Why inequalities have come back into politics

Inequalities are the big political issue for 2012 and beyond. That’s not because the left is about to surge — the left has yet to connect principle to modern conditions. It is because the economic efficiency justifications are crumbling.

For three decades or so the ruling theory has been “all boats rise”. Looser regulation and lower taxes freed entrepreneurs to innovate more, take more risks, make more money and thereby make us all richer.

Even if the already rich became very rich and the already very rich became staggeringly rich that was to the good because the whole economy would lift and even the lowly would lift with it. Theory said this was the most efficient route to wealth for the poor.

The working model was post-1945 United States: much more unequal than Europe and Australasia but its “middle class” got steadily richer.

Actually, since about 1980 a rising number of boats have risen more slowly and some not at all. Debt kept up an illusion the tide was rising but only till 2007, when debt soured. The result is widespread puzzlement, bewilderment, unease or anger, reflected in the Tea Party movement on the right and the Occupy Wall Street movement on the left.

Those extreme movements represent only small minorities of ideologues and super-angries. But they reflect wider discomforts and discontents — evident in the Tea Party’s raids on Republican candidacies and Republican fiscal conduct in the Congress and the fact that the Occupiers attracted serious media analysis and imitators across the “western” world, even, in a very minor key, here.

It is not the fact that there are inequalities that has caused the puzzlement, bewilderment, unease and anger. People widely understand, intuitively and from observation, that we are unequal in many ways — genes, family circumstance, intelligence, physique, application, aspiration, educational opportunity, health and so on — and that a wide range of random and significant influences can cause unequal income and wealth outcomes even from equal effort and ability.

Understanding that and knowing roughly where they fit, people make the best of their lives, with their equals.

They do that more comfortably if they believe they or their children have real opportunity to do better — that is, if all boats are rising and/or there is socioeconomic mobility — and if the collective (the state or community) eases the unfair inequalities.

Inequalities become a bother if they rigidify, if the state (or a state-backed class system) locks them in or appears to fix the rules in favour of the better-and-best-off, so inequalities grow — and especially if too many boats stop rising.

Between 1979 and 2007, according to the OECD, while all boats rose in our sorts of countries, the boats in the top 20 per cent income band rose far faster than those in the other 80 per cent bands and those in the top 1 per cent rose far faster still.

After the debt veil was ripped off in 2007, there was initially a presumption that the old rules still held and that, with dollops of fiscal and monetary medicine, “recovery” would take hold and boats would rise again.

But “recovery” has been insipid or illusory. So inequalities — particularly of income and wealth — have seeped into politics: the two United States extremist movements, populist political parties in Europe and riots in Britain by an underclass not believing it has a stake in the establishment’s game.

Angst about this used to be the preserve of the political left. But increasingly over the past six months it has been bothering the political right.

The World Economic Forum of major companies last week rated “severe income disparity” its top global risk for the next 10 years. Singapore is cutting politicians’ pay by up to 51 per cent to counter rising public concern about income inequality.

In the Financial Times (FT), not exactly a left-wing rag, Lawrence Summers, a former banker and United States Treasury Secretary, wrote on November 20: “The extent of the change in income distribution is such that it is no longer true that the overall growth rate of the economy is the principal determinant of middle-class income growth. How the growth pie is distributed is at least as important.”

On December 22 the FT’s magisterial Martin Wolf, till 2007 a stout defender of the finance sector’s brilliant but eventually disastrous inventions, declared in his column that the “huge rewards” for those with “ultra-high incomes” were “both unjust and inefficient”. He demanded “a huge agenda” of government intervention, a “divisive” debate which “cannot be avoided if western democracies are to stay legitimate in the eyes of their peoples”.

If such people — and rafts of others — think addressing inequalities is a political imperative in the north Atlantic countries, expect inequalities to feature here, too.

How that plays out — and particularly how, or if, John Key comprehends and addresses it — will be this year’s most serious political show.