It was, perhaps, the ‘Occupy’ movement that brought income and wealth disparity into public consciousness. They split society into the 99% and the 1%, with the latter branded as the ‘elite’. It’s a simple message, but not quite correct. To be in the 1% you need an income of £150k, something that many professionals achieve without feeling themselves to be ‘super-rich’. The really rich, the mega-rich are a much smaller subset of the 1%, perhaps 1% of them. But Oxfam publicised this recently at the Davos Economic Forum.
Be that as it may, the idea that there is marked wealth and income equality in much of the western, developed world has certainly taken hold, though the consequences of poorer outcomes in health and social problems isn’t nearly so clear, even if there has been a lot of publicity about the effects of ‘austerity’ on the poor. How did we get to be so unequal? Can anything be done about it?—for improving monetary inequality can be surely expected to reduce health and social problems. And if we as a society really want to do something about this, isn’t this the way to do it?
Certainly, there have been many very rich people in the past, though the absence of data about what other people (the ‘proles’) earned makes it difficult to be sure of the level of inequality, though it was probably very high. The Sun King and his court at Versailles financed their extravagance through taxes on the ‘common people’, the aristocracy and the church (the ‘elite’ of their time) didn’t pay tax; the French Revolution ended that line of the Bourbon monarchy. The French economist Thomas Piketty in his recent book ‘Capital in the Twenty-First Century’ goes far back into historical records both in France and in the UK.
The UK, and the US, were very financially unequal countries just before the Great War. In the UK, people were either rich because they were ‘landed gentry’, and lived off the income their capital produced; or they were successful businessmen and entrepreneurs who made their money in ‘trade’. The really rich in the US at that stage were the ‘robber barons’, giants of industry. The war changed the position of the rich; taxes were significantly increased to pay for the war, and though they recovered somewhat in the 1920s and 1930s, still taxation was very high. During the second World War, the incomes of the poor increased, while those of the middling class declined; there was full employment, and a sense of common purpose.
After this war ended there was what the French call les trente glorieuses (thirty glorious years), characterised by full or nearly full employment and gradually increasing levels of prosperity and living standards, characterised by Supermac’s phrase, ‘you’ve never had it so good’.
Taxation remained high during this time, with the highest rate of UK income tax on earnings being 83%; if your income was unearned, there was a 15% extra levy, taxation until ‘the pips squeaked’. Some would call a taxation rate of 98% ‘confiscatory’. There was tight control on credit and what banks and stock markets could do.
This approach changed in the late 1970s and early 1980s. Such tax rates and control of business were felt to be a hindrance to the country’s economic growth. Reaganism and Thatcherism were the new ideals, the concepts taken up avidly in the Anglo-American world, but to a lesser extent elsewhere. These ideas were based on the theories of the Austrian economist, Friedrich von Hayek, and were also called ’neo-liberalism’ or the Austrian model. They included the idea of a ‘free market’, that is one which is untrammelled by Government regulation, together with the ‘privatisation’ of government or state assets; and lower taxation. By contrast, the previous model, based on the theories of John Maynard Keynes included an active fiscal policy, with income redistribution. In good times, when there was growth in the economy, the government should save, and use these savings to stimulate growth during economic downturns.
In the UK, privatisation began with the sale of council houses, and has continued with the sale of utilities—as Supermac, in one of his last speeches, said it was ‘selling off the family silver’.
Likewise the stock market ‘modernised’, with transactions done electronically, by computer rather than face to face. Controls over banks were relaxed, both in the UK and the US.
Banks, particularly in the US, developed some remarkably complex financial ‘products’, such as collateralised debt obligations (CDOs); some of these were so complicated that more senior bankers didn’t understand what they were, or their potential for loss—for risk, it was felt, had been (almost) eliminated from the system.
At the start of the 1980s, the pay differential between senior executives of large firms and the pay of the ‘average’ employee was about 40:1. Average pay showed little, if any real growth over the next 30+ years; yet at that time, differentials had increased to perhaps 300:1, or even more. In some companies, the best paid executive could ‘earn’ more in a day than the average worker in a year.
What happened in 2008, the crash, and why it happened are well known—CDOs based on sub-prime mortgages, the ‘greed is good’ mentality growing the economy on the back of debt, and lending to borrowers who in reality could never pay back. Once in the UK, most of us rented out homes; this gradually changed, and ‘property’ was seen as a safe long-term investment, and a ‘right’. Banks were seen to be ‘too big to fail’, and were bailed out, though this is hardly letting the market do its work—that logic would imply that the banks should have been allowed to go bankrupt—as indeed were a very few, such as the Islandic banks, and Lehman Bros. Rather governments took on the extra debts that the banks had accumulated, which the ordinary taxpayer is now expected to pay for, through ‘austerity’, the idea that saving and financial retraction by the state will effect a cure. Yet, even the crash of 2008 was only a temporary setback to this apparently inexorable rise in pay inequality; the 99% are still worse off than they were beforehand. The effects of this austerity are clearly seen in Greece, where the economy is 25% smaller than previously, and 25% are unemployed. How can a country in such a position repay its debts. In the UK, we are seeing the emergence of an ‘hourglass’ economy; a squeezed middle, with an increase in the super-rich, and also those icing close to the margin of survival.
Piketty’s analysis produced a formula to show when wealth inequality will increase; the rich derive much (or all) of their income from invested capital, rather than through work:
r > g
Where r is the ‘rent’ or interest received on invested capital, and g is the rate of growth in the economy. This is what’s happening now, and what happened in the past when inequality rose.
High taxation did produce less wealth inequality, but is seen now as offensive, almost ‘morally’ wrong. There has been growth, if that’s an appropriate expression, in tax avoidance (which is legal), and tax evasion. Tax evasion is generally illegal, though in some jurisdictions, such as Switzerland, the illegality is less than in others. Elaborate schemes have been devised to ‘protect’ income from the tax man; such causes aren’t helped by anecdotes such as, ‘only the little people pay tax’ and, ‘I pay less tax than my cleaner’.
The Laffer curve describes, in theory, what happens, or is supposed to happen, as tax rates rise; there is a point beyond which increasing tax rates reduces taxation return:
This is said, by some, to be the justification for the recent Coalition government’s decision to reduce the top rate of income tax from 50% to 45%.
Piketty suggests that some form of taxation is required to reduce inequality; perhaps a tax on the millions of daily share transactions. Alternatively, a tax on wealth rather than increases on taxation of income and expenditure; these are seen as ‘regressive’. Further, it’s probable that even if government were to take on board the evidence that inequality is a bad thing, and attempt to correct it, this would take more than one parliament. Yet governments must keep an eye on the short term, if they are to win the next election. Significant change comes from a change in culture, yet such a cultural change is slow, needing one or two generations to be realised. Think about the introduction of seat-belts, or the appreciation that ‘drink-driving’ was irresponsible. How long did it take for these societal, cultural changes to happen.
Finally, recall that a suggested title for The Spirit Level was Evidence-based Politics. In the same vein, there is a small insert in Ha-Joon Chang’s excellent book Economics: the User’s Guide: