In their influential book The Spirit Level, Kate Pickett and Richard Wilkinson explain how more equal countries score better on a whole host of social goods. From teenage pregnancy to prison population, drug and alcohol abuse to depression, the less equal society is, the higher the incidences of these sorts of social ills.
Britain has a major inequality problem. The richest 10% are 100 times richer than the poorest 10%. Whether you think that’s a problem or not probably depends on which decile you’re in, but if Pickett and Wilkinson are right, addressing inequality would help in all kinds of other areas. It’s not something we can ignore. So how do we do it?
For clues, we can look at more equal countries such as Sweden, Denmark, or Japan, and two distinct approaches emerge. In the Scandinavian countries, taxes are high and the money is recirculated downwards through government services, including generous childcare and pension provision. This seems to work pretty well, considering how highly the Scandinavian countries score on life satisfaction rankings, and it doesn’t appear to have broken their economies or entrepreneurial spirit in the process.
Japan has taken a different route. Rather than tax and redistribute, they just haven’t allowed the gap between rich and poor to grow too wide in the first place. Executive pay doesn’t run hundreds of times ahead of average pay the way it does in the US or America. (It’s been suggested that this is possible because Japanese companies prefer to promote from the ranks than compete for big name CEOs.)
The first approach is redistribution, and relies on taxation and benefits and services. The second approach is predistribution, and depends on pay structures. The term was coined by Yale professor Jacob Hacker, who describes it thus: “When we think of government’s effects on inequality, we think of redistribution – government taxes and transfers that take from some and give to others. Yet many of the most important changes have been in what might be called “pre-distribution” – the way in which the market distributes its rewards in the first place.”
Examples of predistributive policies might include a higher minimum wage or a ‘living wage’, guaranteeing the lowest paid employees of a company a decent standard of living. Some companies do this already. (KPMG adopted such a policy for themselves and their contractors, and found that it actually saved them money, because it reduced staff turnover and lowered recruitment costs. See the Living Wage Foundation. Greater labour rights are another example – unions often have a seat on the board in Japan, avoiding the sort of us and them union politics we struggle with in Britain.
Restricting executive pay is another common predistributive idea, or a High Pay Commission as well as a Low Pay Commission. It could mean rebalancing the economy so that one sector doesn’t accelerate away from the rest. (Here’s looking at you, finance). Land reform and extending property ownership is also predistributive, helping people to acquire assets. This is a strategy for developing countries as well as rich ones, as Hernando de Soto explains. Other ways to avoid the need for redistribution in the first place might be to prioritise education and vocational training so that young people don’t finish school with no useful skills, or a focus on long term unemployment.
There are lots of advantages to predistribution. It’s preventative, stopping equality from forming rather than trying to fix it afterwards. People get to keep more of their incomes. Once the reforms are in place, it happens in the labour marketplace and doesn’t require the enormous government bureaucracy required to collect taxes and run services. That in turn facilitates smaller government, and thus lower taxes.
Another big advantage is that while redistribution is considered a socialist idea, the predistributive approach can be used by either side of the political divide. Ed Miliband has brought attention to the idea this year, but Boris Johnson is the Conservative mayor of London, and he supports a living wage. The Thatcher government had a real vision for extending home ownership.
There are limits to what predistribution can achieve. The problem we have in Britain is that we already have serious inequality. Predistribution might stop the slide, but can it reduce the inequality we already have? We’re not starting with a level playing field, so I’m not sure it’s enough – but it’s certainly a powerful idea. Ed Miliband says it’s one of the big ideas that the Labour party want to explore, and that’s very welcome. It’s an idea we should be talking about, and if we can resist the kind of partisan scorn David Cameron demonstrated in PMQs the other week, it could be a useful public debate.