Making the pie bigger isn't enough

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Politicians at both ends of the M4 place a great deal of emphasis on economic growth as a way of making us better off. It’s true, of course, that a bigger pie makes it possible for people to enjoy bigger slices – and making the pie bigger is a convenient way of avoiding questions about the way the pie is shared. Sometimes, vacuous phrases about rising tides lifting all boats are thrown into the debate, but it’s an analogy which isn’t as helpful as the initial image may appear. In the first place, only seaworthy boats are lifted – unseaworthy ones simply get inundated. Secondly, even for all the boats that are lifted, there is still a huge disparity between a superyacht and a dinghy, and rising tides do nothing to reduce that. Thirdly, at the risk of pushing the analogy too far, if the owner of the superyacht steals the sails and oars from the dinghy, the rising tide isn’t overly helpful to the guy in the dinghy.

The point is that whilst growth creates the potential to benefit all, the reality can be different: ignoring the question of distribution of benefit is akin to a belief in the magic of trickle-down economics. In the US, the proportion of GDP going to employees (through wages etc.) has fallen from a high of 58% in 1970 to around 51% today; over the same period, the proportion diverted into profit has risen to around 12%. There is a similar pattern in many other advanced economies, underlining the way in which the benefits of economic growth have been concentrated in fewer hands, leading to an increase in inequality. On the face of it, the UK is something of an outlier. According to this research, the proportions of GDP going to wages and profits have been remarkably stable in the UK, which might give us superficial hope that rising GDP will indeed benefit society more generally than is happening elsewhere.

As the research also makes clear, however, such high level statistics are hiding a pernicious growth in inequality. It’s not only the share of GDP going to ‘workers’ which matters, it’s also the way in which that is shared out amongst those workers. More detailed analysis shows an increasing remuneration gap between the lowest and highest paid workers, and that in turn leads to an increase in inequality, and means that an apparent increase in wealth is not being felt at all by many. It underlines the importance of governments avoiding a dependence on simplistic measures of ‘success’ such as overall GDP, or even average GDP per head. Growth per se is not enough. Even if growth is always possible and sustainable (which is a whole other, far from unimportant, question), we cannot ignore – as many politicians seem keen to do – the question of the way in which wealth and income are shared within society. Baking a bigger pie is not enough.