The Statesman’s Yearbook Online

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The Rich Get Richer and the Poor Get Poorer

In his widely acclaimed book, Myths, Politicians and Money, Bryan Gould mounts an attack on globalization and unfettered markets.

It is now widely accepted that inequality in both wealth and income—and, as a consequence, in power as well—has widened substantially in many Western countries over recent decades. This trend has been most marked in the English-speaking democracies—countries such as the USA, the UK and New Zealand. This has been a particularly surprising development in a country such as New Zealand, which recently was one of the most egalitarian countries in the world.

Nobel Prize-winning economist Joseph Stiglitz has highlighted the extent to which this trend has disfigured American society and handicapped US economic development. By 2007, he reports, the income of the top 0.1 per cent of households in the USA was 200 times greater than the average of the bottom 90 per cent. It took them just a day and a half to earn what it took a year for the bottom 90 per cent to receive, while the wealthiest 1 per cent also owned more than a third of American wealth. Between 2002 and 2007, 65 per cent of the increase in national income had gone to that same top 1 per cent. Worse, since the global financial crisis, the trend has intensified: 93 per cent of the increased national income in 2010 went to—yes—the top 1 per cent. The statistics look even more alarming as we dig into the detail. The six heirs to the Wal-Mart empire, for example, own wealth worth as much as is owned by the whole of the bottom 30 per cent.

While the American figures are the most extreme, they are reflected in the experience of other Western countries. In the UK, Michael Meacher MP recently made a telling analysis of the annual Sunday Times Rich List for 2012. He found that the wealth of the 1,000 richest people in Britain (just 0.003 per cent of the adult population) had increased by £155bn. over the past three years. That increase alone would have allowed them to pay off the entire current UK budget deficit and still have about £30 billion left over.

These super-rich were mainly bankers, hedge fund managers and private equity operators—a group that had been largely responsible for the financial crash. Yet while ordinary people had borne the burden of paying increased taxes (largely through increases in indirect taxation) in order to deal with the consequences of the crash, the super-rich had paid no increased tax specifically directed at them. The wealth of this super-rich group now totals £414bn., about one-third of the UK's total GDP. If the increase in their wealth over the past 15 years had been taxed at a 28 per cent rate on capital gains, about £88 billion would have been raised, enough to pay off 70 per cent of the entire deficit.

Salaries for senior managers in most of the Western world have, of course, risen hugely over the last two or three decades, in line with the increased value apparently placed by the market on their services. All kinds of bonuses, share options and other benefits are paid (but often not taxed) as part of the remuneration packages of executives. The top ten highest paid CEOs in 2011 earned about 77 per cent of their total realized compensation through stock option exercises and vested equity, while those who own and direct corporations, especially in the financial sector, have done even better.

In the USA the portion of national income going to the richest 1 per cent of the population tripled from 8 per cent in the 1970s to 24 per cent in 2007—an amazing statistic of which most people, not least in the USA, seem unaware. In addition, that same 1 per cent also holds around 40 per cent of all wealth. As Professor James K. Galbraith has shown, contrary to the constantly-made assertion that increased inequality is the consequence of 'real factors', such as the increased value of technology as compared to labour, the true explanation is that the huge growth in the financial sectors of Western economies has made bankers rich, and—equally important—pumped up the value of assets such as stocks, bonds and real estate. This supports the point made by Joseph Stiglitz that the huge growth in wealth of the richest has not been earned in the ordinary sense but is rent income—that is, an income gained entirely by virtue of being already wealthy.

At the same time, the global financial crisis has been used as the chance, in many Western countries, to reinforce the drive to reduce real wages and to further reduce the share of national income that goes to wage-earners. The share of wages in the UK's national income, for example, has been on a downward trend for three decades. Since the global financial crisis, however, that trend has intensified. In the two years 2010 and 2011, real wages fell on average by 7 per cent, a downward trend that was set to continue to at least 2016, if the Office of Budget Responsibility's forecast is accepted. The suspicion must be that this is, at least in part, the consequence of a direct attempt by government to engineer, under the cover of the crisis, a further fall in the share of the national cake going to earnings.

The proportion of the British workforce in low-paid work has almost doubled over the last two decades and now stands at more than a fifth. This decline is the result of a four-year-long freeze (meaning a real cut after inflation) on public sector pay, the straitened finances of voluntary sector organizations and charities—so that many home care staff and those working with the homeless are facing substantial pay cuts—pay freezes in parts of the private sector including distribution and manufacturing, and the failure to maintain the real value of the minimum wage.

These current trends reflect a long and unattractive history. In the Great Depression of the early 1930s, most developed economies followed the call made by the multimillionaire US treasury secretary Andrew Mellon, after the 1929 crash, to 'liquidate labour'. It is sad to see history repeating itself in this way, as the rich defend their interests and pile the burdens on to the poor. The tragedy is that, in most Western economies, cutting pay simply squeezes even more of the lifeblood out of economies already suffering from a severe shortage of demand. Falling real wages over the last three years are the key explanation for economies struggling to escape from recession.

And this is not all. The benefits on which many unemployed are forced to rely are reduced, at least in terms of their real value. Their rights, either in work or out of work, are also reduced. The services on which they depend for the delivery of education, health care and housing attract fewer resources in comparative terms and are increasingly made available on a user-pays basis. The esteem they enjoy in their own eyes and those of others diminishes. And all this, in the case of the American worker in particular, in the aftermath of the global financial crisis which meant that for many such people their jobs, retirement incomes and homes had all been jeopardized by the monumental errors made by their supposed betters.

Nor is the differential treatment of the rich and the poor in income terms the whole story; there are many other advantages delivered to the rich and powerful by the policies applied in most Western countries over recent decades. In particular, tax rates on high income have been substantially reduced and taxes on capital have also been brought down, while in some countries, such as New Zealand, wealth is completely untaxed.

The tax burden has also been increasingly switched away from progressive taxes on income (so that high income-earners have been relieved of part of the burden) and towards regressive indirect taxation. A higher proportion of taxes on consumption necessarily impacts more severely on the less well-off, who spend a higher proportion of their incomes on goods that they need for day-to-day consumption, while a smaller proportion will go to capital goods, savings and investments, which is where the better-off tend to put their disposable income.

One of the starkest and most dramatic illustrations of the gulf that has developed between the small minority of super-rich and ordinary people was some research released in 2012. James Henry, former chief economist at consultancy McKinsey and an expert on tax havens, detailed in a report called The Price of Offshore Revisited his latest estimates of the amount of money squirreled away in offshore tax havens by the super-rich.

The total is truly staggering. Henry showed that at least US$21trn.—perhaps up to US$32trn.—has leaked tax-free into secretive jurisdictions such as Switzerland and the Cayman Islands. This sum is the equivalent of more than the total GDP of the USA and Japan combined. The detailed analysis in the report suggests that it would be enough to pay off Third World debt many times over, or to finance the stimulus required worldwide to enable the global economy to recover from recession.

The tax advantages enjoyed by the rich are not just a matter of low rates and ease of avoidance; they also reflect the structure of taxation in most advanced countries. Remarkably little attention is paid to the fact that property—the form in which the wealthiest often accumulate their wealth—is largely immune from taxation. The real scandal is the fact that the owners of property worth millions of pounds pay a property-based tax, such as the council tax, at minimal rates, and escape any tax at all on the development value of the land they own.

A further startling instance of how thoroughly the taxation system has been suborned by those whose liability is or should be greatest has only recently come to light. As Polly Toynbee reported in February 2013, the House of Commons Select Committee on the Treasury took evidence from the major accountancy firms as to their involvement in advising the British government on tax arrangements which applied to firms looking to the selfsame accountancy firms for tax advice.

The case that particularly attracted the select committee's attention was that of the Patent Box. This is a scheme that offers tax relief on patents, designed to encourage companies to innovate, invest in R&D and entice foreign companies to relocate to the UK. The relief is available on any product, provided that some part of that product—perhaps a very small part—contains a patent; the relief is retrospective, and therefore covers old patents as well as new ones. The Treasury estimates that this one scheme for tax relief will cost £1.1bn. per year in lost corporation tax, roughly the annual cost of benefit fraud in the UK—yet it is benefit fraud that hogs the headlines.

Another device is deferred compensation. The way this works is simple: most taxpayers are expected to pay 35 per cent of their income in taxes the year they earn it. But CEOs do not have to pay the tax until they claim the cash, which can be earning interest in the meantime. Depending on how the money is invested, CEOs can engineer a substantial profit. Thus Michael Duke, CEO of Wal-Mart, received US$17,028,615 tax free in 2011, roughly 774 times more than one of his employees would have been allowed to do under normal tax rules.

Yet these sums shrink into insignificance compared with the money that hedge fund managers make. Raymond Dalio, for example, was paid an astronomical US$3bn. in 2011, but paid just 15 per cent in taxes because the money was considered capital gains, as opposed to the average citizen, who would be required to pay 25 per cent (in income tax). The cost to the taxpayer of this instance in 2011 was US$450m.

Inequality is largely a function of the 'free market'. As long as the outcomes are sanctioned by the market, there is thought to be no limit to the share that some are entitled to take at the expense of others. Growing inequality has, therefore, a momentum all of its own; we find that even in hard times the rich and powerful continue to make gains while the rest languish. It operates on a ratchet, impossible to turn back, constantly clicking forward.

Wealth of course entrenches and grows itself. The best chance of being seriously wealthy is to be born into a seriously wealthy family. Even in the supposed land of opportunity—indeed, especially in the USA—social mobility has largely ground to a halt. Well-off families now spend eleven times more than the working-class on children's 'enrichment activities', which are so important for psychological well-being and character building. It is not just educational advantage, in other words, that can be bought; life chances of all kinds, including social exclusivity, are scooped by the well-off.

As society becomes more unequal, the growing inequality intensifies and feeds upon itself. On the part of the wealthy there is less understanding of the plight of the poor and disadvantaged, and there is less willingness to accommodate their interests and meet their needs. If a necessary part of the justification for the inequality is that the wealthy deserve their advantage because it is a proper reward for superior virtue, then it must follow that the poor are undeserving. The myth of the 'feckless' poor is sedulously fostered and believed.

The free market in its current extreme form has had the effect of weakening social cohesion and in particular the family. Paradoxically, the family is often held up by the proponents of 'free-market' reforms as the epitome of what is valuable in society. Yet the rate of family breakdown has grown sharply in those countries where free markets are most firmly entrenched.

This in turn has led to the growth of an underclass with predictably antisocial attitudes. Incredibly, its emergence is seen by the rich as a consequence of welfarism rather than an inevitable reflection of widening poverty and social dislocation. They demand tougher penalties for crime and more jails are built—5m. Americans are in prison at any one time. The peccadilloes of the wealthy are excused, even celebrated, while the frailties of the poor are condemned.

One obvious indicator is the differing treatment accorded to different kinds of people when they lose their employment. When ordinary people lose their jobs the pressure is on to make sure that they are forced back into the workforce as soon as possible. The value of unemployment benefit is carefully monitored to ensure that the unemployed are not too comfortable, and that even low wage rates are more advantageous than the benefit. Top executives, on the other hand, enjoy a rather different experience if it is decided to dispense with their services. Many will have negotiated contracts that provide for substantial golden handshakes. Even those whose performance has been abysmal and who are dismissed for incompetence will walk away with generous compensation. Nor does their lack of success or even proven incompetence disqualify them from rebounding into other highly paid jobs.

There is nothing efficient about an economy that amasses great wealth in just a few hands. The decisions the super-rich take as to how they spend their money are often irresponsible, and at best capricious. The most common use of wealth is not to create new productive capacity and new jobs but simply to earn a 'rent income'. Instead of spreading purchasing power across the whole of society, where it can irrigate every part of the economy, the concentration of wealth compresses it so that it can do little good.

What is economically efficient about keeping large numbers out of work, as Western countries are currently doing, so that their productive contribution is lost? What is economically efficient about cutting the real incomes of the low-paid so that their purchasing power is not available to stimulate the economy? What is economically efficient about cutting benefits so that the health and education of large numbers in Western workforces suffer?

And what chance do we have of achieving an efficient and productive economy if competence and merit are overlooked, while privilege determines who occupy positions of power and accordingly take the decisions that matter? How can it be efficient when the people who run our affairs have little idea of how the economy and society really work?

Extracted from Myths, Politicians and Money by Bryan Gould; published by Palgrave Macmillan.

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