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Why has inequality risen in the UK?

Hector McNeill1

The real incomes approach to economics was first explained in 1976. The purpose of this enquiry, and its development over the last 43 years, was to analyse why inequality rises under conventional policies and to propose policy instruments to reduce this trend and reverse the process.

Unfortunately mainstream macroeconomic policies have continued on the basis that there is no alterative to policies based on the Aggregate Demand Model (ADM). All ADM policies (Keynesianism, monetarism and supply side economics) create winners, losers and those in neutral policy impact state. The issue of concern is the extent to which the losing class is expanding from the lowest income segment and progressing upwards through higher income groups.

Recently the United Nations pointed out that inequality in Britain, the fifth largest economy in the world, is higher than in some low income countries. The degree of inequality as an index is higher in the UK largely because of the very high income bracket. Although the UN report is considered to be an affront by the UK government, there is a considerable degree of denial in the assertions that this has nothing to do with macroeconomic policy. This being the case, the current government is unlikely to take the necessary steps because there appears to be a confusion between nominal growth rates and low unemployment on the one hand and the actual situation, when calculated in terms of real incomes and inequality trends. Real incomes and continue to decline and inequality is increasing.

The hollowing out of the economy

In reality, since the mid 1970s there has been an advance of financial considerations taking precedence over other considerations in macoeconomic policy. The aggregate demand model (ADM) that represents the foundation of macroeconomic management of "demand" whose track record has been a constant currency depreciation treadmill. This has caused a constant decline in purchasing power of nominal incomes. This is caused, not by some mysterious machinations of the quantity theory of money, but rather in the attempt by economic units to increase their profits by raising unit prices to compensate for the fall in value of the pound.

Inflation is a direct result of economic unit decisions on pricing. This fact has ended up with central banks and financial authorities becoming somewhat lax in what they consider to be price stability. Almost on an international basis, central banks have established a 2% inflation rate as a policy target. The justification is that this "equates" with stability to facilitate business planning but it also binds into business plans, at least 2% annual price rises in projections. However, a 2% inflation rate represents a 18% devaluation of the purchasing power of nominal income of the population, each decade. This has resulted in today's sterling being worth less than 2% of its value in 1945, as a direct result of policy-maintained inflation. It is worth mentioning that inflation has, in general, exceeded the 2% target for most of the last 40 years, especially though 1970s-1980s. Even today under quantitative easing and low official interest rates, the all items price index indicates an average inflation of 4.25% for the last 20 years by rising from an index of 47 in 1989 to 107 in 2019.

One disastrous transition has been the orientation of banks, who since the late 1970s, have become increasingly involved in direct transactions in FICRESS (Finance, Insurance, Commodities, Real Estate, Stocks and Shares) and taking up their own corporate positions in these assets. With quantitative easing this redirection of banking priorities can be seen in the use of cheap money to finance corporate share buy back of their own shares (formerly an illegal activity) causing a boom in stock and share prices. This has been used as a means for executives of banks and client corporations to generate massive bonuses from such trades. Investment in real estate has caused builders to avoid social and lower priced house construction to create investment properties for corporate and financial institutions. Quantitative easing's low interest rates have eviscerated pension funds that formerly relied on reasonable interest rates on funds placing many retirees in a precarious position. Education and health services have been impacted by public private partnerships where the financial loan components have been associated with excessive interest rates resulting in a gradual depreciation in the ability of health services to fund these predative loans and for graduates to end up in a position of starting work with excessive debts. The outcome is that insufficient funding has been allocated to industrial and manufacturing investment and productivity has fallen. Stocks and shares make up a "stock market boom" that bears no relationship to corporate prospects and Price-Earning ratios mean nothing. As a result of the massive transfer of money into the financial sector through quantitative easing, where is has remained, the availability of cash, other than debt, has stagnated because nominal incomes of middle and lower income segments have stagnated. With a background inflation of over 4% the rate of decline in the real incomes of those on fixed nominal incomes is declining at the rate of 19% every 5 years, since 2009, this represents a real incomes decline of over 40%.

Signs of a failing economy can be seen in the growth in food banks and state of the roads and the massive ruinous debt surrounding many so called Private Public Partnerships which like quantitative easing are the equivalent of the welfare state for the financial industry. However, this ruinous process is draining resources from the public service operations in a drip feed process. One remarkable aspect of these schemes is that many local authorities are paying very high interest rates whereas the same funds arranged through the government could have been arranged at far lower rates. None of this reflects governance with the interests of the public at heart.

In conclusion, conventional macreoconomic policies have always generated winners and losers but during the last 10 years this process has accelerated with the losers becoming the larger proportion of the population. This trend has been confirmed by the United Nations report on inequality in Britain.

Many reports have been circulated observing that quantitative easing appears to be "benefiting financial instiutions". This observation was made by Melvyn King when he left the governorship of the Bank of England in 2013. In basic terms banks now are able to toss a coin to bet with the outcome options being "heads I win" and "tails you lose". This is done openly and with a straight face. This is because if a bank is big enough, then if it makes money it keeps it but if it takes risks and loses too much money, then this fantacy of their being "too big to fail" causes nervous politicians to advance cash so the taxpayer foots the bill. With this sort of socially prejudicial safety net, the 2008 crisis is likely to happen again because the banks face no risks and receive cheap money from the government in a constant stream. As explained, this has fueled the boom in FICRESS assets values bringing no benefit to the real economy in the form of increased productiviy or real incomes for the majority of he population. Whereas the government continues to reduce provisions for the welfare of the voting constituents, the public, they have amply expanded the provisions of a welfare state for the non-voting constituents, the banks. The real danger of another financial crisis arising from the FICRESS bubbles bursting, in a parallel to the 2017-2008 sub-prime mortgage crisis, is self-evident. And yet economists fail to propose more effective solutions and the government does not act to curtail quantitative easing to terminate these dangerous trends.

In terms of economic logic and constitutional economics, this is an abusive state of affairs. As a direct result of a poorly thought out monetary strategy the people of Britain are exposed to an increasing likelihood of a serious downturn in the economy just as the country is likely to face additional economic challenges associated with BREXIT. There are some who seriously believe leaving the EU without a "deal" is a feasible option. But then the FICRESS lobby is powerful and their bent coin always favours them. In this dynamic the imperative of the constitutional principle that decisions should safeguard the fundamental interests of the people, takes second place to other obscure and hidden interests and, are likely to result, as always, in many being prejudiced while the politicians earnestly persist in attempting to mislead by declaring that...."there is no alternative!"