TJ-PikettyWP

Growth is not the answer to inequality

:: Wouldn’t it be wonderful if our politicians focused on things that matter, like the kind of society we want to live in, instead of squabbling over TV debates and “empty chairs”? Why couldn’t they be a bit more like actor Michael Sheen, for instance, whose barnstorming defence of public values went viral after he turned out for a rain-soaked St David’s Day rally in support of the NHS?

The closest we’ve come to that kind of passion is Ed Miliband’s measured attack on the perils of inequality. “Tackling inequality is the new centre ground of politics,” claimed the Labour leader in his Hugo Young lecture last month, citing Obama’s State of the Union Address, the election of New York mayor Bill de Blasio and the Pope.

Some of what motivates this surge of political interest is prudential rather than moral in nature. Miliband is quick to point out that inequality “holds our economies back”, tapping into the somewhat confusing arguments about the relative merits of equality and inequality. The idea that tackling inequality will give us more growth is of course comforting to those who believe that economic growth is the answer to everything – including inequality.

But this opportunistic thinking ignores the fact that some of the things we’re doing to promote growth, like economic financialisation and political austerity, are rapidly worsening income inequality. A recent report from the New Economics Foundation (pdf) calls financialisation and inequality a “dangerous mix”, while Yanis Varoufakis, Greece’s colourful new finance minister, has described austerity as a form of “fiscal waterboarding”. There is little doubt that the success of Syriza in Greece and Podemos in Spain testifies to a rising discontent with the huge disparity in incomes which is continually justified by economic recovery.

Those like me who fear that the continued pursuit of economic growth on a finite planet might be neither possible nor desirable face a different kind of challenge, brought home to us by Thomas Piketty’s 700 page tome Capital in the 21st Century. The astonishing popularity of the “rock-star economist” is itself a resounding testament to our concern for inequality.

But his painstaking analysis reveals an uncomfortable story. Piketty places the responsibility for rising inequality firmly and squarely on declining growth rates. Like Benjamin Friedman in The Moral Consequences of Economic Growth, he implies that only growth can bring civility, in part because an expanding economy allows for a degree of ‘catching up’ by the poorest in society, without much sacrifice or compromise by the rich.

For those of us less than convinced by the mantra of growth at all costs, the idea that only growth can save us from disastrous inequality poses some pretty serious challenges to our endeavour. Serious enough, that two of us – my Canadian colleague professor Peter Victor and I – decided to spend a bit more time analysing Piketty’s arguments.

What we found was fascinating. Piketty’s hypothesis only holds when the growth rate, savings rate and return on capital remain unchanged over long periods of time. When they move about, as they usually do, the economy is always chasing equilibrium but never quite arrives. In some circumstances, Piketty is absolutely right: declining growth can lead to rising inequality. In others, the exact reverse can happen: de-growth can in fact be compatible with greater equality.

This was definitely good news of a kind. Even more striking were the circumstances that made the difference. It turns out that if we are serious about reducing inequality, we must pay attention to the quality – as well as the quantity – of work in our economy. The endless mining of working life in pursuit of productivity gains for the owners of capital is not just detrimental to prosperity, it is inimicable to social justice.

If the debate about inequality is really back on the political agenda, it seems important that we approach it sensibly, without resorting to comforting half-truths. It remains to be seen how that will play out in a political debate mired in trivialities.

This essay first appeared on the Guardian Sustainable Business Blog, 13 March 2015.

:: Image (CC BY 2.0) Linda Geßner