Is predistribution or redistribution the best way forward?

Economies built around poverty wages and huge corporate surpluses are unsustainable. Relying on extra redistribution will not provide the correction needed.

Is 'predistribution' as championed by Ed Miliband, or old fashioned 'redistribution' as favoured, if stealthily, by Labour from 1997, the best way to create greater equality? An article by the American academic Lane Kenworthy in Juncture argues that because of the obstacles to securing a narrower gap in market incomes, we need to stick with redistribution. 

The most important element of the predistribution debate is how to tackle the problem of shrinking earnings. The share of national output going to wages has fallen from an average of 59% in the two post-war decades to 53% today, with most of the fall borne by low earners. Britain is an economy where both profits and low pay have been booming.

The spread of low pay has capped opportunities, boosted in-work poverty, weakened the incentive to work and increased the cost of income support. Kenworthy argues that reversing the earnings squeeze will be hard: the UK will continue to hemorrhage better-paid manufacturing jobs and there is limited scope for raising the minimum wage. Instead he calls for more generous tax credits to boost take-home pay.

So is this the best way forward? In 2011/12 aggregate wages in the UK stood at £835bn. This is £85bn less than if the wage share had held its 1979 level. Much of the debate about predistribution is about how much of this £85bn shortfall or 'wage-gap' could be restored.

A recent study looked at the potential impact of four ‘predistribution` style measures. It found that a modest 40 pence boost to the minimum wage and policies that halved the numbers earning less than the living wage would, by raising the wage floor, together add around £4bn to the aggregate wage bill, closing about 4.5% of the ‘wage-gap`.

A much more significant impact would come from strengthening labour’s bargaining power which has slumped to one of the weakest amongst rich nations. A doubling of the proportion covered by collective bargaining - bringing Britain closer to the European average - would significantly boost low and middle earnings, adding some £13bn to the wage pool and closing 16% of the gap.

The other most significant measure would be a cut in unemployment. Because tight labour markets are associated with higher wage growth, a rise in employment would boost the wage pool by a further £4bn. Together, these four policies would close around a quarter of the wage-gap, adding over £20bn to aggregate wages. Not huge, but a good start.

So is such a package feasible? The increase in the minimum wage would merely restore its real level to that of 2008. A phased halving of the number below the living wage could be achieved without significant job losses or increased costs. Indeed, living wage companies enjoy improved retention and lower recruitment costs.

Moreover, relying on extra redistribution would also face its own constraints. While Labour from 1997 embraced a strategy of 'stealth redistribution' the policy had run out of steam before 2010. The cost of welfare is increasingly born by middle income groups, helping to harden public attitudes towards benefits. Without reforms that tackle the explosion of tax avoidance and create a more progressive tax system, a further boost tax credits would do little to secure redistribution from the top.

There is a further critical argument for predistribution: restoring economic sanity depends on rebalancing the output of the economy in favour of wages. According to economic orthodoxy, the wages to profits shift should have improved economic health. Instead, it has brought highly damaging distortions, fracturing demand, promoting debt-fuelled consumption and raising economic risk. As profits boomed, private investment plunged. Cheap labour is also a disincentive to raise productivity, and has helped turn the UK into today’s low value-added and low-skilled economy.

According to the International Labour Organisation, nearly all large economies are ‘wage-led’ not ‘profit-led`. That is, they experience slower growth when an excessive share of output is colonised by profits.

The growing imbalance between wages and profits has, arguably, also helped prolong the crisis. While living standards have been falling across rich nations, and wage-based consumption has slumped, corporate profitability has reached new heights. The result – a global economy awash with spare capital. Instead of delivering a sustained recovery, renewing infrastructure and creating jobs, this record mountain of corporate cash reserves is lying idle – 'dead money' according to Mark Carney.

There is now a growing consensus that economies built around poverty wages and huge corporate surpluses are unsustainable, that we need a new economic model that gradually returns the wageshare closer to its post-war level with big firms devoting more of their profits to pay. Despite this, the gap between wage and output growth across rich nations - the primary explanation for falling wage shares - has risen sharply through the crisis. Kenworthy argues that this widening gap is likely to be the 'new normal' rather than a temporary aberration. If so, it will have profound economic and social implications. The signs are that, even at this early stage of recovery, stalled living standards and the growing mountain of idle money are sowing the seeds of the next crisis. 

Consumer credit levels are rising at the fastest rate since 2008 while there are signs of bubbles in house prices and company valuations. As recovery gathers pace, global cash surpluses will be used to finance business activity that raises economic risk. Private equity giants are sitting on billions of 'dry powder' waiting for takeover opportunities.

If we are in a new norm, it is unsustainable. The status quo will end in another crisis. Relying on extra redistribution will not provide the correction needed. Sustainability requires a more proportionate sharing of the cake with wage rises matching output growth. That means making predistribution work. 

Stewart Lansley is the author of The Cost of Inequality and with Howard Reed, How to Boost the Wage Share.

Ed Miliband speaks during a Q&A with party members at the Labour conference in Brighton last month. Photograph: Getty Images.
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Vince Cable will need something snappier than a graduate tax to escape tuition fees

Perhaps he's placing his hopes in the “Anti Brexit People’s Liberation Front.” 

“We took power, and we got crushed,” Tim Farron said in what would turn out to be his final Autumn conference as Liberal Democrat leader, before hastening on to talk about Brexit and the need for a strong opposition.

A year and a snap election later, Vince Cable, the Lib Dem warhorse-turned-leader and the former Coalition business secretary, had plenty of cracks about Brexit.

He called for a second referendum – or what he dubbed a “first referendum on the facts” – and joked that he was “half prepared for a spell in a cell with Supreme Court judges, Gina Miller, Ken Clarke, and the governors of the BBC” for suggesting it".

Lib Dems, he suggested, were the “political adults” in the room, while Labour sat on the fence. Unlike Farron, however, he did not rule out the idea of working with Jeremy Corbyn, and urged "grown ups" in other parties to put aside their differences. “Jeremy – join us in the Anti Brexit People’s Liberation Front,” he said. The Lib Dems had been right on Iraq, and would be proved right on Brexit, he added. 

But unlike Farron, Cable revisited his party’s time in power.

“In government, we did a lot of good and we stopped a lot of bad,” he told conference. “Don’t let the Tories tell you that they lifted millions of low-earners out of income tax. We did… But we have paid a very high political price.”

Cable paid the price himself, when he lost his Twickenham seat in 2015, and saw his former Coalition colleague Nick Clegg turfed out of student-heavy Sheffield Hallam. However much the Lib Dems might wish it away, the tuition fees debate is here to stay, aided by some canny Labour manoeuvring, and no amount of opposition to Brexit will hide it.

“There is an elephant in the room,” the newly re-established MP for Twickenham said in his speech. “Debt – specifically student debt.” He defended the policy (he chose to vote for it in 2010, rather than abstain) for making sure universities were properly funded, but added: “Just because the system operates like a tax, we cannot escape the fact it isn’t seen as one.” He is reviewing options for the future, including a graduate tax. But students are unlikely to be cheering for a graduate tax when Labour is pledging to scrap tuition fees altogether.

There lies Cable’s challenge. Farron may have stepped down a week after the election declaring himself “torn” between religion and party, but if he had stayed, he would have had to face the fact that voters were happier to nibble Labour’s Brexit fudge (with lashings of free tuition fees), than choose a party on pure Remain principles alone.

“We are not a single-issue party…we’re not Ukip in reverse,” Cable said. “I see our future as a party of government.” In which case, the onus is on him to come up with something more inspiring than a graduate tax.

Julia Rampen is the digital news editor of the New Statesman (previously editor of The Staggers, The New Statesman's online rolling politics blog). She has also been deputy editor at Mirror Money Online and has worked as a financial journalist for several trade magazines.