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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After Richmond Park, Labour MPs are haunted by a familiar ghost

Labour MPs in big cities fear the Liberal Democrats, while in the north, they fear Ukip. 

The Liberal Democrats’ victory in Richmond Park has Conservatives nervous, and rightly so. Not only did Sarah Olney take the votes of soft Conservatives who backed a Remain vote on 23 June, she also benefited from tactical voting from Labour voters.

Although Richmond Park is the fifth most pro-Remain constituency won by a Conservative at the 2015 election, the more significant number – for the Liberal Democrats at least – is 15: that’s the number of Tory-held seats they could win if they reduced the Labour vote by the same amount they managed in Richmond Park.

The Tories have two Brexit headaches, electorally speaking. The first is the direct loss of voters who backed David Cameron in 2015 and a Remain vote in 2016 to the Liberal Democrats. The second is that Brexit appears to have made Liberal Democrat candidates palatable to Labour voters who backed the party as the anti-Conservative option in seats where Labour is generally weak from 1992 to 2010, but stayed at home or voted Labour in 2015.

Although local council by-elections are not as dramatic as parliamentary ones, they offer clues as to how national elections may play out, and it’s worth noting that Richmond Park wasn’t the only place where the Liberal Democrats saw a dramatic surge in the party’s fortunes. They also made a dramatic gain in Chichester, which voted to leave.

(That’s the other factor to remember in the “Leave/Remain” divide. In Liberal-Conservative battlegrounds where the majority of voters opted to leave, the third-placed Labour and Green vote tends to be heavily pro-Remain.)

But it’s not just Conservatives with the Liberal Democrats in second who have cause to be nervous.  Labour MPs outside of England's big cities have long been nervous that Ukip will do to them what the SNP did to their Scottish colleagues in 2015. That Ukip is now in second place in many seats that Labour once considered safe only adds to the sense of unease.

In a lot of seats, the closeness of Ukip is overstated. As one MP, who has the Conservatives in second place observed, “All that’s happened is you used to have five or six no-hopers, and all of that vote has gone to Ukip, so colleagues are nervous”. That’s true, to an extent. But it’s worth noting that the same thing could be said for the Liberal Democrats in Conservative seats in 1992. All they had done was to coagulate most of the “anyone but the Conservative” vote under their banner. In 1997, they took Conservative votes – and with it, picked up 28 formerly Tory seats.

Also nervous are the party’s London MPs, albeit for different reasons. They fear that Remain voters will desert them for the Liberal Democrats. (It’s worth noting that Catherine West, who sits for the most pro-Remain seat in the country, has already told constituents that she will vote against Article 50, as has David Lammy, another North London MP.)

A particular cause for alarm is that most of the party’s high command – Jeremy Corbyn, Emily Thornberry, Diane Abbott, and Keir Starmer – all sit for seats that were heavily pro-Remain. Thornberry, in particular, has the particularly dangerous combination of a seat that voted Remain in June but has flirted with the Liberal Democrats in the past, with the shadow foreign secretary finishing just 484 votes ahead of Bridget Fox, the Liberal Democrat candidate, in 2005.

Are they right to be worried? That the referendum allowed the Liberal Democrats to reconfigure the politics of Richmond Park adds credence to a YouGov poll that showed a pro-Brexit Labour party finishing third behind a pro-second referendum Liberal Democrat party, should Labour go into the next election backing Brexit and the Liberal Democrats opt to oppose it.

The difficulty for Labour is the calculation for the Liberal Democrats is easy. They are an unabashedly pro-European party, from their activists to their MPs, and the 22 per cent of voters who back a referendum re-run are a significantly larger group than the eight per cent of the vote that Nick Clegg’s Liberal Democrats got in 2015.

The calculus is more fraught for Labour. In terms of the straight Conservative battle, their best hope is to put the referendum question to bed and focus on issues which don’t divide their coalition in two, as immigration does. But for separate reasons, neither Ukip nor the Liberal Democrats will be keen to let them.

At every point, the referendum question poses difficulties for Labour. Even when neither Ukip nor the Liberal Democrats take seats from them directly, they can hurt them badly, allowing the Conservatives to come through the middle.

The big problem is that the stance that makes sense in terms of maintaining party unity is to try to run on a ticket of moving past the referendum and focussing on the party’s core issues of social justice, better public services and redistribution.

But the trouble with that approach is that it’s alarmingly similar to the one favoured by Kezia Dugdale and Scottish Labour in 2016, who tried to make the election about public services, not the constitution. They came third, behind a Conservative party that ran on an explicitly pro-Union platform. The possibility of an English sequel should not be ruled out.  

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.