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.
Chuka Umunna speaks at the launch of Labour's education manifesto during the general election. Photograph: Getty Images.
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After so badly misjudging the leadership contest, how will the Blairites handle Corbyn?

The left-winger's opponents are divided between conciliation and aggression. 

When Labour lost the general election in May, the party’s modernisers sensed an opportunity. Ed Miliband, one of the most left-wing members of the shadow cabinet, had been unambiguously rejected and the Tories had achieved their first majority in 23 years. More than any other section of the party, the Blairites could claim to have foreseen such an outcome. Surely the pendulum would swing their way?

Yet now, as Labour’s leadership contest reaches its denouement, those on the right are asking themselves how they misjudged the landscape so badly. Their chosen candidate, Liz Kendall, is expected to finish a poor fourth and the party is poised to elect Jeremy Corbyn, the most left-wing leader in its 115-year history. For a faction that never ceases to underline the importance of winning elections, it will be a humbling result.

Though the crash has been sudden, the Blairites have long been in decline. Gordon Brown won the leadership unchallenged and senior figures such as John Reid, James Purnell and Alan Milburn chose to depart from the stage rather than fight on. In 2010, David Miliband, the front-runner in the leadership election, lost to his brother after stubbornly refusing to distance himself from the Iraq war and alienating undecided MPs with his imperiousness.

When the younger Miliband lost, the modernisers moved fast – too fast. “They’re behaving like family members taking jewellery off a corpse,” a rival campaign source told me on 9 May. Many Labour supporters agreed. The rush of op-eds and media interviews antagonised a membership that wanted to grieve in peace. The modernising contenders – Chuka Umunna, Liz Kendall, Mary Creagh, Tristram Hunt – gave the impression that the Blairites wanted to drown out all other voices. “It was a huge mistake for so many players from that wing of the party to be put into the field,” a shadow cabinet minister told me. “In 1994, forces from the soft left to the modernising right united around Tony Blair. The lesson is never again can we have multiple candidates.”

While conducting their post-mortem, the Blairites are grappling with the question of how to handle Corbyn. For some, the answer is simple. “There shouldn’t be an accommodation with Corbyn,” John McTernan, Blair’s former director of political operations, told me. “Corbyn is a disaster and he should be allowed to be his own disaster.” But most now adopt a more conciliatory tone. John Woodcock, the chair of Progress, told me: “If he wins, he will be the democratically elected leader and I don’t think there will be any serious attempt to actually depose him or to make it impossible for him to lead.”

Umunna, who earlier rebuked his party for “behaving like a petulant child”, has emphasised that MPs “must accept the result of our contest when it comes and support our new leader in developing an agenda that can return Labour to office”. The shadow business secretary even suggests that he would be prepared to discuss serving in Corbyn’s shadow cabinet if he changed his stances on issues such as nuclear disarmament, Nato, the EU and taxation. Were Umunna, a former leadership contender, to adopt a policy of aggression, he would risk being blamed should Corbyn fail.

Suggestions that the new parliamentary group Labour for the Common Good represents “the resistance” are therefore derided by those close to it. The organisation, which was launched by Umunna and Hunt before Corbyn’s surge, is aimed instead at ensuring the intellectual renewal that modernisers acknowledge has been absent since 2007. It will also try to unite the party’s disparate mainstream factions: the Blairites, the Brownites, the soft left, the old right and Blue Labour. The ascent of Corbyn, who has the declared support of just 15 MPs (6.5 per cent of the party), has persuaded many that they cannot afford the narcissism of small differences. “We need to start working together and not knocking lumps out of each other,” Woodcock says. There will be no defections, no SDP Mk II. “Jeremy’s supporters really underestimate how Labour to the core the modernisers are,” Pat McFadden, the shadow Europe minister, told me.

Although they will not change their party, the Blairites are also not prepared to change their views. “Those of us on this side of Labour are always accused of being willing to sell out for power,” a senior moderniser told me. “Well, we do have political principles and they’re not up for bartering.” He continued: “Jeremy Corbyn is not a moderate . . .
He’s an unreconstructed Bennite who regards the British army as morally equivalent to the IRA. I’m not working with that.”

Most MPs believe that Corbyn will fail but they are divided on when. McFadden has predicted that the left-winger “may even get a poll bounce in the short term, because he’s new and thinking differently”. A member of the shadow cabinet suggested that Labour could eventually fall to as low as 15 per cent in the polls and lose hundreds of councillors.

The challenge for the Blairites is to reboot themselves in time to appear to be an attractive alternative if and when Corbyn falters. Some draw hope from the performance of Tessa Jowell, who they still believe will win the London mayoral selection. “I’ve spoken to people who are voting enthusiastically both for Jeremy and for Tessa,” Wes Streeting, the newly elected MP for Ilford North, said. “They have both run very optimistic, hopeful, positive campaigns.”

But if Corbyn falls, it does not follow that the modernisers will rise. “The question is: how do we stop it happening again if he does go?” a senior frontbencher said. “He’s got no interest or incentive to change the voting method. We could lose nurse and end up with something worse.” If the road back to power is long for Labour, it is longest of all for the Blairites. 

George Eaton is political editor of the New Statesman.

This article first appeared in the 03 September 2015 issue of the New Statesman, Pope of the masses