Case

3. What measures should the U.K. government take in response to the rising inequality? Is inequality a weakness? Why, or why not?

The case “The United Kingdom and the Means to Prosperity” by Laura Alfaro, Lakshmi Iyer, and Hillary White discusses the recent fiscal policy of the United Kingdom. One area mentioned as a concern was the rising inequality of wealth. As this wealth disparity can create a weakness for the country, the government should evaluate policies that would help narrow this income gap.

As stated within the case, income inequality in the UK has grown faster than any other OECD nation since 1975. By 2012, the top 20% earned an average of 15 times that of the bottom 20%. Evaluating total wealth, the top 10% held roughly 1050x as the bottom 10%. Evaluating the top decile’s income proportion to the total over a historical time period shows that income inequality was trending downwards from the early 1930’s before leveling out in the 1950’s and then rising steadily since the early 1970’s.

Rising inequality is a weakness for the U.K. economy. Internal consumption within the economy drives growth. The top decile income earners do not consume the same proportion of their income as those in the lower deciles and the middle and lower classes encompass the vast majority of the populace and the spending. If lower and middle income earners do not have enough income available to grow consumption, it hurts the U.K economy. In addition, decreasing disposable income limits the ability to invest in education, which locks people into their class or the class of their parents. Finally, stagnant and shrinking wealth for the middle and lower classes means the government is receiving less taxes. The problem really lies not in the fact that the upper deciles are gaining wealth, but in the fact that the remaining deciles are not growing at the same rate.

By evaluating the factors that lead to this inequality, the U.K. government can best draft measures to address it. One factor that contributes to this wealth gap is the unemployment rate which was under 2% from 1946 but started rising in the late 60’s to 8% in 2012. In addition, real wage increases have been small or negative with the total real wage increase between 1990 and 2014 being 1.4%(summing and subtracting the growth for that period). While wages have been stagnant and unemployment high, there has been growth in the financial services sector that has exceeded GDP from 1970 through 2008. Many top income earners participate in this sector. To summarize, increased unemployment plus stagnant real wage increases for the majority of the population coupled with the increasing income of the financial sector has exacerbated income inequality.

To combat the problem of growing income inequality, the U.K government needs to create policies that are designed to address unemployment and support real wage increases. While recent government policies have focused on austerity and debt reduction, a shift in strategy will be necessary to foster growth in employment and wages. Increases investment in factor endowments, such as education and infrastructure would provide more opportunity. It was stated in the case that two-thirds of British companies felt that infrastructure was going to deteriorate over the next five years. Increased government spending on public works and infrastructure projects in addition to programs and policies that make higher education more accessible has the ability to lower unemployment. The increased consumption and tax revenue

as a result of increased employment would help offset the public debt required to fund these programs. To address stagnant wages, wage increases can be implemented for government employees.

Some additional measures might also be taken. This includes further increases of the minimum wage as well as rolling back some legislation that stripped some of the power from labor unions. While these measures might lead to better real wages for employees, they introduce the possibility of inflation that has the potential to negate any gains they might offer. Careful consideration would be necessary to ensure these changes have a net positive effect on those it is trying to help.

To conclude, the United Kingdom’s increasing income inequality problem creates weakness within the economy as it limits growth, tax revenue and opportunity. This inequality is widening due to stagnant wages and continued high unemployment. This problem will not fix itself, but rather will require the U.K government enact policies that foster employment and wage growth while balancing the costs needed for these policies.

Q4 Would leaving the E.U. help or hurt the U.K.?

In the article, “The United Kingdom and the Means to Prosperity” the main objective of the article is to show how the United Kingdom has come to achieve it’s financial success through the rigors of the 2008-2009 financial crisis and even further back from the Great Depression triggered by World War II and the Stock Market Crash of 1929. There are many opposing views on whether the U.K. should be a part of the European Union or not. Based on the article it is important to be a part of the E.U. because “As a member of the EU, the U.K. attracted many financial firms to London due to its sizable market and the free movement of labor and capital with Europe.” The fact is that the E.U. validates the U.K. in the eyes of financial giants, such as China and the U.S. By showing that the U.K. can function as a part of the financial system of the entire E.U. and play as a “team player” that is a big asset to many countries who want to work with the U.K., and for it’s financial future is best if the U.K. continues to function as the financial center of the E.U.

In addition, the Prime Minister Cameron believed that “E.U. membership entailed greater political integration than just participating in a common market as initially promised.” By integrating more politically the fact is that U.K. will become a better member of financial negotiations because they have more leverage being a part of the E.U. because of the access to all of the resources of the European Union. Leaving the U.E. would definitely hurt the U.K. because the fact is that the being a part of the E.U. has helped the United Kingdom to have a strong economic recovery by 2014. In addition, the nation’s GDP figures have also increased further solidifying the importance of the E.U on the financial success of the United Kingdom.

It is imperative to mention that leaving the E.U. could be good for the U.K. because of a lack of dependence on the services in the financial sector that the E.U. provides for the country. When tragedy or another financial crisis hits dependence on an entity like the E.U. will not be beneficial to the country as a whole. The U.K. has the advantage of being a head of a colonial empire and a true global financial center and in some regards the failings of some of the other countries in the E.U. can bring it down. The fact is that the mistakes of a few can poison the well. These concerns aside the benefits to staying in the E.U. outweigh the negatives that are pretty slim to really be deemed a significant threat to the financial health of the country as a

whole as a part of the European Union. It is important to acknowledge problems and challenges that lie ahead for the United Kingdom, such as the rising inequality not only in wages between the “haves” and the “have-nots,” but also the rising xenophobia within the country. The U.K. functions under a very “old-school” way of doing business and although this has worked for them in the past, I do not see the longevity in such an approach because countries have evolved past a colonial mentality, but the U.K. continues to operate in such a manner both inside and outside the boardroom. In conclusion, staying in the European Union will not only hold the U.K. to some standard of business practices, but will also make sure it’s financial health is intact. Some people play better with others, and I think in this case the U.K. needs to learn how to play with the European Union if it wants to continue to be a strong global financial center.