We need social investment to combat rising inequality

Blog entry
Date: 
28.01.2014
Author: 
Patrick Shine

In recent months I’ve enjoyed revisiting my former profession –as bond investor – as a slew of economic data has confounded the pessimists.  It does seem that the effect of the UK’s more flexible labour market, and our participation in China’s growth story, has been underestimated.  So it has been fun watching all the economists upgrading their forecasts of GDP which were proved wrong.

It does now look as if the jobs market is building nicely and construction – important for many social enterprises – is recovering strongly after years in recession. And real disposable income may well stop falling as inflation falls and overall wages pick up a little in line with business confidence.

However, this recovery has been marked by significant increases in inequality (which Will Hutton argues is the real issue) and it is not at all obvious that this will reverse. Asset owners, especially London property owners, are doing great. Artificially low interest rates have done the trick of inflating all asset prices – but there is minimal evidence this trickles down into the waged economy.  Meanwhile, the decline in real incomes of the lowest paid has been profound, and the changes to the structure of low-pay wages – zero hours contracts, part time work, benefits and the like – this is a source of real concern. When a Conservative Chancellor advocates a rise in the minimum wage you know something is out of line.

How much does inequality matter? Inequalities in health outcomes are quite sticky, but overall health outcomes are improving for everyone. So some people might not care so much about that.  Similarly, Britain needs to improve education outcomes across the board, in order to be competitive in the global market - but excellent education for the less well-off is critical for social mobility. So people seem to care quite a lot about inequalities in education.

Perhaps it’s more an issue of how much inequality there is. My view is that, like pizza, too much inequality is a bad thing. Specifically it creates mental and institutional barriers to social mobility, lowers expectations and increases resentment. The emotional distance between people increases, which reduces philanthropic and community activity. And over time inequality leads to exclusion, with groups of people permanently excluded from markets – arguably this has already happened for young people priced out of the London property market. The rise of pay day lenders reflects the exclusion of poorer people from mainstream banking services. Not all changes are bad – the drop in alcohol expenditure by young people is partly influenced by declines in their spending power.

It is tempting to see redistribution as the only way to tackling inequality, but this ignores how inequality develops in the first place. So I believe that any redistribution policies need to be complemented by two further strands of activity that are well suited to interventions from Social Ventures.

Improving access to asset markets for low income groups: A real good example of this is FranchisingWorks. Although most stakeholders see FranchisingWorks simply as an addition to the range of options offered to unemployed people seeking work, it has a more profound impact. The reason is the franchisees get to own their business if they perform well. This transforms their role in the economy as they become buyers of labour as well as sellers, and have the chance to build up their own net worth.

A broader application of the same principle is improving access to the (owner occupied) housing market, through innovations in finance and tenure. Housing associations have an important role to play here.

Lowering the cost of being poor: Much of the recent tribal warfare about poverty has missed an important point – that being poor means you pay more for certain goods and services – in actual terms as well as relative terms. Not having a credit card means you pay more for mobile telephony, for furniture, and most famously for loans. Even before the iconic purchases of trainers, tattoos and TV’s, people on low incomes are at more of a disadvantage in purchasing basics than their critics. So social enterprises such as FRC (providing affordable furniture), and Five Lamps (providing affordable loans) are lowering the costs for people on lower incomes. There are many more examples.

Let’s have more social investment

As I reflected on these examples, I realised there was a common thread. Each of these programmes or enterprises relies on some sort of social investment to support them. As Big Society Capital gets into its stride, we can expect such programmes to flourish and multiply. In doing so, the social investment sector can play an important role in levelling the playing field, by providing the liquidity that improves access to both consumer and financial markets, and thus reducing the underlying inequality that has driven the increasing wealth imbalance seen in recent years.

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