“The bottom line is that much of the glue that has held British society together since the Second World War has been deliberately removed and replaced with a harsh and uncaring ethos.”
Professor Philip Alston, UN Special Rapporteur on extreme poverty and human rights
“I reject the idea that there are vast numbers of people facing dire poverty in this country. I don’t accept the UN rapporteur’s report at all … of course, there are people struggling with the cost of living. I understand that. But the point is that we are addressing these things through getting to the root causes.”
Philip Hammond, Chancellor of the Exchequer
Who is right? The ‘social glue’ to which Professor Alston refers is of course the welfare state, but it has resulted in a colossal public debt burden while wealth polarisation, to which we drew attention before the EU referendum in June 2016, has dogged both Labour and Conservative administrations.
What are the root causes of poverty to which Hammond refers, and is the stick of restricting benefits really the only way to tackle them? How about the carrot of empowerment, fuelled by genuinely democratising wealth creation?
In this commentary, we consider how economic progress needs to be measured across all levels in society using tools which are more effective than raw economic aggregates such as GDP, and how we should be making more use of the ‘carrot’ of energising the disadvantaged, through egalitarian capitalism. In this respect it’s good to hear that Esther McVey’s push for ‘blue-collar Conservatism’ is finding a place in Boris Johnson’s team.
Last Thursday Professor Diane Coyle, Bennett Professor for Public Policy at Cambridge University, addressed a group of alumni, including myself. She is studying the challenge of measuring economic progress as technology changes our world so fast around us, and she cited a broad range of activities - from cloud computing to digital photography - as areas where the numbers have just dropped out of GDP.
This is an area which has interested me for several years, as it is clear that the technological revolution, by introducing huge scalability into supply while at the same time de-monetising demand, has knocked the bottom out of inflation: and therefore out of interest rates. The economists were slow to make this association. If it had been spotted twenty years ago, it might have held back the huge over-leveraging of the banking industry, and spared us from the 2008 financial crisis.
However, it has now been recognised; and while some governments (including the United States) seem to think that ultra-low interest rates are still a licence to print money, most banks, regulators and businesses are keeping a tighter rein on debt.
But this is only half the story of the measurement challenge. The other half, which economists still resist, is to investigate the impact on relative wealth and poverty of different communities. While it is clear that ultra-low interest rates boost asset values generally – and thus accentuate polarisation at the top end - the impact on the standard of living for those not so fortunate is not so evident, as shown by the disagreement between Alston and Hammond.
The technological revolution has empowered so much of what used to be called the ‘Third World’ that it has literally transformed emerging markets such as India. At the same time, studies have shown how it hollows out the earning power for most average earners in developed countries, as the Brynjolfsson and McAfee study showed in 2013 (see our commentary of 27th November 2017).
For a more detailed look at what’s happening across England, it’s worth looking at the multiple deprivation analysis used by the Church of England. This looks in detail at relative poverty in each parish, and is used to determine the extent of mutual support which is embedded into relative payment allocations known as parish share, which pay for ministry and support costs.
At the Oxford diocesan synod on Saturday morning, some stark figures were presented for a parish in Cowley, where production of the Mini is based. These were that:
- 31% of people live alone, including many pensioners;
- 26% of working adults have no qualifications;
- 27% are economically inactive;
- 36% of families are one parent households; and
- child poverty is running at 30%.
It’s therefore hard to challenge Professor Alston’s conclusion that 14 million people in the United Kingdom live in poverty. As noted in our commentary on 4th February, we need to analyse the relative standard of living across society, not just look at GDP: arguably those technological changes mask much of what is really going on – because, if you’re on the breadline, your costs will be driven by real expenditure such as food, lodging and transport, while the delights of online virtual delivery are a very optional ‘nice to have’.
This explains why we need an egalitarian transformation in the style of Thomas Jefferson, bringing hope and opportunity to those who have none. Rather than state handouts, this lies at the heart of egalitarian capitalism - and our commentary of 28th May sets out some of the key policies needed.
A really significant place to start could be to ensure that the most disadvantaged young people do see the benefit and opportunities of their already existing Child Trust Fund. This would not cost the Government anything, since the accounts are already in place even though these young people don’t know it. The Share Foundation is volunteering to do the work necessary to link lost accounts to their rightful owners: one million accounts, for children in families in receipt of Child Tax Credit, worth an average of £1,500 each and designed to “to establish a savings habit among children: providing a cushion of financial assets as they embark on adult life, and enabling them to be confident in the management of their finances”.
So, as the new administration takes over, let’s put less emphasis on the ‘stick’ of removing benefits and more on the ‘carrot’ of introducing new opportunities through schemes such as the Child Trust Fund; and let’s measure progress by looking directly at the relative standard of living across society, which could start with the multiple deprivation analysis described above.
Gavin Oldham OBE