Reducing inequality is an economic imperative

There is now growing consensus, from President Obama and Pope Francis to the International Monetary Fund (IMF) that inequality is the greatest threat to the global economy. Yet despite widespread condemnation, the income gap has continued to widen through the global economic crisis. Across the UK, real incomes have been falling for years while corporate rewards have powered ahead. While inequality in Scotland is lower than it is in the UK as a whole, it is still strikingly higher than in Nordic countries such as Norway and Denmark.

Economies built around poverty wages and huge corporate and private surpluses are unsustainable.

These levels of inequality should be economic red alerts. Chronic income gaps make economies much more prone to crisis. The great surge in inequality from the 1980s not only blew us over the cliff in 2008, it also prolonged the downturn and is now sowing the seeds for the next meltdown. The clearest sign of the risks ahead come from what the Geneva-based International Labour Organisation has called the ‘dangerous gap between profits and people’. While living standards are shrinking, corporate profitability has reached new heights. The world is awash with spare corporate and private capital. In the UK, corporate cash piles have climbed to a record £165 billion, more than a tenth of the size of the economy. American corporations are sitting on cash reserves of $1.45 trillion, up a remarkable 50% since 2010. Before the crash these surpluses were spent in ways that destabilised economies, distorting incentives and raising economic risk. During the crisis they could have been used to launch a sustained investment and job-creating boom. Even a portion of it could have raised Britain’s sinking wage floor without a threat to competitiveness. Yet, instead, most of it was lying idle – 'dead money' according to Mark Carney, the Bank of England governor. It was this that fuelled the contraction of demand that led to the longest recession since the 1930s. Now that recovery is belatedly under way, the risk is that these surpluses will be used again, not for much needed investment, but to feed another round of high-risk bur self-enriching financial activity. Investment banks are already promoting a new version of the lucrative collateralized debt obligation, the financial product that wreaked so much havoc in the buildup to 2008. Despite the lofty speeches, the lessons of 2008 have yet to be learned. Economies built around poverty wages and huge corporate and private surpluses are unsustainable. As Larry Summers, former US treasury secretary and adviser to President Obama, has warned, today’s dominant economic model seems only able to trigger growth through asset bubbles. Creating a more equal distribution of the cake – with firms using these surpluses to finance a pay rise - is an economic imperative. Until we correct for these great imbalances, today’s artificially-created recovery will prove very short-lived. Stewart Lansley is the author of The Cost of Inequality, Gibson Square