Wealth, power and fairness: in conversation with Mike Brewer

The Resolution Foundation's Deputy Chief Executive on why the absolute size of wealth gaps matters as much as the relative ones, what extreme wealth does to power, and much more...

The Parable of the Rich Fool (Rembrandt, 1627)

For several decades, the standard measures of wealth inequality in Britain have barely moved, which has led some to conclude that wealth inequality isn’t a problem worth worrying about. Mike Brewer, Deputy Chief Executive at the Resolution Foundation, thinks that this reading of events misses the bigger picture. I sat down with him to talk through what we should actually be worried about, from the absence of wealth at the bottom of the distribution to the billionaires at the top, and how to persuade policymakers of all political persuasions of the urgent need for action.

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Should we worry more about the relative gap in wealth, or the absolute one?

Our view at the Resolution Foundation started from the particular circumstances of the UK, not from a philosophical position. The striking observation is that for 30 or 40 years, relative wealth inequality has barely budged. It fell for most of the 20th century, bottomed out in about the late 1970s, and has stayed flat since. People conclude that if it isn’t going up, maybe it isn’t a problem.

But at the same time as relative inequality has been broadly static, the total amount of wealth in the economy grew almost continuously from the 1980s to at least the financial crisis — and that produces growing absolute wealth gaps, which definitely are a problem. So you need both lenses at once; either on its own doesn’t tell you enough.

An extremely unequal society with hardly any wealth might pose no problem at all. But a society with a lot of wealth that’s badly distributed should worry you, because the sheer size of wealth, in pounds, that rich people hold lets them do things others can’t. Wealth is only useful when you use it, so the gap that matters is the gap in spending power. A trick we borrow from the late Sir John Hills is to express wealth gaps as a multiple of typical earnings or household spending: it captures just how much more the wealthy can do than everyone else, and how long it would take someone to work their way up the wealth distribution. The wealth gap between the top wealth decile and the fifth wealth decile increased from 38 times typical full-time earnings to 52 times between 2006-08 and 2020-22.

And at the very extreme — the billionaire end?

That’s a different kind of concern from our traditional worry at the Resolution Foundation about the top 10 or 20 per cent. With extreme wealth comes extreme power. If your wealth is meaningful as a fraction of the economy, you can intervene in ways no one else can. I don’t just mean political power; I mean economic power too. You can see it with some tech billionaires: if they decide something should happen, it happens, almost regardless of the underlying economics. In a capitalist economy, that much wealth lets you bend the rules or ignore the constraints that the market would otherwise place on you.

It’s possible that the highly disruptive power of AI, combined with extreme wealth inequality, means that very wealthy people will have the power to do even more; it’s not so much that AI is the problem here, but such disruptive (but also expensive-to-develop) technology could make the problem of wealth inequality even worse. And in a more uncertain, more disruptive world, financial resilience matters more, and wealth is the best form of resilience. So an unequal wealth distribution plus lots of disruption is likely to mean that people will feel the shocks from any future technological revolution very unequally.

Is the core problem inequality of outcome, or unfairness?

It’s both. There’s a well-established argument — Joe Stiglitz made it powerfully for the US — that very high incomes and wealth distort the economy: when the prizes are huge, people spend their energy protecting their gains rather than creating value, and then use their money to buy political clout to lock those gains in, by shaping competition law or protecting the rents they extract.

But that’s a problem confined to the very top — the top half a per cent or so. I’m also concerned about inequality across the whole distribution, not just the top half a per cent, because of the way it affects social mobility. People who accumulate wealth tend to use it to help their children — that’s human nature. Whether through bequests, or private tuition, or moving to the right catchment area, or buying your adult child a flat in London, wealth gets transmitted between generations and stacks the odds for the next one. The more wealth there is, the more it matters who your parents are. This isn’t just Piketty’s worry about trust-fund kids at the very top; I’m just as concerned about someone at the 80th or 90th percentile of the UK wealth distribution using their wealth to give their children a leg-up in ways that are unaffordable for someone in the bottom half.

On fairness, the public’s instincts don’t always match an economist’s. People do tend to think income from work is fair — high salaries are justified if you’ve earned them. And they’re deeply attached to passing on wealth: the strong opposition to inheritance tax comes from a feeling that it’s your right to leave what you’ve accumulated to your children, and they see no unfairness in it, despite how much it skews the odds. The public may accept that the very extremes look unfair, but they seem fairly relaxed about millionaires if the money was earned.

Where does relative poverty fit into the picture?

There’s an old criticism that relative poverty is just income inequality by another name — mathematically that’s roughly true, and I actually don’t have a problem with such a characterisation. I’m very happy to accept that poverty is a relative concept; that goes back to Adam Smith — what people expect as a reasonable standard of living depends on society’s overall resources. So I have no problem with relative poverty being a measure of bottom-half income inequality by another name.

The same logic applies to wealth. In the UK we have a real problem in the bottom-half of the wealth distribution: far too many people have no wealth, or negative wealth. The difference between having nothing and having even one or two thousand pounds is enormous — far bigger than the difference between £10,000 and £20,000. With no cushion, you’re acutely vulnerable to any shock, and that insecurity shapes the choices you make at work and at home. Median wealth in the bottom half is close to zero, so I do think relative wealth poverty – or some focus on the bottom half of the wealth distribution, and not just the top - is a sensible thing to measure.

Which is why you support a Citizen’s Inheritance?

Yes. Too many young people have no wealth at all. The jump from nothing to £10,000 gives you a cushion: it lets you make different choices about education, brings you a couple of years closer to being able to put down a deposit on a home, maybe lets you feel able to start a family earlier. Even if it’s not transformative, even if it doesn’t let you buy a house the second you turn 18 or 25, it brings you closer.

And if you’re serious about wealth inequality, you have to face a hard truth. Taxing wealth only brings down the top; encouraging saving does little to boost wealth, because people don’t save much. If you actually want to lift up the bottom of the wealth distribution, you have to give some money away. The Resolution Foundation’s proposal from our original Intergenerational Commission — funding a Citizen’s Inheritance by replacing inheritance tax with a lifetime gifts tax — is a double hit: it taxes large inheritances as they’re received, and boosts those with nothing. It’s might also be more politically acceptable than simply raising income tax.

Is there an optimal level of wealth inequality that recognises both the need to incentivise and reward effort and the harms causes by the current wealth gap?

On income, there’s no strong link between a country’s overall inequality and its affluence or growth; the UK just happens to sit in the high-inequality, not-great-living-standards corner. Should we or could we try to put a ceiling on inequality? At the top end, capping incomes risks people or firms simply moving abroad. But there must be a point where most of us would agree no one needs more — and I’d locate it where an individual’s wealth becomes large enough to have a noticeable effect on the economy or on democracy. And I feel that danger point is far, far higher than any level at which we’d actually blunt someone’s incentive to work or save.

I’m wary of prescribing an ideal shape for the wealth distribution, because wealth is bound up with age and inheritances — you would have to age-standardise before comparing anything, and even then, the wealth distribution reflects the accumulated inequalities of several generations. But on top of reducing the level of wealth inequality, countries concerned about its impact could take a different approach: to make wealth matter less. Scandinavian countries aren’t necessarily more equal in wealth than the UK, but they soften the impacts of wealth inequality with strong public services and a better social safety net, as well as limits on how the wealthy can influence politics. We could go further, for example through lotteries for school or university places, to limit how far parents can buy advantage. It shouldn’t be either/or: we should be thinking about reducing the extremes of wealth inequality at both ends of the distribution, as well as taking action to reduce the harms caused by it.

How much does the thinner evidence base on wealth inequality hold us back?

We have better data on income than on wealth, so researchers tend to reach for income data, especially if their theory is vague about whether they are talking about income or wealth. That should spur us to collect better wealth data. That said, income and wealth tend to move together, so even if you have great data, it’s tough to tease apart separate impacts.

But when it comes to making the case for action, I suspect we can be a bit more relaxed. When people come up with theories for why inequality might be damaging, I don’t think they have in mind something precise — and I mean that in a good way. The theories about why inequality is damaging rarely specify income or wealth — they’re really about inequality in command over economic resources. So whatever is linked to income inequality is almost bound to be linked to wealth inequality too, and the public treats the two as much the same thing.

What about the lack of causal evidence for the impacts of wealth inequality?

I think the evidential pluralism approach (where you set out the hypothesised mechanisms and study each link in the chain) ought to be enough. We’re never going to run an experiment to see how the UK would have turned out without the Thatcher revolution of the 1980s, which let income inequality rise massively. So we’re never going to have fantastic causal evidence at the country level. The best we can do is some descriptive evidence, or evidence about associations, at a high level, and then ideas about mechanisms — some of which we can study in detail and be more causal about, perhaps not at the national level but at the level of a town, a firm, or sometimes a more artificial environment where we get solid results. We can’t run experiments on countries; we’re never going to throw enough control factors into the regression for a quantitative social scientist to say, yes, that’s causal. But it’s not enough to rely on small-scale experimental evidence, but if that’s the only way to show causality, and you’ve also got lots of descriptive, associative and highly suggestive real-world data, then to me that’s the best chance you’ve got of making the case.

Taking a step back, there’s always going to be difficulty getting rich and powerful people to accept that there’s a link between being rich and being powerful, and that it can have damaging impacts. The quality of the evidence isn’t going to persuade those people, and when they can influence the political debate or the public narrative to the degree that they can today, maybe that’s where we should focus our attention instead.

Mike Brewer is Deputy Chief Executive at the Resolution Foundation. He was talking to Will Snell, Chief Executive of the Fairness Foundation.