Since the financial crash of 2008 national and international authorities have implemented a range of reforms aimed at reducing the risks which individual financial firms can take, and the systemic risks which the financial system as a whole poses to the rest of the economy.
But critics of the structure and behaviour of the financial system argue that these reforms do not go far enough. They note that the incentives faced by financial companies and the herd-like behaviour of financial markets tend to drive asset bubbles in an upswing and exacerbate recessionary forces when the economy experiences a downturn. Closer regulation of the shadow banking sector and stronger counter-cyclical measures are required if financial instability is to be reduced.
The financial crises of 2008-12 showed that, while shareholders gain the benefit of financial firm profitability, major losses will be borne by debtors, and by society and taxpayers. A number of reform proposals therefore focus on ensuring that financial firms share the liability for failure.
The financial system connects savers and investors. But recent decades have seen the growth of 'agency capitalism', in which a wide range of financial intermediaries manage investment funds. Reformers seek to ensure that such companies have stronger fiduciary duties to act in the interests of savers.
Deeper financial reform proposals centre on the goal of creating a 'purpose-driven' financial system, designed to serve the rest of the economy rather than itself, and in particular which supports efforts to build a more environmentally sustainable and inclusive economy.
The NGO Finance Watch sets out why deeper financial system reform is needed, and the principles on which it should be based.
The Finance Innovation Lab explains the concept of 'purpose-driven' financial regulation, exploring how current regulatory assumptions hinder financial firms focussed on social and environmental impact. It argues that regulators need to be given new mandates on the purpose of finance; a different mindset, embracing purpose-centred business models; and new metrics that assess how well the financial system and financial firms are fulfilling their ultimate purposes.
The Finance Innovation Lab explains the different ownership structures and business models of purpose-driven and non-shareholder-based financial institutions, including building societies, credit unions, mutual and ethical banks, and community development finance institutions (CDFIs). It discusses the barriers to a further scaling-up of these models and how they can be overcome.
In a policy briefing for Economists for Inclusive Prosperity, Atif Mian examines the economic impact of the growth of credit and debt. Among his policy proposals to reduce financial volatility is the use of ‘state-contingent contracting’ which allows a more equitable sharing of risk between creditor and debtor in the event of a wider economic downturn.
In a SPERI blog, economist Johnna Montgomerie proposes a 'modern debt jubilee', in which targeted debts of low-income households would be written off. Such a measure, she argues, would bring macroeconomic renewal by freeing up household cash-flow in the same way as a tax cut, and help relieve poverty. It would signal an end to debt-dependent growth.
Wealth is far more unevenly distributed than income. In 2016-2018 the wealthiest 12% of households owned half of the UK's wealth, while the least wealthy 30% of households held just 2%. The poorest tenth of the households have negative wealth: that is, their debts exceed their assets. Measured by the Gini coefficient, wealth inequality has increased since 2006-8, with financial and property wealth showing the largest rise.
Pension wealth has become more equal in this period, as automatic pension enrolment has been rolled out. The rise in property values has led to a sharp increase in intergenerational inequality. For the most part, income and wealth are closely linked, with high incomes allowing people to accumulate assets, which have consistently grown faster in value than national income over recent decades. The poorest households most exposed to income shocks often have no savings to fall back on.
One consequence is the increase in low income households turning to debt to cover essential needs - rent, food, utility bills - over the past decade, and the increasing use of food banks.
The World Inequality Database, established by Thomas Piketty, Gabriel Zucman, Emmanuel Saez and colleagues, provides a comprehensive set of data on income and wealth inequality in countries across the world.
The Resolution Foundation has published a series of reports outlining the extent and character of wealth inequality in the UK.
The Resolution Foundation's Intergenerational Commission has documented the inequalities between generations in the UK, noting in particular how today's younger generations are much worse off in terms of housing and pensions than previous generations.
The multiple drivers of income and wealth inequality mean that many different kinds of policies and approaches are needed to reduce them. One of the core features of the growth of inequality in most high-income countries since the 1970s is the significant fall in the proportion of national income which has gone to wages and salaries (the 'labour share') and the corresponding rise in the proportion which has gone to the owners of capital assets (such as company shares and land and property). This suggests that policy needs to focus, on the one hand, on raising the productivity of labour and the bargaining power of workers; and on the other on reducing the rate at which assets appreciate in value. Both kinds of approach would reduce the growth of 'market' income and wealth, before tax. Reforms to the tax system and welfare measures can then further reduce inequality.
In recent years the growth of low-paid and insecure jobs has led many to argue that there needs to be a revival of the role of trade unions in the labour market, able to bargain collectively on behalf of workers and employees. There is a strong correlation between the decline of union membership in most high-income countries since the 1970s and the rise of income inequality. Productivity improvement - for example through automation - will enhance wages, but only if the benefits are shared between workers and the owners of the automating technologies and software.
Over recent decades there has been an increasing concentration in the ownership of company shares, and the values of stocks and real estate have grown substantially faster than national income (GDP). Companies have become more 'financialised', using more of their profits for dividends and less for investment, and and banks (particularly in the UK and US) have lent increasing sums for land and property. Various proposals have been made to counter these trends, including stronger financial regulation, higher taxation of financial companies and transactions and new forms of corporate governance. There have also been proposals to widen the ownership of company shares, both to their workers and the population as a whole.
Writing for Economists for Inclusive Prosperity, Dani Rodrikand Stefanie Stantcheva have created an organising framework for policies to tackle inequalities, including a taxonomy of policies to distinguish the types of inequality being addressed and where the intervention takes place.
The TUC argues that collective bargaining is a public good that promotes higher pay, better training, safer and more flexible workplaces and greater equality. It proposes a range of measures to give unions greater access to workers and workers greater rights to join unions. Detailing trends in union membership and the evidence relating this to inequality, a report for the IPPR Commission on Economic Justice makes similar proposals.
A paper for the IPPR Commission on Economic Justice sets out how trends in automation and artificial intelligence are likely to increase inequality, and proposes a process of 'managed automation' to share the benefits of productivity improvements between workers - including those displaced - and the owners of capital.
The final report of the IPPR Commission on Economic Justice, Prosperity and Justice, sets out more than 50 policies which can reduce inequalities in income and wealth, between geographic areas and between genders and ethnic groups.
A report for the Friends Provident Foundation proposes the creation of a Citizens' Wealth Fund, a national sovereign wealth fund which would take gradual ownership of company shares on behalf of the public and distribute a dividend to citizens. IPPR has made a similar proposal.
A report published by the LSE's Inequalities Institute examines the economic consequences of major tax cuts for high income earners in a variety of countries over the last 50 years. It shows that such tax cuts increase income inequality but do not have any significant effect on economic growth or unemployment. A report for the IPPR shows how the UK income tax system could be made more progressive.
The ownership of UK firms is highly concentrated. Apart from institutional investors such as pension funds, individual share ownership is dominated by the wealthy, many of whom are based overseas. Since the 1980s successive governments have privatised previously public-owned industries such as rail, water and energy. Few workers hold shares in the firms in which they work and the UK cooperative sector is smaller than in many other countries.
Over recent years there has been increasing interest in how ownership can be widened. One way is through nationalisation, in which the state would take equity stakes in companies in major sectors, such as energy or rail. Another is by giving ownership stakes in companies to their workers. This can be done either through individual or collective employee share ownership schemes.
A particular proposal is for democratic ownership funds, in which firms above a particular size would be required to transfer ownership of a percentage of their equity to funds managed by representatives of their workers. This would widen the distribution of profits and, in the process, give workers a say over how the firm is run.
The idea of widening ownership can also be applied to other assets. For example, in online transactions consumers provide large amounts of personal data for free. This data has considerable commercial value to the firms who collect it. Proposals to reform the regulation of digital companies include making ownership of data a common resource of benefit to the community or requiring private companies to make data publicly available.
Co-operatives UK's 2021 report on the UK’s co-operative sector found that co-operatives were four times less likely to close in 2020 than firms in general and the number of co-ops grew by 1.2% despite the economic downturn.
Common Wealth calls for the establishment of democratic ownership funds as a way of democratic ownership funds as a way of democratising the ownership of firms and giving employees a share of company profits.
CLES explains how promoting social enterprises (businesses with social aims and democratic structures) can address local inequalities and ensure that wealth is retained within local areas.
CLES's Community Wealth Building Centre for Excellence illustrates where and how local authorities are promoting democratic ownership across the UK.
IPPR argues that big tech companies should be required to open up their data to the public to prevent them monopolising the benefits of the digital economy and enable other businesses and civil society to use data for the public good.
The Democracy Collaborative and Common Wealth show how digital infrastructure can be democratised as a 21st century public good, underpinned by democratic ownership and governance.
The ownership of UK firms is highly concentrated. Over the last fifty years there has been a dramatic decline in the proportion of shares held by ordinary individuals. Share ownership is dominated by institutional investors such as pension funds, asset managers (many now operating passive investment funds), and the wealthy, many based overseas. Since the 1980s successive governments have privatised previously public-owned industries such as rail, water and energy. Few workers hold shares in the firms in which they work and the UK cooperative sector is smaller than in many other countries.
In recent years there has been increasing interest in how ownership can be widened. One way is through public ownership, in which the state takes equity stakes in companies in major sectors, such as energy or rail. Another is by giving ownership stakes in companies to their workers. This can be done either through individual employee share ownership schemes, or through collective worker ownership funds which would both widen the distribution of profits and give workers a say in how businesses are run.
Another route increasingly advocated would be through the creation of a national ‘citizen’s wealth fund’, which would build a portfolio of company shares and distribute a dividend to every citizen.
Common Wealth and the Democracy Collaborative argue that ‘democratic public ownership’ – assets, services, and enterprises held collectively by everyone in a specific geographic area, either directly or through representative structures – must play a crucial role in a more equitable and sustainable economic system.
The IPPR calls for the creation of a publicly-owned ‘Citizen’s Wealth Fund’, built up by the gradual acquisition of equity stocks, which would distribute a dividend either to all citizens or to all younger people. The Friends Provident Foundation makes a similar proposal.
Common Wealth calls for large companies to be required to distribute a small percentage of their shares over time to democratic ownership funds owned and managed by their workers. This would both democratise the governance of firms and give employees a share of company profits.
The ESOP Centre describes the benefits of employee share ownership schemes, under which employees can either own shares in their company directly, or through collectively managed trusts.
Economists Emmanuel Saez and Gabriel Zucman proposed a tax on corporations’ stock shares for all publicly listed companies with headquarters in G20 countries. The authors propose a 0.2% tax on the value of company stocks to raise approximately $180bn each year, levied through share issuance to directly redistribute ownership of companies so that the tax avoids liquidity issues and does not affect business operations.
The idea of ‘wellbeing’ is now widely used to characterise the goal of a flourishing economy.
Wellbeing includes income but is not limited to it: it also includes other factors, including the quality of work, physical and mental health and public goods (such as the natural environment and social cohesion) that make up people’s overall quality of life. The general concept of wellbeing includes both individual life satisfaction and the flourishing of society as a whole.
A common focus of those arguing for a ‘wellbeing economy’ is that we need new indicators to measure economic and social progress, in place of growth of GDP (see below). Economic and social policy needs to be designed to achieve wellbeing directly, rather than relying on economic growth.
A number of countries, including Iceland and New Zealand, are using ‘wellbeing budgets’ and new indicators to try and ensure that this is achieved.
The Wellbeing Economy Alliance (WEAll) defines what is meant by wellbeing, and explains the policy pillars which can help achieve a wellbeing economy. A range of policies are currently being implemented around the world which are promoting wellbeing economies in practice.
In 2019 the All Party Parliamentary Group on Wellbeing set out a £9.5 billion policy agenda to improve wellbeing. It proposes targeted action in key areas including mental health provision, childcare, job creation and wellbeing at work.
HM Treasury has published its supplementary guidance to the Green Book covering the consideration of wellbeing as part of the government’s cost benefit analysis and evaluation of spending decisions. The What Works Centre for Wellbeing provides a summary of the aims and links to resources in the document, as well as an evidence base for policies which can increase wellbeing, and a range of policy case studies.
Duncan Fisher explains how New Zealand, Iceland and Scotland are using wellbeing budgets and alternative indicators to change the way they make policy.
The wide disparities in the distribution of wealth have led to an emerging consensus that the way in which wealth is taxed needs to be reformed. While wealth has soared relative to incomes over recent decades, with these gains concentrated very narrowly among high-income households, the tax take from wealth has remained flat.
Property wealth constitutes an important part of this. House prices in the UK have tripled relative to incomes since the 1970s, a key driver of economic inequality. But soaring property values have been left largely untaxed, with a council tax system still based on 1991 property values. Economists point out that land and property taxation is an efficient mechanism since they are fixed and their rise in value often occurs without any work, effort or skill on the homeowners’ part.
Income from wealth , including dividends and capital gains, is currently taxed at lower rates than income from work, one reason why the very wealthy pay a much lower effective average rate of tax on their remuneration. The system of inheritance tax includes a range of reliefs and exemptions, which can allow the wealthiest estates to avoid it: the effective rate of inheritance tax paid on estates valued at over £10 million is half that paid on those with a value of £2-3 million. Tax avoidance schemes also allow the very wealthiest to circumvent tax. Among the wealthiest 0.01% of household, who hold 5% of national wealth, approximately 30-40% of wealth is held offshore.
Proposals for tax reform include equalising the rates of tax on income from wealth and income from work; reforming land and property taxation; reforming inheritance tax; and proposals for annual or one-off taxation of household wealth.
IPPR have published proposals to equalise the rates of tax on income from work and wealth and integrate all income into a single progressive tax schedule. It estimates that such reforms could raise around £100bn in annual revenue.
The Resolution Foundation outlines how a series of relatively minor reforms to the taxation of wealth which could raise significant sums without, it argues, significant political opposition.
The broadly-based campaign group Fairer Share outlines the case for a proportional property tax to replace council tax, thereby bringing property taxation into line with the principle that taxes should be progressive (rising with ability to pay). The Institute of Fiscal Studies has argued for the reform of council tax to make it more progressive, while IPPR has proposed the abolition of business rates and the introduction of a land value tax which would capture the increase in land value when planning permission is given.
University of California economists Emmanuel Saez and Gabriel Zucman outline how a progressive wealth tax could work, drawing on a wide range of evidence on wealth inequality, technical feasibility and economic impact.
The UK Wealth Tax Commission established by the LSE has explored the viability and desirability of a wealth tax in the UK. Its final report concludes that a one-off wealth tax set up to respond to the impacts of Covid-19 could raise £250 billion over five years. The IMF has proposed a similar temporary 'solidarity levy' on richer households to pay for measures to combat post-pandemic inequality.
IPPR proposes the abolition of inheritance tax and its replacement by a donee-based gift tax which would tax all gifts over a minimum amount, thereby encouraging the dispersal of estates and reducing avoidance.
A healthy natural world is a necessary precondition for healthy societies. Hunger cannot be kept at bay without fertile soil, long term economic planning is impossible in a world of persistent catastrophic storms. In many ways, the fundamental benefits of nature to our economies is not included in how markets and governments value economic decision-making.
Natural capital, a concept that underpins the Government’s 25 year plan for the environment, seeks to calculate the value of those bits of nature that are typically seen as being free. The idea is that putting a figure on the value of nature will lead to better decisions by government and in markets. Some reject this idea, questioning how a value can be put on the aesthetic beauty of a river or on the value of the global nitrogen cycle.
WWF’s Living Planet Report from 2018 includes estimates of the economic value of nature, which it claims amounts to $125 trillion globally.
Green Alliance’s work on Natural Infrastructure Schemes explores how farmers and landowners can profit from protecting the environment, working with others who could benefit, such as local authorities.
The government's Natural Capital Committee, which explored the state of natural capital in England, has released a report that summarises all it has learned and its recommendations, including an upcoming environment bill.
