Inequality In Europe: What Can Be Done?

Patrick Diamond

Since the 1940s, the Left in most western European countries has relied on a combination of four strategies to tackle inequalities in the distribution of income and wealth. Firstly, the pursuit of full employment through Keynesian demand management. Secondly, state planning and nationalisation of the means of production. Thirdly, collective bargaining and the promotion of trade union power through the wage setting process. Fourthly, redistribution using the fiscal levers of the tax and benefits system to alter the income distribution along progressive lines. By the early 1980s, however, traditional egalitarian social democratic politics had been undermined in many countries.

For different reasons, each of these policy strategies developed problems, and steadily unraveled in the crisis years of the late 1970s. Keynesian principles became more difficult to operationalize in open economies where capital mobility and exchange rate fluctuations negated government policy action. Nationalisation of major public utilities proved problematic for economic efficiency and consumer welfare. Moreover, trade unions became increasingly unpopular among the working class with the growth of strikes and violent industrial unrest; the unions were too often seen as a producer interest in a world where voters increasingly perceived their interests as consumers. Finally, it was evident that redistribution had limits given the growth of tax resistance and hostility to public expenditure.

After a period in the electoral wilderness, the Left sought to devise a new egalitarian strategy centered on deploying the fiscal surplus from growth to invest in the welfare state and public services, alongside limited fiscal redistribution. That was the so-called ‘third way’ approach of the 1990s pioneered by Bill Clinton, Tony Blair and Gerhard Schröder. The third way involved a process of serious rethinking and a ‘new revisionism’ on the European Left; but because it enthusiastically embraced the liberalization of markets, particularly capital and financial markets, the 2008 financial crisis exposed the weaknesses in third way political thought. The crash revealed the essentially unstable and dysfunctional qualities of markets which had long been recognized by social democracy, but which the third way had failed to properly acknowledge.

New strategy

Today, in the light of such developments, social democrats have to devise a new strategy to make European societies and citizens more equal. Rather than simply returning to the tried and tested remedies of the post-war era, the Left has to shape an egalitarian programme that is relevant to contemporary economic and social circumstances. The descaling of economic production, the growth of flexibilization and specialization, the emergence of global production chains, and the impact of emerging digital technologies necessarily entails new egalitarian policies. In essence, it means a renewed focus on increasing the economic power of workers and wage earners in predominantly private sector markets. Such an approach is based around the rather inelegant term ‘predistribution’, but those measures have to be pursued alongside, not instead of, intelligent redistributive policies.

Predistributive policies fall into several categories. The first is concerned with boosting the relative earning power of low-paid workers: high quality, vocational education and training will help to increase productivity, but there should also be targeted support for low income households to improve human capital and labour market access, such as widening the availability of childcare. Empowering workers means tackling the drivers of labour market discrimination which result in persistent gender pay gaps, as well as discrimination against disabled employees and older workers. Raising wages for workers also entails increasing the supply of secure, well-paid jobs in labour-absorbing sectors such as social care.

The second category of predistributive policies are about cracking down on excessively high pay, unequal rewards and large wage differentials. Of course, it is essential to properly enforce minimum wages, harshly penalizing rogue employers. Moreover, the role of trade unions as labour market institutions providing a countervailing force against low wages and deteriorating terms and conditions ought to be encouraged. Corporate governance reforms such as worker representation on company boards can help to limit executive pay awards and maintain a fair ratio between the lowest and highest paid. There should be targeted action against unjustified rewards in the financial services sector, which too often sets a bad example to the rest of the economy. The case for global taxation of financial transactions remains compelling, but it requires international co-operation which has been lacking until now.

The third axis of predistributive policies is the reform of product, capital and consumer markets. The active state should use competition policy to drive down prices, especially in energy and utilities markets which have a disproportionate impact on vulnerable consumers. Despite the problems associated with state nationalization in the 1940s and 1950s, governments should be willing to use models of public or social ownership where natural monopolies allow private sector companies to indulge in egregious rent-seeking or price-fixing behavior that is detrimental to consumer welfare.

The fourth category of predistribution is to address growing precariousness among the younger generation that has suffered declining real incomes and living standards since the 2008 crisis. Government intervention should include increasing the supply of high quality social housing with fair rents, giving local public authorities the freedoms and resources to build more homes. There should be stronger incentives for students in low income households to enter university (including maintenance grants to help with living costs), but also much greater support to undertake vocational training and apprenticeships. Capital grants and ‘baby bonds’ funded through inheritance and wealth taxation will help to further equalize the distribution of assets, property and capital.

Beyond the nation-state

This is not an exhaustive list but illustrates the breadth of predistribution as an egalitarian strategy. In conclusion, three points ought to be made. Firstly, ‘redistribution’ and ‘predistribution’ are not mutually exclusive. Egalitarians need both. If predistributive measures are effective, they ought to raise the overall tax take by boosting employment participation; greater resilience in the tax base then increases the potential for redistribution and ‘social’ investment over the long-term.

The second point is that predistribution is often politically more difficult than traditional redistribution. Predistribution involves taking on entrenched vested interests, especially in the financial sector. It is important to highlight that lower inequality of primary incomes is positive for economic efficiency as well as social justice. Greater equality helps to create more stable market economies, balanced by societies where democratic politics rather than market forces prevail.

Finally, policy experience since the Second World War demonstrates that equality cannot be achieved solely within the boundaries of the nation-state. There is a growing need for co-ordinated action internationally to tackle tax avoidance and tax evasion, and to enforce common labour standards to prevent a race to the bottom in global markets.

This is the latest in a series on inequality in Europe sponsored by SE, the Hans-Böckler-Stiftung and the Friedrich-Ebert-Stiftung