Trickling Down in the UK

August 12, 2015
Posted by Jay Livingston

An essential tenet of the creed of free-market economics is that the success of capitalists benefits everyone. The wealth created eventually flows through the entire society. Some nonbelievers scoff at this notion. They see not a flow but a trickle.  And sometimes even the trickle doesn’t trickle all the way down.

Tom Forth tweeted this graph showing how inequality and the income of the poor in the UK changed under the different governments since 1964. Each dot represents a year. To trace the chronology year by year, connect the dots. Years of the Conservative government are in blue, Labour in red (a reversal of the US color convention). 

(Click on the graph for a slightly larger and perhaps clearer view.)

In the Thatcher years, inequality as measured by the Gini index increased greatly increased, from about 0.26 to 0.34.  No surprise there given the Conservative ideology of Less government spending, more tax cuts. As Wikipedia says, “Thatcherism claims to promote low inflation, the small state, and free markets through tight control of the money supply, privatisation and constraints on the labour movement. It is often compared with Reaganomics in the United States. . . .” 

The UK economy as measured by GDP grew, though on the whole, the growth in the Conservative Thatcher years was no greater than it had been under the Labour governments of Harold Wilson. 

Clearly, the Thatcher years were very good for those at the top. But did the rising tide lift the boats of the UK’s poorest, the bottom 10%? Barely, according to Forth’s graph. Their annual income went from about £6100 in 1979 to about £6300 a decade later.The line on the graph moves upward vertically (the Gini co-efficient), but on the Income axis, it moves hardly at all.

By contrast, under the Labour government of Tony Blair, the Gini index of inequality changed little – a little up, then a little down – and the income of the poorest 10% grew from £6600 to about £8500 (adjusted for inflation). When inequality stopped increasing, the poor did much better.