What the Treasury thinks about inequality

The Treasury has just released a paper outlining its thoughts on inequality (as part of its wider work on Living Standards). Now, it’s great to see the Treasury acknowledging that it matters how income is distributed – not just how much of it we generate. Unfortunately, it hasn’t quite faced up to the full reality of the problem, which leaves its account very weak, and in places incoherent.

The Treasury says its starting point is “the ability to participate in society”, which is a fabulous place to begin. The whole point about inequality is not just that people need to be lifted above an absolute level; inequality means they are left out of things that other people have, unable to join in with the rest of society, in way that is determined by how much other people have.

Unfortunately, the Treasury doesn’t seem to realise what that really means, because its proposals are then focussed almost entirely around improving social mobility. Now, social mobility is important: people need opportunities to earn more, or to live better than their parents did. But it isn’t enough by itself.

Even if people can move freely up and down the ladder, there is obviously still a ‘down’ – and being in that ‘down’ spot is miserable. To put it differently: even with mobility, there will always be people who are very poor and don’t earn enough to participate in society – even if they are doing useful work. Tamara Baddeley, a woman whose story will be told in the Inequality book, cares for the elderly, is paid $14.81 an hour – and can’t afford to go to the movies. To talk about ‘opportunity’ and mobility’ is meaningless here.

What is needed is direct action to tackle inequality now: action to raise her salary, so that she can participate fully. The Treasury’s view, which seems to be that it doesn’t matter if people are desperately and unfairly poor, as long as it’s not for long, is woefully inadequate – not least because, by its own measure, people need more income – right here, right now, whatever they are doing – if they are going to be able to participate in society (like being able to go to the movies).

In addition, the Treasury seems to have missed the obvious point that if you want to increase social mobility and offer equal opportunities to all, you need greater equality of incomes. To state the obvious, if some people have far more wealth than others, their children will get a much better start in life. In addition, some whole communities become cut off from opportunity because, when poverty is concentrated, there are few jobs going, their communities aren’t adequately invested in, and they become characterised by hopelessness and despair.

The international evidence is that, across countries, more equal societies have better mobility (far more people make it out of poverty in Denmark than they do in the US), and that, across time, as inequality increases, mobility decreases. The US shows this: as gaps have widened, people’s ability to escape poverty has fallen.  Again, the Treasury’s paper fails to take into account this basic point.

Another problem with the paper is that it gives an extremely biased account of why inequality has risen in New Zealand, discussing technological change and different household patterns, but not mentioning little things like lower taxes on the very wealthy and reduced benefits for the poorest. Nor does it mention the decline in union membership, which some overseas research suggests is responsible for up to one-third of rising inequality. The failure to even mention this factor is just staggering.

Still, it’s good to see the Treasury engaging with the issue. As with The Economist’s (similarly partial) special feature on inequality last year, the fact that the issue can’t be ignored now is a huge positive in itself.