Wealth gap keeps widening

The United Kingdom, like the United States, is becoming more and more economically unequal — that much is agreed. But the usual measure of inequality focuses on annual incomes, not assets or debts.

According to Real World Economic Outlook, this means we are failing to recognise what is really happening: an alarming polarisation in wealth, security and freedom.

Today, households believe the way to acquire wealth is to buy an asset — by borrowing, if necessary — and then wait for its price to rise.

Someone buying a house for £150 000 a year ago, for example, will have made a tax-free gain of £30 000, exceeding the average, post-tax annual income. It’s far easier to make money this way, they reckon, than to grow tomatoes or work a nine-to-five day.

Perhaps they are right. The share of Britain’s income that goes into rewarding labour, in the form of wages and salaries, has fallen from about two-thirds in 1975 to more than half today, with the balance shifting towards rewarding capital.

And if the middle classes are making thousands in this way, the rich are making millions. The more money you have to invest, the more money you can make. Unlike the earning of incomes, the accumulation of wealth (or assets) is not limited by the number of hours in a day or jobs on the market. So wealth inequality is increasing dramatically.

In 1976 the top 50% of UK households owned 88% of total non-housing wealth. Today they own 99%, meaning the bottom 50% of all households own 1%. In the US 80% of the fourfold increase in household wealth between 1983 and 1998 has accrued to the wealthiest 10% of households.

But the burden of debt is weighing more heavily on the middle classes and the poor. On average, households now owe 120% of their incomes. But averages can be misleading. According to the latest data (for 2000), households with an annual income of less than £115 000 owe 430% of their incomes, up from 330% in 1995. Those earning more than £50 000 have seen their debts increase from 104% of incomes in 1995 to 107% today.

Britain’s economic system is increasingly generating assets for the rich and debts for everyone else. Inequality of net worth — assets minus debts — is growing at a rapid rate.

The Third World debt crisis may soon be eclipsed by a First World debt crisis. When US interest rates rise, forced up by the soaring federal deficit and the country’s vulnerable external position, US consumers will start to feel the heat.

Given the US’s dominant global position, households everywhere will feel the pain. — Â

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