Mr Medlock and the Classics: Part V

Wealth disaggregation in practice

There’s no point in doing all of the above if 40% of society’s output is accrued on the basis of no labour and is disproportionately going to the wealthy. That’s why, as important as employment and labour income is, we also need to look at the role capital income and wealth plays in economic inequality. Unsurprisingly, wealthy people have more to save and earn more in capital income. But crucially, they not only earn more via the volume of wealth, but they get higher returns on their wealth. In short, the rich get richer and small disparities in initial endowments create a feedback loop that magnifies the gap.

This is why some have suggested a social wealth fund - this is where the government would have a large fund of assets it invests in, with every member of society owning a share and earning dividends from that. We’ve seen in the case of Norway that this is perfectly doable - its government owns around 60% of its country’s wealth, with seemingly no economic calamity in sight. And funding it is also very much workable- this could be done by a financial transactions tax, forcing companies to issue shares or countercyclical asset purchases etc. The result is a universal dividend that provides some poverty relief and addresses wealth inequality without being a tax. Although there are some critiques of this, these tend not to hold up. In particular, the ownership of firms is not the determinant of efficiency as much as competition is, so there isn’t a danger of a SWF leading to reduced market pressures.

There’s one thing that’s so far been missing from this discussion of wealth - that is of where the capital share actually goes to. Some might remember the kerfuffle that Matt Rognlie stirred up half a decade ago, when he published his paper on the net capital share. One important component of his work was to suggest that the main mechanism by which capital’s share of income was rising was in housing. That has important implications, because it means we need to think about rising housing prices and housing scarcity. Coupled with the possibility for landowners to capture the gains of a well-funded welfare state, it is important to support YIMBYism that expands the housing supply.

Policy in practice

Ultimately, there’s a whole set of plausible policy platforms that could be formed on the basis of these five principles. Some have argued that we ought to be looking at healthcare at a national level and housing at a local one, in terms of things to focus on first. Other higher priority areas might be supporting childcare. Or maybe sectoral wage bargaining might be up there.

But regardless of what one chooses to prioritise, two things ought to be kept in mind. Firstly, the long-run sustainability of these programs depends on people having positive interactions with government and having confidence in the state - that means it’s worth building up state capacity. And at all levels of government, because in many cases state-level rather than national-level change represents the most plausible avenue of change. Secondly, these principles work best together i.e. they are complementary not just in political messaging but also in practice.

The societal allocation of income, wealth, opportunities and services is entirely institutionally constructed. There is no such thing as a baseline pre-intervention state of the world. Nor do people get a choice of who they are born as - as such, everyone deserves equal moral worth. That’s why we should craft our laws to provide a competitive egalitarianism. In a market economy, it means raising taxes to redistribute as welfare and services. It means giving everyone the equal chance to access the labour market. It means providing each and every individual with a stake in the collective wealth. And this is exactly what the five areas I’ve outlined achieve.