The real problem? We can’t build anything.
This article originally appeared at CapX.
On 4 December, the LSE Hayek Society organised a panel debate between Gary Stevenson and Kristian Niemietz on the question “Are the super-rich destroying the UK?” The article below is based on Niemietz’s opening remarks.
The British economy is not in great shape, and it has not been for quite some time. This is a statement of the obvious.
We have had 18 years of exceptionally weak productivity growth, and as a result, 18 years of exceptionally weak growth in real incomes. This is an anomaly by the standards of the previous 200 years or so of economic history.
On top of that, we also have a massive housing affordability crisis. In the 1990s, the average house price was less than four times the average annual gross salary. Today, it’s about eight times that. So we have the dreadful combination of a nearly stagnant economy with sky-high housing costs.
These problems are not unique to this country, but they are more pronounced here than in most other developed economies, some of which have managed to avoid those problems altogether. Britain is performing badly relative to its own past, and relative to its peers.
So it is unsurprising that people from very different parts of the political spectrum are asking themselves why that is, and what can be done about it. What has caused this slowdown in economic growth? What has caused the housing crisis? And how do we get out of this situation?
Gary Stevenson thinks that he has discovered the root cause of Britain’s malaise: wealth inequality. In his version of events, the super-rich are monopolising all the assets, including property and they are using the returns on those assets to buy even more assets—a self-reinforcing downward spiral. A small, super-wealthy elite is getting wealthier and wealthier, while the rest of the country is sinking into abject poverty.
Gary has assembled a mass following on the basis of this thesis, so it is clearly persuasive to a lot of people. It is also completely wrong, for a number of reasons.
For a start—wealth inequality is not even particularly high in this country. It is not high by historical standards, and it is not high by international standards.
The wealthiest 1% hold about 22% of the total wealth. That is much less than it used to be for most of the 20th century. It is also much less than it is in most of the rest on the world. The EU average is about 25%, Japan is about the same, and in the US, that share is more than 35%.
This is not a defence of the current distribution of wealth. The point is simply that if we want to know why Britain is doing badly relative to its peers, and relative to its own past, we need to find some factor that makes present-day Britain, to some degree, different from its peers, and different from its own past. Whatever that factor is—it is not wealth inequality.
So much for wealth inequality. But Gary’s argument also breaks down on a different level.
Let’s have a look at the composition of wealth at the top of the distribution: what types of assets do the super-wealthy own?
Among households with net wealth levels of £5 million or more, over 40% of that wealth is business wealth. These are people who own successful businesses. Obviously, this does not mean that they’re all self-made entrepreneurs: business wealth can be inherited. We are not living in an Ayn Rand novel, where the wealthy are all self-made superheroes. But the point is that business wealth is not the sort of wealth that they have taken away from anyone else, or that they are just passively hoarding without doing anything with it. It is certainly not the sort of wealth that is fixed in supply, like gold or Rembrandt paintings.
Financial and pension fund wealth also accounts for over 40% of the wealth portfolio of the households with more than £5m in net wealth. Property wealth, on the other hand, is not a huge part of it: a sixth of the total at most, and probably less if we go further up the wealth distribution.
This makes perfect sense. As people get wealthier, they can buy more shares and bonds, but it makes no sense for them to buy more and more residential properties. Even Elon Musk can only be in one place at a time, so there would be no point in him owning thousands of homes, even though he could easily afford that.
So it is clearly not the case that the super-wealthy are hoarding all the property. We can also see this if we look at the raw numbers. In this country, the rate of second home ownership is astonishingly low—one of the lowest in Europe. In France, where they build a lot more, it is completely normal for better-off people to have holiday homes, on the coast or in the countryside. In the UK, that is a rare luxury. Only about 3% of the population have a second home (which usually means a holiday home in Cornwall, Devon, or the Welsh coast, not a place in a major population centre).
So if wealth inequality is not the issue—what is?
It is something extremely mundane and unexciting: we have made it too difficult to build anything in this country. We are not building houses, we are not building business premises, we are not building infrastructure, we are not building power stations—we are not even building water reservoirs.
Britain is 4 million homes short of the European average. Similar data for office buildings, retail and hospitality venues is harder to come by, but there has to be a similar gap for those. The road network is about a third below EU average. Electricity output is about a third below the EU average. Britain needlessly deprives itself of some of the key input factors of a prospering economy, much like the pot of a Bonsai tree deprives the roots of the tree the space it needs to grow.
And that, ultimately, is the main problem with this obsession with wealth inequality. It is not just that it lends itself to bad policy prescriptions, like the wealth tax. The bigger problem is the opportunity cost. Every minute we spend talking about wealth taxes and wealth inequality is a minute we no longer spend talking about how to build things. It is a minute we can no longer spend developing an agenda of “Abundance Yimbyism” applied to a British context.
An agenda of Abundance Yimbyism would not have to be a free-market libertarian agenda (although it would be even better if it were). It could have distinct centre-left flavours, as it does in the US.
But the British Left is distracted with other things, such as obsessing about the non-issue of wealth inequality. Wealth is not fixed, but political energy very much is, and it is in short supply. At the moment, too much of it is wasted on dead-end projects such as “Gary’s Economics.”
