A partial response to Snowdon’s Precis: Are the Rich Getting Richer?

A portrait of Karl Marx.

A portrait of Karl Marx. (Photo credit: Wikipedia)

Christopher Snowdon has written an interesting article about poverty and prosperity in the United Kingdom.[1] (The article is in the Institute of Economic Affairs Magazine EA can be found here: ) He makes an impassioned argument that the poor have gotten wealthier and their income is better relative to the average despite the recession. The argument appears strong and incontrovertible on the surface. However, we have to look closely, but not too closely, to find its flaws. Despite those who would quote his article to great effect, it does not suggest that the anti-austerity marchers are wrong to march or to protest austerity.

The basic message to understand is that Snowdon promotes income and wages as improving and the austerity campaigners argue against the cuts to government programs and benefits. To put it bluntly, they are comparing apples and oranges. What we need to do is look at Mr. Snowdon’s article on its own merits. To do this, we need to read it closely to understand it.

Straw men rarely make an argument.

Mr. Snowdon, like those who wish to make an ideological argument, start with straw man arguments

The general secretary of the Trades Union Congress, Frances O’Grady, said last year that Britain is a country in which ‘inequality soars’ and ‘social mobility has hit reverse’.

The Guardian tells us that Britain is ‘Europe’s sweatshop’, a country where workers put in the longest hours in the EU.

And it is a perennial lament that ‘the rich get richer while the poor get poorer’.

To be sure, the headlines and selected speech quotations taken out of context sound interesting and create a good straw man to knock down. Except that as headlines and quotations taken out of context, they have no basis to test. Until we provide a standard to measure the statements against, that is the statements against their own logic, we cannot assess them.

What did Frances O’Grady’s statement say? Here is the exact quotation.

This brand of conservatism is the enemy of aspiration. As inequality soars, social mobility has hit reverse.[2]

That is it. It is a throwaway line, a claptrap, without any substance. We do not know what it meant. We can read into what we want. Like most political rhetoric, it is short on substance or logic and long on emotion.

If we take the regular lament “The rich get richer and the poor get poorer” at face value, it is always true relatively. If I earn a billion and you earn a billion this year, next year you earn a billion, and I earn a trillion. I am richer and you are poor than me relative to last year. Against an absolute average, we are both “richer” but my increase is larger than your increase so you are relatively poorer. It is a phrase that is empty of substance and that is filled by emotion.

Once you debunk their straw men you can provide your own

Mr. Snowdon recognizes these as straw men statements and then provides his own.

Taken together, these assertions encourage a counsel of despair about the prospects of workers in the UK today, but they are all empirical claims and can be tested against the facts.

The two statements do not provide a counsel of despair. Neither the speakers nor the statements suggest despair. They may suggest unfairness; they do not counsel despair because they are rallying cries for change. The speakers want the situation to change. Despair means to give up and this is definitely not what the speakers or the statements encourage.

Make sure you mention Marx to show you are a capitalist

Mr. Snowdon, like a good capitalist, has to say something bad about Marx. Why we have to invoke Marx each time we talk about inequality, I do not know. However, no discussion seems to be complete without him.

The well-worn assertion that the rich get richer while the poor get poorer echoes Karl Marx’s theory of immiseration which said that capitalists could only become richer by lowering wages, thereby reducing the living standards of workers until they had no choice but to revolt. Marx was wrong.

The idea sounds good except that the assertion does not echo Marx. Mr. Snowden has connected two ideas that are not connected. First, Marx never had a theory of immiseration. He did have a theory about revolution and he believed that as capital accumulates the worker would be worse off. This is not the same as saying, as the rich get richer the poor get poor. For it to be the same, it would have to say that as the rich get richer they make the poor get poorer by taking the money from the poor. Except that is not what Marx said. Here is what he said.

It follows therefore that in proportion as capital accumulates, the situation of the worker, be his payment high or low, must grow worse.

— Karl Marx, Das Kapital: Kritik der politischen Ökonomie, 1867.[1]

Cf. Marx, Karl (2007): Capital: A Critique of Political Economy: The Process of Capitalist Production. Volume I, part 2. Cosimo Inc., pp. 708-709[3]

Second, the poor can be better off or worse off even as the rich get richer, and that is not same as saying that the capitalists only become rich by lowering wages. Again, this is not something that Marx said. Why Mr. Snowdon wants to make up quotations is beyond me, but it seems a bit pointless to smear Marx with made up quotations.

Relative or Absolute poverty still means you are poor.

The straw man arguments continue.

Today, no one seriously argues that the poor are poorer than their Victorian counterparts, but some claim that they are poorer – and that there is more poverty – than twenty, thirty or forty years ago. It is not true.

I am not sure anyone has argued that the poor are poorer than in the Victorian era. The obvious infrastructural changes: universal health coverage, health and safety laws, improved access to education would disprove this statement. If it is manifestly and demonstrably wrong, why make the statement. However, Mr. Snowdon finishes with the straw man arguments and moves to the statistics.

There has been a steady increase in wage rates for more than 150 years. Average earnings have risen more than four-fold since the start of the twentieth century despite two world wars and intermittent recessions.

Wages declined or stagnated in the mid-1970s, early 1990s and, above all, during the recent economic downturn: average earnings for full-time workers were 7.5 per cent lower in 2013 than they had been in 2009.

Initially (2009-11), the poorest 10 per cent – but not the poorest 2 per cent – saw a larger than average fall in wage rates, but this pattern was reversed in 2011 and 2013 when the richest decile saw their earnings fall by more than four per cent while the poorest decile saw earnings fall by less than two per cent.

Here the truth emerges but not as Mr. Snowdon expected. What he wrote confirms that which he was arguing against. Initially the poor were getting poorer faster than the rich were and then they were getting poorer slower than the rich were. What this misses is that the poor were worse off than the rich were relatively and absolutely. In effect, the rich got richer and the poor got poorer relatively and absolutely.  The statistics paint a bleak picture.

Check the sources and you find the bias

The table is taken from the ONS report Equivalised¹ disposable household income, 1977-2012/13, UK (2012/13 prices²)[4]

Quintile groups of all households ranked by equivalised1 disposable income All
house-
Bottom 2nd 3rd 4th Top holds
2006-07 11,014 17,916 24,551 34,036 63,650 30,233 0.364304 2.105315
2007-08 10,750 18,156 24,587 33,478 62,314 29,857 0.36005 2.087082
2008-09 11,021 17,835 24,344 33,558 62,355 29,823 0.369547 2.090836
2009-10 11,467 18,502 24,600 33,529 61,728 29,965 0.38268 2.060003
2010-11 11,510 18,181 24,054 33,099 61,942 29,757 0.3868 2.081594
2011-12 11,503 17,988 23,746 32,111 58,109 28,691 0.400927 2.025339
2012-13 11,122 17,805 23,533 31,870 59,049 28,676 0.38785 2.059178

The last two columns are first Bottom divided by All household and the second is Top divided by All Households.

This shows us how the poorest and the richest did relative to all households. We can see that in the change from 2011-12 to 2012-2013 the rich did get richer and the poor did get poorer relatively and absolutely.

Let’s focus on wages to avoid income

Although Mr. Snowdon wants to focus on wages, this is less helpful

As painful as these pay cuts have been in recent years, it is unlikely that posterity will view them as anything more than a blip in the upward march of progress.

The bigger picture is quite clear. Since 1975, average real wages have more than doubled for full-time workers and nearly doubled for part-time workers.

Amongst the poorest decile, full-time wages rose from £3.40 to £6.67 between 1975 and 2013 (in 2013 prices) and part-time wages rose from £2.83 to £5.83.

Put another way, whilst only two per cent of full-time workers earned the minimum wage of £6.19 in 2013 45 per cent of full-time workers in 1975 earned less than £6.19 (in 2013 prices).

And, whilst 30 per cent of full-time workers earned less than £10 an hour in 2013, 85 per cent earned less than the equivalent of £10 an hour in 1975.

Wage rates do not tell the full story. Many people do not work and many workers have their incomes supplemented by benefits. If we look at household disposable incomes (i.e. income after direct taxes and benefits have been taken into account), we see a similar story of rising prosperity.

Between 1977 and 2011/12, the incomes of the poorest twenty per cent (the bottom quintile) rose by 93 per cent in real terms. Those of the top quintile rose by even more – 149 per cent – so it is true that the rich have got richer, but it is clear that the poor have also got richer.  State benefits play a major role in cushioning the poor from the impact of declining wages.

The problem with a focus on wages is that if you start in a low paying job you are likely to remain in low paying job.

There is evidence for wage persistence. If a worker begins his/her career in a low- paying job, he/she is very likely to stay in a low-paying job. Sixty per cent of the bottom ten per cent of earners in 2001/02 were among the bottom 30 per cent of earners in 2008/09. 84[5]

No matter how poor you are remember prosperity is up across the board

The argument continues to focus on rising prosperity across the board.

The post-2007 fall in earnings has been due to inflation rising at a faster rate than nominal wages, but, since benefit payments tend to be tied to inflation rather than wages, those who depend on benefits for most of their income have been protected from much of the decline in pay.

The Office for National Statistics records that average real disposable incomes fell by four per cent between 2007/08 and 2012/13 but that ‘the largest fall in incomes over this period has been for the richest fifth of households, whose disposable income has fallen by £3,300 (or 5.2 per cent) in real terms’.

By contrast, the ONS says, ‘the average income of the poorest fifth has risen by £400 (or 3.5 per cent) since 2007/08.’

This figure is chosen to avoid the follow up sentence that puts it all into context.  It is a drop of £400 from the previous year. Even though it is £400 better than 2007/8 (11,122 vs 10750) it is still £400 worse than the year before (11, 122 vs 11503). Moreover, the Top grew by £950 from 2011-12 to 2012-13 (58,109 to 59, 049) on the previous year! Thus, the rich got richer even as the poor became poorer. Why does Mr. Snowdon avoid this uncomfortable truth? [6]

2007-08 10,750 18,156 24,587 33,478 62,314 29,857 0.36005 2.087082
2011-12 11,503 17,988 23,746 32,111 58,109 28,691 0.400927 2.025339
2012-13 11,122 17,805 23,533 31,870 59,049 28,676 0.38785 2.059178

He continues by trumpeting how the poor have become richer. In absolute terms, this is undeniable. However, the issue has always been relative wealth. The poor have not seen their relative share grow at all while the top have seen their share grow faster and faster.

It is inarguable that the poor have become richer in the long-term and doubtful whether they have become poorer even during the recent economic slowdown, despite incomes falling amongst every other group.

Whether measured in cash or real terms, whether looked at in terms of hourly, weekly or annual earnings, and whether taken before or after housing costs have been deducted, the last forty years have been an era of rising prosperity across the board.

Except the statistics do not support his argument. Let us compare the disposable income levels in 1977-1987. Overall things have gotten much worse, relative to the average, for the lowest group.

1977 5,966 8,606 11,386 14,852 23,288 12,821 0.46533 1.816395
1978 6,468 9,319 12,369 16,056 24,516 13,746 0.470537 1.783501
1979 6,396 9,300 12,531 16,574 25,371 14,032 0.455815 1.808082
1980 6,384 9,477 12,892 16,935 26,967 14,532 0.439306 1.855698
1981 6,672 9,516 12,730 16,978 27,895 14,759 0.452063 1.890033
1982 6,597 9,277 12,442 16,463 26,953 14,345 0.459881 1.878913
1983 6,640 9,449 12,704 17,007 28,290 14,818 0.448104 1.909165
1984 6,937 9,660 12,902 17,177 27,973 14,930 0.464635 1.87361
1985 6,898 9,773 13,515 18,653 30,828 15,934 0.432911 1.934731
1986 7,107 10,127 14,013 19,025 33,340 16,723 0.424984 1.993661
1987 7,151 10,428 14,772 20,425 36,765 17,908 0.399319 2.052993

From 1977 to 1986, the situation deteriorated slowly for the bottom. Then it dropped out in 1987. The ratio of bottom to all dropped from .42 to .39. It would not move greater than .39 until 2012 when it reached.4009.  By contrast, things were getting better for the top and jumped dramatically from 1985-1987. The Top went from 1.93 of Top to all households to 2.05. They have never looked back and despite some setbacks have never seen their ratio drop below 2.03.

Income inequality is the main issue

Mr. Snowdon continues his argument and turns to, of all things, income inequality.

Is income inequality rising?

Because it is difficult to maintain the notion that the incomes of the poor have been falling in the long-term, critics of capitalism often base their argument regarding poverty around concepts such as ‘relative poverty’. However, reductions in relative poverty typically coincide with periods of general impoverishment. The official (relative) poverty line is generally understood to be 60 per cent of the median income, but this is essentially a measure of inequality and does not tell us whether or not the poor are getting poorer.

In 1979, thirteen per cent of the population was living below the relative poverty threshold. By 2005, the real disposable incomes of the poorest fifth had risen by more than fifty per cent and yet eighteen per cent of the population was now officially living in poverty.

Mr. Snowdon makes a good dodge in his argument. He begins by talking about wages of poorest increasing during selected years and he then measures this against relative poverty without providing the measure for relative poverty. Even though he focuses on the 60% of median income, this does not tell us about poverty or income inequality.

Selective years paints a selective story

I find his years curious. Let’s look at them individually and then in context.

1979 6,396 9,300 12,531 16,574 25,371 14,032 0.455815 1.808082
2005-06 11,079 17,735 23,976 33,067 61,026 29,377 0.377132 2.077339

We see that the disposable income relative to all incomes has decreased for the poorest and increased for the top. Let’s look closer and see the context of these changes and why these years are important.

1977 5,966 8,606 11,386 14,852 23,288 12,821 0.46533 1.816395
1978 6,468 9,319 12,369 16,056 24,516 13,746 0.470537 1.783501
1979 6,396 9,300 12,531 16,574 25,371 14,032 0.455815 1.808082
1980 6,384 9,477 12,892 16,935 26,967 14,532 0.439306 1.855698
1981 6,672 9,516 12,730 16,978 27,895 14,759 0.452063 1.890033

When we look at the two years before and the two years after, 1979 stands out before of the changes before and after it for the bottom and the top relative to all incomes. The bottom suffered a drop both absolutely and relatively in 1980 and the top continued a steady increase relatively and absolutely.

Let’s look at 2005 in context.

2002-03 10,423 16,664 23,106 32,052 57,706 27,991 0.37237 2.061591
2003-04 10,625 17,137 23,430 31,573 59,017 28,356 0.3747 2.081288
2004-05 11,238 17,921 24,127 32,632 59,055 28,994 0.387597 2.036801
2005-06 11,079 17,735 23,976 33,067 61,026 29,377 0.377132 2.077339
2006-07 11,014 17,916 24,551 34,036 63,650 30,233 0.364304 2.105315

We see why 2005 is so important for Mr. Snowdon. It is the only year in which poorest did well relative to all that is .38. It is coincidently the year the Top 2.03 was at its lowest. Why was Mr. Snowdon so selective in his statistical choice?

He continues his argument looking at relative power but comparing it other countries.

In other words, raising the incomes of Britain’s poorest people by half did not prevent the official poverty rate rising by half. Just as the relative poverty rate can rise despite the poor becoming richer, so too can the relative poverty rate fall as long as the wages of the poor fall less sharply than those on median incomes. This is precisely what happened during the recent financial crisis. In 2010/11, Britain’s (relative) poverty rate fell to 16 per cent and the child poverty rate fell to 18 per cent. Both figures were the lowest they had been since the mid-1980s, despite – or rather because of – wages falling across the board. In short, the poverty rate has very little to do with how much money the poor have.

The UK’s official poverty rate in 2012 (16 per cent) was higher than that of Bangladesh (14 per cent), Azerbaijan (2 per cent) and Namibia (0 per cent). But, where would you like your children to be born?

The Gini Coefficient is not something you can eat when you are hungry

Mr. Snowdon then turns to the Gini coefficient to make his point that inequality is falling after it peaked in 1990.

Not only has poverty reduced but income inequality, as measured by the Gini coefficient which is the standard measure of inequality, is falling too: it peaked in 1990. By 2011/12 it had dropped to 32.3, the lowest since 1986.

Contrary to popular belief, the modern peak of income inequality was twenty five years ago. There was a significant rise in the 1980s, but since then rates have been quite stable except when a weak economy brings them down. It is simply untrue to say that ‘inequality soars’ in modern Britain.

When we look at the data, we find this just does not follow what the various indicators show. Yes, the relative income inequality peaked in 1990. This was the worst year for the lowest and the best for the top. It could not get worse without serious dislocation.

1990 7,158 11,286 16,989 24,401 45,613 21,089 0.339419 2.162881

However, this misses the longer trend and the current situation especially with the focus on 2011/2012. Again, he chooses the best year to make his case and it is wrong.

2011-12 11,503 17,988 23,746 32,111 58,109 28,691 0.400927 2.025339

The ratio of lowest to all hits it highest in 2011/12 at .4092 and the top has its, worst level since 1986 at 2.02. If we look at the next year, this all gets into context and we see the inequality gets worse. The lowest drop back to .38, marginally better than 2010/211 and decreasing from the previous year. The top get higher but worse than 2010-11 and increase on the previous year. Which one would you rather be experiencing?

2010-11 11,510 18,181 24,054 33,099 61,942 29,757 0.3868 2.081594
2011-12 11,503 17,988 23,746 32,111 58,109 28,691 0.400927 2.025339
2012-13 11,122 17,805 23,533 31,870 59,049 28,676 0.38785 2.059178

Again, we see that Mr. Snowdon avoids the uncomfortable context that undermines his argument. Why?

Mr. Snowdon also mentions the Gini coefficient to make his argument. He claimed that income inequality as measured by the Gini coefficient had peaked in 1990 and had decreased since.

Not only has poverty reduced but income inequality, as measured by the Gini coefficient which is the standard measure of inequality, is falling too: it peaked in 1990. By 2011/12 it had dropped to 32.3, the lowest since 1986.

Let us look at the Gini coefficients over this period and focus on the figures he mentions.[7]

1977 1978 1979 1980 1981 1982 1983 1984
27.2 26.6 27.4 28.6 29 28.6 29.1 28.4
1985 1986 1987 1988 1989 1990 1991 1992
30 31.6 33.2 35.1 34.4 36.8 35.6 34.7
1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01
34.8 33.8 33 34.4 34.5 35.4 35.8 35
2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09
36.2 33.8 34 32.8 33.9 34.7 34.2 34.3
2009/10 2010/11 2011/12 2012/13
33.2 33.7 32.3 33.2

We do find that he is correct. 1990 was the worst year. When we compare 2011/12 to all previous years, it is the best until 1986. Except, that is not the full story. When we look at next year, the figure has gotten worse and returned to the overall trend of the previous 10 years. Far from being a sign of things getting better, it is seen for the anomaly that it is. The trend only improved under Labour in 2004/05 it was 32.8 which did not require a recession unlike 2011/12.  To keep the trend downward or stable it will require a similar economic and social policy by the Conservatives to keep the Gini Coefficient trend downward rather than encouraging it upward.

Conclusion

Mr. Snowdon continues to discuss working hours and social mobility. However, at this point, I cannot continue. His statistical choices appear to suit his ideological interests. The selective statistics are not the sign of an academic or scholarly work. It is a work of propaganda. A propaganda that many will repeat without reading the fine print. However, those who repeat it without reading the wider context will demonstrate that ideological goose-stepping is easier than research, analysis and intellectual probity.

[1] Christopher Snowdon’s article in the Institute of Economic Affairs Magazine EA can be found here: http://www.iea.org.uk/sites/default/files/EA%20Spring%202015_PRECIS.pdf

[2] https://www.tuc.org.uk/about-tuc/congress/congress-2014/tuc-general-secretary-frances-o%E2%80%99grady%E2%80%99s-address-congress-2014

[3] https://en.wikipedia.org/wiki/Immiseration_thesis

[4] http://www.ons.gov.uk/ons/rel/household-income/the-effects-of-taxes-and-benefits-on-household-income/2012-13/data–deflated-equivalised-disposable-income–1977-2012-13.xls

[5] See the Government report on child poverty. 2012 Measuring Child Poverty:    A consultation on better measures of child poverty p. 33 https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/228829/8483.pdf

[6] http://www.ons.gov.uk/ons/rel/household-income/the-effects-of-taxes-and-benefits-on-household-income/2012-13/data–deflated-equivalised-disposable-income–1977-2012-13.xls

[7] The Gini Coefficients are taken from the ONS figures. http://www.ons.gov.uk/ons/rel/household-income/the-effects-of-taxes-and-benefits-on-household-income/2012-13/sb-figure-4-download.xls

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About lawrence serewicz

An American living and working in the UK trying to understand the American idea and explain it to others. The views in this blog are my own for better or worse.
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