industrial relations depended on which Union covered which workers, which could only be explained historically and often appeared illogical to an observer unaware of the historical development. Where the same Union covered workers (like eg. cleaners, electricians etc.) who worked in many different industries, industry unionism and industry bargaining was threatening to the Union leaders involved, who were more interested in maintaining wage parity across industries among workers doing essentially the same work and, where relevant, having the same qualifications. I would imagine that similar considerations exist in the minds of US unionists. This is a real issue, and proponents of industry unionism and industry-based bargaining do have to confront it.

Australian industrial relations reforms in the 1980s included a period of so-called "award restructuring" from 1988. Rather than expound the complex origins of this process, I refer you to this paper. Award restructuring did in some industries lead to a situation of fewer awards, but not uniformly.