Give working people more money because they will spend it

It's not about fairness, it's about the economy, stupid.

To date, the history of our current financial crisis has concentrated minds on the distribution of wealth in a way that we haven’t really seen for a generation. Filled with materialistic expectations, the withdrawal of credit and government subsidies from society has brought home some harsh realities. We can’t afford the lifestyle we have come to think we are entitled to. Wealthy people, once seen as social leaders, are increasingly treated as though they somehow stole what they earned.

Most of the time the redistribution of wealth is put in political terms – it ignores who had the original idea for a company or product or who put the money up in the first place to fund it. Instead, agitators argue that workers, because it is their toil that creates the goods and services, should get an equal participation in profits. Ironically, this is probably the right answer but the wrong reason – people should be given more money so that they can spend it.

The World Bank recently released numbers on the distribution of Corrado Gini’s index of income and wealth distribution. The Gini Index ranges from 1 to 100 and seeks to measure financial inequality in a society; a value of 100 means that a single person has all the money whilst as it declines money is more and more equally distributed.

Some interesting trends are showing up. For instance, in Latin America wealth inequality, although at a high level, is declining as a phenomenon. Crises like that seen in Argentina are working to redistribute wealth whilst in Brazil the new-found economic prosperity is becoming shared by a greater and greater proportion of society.  Africa, notably South Africa, displays disturbingly high levels of wealth concentration in the hands of a few.

Although we have a tendency to pillory ourselves here the UK, we actually come out quite well with a score of just under 26 – you would have to go to parts of Eastern Europe to find other countries with the kinds of equality that we possess. In fact, equality of wealth distribution has improved markedly between 1995 and 2010 when the latest data is available and embraces the financial crisis.

What is most disturbing though is the United States. The Gini index for the US has shown a marked and continuous increase of inequality, an effect that has been occurring since the 1970’s, and a phenomenon that has accelerated as the recovery from the financial crisis has gathered pace.

Economic commentators often talk about "the wealth effect", the confidence-boosting mental state that allows ordinary people to look at their total assets and give themselves the psychological comfort to stop hoarding money and start spending it. To this end the Federal Reserve in the US and western central banks have been complicit in propping up the stock and housing markets through ultra-accommodative monetary policies that placate the electorate through the illusion of financial affluence.  They will go about their day without necessarily calling for higher levels of taxation or the forced redistribution of wealth in the face of obvious inequalities. This has by and large worked to date but we are now entering a phase of prolonged sub-potential growth combined with rising wealth inequality in the US that will have long-range effects economically, socially and politically.

The problem arises from the fact that if you give wealthy people more money they don’t necessarily spend it – it becomes dormant and redundant. Give a poor person an extra £10 and they will spend it on food or new clothes, propelling consumption, but give an ultra-high net worth person another million pounds and more than likely it will lie in the bank largely unnoticed and more importantly unused. So in many respects the inequality of the distribution of wealth is not so much about "fairness" or venality, but more that the concentration of too much money into too few hands leads to economic stagnation adding to an already sub-par economic atmosphere.

Photograph: Getty Images

Head of Fixed Income and Macro, Old Mutual Global Investors

Getty
Show Hide image

Want to send a positive Brexit message to Europe? Back Arsene Wenger for England manager

Boris Johnson could make a gesture of goodwill. 

It is hard not to feel some sympathy for Sam Allardyce, who coveted the England job for so many years, before losing it after playing just a single match. Yet Allardyce has only himself to blame and the Football Association were right to move quickly to end his tenure.

There are many candidates for the job. The experience of Alan Pardew and the potential of Eddie Howe make them strong contenders. The FA's reported interest in Ralf Rangner sent most of us scurrying to Google to find out who the little known Leipzig manager is. But the standout contender is Arsenal's French boss Arsene Wenger, 

Would England fans accept a foreign manager? The experience of Sven Goran-Eriksson suggests so, especially when the results are good. Nobody complained about having a Swede in charge the night that England won 5-1 in Munich, though Sven's sides never won the glittering prizes, the Swede proving perhaps too rigidly English in his commitment to the 4-4-2 formation.

Fabio Capello's brief stint was less successful. He never seemed happy in the English game, preferring to give interviews in Italian. That perhaps contributed to his abrupt departure, falling out with his FA bosses after he seemed unable to understand why allegations of racial abuse by the England captain had to be taken seriously by the governing body.

Arsene Wenger could not be more different. Almost unknown when he arrived to "Arsene Who?" headlines two decades ago, he became as much part of North London folklore as all-time great Arsenal and Spurs bosses, Herbert Chapman or Bill Nicholson, his own Invicibles once dominating the premier league without losing a game all season. There has been more frustration since the move from Highbury to the Emirates, but Wenger's track record means he ranks among the greatest managers of the last hundred years - and he could surely do a job for England.

Arsene is a European Anglophile. While the media debate whether or not the FA Cup has lost its place in our hearts, Wenger has no doubt that its magic still matters, which may be why his Arsenal sides have kept on winning it so often. Wenger manages a multinational team but England's football traditions have certainly got under his skin. The Arsenal boss has changed his mind about emulating the continental innovation of a winter break. "I would cry if you changed that", he has said, citing his love of Boxing Day football as part of the popular tradition of English football.

Obviously, the FA must make this decision on football grounds. It is an important one to get right. Fifty years of hurt still haven't stopped us dreaming, but losing to Iceland this summer while watching Wales march to the semi-finals certainly tested any lingering optimism. Wenger was as gutted as anybody. "This is my second country. I was absolutely on my knees when we lost to Iceland. I couldn't believe it" he said.

The man to turn things around must clearly be chosen on merit. But I wonder if our new Foreign Secretary Boris Johnson - albeit more of a rugger man himself - might be tempted to quietly  suggest in the corridors of footballing power that the appointment could play an unlikely role in helping to get the mood music in place which would help to secure the best Brexit deal for Britain, and for Europe too.

Johnson does have one serious bit of unfinished business from the referendum campaign: to persuade his new boss Theresa May that the commitments made to European nationals in Britain must be honoured in full.  The government should speed up its response and put that guarantee in place. 

Nor should that commitment to 3m of our neighbours and friends be made grudgingly.

So Boris should also come out and back Arsene for the England job, as a very good symbolic way to show that we will continue to celebrate the Europeans here who contribute so much to our society.

British negotiators will be watching the twists and turns of the battle for the Elysee Palace, to see whether Alain Juppe, Nicolas Sarkozy end up as President. It is a reminder that other countries face domestic pressures over the negotiations to come too. So the political negotiations will be tough - but we should make sure our social and cultural relations with Europe remain warm.

More than half of Britons voted to leave the political structures of the European Union in June. Most voters on both sides of the referendum had little love of the Brussels institutions, or indeed any understanding of what they do.

But how can we ensure that our European neighbours and friends understand and hear that this was no rejection of them - and that so many of the ways that we engage with our fellow Europeans rom family ties to foreign holidays, the European contributions to making our society that bit better - the baguettes and cappuccinos, cultural links and sporting heroes remain as much loved as ever.

We will see that this weekend when nobody in the golf clubs will be asking who voted Remain and who voted Leave as we cheer on our European team - seven Brits playing in the twelve-strong side, alongside their Spanish, Belgian, German, Irish and Swedish team-mates.

And now another important opportunity to get that message across suddenly presents itself.

Wenger for England. What better post-Brexit commitment to a new Entente Cordiale could we possibly make?

Sunder Katwala is director of British Future and former general secretary of the Fabian Society.