Introduction
In the UK at the time of writing, there appears
to be a handful of issues that are seemingly inexpungible from the media
limelight; they are tireless and of unceasing appeal. Immigration and welfare
benefit frauds, to take just two examples, are both fanatically and continually publicised. Just open up a copy of the Daily Mail and observe the outstanding
triviality of the chosen topics - the latest drivel about X Factor, Big Brother, or my personal guilty pleasure, I'm a Celebrity...Get Me Out of Here!, no doubt. What goes under the radar, so to speak, and is
of far more importance than the aforementioned topics is the problem of income inequality.
As an illustration to how important it is, the above topics of immigration and
welfare benefit frauds both pale in significance; each can be readily addressed
(that is, if you truly believe them to be pressing issues) and neither affects the entire population, from the millionaire to the "benefit
scrounger". Some publications do indeed report the scary extent of uneven
income distribution – but these are often read exclusively by individuals who
are already aware of the problem, not the masses of people who are not. This is
strange and, to a degree, paradoxical, considering the abundance of exemplifications; inequalities of income
are to be found within all major Western nations, emerging countries, and
developing countries; in fact, it would be a fair analysis to state the entire world
(at least the parts inhabited by humans) as being beset by income inequality. As such, the following is written with income inequality, and this alone in
mind; written in an attempt at providing the reader with an insightful introductory text to the
phenomenon. That it goes underreported is not because media disseminators view
the topic as unengaging or unlucrative. Rather, the true reason
is because of the monopolisation of the industry, because only a few
individuals own the major media corporations. And it is these same individuals, incidentally, who have not
only their interests at heart (which makes them not completely selfish),
but also their elitist buddies – about the only people who are content with the current
state of affairs – and nobody else. There are of course exceptions, but in large
part the choice and diversity of newspapers is controlled by the same
individuals. To quote Malcolm X, who I believe embodies this
point in a single statement: "The media's the most powerful entity on
earth. They have the power to make the innocent guilty and to make the guilty
innocent, and that's power. Because they control the minds of the masses”. The
crude analogy of the 99% and 1% that frequently crops up in the income
inequality discourse is not an exaggeration; if anything, it is a representative
comparison, and helps to illuminate the issue to an extent. In what
proceeds, I will courageously present a multifaceted account of income
inequality, from its origins in the 20th and 21st centuries,
to what causes it; from the reasons of why it is so worrying and disconcerting,
to the solutions we have at our disposal to tackle the problem. It is with the
historical timeline that I begin – so if it is provocation you want you may be
disappointed (that is, until section three, then it truly gets exciting).
History
Income inequality has not always been a problem (since the first Gilded Age anyway).
Only relatively recently has a disparity emerged again – for a precise date, or
thereabouts, the initial set of seeds were sown in the latter half of the
1970s. Prior to this era, incomes across the board were tolerable and fair;
importantly, there was no unacceptable gulf between the rich and poor.
Capitalism, though disputed by some, was and continues to be the underlying
engine for economic growth. The developed world and, to a lesser extent, the
developing world would not be at their current stages of development was it not
for one of capitalism’s main virtues, the profit motive. Competition between
voraciously profit-hungry businesses prompts exciting innovations, bringing new
products to the consumer’s living room and once-dreamlike services. Investment
was committed with a long-term perspective, putting faith in a budding and
hopeful business. Everyone was the beneficiary of this form of capitalism.
Consumers remained happy by a perennial introduction of original goods and
services, investors were kept contented by their consistently modest returns,
and businesses saw profits rise year-on-year. Most important, stability
remained buoyant – the textbook spikes and nosedives of the business cycle were
not a huge issue. How this has changed. Today, investment is recognised as a
route to quick but unsatisfying returns. No recognition is given to the
long-term health and vitality of the business – profit trumps all other considerations.
Working harmoniously until the 1970s, the money
economy, fuelled and driven by the rapacious motives of financial bankers, and
the productive economy, encompassing all factories that churn out consumer
durables and services, have become increasingly polarised. While the meteoric
rise of the money economy has extended the influence of bankers and financers
on both an economic and political platform, the productive economy is in a
worsening condition, shrinking in both size and importance. One of the first
fundamental lessons of economics is that prosperity, in large part, is underpinned
by consumer bolstered demand. That being said, a continuation of the severe
misallocation of income we are seeing today, from the majority to minority,
will effectively curb such consumption - how does one pay for goods and
services if their income has been decimated to an amount barely sufficient of
simple sustenance?
After the Great Depression, one would surely
expect the governments of the world to isolate and analyse the many causes and
as a reassurance to the general public, put in place the desperately needed
safety nets to ensure a reoccurrence of such a gloomy downturn is impossible at
best and improbable at worst. In fact, worries were indeed appeased – a
plethora of policies were drawn up and accordingly administered. Reinforced by
these responsive policies to the Great Depression, a sweeping redistribution of
income took place; the nauseating bonuses and rewards of the super-rich were
curtailed in; favourable taxes towards the rich became untenable,
begrudgingly handing over a greater proportion of their salaries to the taxman
due to more progressive tax rates. The populace itself held the rich in
contempt. Widespread was an overarching attitude, to be later turned into
policy that the millionaires of the age were undeservingly wealthy. Complementary
measures, too, were rolled out – in particular, monopolies were coercively
disbanded in order to promote competition. These policies were successful
in their purpose; income inequality did indeed fall, and by a considerable
amount.
In fact, this period of startlingly equality was
known as the Great Compression in the United States. Similarly, in the UK
commentators dubbed this period of equalisation as the “great levelling”. The
number of UK based millionaires fell from a plateau of more than 1000 to a low
of 36. As soon became palpably clear, this virtuous cycle of fairer income
distribution was to be a brief respite from the vices of extreme income
inequality. Statistically, the wealth held by the top one percent shrunk
diminutively between 1937 to 1978, from 12.6 per cent to 4.2 per cent of
national income. On the advent of the 21st century 4.2 per cent
had incrementally risen to 10 per cent mark of national income, tentatively
behind the peak of the Great Depression. By the doing of Margaret “Maggie”
Thatcher, the UK government was metamorphosed into a destructive machine
hell-bent on the complete obliteration of intransigent trade unions. A success
in the eyes of Thatcher, the bargaining power of workers did indeed fall,
putting a limit on their clout and influence when discussing wage increases. In
the end, the unions conceded defeat; their wages, the very reason for the
strikes and demonstrations, remained stagnant, not rising proportionately with
profit; and as if to afflict more humiliation upon them, the pay of senior
staff members gratuitously rocketed. This poses the chilling question: once the
wants and needs of the rich are temporarily satisfied, what is to be done with
the surplus output that no one but the rich can afford? The answer: debt – and
lots of it. To retain a vestige of purchasing power, working class families
went down the precarious and dangerous path of indebtedness. For a short while,
the debt-fuelled consumption binge was a source of economic prosperity –
economic prosperity with an artificial tint to it.
At around the same time, the US presidential
election had come around again. After a close counting of the votes, not
without controversy, George Bush was to be instated as the new president.
Shortly after his inauguration, Bush wasted no time in perpetuating the
policies of his predecessor Ronald Regan, espousing a constellation of freer
markets, smaller government and lower taxes. In the economic profession,
passivity pervaded almost all major economists, accepting unhesitatingly the
claims by the conservatives that inequality was a necessary precondition to a
more productive and faster growing economy. Heterodoxical as ever, eminent
economist Paul Krugman believed otherwise and publicly opposed conventional policy
and questioned the merits of ‘Reagonomics’. Unwilling to acknowledge Krugman’s
contentions with epistemological judgement, the conservatives were obstinately
dismissive, arguing that although income inequality was on the rise it had in
fact paradoxically liberated poorer individuals; liberated in the sense of
laying out more viable routes to ascend the societal hierarchy, to higher
echelons. On the subject of retorts, another personal favourite of the rich and
their community is calling upon the classic and far from perfect trickle-down
theory. (This theory has become so prominent that it has acquired its own
compartmentalisation in economics, known as “Trickle-down economics”). At its
core is the fiercely contested premise of cutting top income tax
rates in order to engender this so-called trickle-down effect; and, it is
hoped, in doing so a notable rise in investment will prevail, as the rich have
more money to fund new projects and initiate more positive multiplier effects
within the economy. This, of course, is conjecture and far from guaranteed; and
indeed saving or more deleterious investments are often opted for instead.
These are not just speculations, either – peer-reviewed research confirms a
strong and positive relationship between income and one’s marginal propensity
to save (that is, how much of one’s income is apportioned to savings). In other
words, as one becomes more rich, there is a tendency to save a larger
proportion of income. Moreover, why are the rich in particular so deserving of
these tax cuts? Why not bestow the poor majority with these tax cuts, whom will
almost certainly purchase more goods and services? Of course, the tenuousness
of arguing in sympathy of income inequality is made even more insignificant,
even more insupportable, when placed in juxtaposition against the mounting
abundance of scholarly evidence affirming the extremity of income
inequality. A longitudinal data diligently complied by French economists
Thomas Piketty and Emmanuel Saez, for example, tracked the income concentration
of the top 1 percent in the United States from 1913 to 2006. What they
discovered was that at two instances within this period the top 1 percent held
over a fifth of national income; the first, notably, was in the latter half of
the 1920s, preceding the notorious Great Depression; the second, similarly,
occurred at the beginning of the 21st century, a short number
of years before the so-called Great Recession of 2008-09. It is known for
people to mistake causality, but such a refutation is insufficient here – a
highly skewed income distribution is a principal cause of shockingly egregious
crises. The top 0.01 alone had 5% of national income (see graph below). The fact that indebtedness proliferated in both of these intervals,
cannot be attributed to mere coincidence, either.
Tantamount to a neoliberal conceding
people have irrational tendencies (for non-economists, a cardinal theory of
Neoliberalism is that all people demonstrate rational expectations; in other
words, all people are rational), Alan Greenspan, a partisan of all things free
market, admitted that the United States did indeed have an income inequality
problem, and that exacerbation had made it too consequential to be ignored. In
2007, a mere two years later, Greenspan’s replacement, Ben Bernanke, reiterated
the same point, recognising income inequality as being at an acute degree.
Once dominant values of the time, parsimony and conservatism discouraged indebtedness. As these values underwent a fundamental transformation, now in full effect, the practise of borrowing became the norm. All around was a façade of prosperity; people drove about in new-off-the-production-line vehicles, wore once atypical designer brands, and left the country on a frequent basis to enjoy exotic holidays. Indeed, all this pretentiousness and wealth was illusory; undergirding all the consumption and profligacy was a mountainous pile of debt. In 1993, outstanding personal debt of UK citizens totalled £574 billion; fast-forward less than two decades, and this amount now stood at £1400 billion in 2008. “An important political response to inequality was populist credit expansion, which allowed people the consumption possibilities that their stagnant income otherwise would not support”, to quote Raghuram Rajan, the Governor of the Reserve Bank of India and eminent professor.
Once dominant values of the time, parsimony and conservatism discouraged indebtedness. As these values underwent a fundamental transformation, now in full effect, the practise of borrowing became the norm. All around was a façade of prosperity; people drove about in new-off-the-production-line vehicles, wore once atypical designer brands, and left the country on a frequent basis to enjoy exotic holidays. Indeed, all this pretentiousness and wealth was illusory; undergirding all the consumption and profligacy was a mountainous pile of debt. In 1993, outstanding personal debt of UK citizens totalled £574 billion; fast-forward less than two decades, and this amount now stood at £1400 billion in 2008. “An important political response to inequality was populist credit expansion, which allowed people the consumption possibilities that their stagnant income otherwise would not support”, to quote Raghuram Rajan, the Governor of the Reserve Bank of India and eminent professor.
Before an immersive exploration into the depths
of today's inequality is commenced, it is worthwhile to succinctly recap the
aftermath of the Great Depression. It was manifestly clear a society controlled
by nothing but the whimsical free market was bound to failure. Greed, avarice
and self-interest, would you believe it, cause irrational tendencies.
Fortunately, a prominent economist by the name John Maynard Keynes came to the
fore and expounded a set of ideas. The end result: Keynesian economics. A sceptic
of an unfettered market economy, Keynes suggested an alternative, one at
complete variance to the economic orthodoxy of the day. In short, what he
advocated was for a sort of paternalistic relationship between the government
and market; the government being the rule-maker of the two. It would be the
government’s role, and in its interest, therefore, to monitor and keep a close
eye on market activities. An excerpt took out of one of Keynes’s innumerable
writings explains the situation; 'The decadent international but
individualistic capitalism in the hands of which we found ourselves after the
war is not a success. It is not intelligent. It is not beautiful. It is not
just. It is not virtuous. And it doesn't deliver the goods. In short we dislike
it, and we are beginning to despise it.' Indeed, the policies Keynes espoused
worked better than anyone could have expected. So much so that between 1950 and
1973 world growth soared - a period known historically as 'the Golden Age'.
Outside of the UK, a contagion was spreading, the
ripples of which were reaching UK shores. In fervent debate around academic
circles was a contention about the government – the question often posed was;
why have the government conduct the role of market when it was not as efficient?
It was a volte-face of the most radical proportions. With only vestiges of
credibility left, Keynesian economics was condemned to an eternity of apparent
failure, being swiftly ousted, to be replaced by the paragon of all things free
market, Neoliberalism. Advocated by an intelligentsia under the guise of the
Mont Perlerin Society, the prescribed policies were purposefully designed to
widen the free market – and, contrary to Keynes, limit the involvement, (or
rather interference, depending on one’s economic stance), of the government in
market-based outcomes. Founded by the prominent Austrian economist Friedrich
August von Hayek, and including Milton Friedman at this particular time, the
society mesmerised the two leaders of the United States and UK at the time –
Margaret Thatcher and Ronald Kegan – into believing the potential of free
market fundamentalism. It took on an alluring reputation of being the be-all
and end-all solution to economic woes. To intervene and cause a distortion in
market-based outcomes was to make one guilty of stupidity; it had only one
inevitability: the dilution of efficiency. Accordingly, any policies or
entities that did exactly this, irrespective of supposed importance or size,
were quickly disbanded. Entrepreneurialism at the time was in a state of
sluggishness. A curtailment in tax rates, it was believed, would act as a
stimulative measure. Alongside this, a meritocracy culture, championed by
Thatcher, was emerging across the UK, in which ability was made the
primary determinant of wealth and societal status.
In the mid part of the 1970s a selection of
events, some more so than others, contributed to a general deterioration in
competitiveness among the G-7 countries – reflected by the falling profit
margins within their manufacturing industries. Struggling to remain afloat, the
fact union militancy was particularly intense only aggravated the situation.
The incessant wage demands were simply not feasible, irreconcilable with
declining profits. In this regard, therefore, it became a necessity for
companies to slash the going wage rate, lest cashflow problems and potential
bankruptcy. Indeed, this is exactly what happened – employees had to endure a
cutback in their pay, albeit as contingent to their employment and respective
company’s survival. But in a matter of years profits had burgeoned back to
pre-crisis levels and remained buoyant. Now that companies had found a secure
financial grounding, one would expect a corresponding increase in the wage
rate. However, as is often the case in money-driven situations, greed trumped
equity and company executives opted for the contrary – that is, a calcification of the already stagnant wage rate, whilst awarding those with
seniority status inordinate pay packages. This is not a sustainable strategy –
in fact, signs of a productivity-wage gap are becoming more and more
pronounced, problematic for the reason that it is a clear indication of supply
outstripping demand, a known cause of deflation.
Transitioning from managed capitalism to
unadulterated market capitalism, the belief that markets are efficient and
self-regulating was given unstinting credence by outright biased economists.
Privatisation was popularised, both in debate and in practise. As was the
scaling back of regulatory policies. Unions were viewed as a superfluous
interest group, always unsatisfied with relatively higher wages and forever
demanding more. This unsatisfiability was performed to such a large extent that
it provided the impetus to the outbreaks of stagflation (an economic condition
whereby both inflation and unemployment simultaneously rise) in the
1970s. That is not to say union militancy was the only impetus, as that
would be untrue. It could in fact be argued to have been of secondary significance.
What commentators have a recurring tendency to omit is how the intense
inflationary pressure was not wholly attributable to the spiralling wage
demands, ignoring the significant OPEC crisis in its entirety. In spite of
these exogenous oil shocks, Thatcher carried on, even accelerated, her personal
and spiteful vendetta against the unions. British unionised workers had
employment rights abolished, wage councils discontinued, and strikes became
more onerous. Between 1979 and 2009, UK trade union membership plummeted from
13.5 million to 6.7 million. Stagflation was no doubt in part to blame for the
sudden obsession, bordering on delirium, with inflation. Economic targets were
reprioritised - inflation, rather than unemployment, took precedent. It was a
cause of such unbearably grieve, that Thatcher and her loyal servants employed
a harsh but effective double-sided policy: fiscal conservatism coupled with a
tightening monetary policy, in an attempt to tame the recalcitrant inflation.
Eventually, inflation started to drop to more manageable levels – but not
without the accompaniment of harmful and lasting side effects. In retrospect,
on looking at the results of the policy – relatively lower inflation – and the
pain and suffering caused – vast unemployment – it questions whether it was the
most desirable decision. Enveloped by a demand-deficient induced recession,
unemployment reached soaring levels. Policymakers anticipated an increase in
unemployment and believed it to be transitory – the slump, it was purported, was
a temporary precondition to a more prosperous economy. So when the unemployment
prolonged and affected some areas disproportionately, it came as an unexpected
shock to those in power. Deindustrialisation was induced yet more quickly by a
rearrangement of exchange rate controls (from a relatively fixed to floating
exchange rate), the result of which was a sudden, large strengthening of the
pound, so to embrace the sentiment of globalisation and its ethos. No longer
subservient to governmental demands, exchange rates moved, or floated rather,
in accordance to the laws of supply and demand. The subjugation of inflation
was further intensified by revising interest rates upwards, to a percentage
deemed as excessive in the eyes of export-led firms. Naturally, an inundation
of foreign capital entered the country, all raring to partake in the game of
interest rate differentials, a ramification that was welcomed by financiers,
but detested and hopelessly resisted by manufacturers. In the end, traditional
companies that in days gone by had been the central pillar of the economy, the
primary driver of the industrial revolution, began to sink down to the murky depths
of bankruptcy and insolvency, burdened under the drastic curtailments in
international trade.
 |
| How inflation appeared through Thatcher's distorted vision. |
Financial institutions were subject to ceaseless inflows and outflows of money, on an expedition to safety away from the encroaching hands of the taxman. Shares were bought and sold in quick succession, with little thought given to the fundamental value of the company. The sheer rapidity in which the trades of these financial instruments took place, a large part of which were of a speculative and inherently unstable nature, was to be a predominant, though not exclusive, cause of destabilisation for some businesses. In vogue was the practise of taking over unsuspecting companies, often with hostility, to be forced through a process of downsizing (through extensive redundancies), all to attain a semblance of efficiency. Whether the company truly becomes more efficient is questionable. The main winners from this ruthless practise were shareholders and the new owners – not, emphasis, the current workforce. In spite of these superficial “efficiency gains”, shareholders were so keen, so bloodthirsty to make a profit that they bid up the companies share value regardlessly. This suited the new owners brilliantly – once the share value reached a price above that originally paid by a significant margin, ownership was abdicated and equity sold, and they wander off with a handsome profit.
The first signs of inequality were gaugeable from
the share of national income being paid to employees in the form of earnings –
what this indictor unequivocally showed, was that a gradual decline was in
process. Of course, there are some stakeholders, notably greedier than others
and demand more than their fair share of the profit. In turn, a hotbed for conflicts
is spawned; investors, owners, employees – each demanding an increasingly
bigger pay-out from a finite pot of money. The major loser since the 1970s has
been employees; inflation has outrun wage increases, reducing real income
implicitly. Left to its own accord the capitalist system will encourage a
continuation of this distribution and exacerbate the already significant income
gap between the poor and rich. Indeed, as paradoxically as it may sound
differentiated incomes are in fact a desirable characteristic for an economy to
demonstrate. Too equal, in that profits are shared among all stakeholders
indiscriminately, and companies will find themselves undercapitalised, unable
to pursue and capitalise on investment opportunities. Too unequal, in that profit
is greedily horded by the owners, and the purchasing power of the masses will
stagnate and ultimately decline. (The major Western countries would constitute
the latter description, and are leaning too far in this direction). Of course,
this is not to say an unequal distribution is a path to economic utopia –
rather, a modest illustration of inequality is accommodative of a properly
functioning economy. Clearly, both outcomes are unenviable, and as a
compromise, a combination of the two is necessary – that is, neither too equal
nor too unequal.
Income inequality is of benefit to a tiny cohort
of individuals only. Financiers and chief executive officers (CEOs), to take
two examples, are beneficiaries of inequality. With year-on-year pay rises on average ofSE 11 percent between 1999 and 2006, CEOs are firmly in the minority of
employees unaffected by the erosive effect of inflation. The remaining
employees, on the other hand, are not quite as financially comfortable; unlike
their ultimate senior, pay rose for this majority by an average of 1.4 per cent
between the same time frame. In 2006, amid the irrational exuberance of
financiers, the top 100 CEOs earned almost 100 times that of their average
employee. Interestingly, the hedge fund managers, CEOs, and financiers, the
individuals earning these ludicrous sums, are part of the private sector
exclusively. Profit is so alluringly powerful that efficiency – or what is
perceived as efficient – is derived to a larger extent than government-owned
organisations, who operate under the veil of public welfare maximisation.
Until now, income inequality has been described
strictly in the context of the developed world, within the Anglo-American
countries. Let this not detract from the importance of talking about emerging
and developing countries, not least for the influential role they will play in
forthcoming decades. For these countries, in some cases, income inequality is
even more of a problem than within the US and UK. Often, the economy is
undergoing a painful ideological transition, from communism or socialism to
capitalism. Since the Cold War, any grounds for taking communism seriously as an ideology have lost any credibility and conviction; any glimmers of hope that
communism would bring about a functional, prosperous economy have dissipated.
(Only questionably sane ideologues still argue otherwise, and are often found
in the outlandish nations such as North Korea). Instead, countries began to
experiment cautiously with the virtues of
capitalism. As part of this change, privatisation was performed on a nationwide
basis. As a process, privatisation is a perfect opportunity for well-connected
individuals to ascend instantly to millionaire status. Auctions (with
questionable legitimacy) decide whose hands the public services end up in, and
how much for. Such was the case for Russia in the 90s, these public services
were sold at a fraction of their true value as underhanded political favours. They
decide who becomes an oligarch and who does not. Chile is a single exemplar of widespread
income inequality; while the top fifth of the population own 67 per cent of
national income, the bottom fifth barely survives on an indigent 3 per cent.
Globally, too, income inequality is at an absurd level. Unsettling to say the
least, a statistic that came to light recently found the combined wealth of the
world’s poorest 2.5 billion (or about 35% of the entire global population) to
be at equivalence with the top 1000 wealthiest individuals (or about 0.00001377841%
of the world population). Still, there remain some individuals, though
dwindling in numbers, who view nothing inherently worrying about income
inequality and free-market fundamentalism. Prompted to support their belief,
the recycled and clichéd argument of income inequality being the natural and
virtuous outcome to an alignment, a matching up as such, of those with rare
skills and ability with commensurate riches is often regurgitated. By this
notion, therefore, those able to afford private education are more worthy of
the higher salaries they earn in later life when employed. From a different
angle, it could equally (and more credibly) be viewed as discriminatory against
poorer families, not to mention being inhibitive, rather than conducive, of
equal opportunity.
What is afoot at present are two contemporaneous
“gilding ages”. Within the emerging economies – known popularly by the BRIC
acronym (though certainly not limited to this group) – the first and arguably
most significant one is taking place; here, the pivotal industrial age, as
experienced by the UK and United States, is finally and welcomingly apace.
Propelled by the dual forces of industrialisation (the transition from
agriculture-based activity to manufacturing) and globalisation, it is not
seldom for economic growth to be in stratospheric double figures. The economic
conditions characteristic of these latent economies are the very reason for
their rapid growth. China, India and Brazil are among the World’s five most
densely populated countries. It is with these vast populations that both their
significantly sized labour markets and unbeatably low wages are explained. The
necessary institutions and infrastructure are concretely in place, too.
Multinationals, thereby, are attracted en masse into the countries, setting up
manufacturing facilities; those who demonstrate a moment of reluctance and
hesitancy are often left to wither and die out, as by the time they do decide
to relocate it is normally too late. The dynamics of the world economy are so
interrelated and fast-moving that hesitancy is a deadly mistake. Even though
the fruits of such prosperity are unevenly shared, dissatisfaction among the
inhabitants of these countries is paradoxically unlikely. But when the
alternative is a reversion to the conditions of a previous era(s), it quickly
seems preferable. At least with industrialisation, a demand for labour (and
thus their services) is created – not something that resonates with the
agriculture, self-subsistence society of pastimes. Indeed, for the legions of
middle and working class peoples in the far-away developed nations
globalisation, outsourcing, and the growing interdependency between countries
is a source of discontentment - what reason does a large multinational have to
continue production in the UK when they can readily relocate to, say, India and
pay a wage 25 times as less? Then, in simultaneity, another gilded age is in
process, predominating in the developed world and is related to technology and
its advancement.
Culture
The super-rich are aware their lavish lifestyles
do not go unnoticed, out of the public's scrutinous glance. In fact,
the extravagance on display is a source of contempt for some. To give something
back to society, and disprove the stereotype of all billionaires being greedy
megalomaniacs, a large majority are heavily involved or affiliated in one way
or another to a philanthropic organisation. Remember the insane wealth of these
individuals, so in question is not a couple of meagre million - donations are
commonly in the billions, funnelled through an organisation or think-tank often
set up under their name and towards a cause they are personally empathetic
or sympathetic of. Take the Bill & Melinda Gates Foundation, for
example, responsible for donations of $28 billion as of May 2013. Or George
Soro’s Open Society Foundations, involved in important issues such as the
foundation’s “Global Drug Reform Policy”. Instead of watching passively,
without hope or belief, these deep-pocketed individuals are proponents of
positive and active change in policies and ideologies that to them, and
resoundingly to others too, are not something to be continued and definitely
not something to be strived for. Such is why these charitable deeds deserve and
warrant laud.
So, I think the fact there is a small coterie of
individuals with more money than is wise has been affirmed. From this
point of view, it is difficult to see who benefits from the present state
of affairs, apart from the superrich themselves of course. But, as will soon
become clear, there are some, and increasingly this some is becoming many. Only
recently has this inchoate cohort grown in numbers, at complete servitude to
the plutocrats of the world. It is the international, nomadic tradesman – and
when I say tradesman, I do not mean plumbers, electricians, and carpenters, but
rather lawyers, decorators and property developers and the like who are able to
demand a seemingly extortionate sum in the eyes of the ordinary person in
exchange for their services. For people such as Rinat Akhmetov,
a Ukrainian businessman and
oligarch however, the purchase of a $233 million palatial home is a small price
to pay when your personal fortune is approximately $12.7 billion. The services
these individuals can offer are often unique in nature, not easily imitated
which makes any imitations inferior, ersatz. But as inequality goes on widening, more
people are joining the ranks of the multi-billionaires (albeit at an
incremental rate) and as a result these idiosyncratic tradesmen (and women) can
sit by idly and watch whilst their commissions exponentially rise (no doubt
with a wolfish countenance).
Causes
That concludes the historical and cultural
timeline of 20th century
income inequality, (not by any means comprehensive, though). So, I suppose it’s
important to discuss how such an obviously pernicious reallocation of income
has become institutionalised? The forthcoming section will be a full-hearted
attempt at answering this interesting question. Of course, a definitive answer
would require a near infinite amount of time, explaining an almost
inexhaustible number of reasons, which is why, and probably to your benefit (if
you value your time), I will only identify the salient ones.
The Gilded Age is not an appealing era, not least
for its notoriety as a period in which a handful of ‘robber barons’ employed
unscrupulous, exploitative means to achieve devastatingly large returns. Why
then, are the income and wealth inequalities of today so reminiscent of such a
period? In fact, commentators have gone as far to label this new precedent of
inequality as the second Gilded Age within Western society. So, if indeed the
commentators are correct in their representation, what has caused this so-called second
Gilded Age?
On an International Context
Let’s begin with the most obvious ones.
Outsourcing, as touched on above, is principal to the widening of incomes. The
relocation of manufacturing bases to countries categorised as “developing” or
“emerging” are welcomed with open arms (and often preferential treatment; think
low tax rates, free land, and export-tax exemptions) by the host country. They
create jobs for locals, many of whom are on the brink of, or affected by,
privation, and kick-start a virtuous process of cyclical consumption by
injecting foreign investment into the economy. In hyper-competitive markets, it
makes perfect sense for multinationals to seek out the cheapest labour –
sometimes a deciding influence on who remains in business and who is uprooted
and replaced. Sympathetic indeed, it is helping those in need of the most
assistance; not everyone gains, however - the indigenous of developed
countries, particularly among jobs entailing manual labour, tend to be
thoughtlessly laid off as a result of outsourcing. On the whole, though, outsourcing
does more good than harm. The process has the effect of suppressing the wages
of manual labour roles, which is why its role and progression is so important
and integral to income inequality.
Production – as in actual production, how goods
and services are synthesised - is constantly revolutionised, and with each new
wave of revolution the capital versus labour debate is frequently reignited and
recontextualised to take account of the change in parameters. Ultimately, what
every businessman aims for is income (this even goes for non-for-profit
organisations, but it is relegated to a secondary objective). Once attained,
the much-relieved businessman can do one of two things, broadly speaking: allocate
the income between either labour (wages) or capital. In this instance, capital
refers to instruments such as dividends, profits, and interest. Increasingly,
at least over the past four decades, the amount of income being allocated to
capital is incrementing upwards, and is likely to persist into the future. This
is problematic, of course; it is a stark representation of income inequality
becoming worse (more income going to capital is only compatibly possible if
there is a corresponding and proportionate fall in the amount going to labour).
In the past, rents on land was the predominant form of capital; today, thanks
in large part to the rapidity in computerisation, it can be found in numerable
manifestations. The growing presence of capital (in that it now takes numerous
different forms) is partly to blame for this uneven capital/income share; but
the onus is unambiguously upon technological change. Technology, naturally, is
very effective at attaining a higher productivity; this is relishing news for producers.
For employees it often precedes redundancies. For someone in employment, the
possibility of another person taking their job is now a subordinated worry;
their main competition, which could quite effortlessly put them out of work, is
inanimate automation.
Causes endemic to developed, Western countries
Amid the Thatcherite period, deindustrialisation spread rampantly across the UK, most notably in the mining towns (or, in other
words, the North). Around this time, economic orthodoxy saw an inexplicable
potential in the financial services. So nascent, or so they thought, the
authorities allowed the manufacturing sector, still in the recovery phase after
Thatcher’s vicious beating, to go unassisted. Soon, the manufacturing industry
and all its interconnected sectors were marginalised, incarcerated to an aura
of inferiority. Ushered in as a “fitting” replacement was a tsunami
of financialisation, concentrated almost exclusively in London, and was
startlingly prescient of what the future held – it was the initial building
block of the soon-to-be domineering financial megastructure. Incidentally, it
was this exact megastructure, so seemingly impenetrable and impervious, that
collapsed in the 2008 crisis, giving way to a haphazard disarray of rubble, deflated
ebullience, and empty pockets. Through her little self-centred bubble, Thatcher
wholeheartedly believed an expansion of financialisation at the expense of
manufacturing to be a wise and judicious decision. What she either stupidly
forgot or purposefully ignored was the critical difference between the two:
financial services employ vastly fewer people than manufacturing. Unemployment,
therefore, was the only outcome. The people safe from the misfortune of
unemployment were the chief executive officers (CEOs) at the top of the
organisational hierarchy. Instead of being faced with no prospects and
dependency on the government, these individuals actually saw substantial
increases in their salaries; they were and still are able to demand a
salary they view as fit, one reflective and correspondent to their apparently
exceptional “marginal productivity”. The bonus culture, too, awards these same
CEOs with more millions, in times of either profit or loss. In more recent
years, deindustrialisation remains in a less malicious form and has manifested
itself in service-based industries. Notorious for their poor satisfaction,
these line of works pay poorly too. I hold a reasoned dislike towards
statistics (mainly because my past history with Mathematics is, on the whole,
unpleasant) – but on an objective level, and in this instance, they are of real
value and indisputable persuasion. By carefully tracking data over time, Thomas
Piketty, author of the seminal but rather long and dense Capital in the
Twenty-First Century (at 696 pages the “rather” is definitely
disputable), shows conclusively how the share of national income apportioned to
the top centile (that is, the richest 1%) has risen by a significant amount
since the 1970s. Indeed the 70s were a time of relative equality; inequality
was subdued, neither as rife or problematic as today; in the UK, United States,
and Australia the top centile held 6-8% of national income. Leapfrog to the
early 2010’s and across all countries this share has increased, in varying degrees
however. The United States witnessed the largest hike, from around 8% to nearly
20%. Not quite as significant, the top centile in the UK controlled 14-15%.
Meanwhile, in Australia the top centile absorbed a further 2%, bringing the
subtotal up to 10% of national income. Besides the predominant English-speaking
countries, elsewhere, too, the wealth of top centile became more concentrated.
In Europe, for example, the majority of countries saw a further 2-3% deposited
into the bank accounts of the top centile, subtotalling between 7-10% dependent
on which country. The general pattern, with unfaltering consistency, was a
sizeable enrichment of the top centile. In particular, both the United States
and the UK are distinguishable by their high double figure percentages. Another
particularity of these two countries is an important common feature: they both
pursued a strategy of financialisation. It is very easy to mistake causation;
but given how the other countries, in Europe and indeed across the globe (even Japan),
were not too enthusiastic to build a significant reliance on financial
services, insofar as the funds generated by the sector were multiple times the revenue from
the entire manufacturing industry, a condition both the case in the UK and United
States satisfied, it illustrates a positive and direct relationship
between financialisation and income inequality. For the sake of perspective, I
will strive to explain to the best of my ability just how extreme income
inequality has come, using the United States as a factual example. The top
centile, as stated above, controls roughly 20% of national income. With the
help of microscopic analysis, I will go even more specific and examine the top
0.1%. Given the top 1% own 20% of national income, this corresponds to a salary
two-hundred times the national average for the top 0.01% (for example, if the
average is $30,000 then the salary of each individual within this small cohort
will take home $6 million per annum).
What can be identified as another cause of the
income disparity, and contributing to its pronouncement, is the hollowing out
of employment opportunities that lie at the midpoint of the wage-rate/salary
spectrum. Entering the job market can be an exciting task: today, however, it
is tarnished more by mundanity than excitement; those seeking employment
are limited in their choice to, increasingly, either low or high paid work
– which one depends largely on whether one has the prerequisite qualifications
and experience. In essence, then, prospective employees without these
preconditions will be confined to the monotony of uninteresting work and a
hardly sufficient payslip. A noticeable lack of opportunity for progression to
more advanced and well paid roles, ensures the income gap remains intact, even widening. All
that remains is a huge vacuous gap separating the rich and the poor; the
middle-class has been marginalised to such an extent to endanger the
populations very existence. In an attempt to assuage the restlessness of
the working class population, reports and publications alike have lionised
and emphasised the materialisation of a new middle class, which they
are the constituents of. The old working class has moved
into the "vacuous space" between the rich and poor; they are now the
new middle class. There is of course a new working class to replace the old
constituents. Indeed, the very reason such a claim can be purported,
is since the hollowing out of the previous middle class has been done so
decisively, the working class - when financial income is unaccounted for - have
moved up the class system. When income is incorporated into the picture,
it’s a completely different story. Now the extent of the disparity becomes all
too clear – though they constitute a new class, at least according to government
reports, their incomes are not reflective of this progression; in fact,
incomes, for the large part, are stubborn with very little differentiation and
for some, income has actually fallen. At best, what is prevalent is an upsurge
in the petite bourgeoisie.
One would expect the employee to be held in the
highest regard and to be of greatest value to all organisations. After all, without human
labour, organisations of any kind would quickly turn dysfunctional. (Labour is
substitutable with machinery; but like all things, machinery is fallible and, inevitably, at
some point will breakdown requiring human intervention). Why then, are
employers so persistent in scaling back the expenditure spent on wages whilst, simultaneously, augmenting the salaries of executives? In transit already, those most severely
affected by this most undeserving of pay cuts (wages may not have fallen in
absolute terms – that is, from £8 to £6 an hour – but when inflation is took
into account, purchasing power has fallen) are turning to other sources of
income, mainly debt and credit. Debt dependency is anathema; it provides an
instance of momentary respite for those affected by financial difficulty, only
to place them in an even more dire state. Debt implicates regular interest
repayments, adding further stress and helplessness upon the borrower. Instead of placating their financial troubles, it serves as an exacerbation mechanism. That debt
is increasingly being viewed as a viable recourse, to escape financial
difficulty, ought to evoke at least bit of a sympathy from the government. That
it does not, at least to the degree one would hope for, is worrying. The poor
in particular and the middle class to a lesser extent suffice on a relatively
lower income in contrast to their rich counterparts. For this very reason, both
groups tend to spend a greater proportion of their income - in economics
jargon, this is known as a high marginal propensity to consume. This is to be
expected, of course. For a worker on the minimum wage, food, shelter, and a
plethora of other associated costs will exhaust a majority share of their
income. This situational scenario will be different for a millionaire; they
will almost definitely have income to spare (unless profligacy is a practised
pastime). It is with this leftover income that speculations and general stock
market activities are financed. Similar to the marginal propensity to consume,
the one of most relevance to the rich is the marginal propensity to invest;
that is, what proportion of their income is used to pursue investment
opportunities. Together, the two make for a precarious concoction. Income
inequality is not assistful in addressing the problem; in fact, it actually
exacerbates the tumultuous nature of both processes. Debt and (assumptively
profitable) investment are self-sustaining activities, in the sense that, by
procuring debt, at some future point, there is likelihood that more will be
procured, and so on. While investment, (if consistent), delivers continued
returns to the investor, debt creates a figurative stranglehold upon the
borrower.
A broad consensus among the medley crew of
conservatives and neoliberals is an unanimous agreement on the frequently posed
statement that public debt is a real and growing problem. That being said, it
is improbable to disappear at any point soon, and should therefore be accepted
(begrudgingly for some) as it is. After all, as long as the government can be
meet the obligatory interest payments, everyone is contented (at least for now;
a government in the future will undoubtedly be bitter about the
decision). To argue that this state of affairs has no concerning or alarming
aspects would implicate the commentator guilty of superficiality. It would be
easy to make such a false judgement, however – but none the less it would be
wrong. In short, the problem lies with who is financing the mounting levels of
government debt. And it is a significant problem. By buying large numbers of
governments bond, and forfeiting the aspect of access and immediacy to the
money, the individuals and institutions responsible are guaranteed a modest
return. They receive a stable flow of interest and after the predetermined time
period the principal sum is reimbursed. Pension funds, banks, and other
institutions who are entrusted with large sums of money purchase governments
bonds. The mega rich, too, are enticed by the negation of volatility. In
effect, the government is dependent on the generosity of the rich. The
realisation of the rich’s ulterior motive, a stable and reliable source of
income, dilutes this generosity into greed. They just want a safe bet and one
in which more money can be made as a result of. In sum, as public debt enlarges
(as it has done in consecutive years), the payments being made to the rich and
their friends, in the form of interest and bond maturity payouts,
proportionately enlarges too. The rich are the only beneficiaries here.
And the rich alone. Me and you (unless your a millionaire) will see an
implicative effect upon public services, a reflection of the eroded budget
presented to the government.
Given the extremity of income inequality in
today’s age, one might rationally expect some kind of collective revolt, some
kind of stand against the inequities as a demonstrative response. In the
not-too-distant future, perhaps, such an expectation may well materialise and
become reality. Nevertheless, the evidential damage of income inequality is
around for all to bear witness to (the following section, “Implications”, will
divulge some of the nasty side-effects). In spite of these unpalatable
blemishes, action, with the exception of the Occupy movement, has
been virtually non-existent. This widespread passivity is indeed
bizarre, and worth taking a moment to explain. Ultimately, at the very centre
of this paradox is the role of societal norms. There are norms entrenched in
all societies; what they valorise is contingent upon a country’s economic,
political, and ideological stances. Both the UK and the United States share
numerous features, indeed one is how societal norms are similar. The
free-market is embraced more enthusiastically, individualism is
an extolled virtue, and the extent of class division is more
pronounced than elsewhere. How people perceive finance and the millionaire
and billionaire culture is almost the same with negligible difference. Indeed
there is a marked laxity towards the excessive bonus culture and 7-digit salaries.
Such a perception has not been moulded over night; perpetual protestations of the
virtues of finance and intellectually unsound arguments in favour of income
inequality have no doubt been instrumentally helpful. The media, too, is
instrumental in the construction of such a perception. The industry is
dominated by the same influential individuals who are part of the same
close-knitted and mutually beneficial community as the financiers
and politicians. Available to society is a choice of two outlooks: the first
is a radical change of societal norms; the second is to remain passive until
income inequality reaches a point of intolerability (as it inevitably will) -
even for those who are staunch believers of the norms that assert otherwise.
Implications
Deindustrialisation has paved the way for a
service based economy, one that has relinquished the supposed virtues of
Fordism (that is, a mode of production that emphasises mass
standardisation) in exchange for its more mature variation, Post-Fordism
(that is, a mode a production that emphasises small-batched differentiation, with a large degree of flexibility). It is a rise of the precariat, with a simultaneous fall of the traditional proletariat. As part of this change,
employers are stipulating a more pliable and expendable workforce. Job security
has fallen to a new low; full-time positions are dwindling in number. What
remains for those seeking employment are roles of a flexible, part-time nature.
The employer has the power to enforce involuntary redundancies with very little
notice. Those on the receiving end of this complete powerlessness are
majoritively poor, working class citizens; individuals in capricious
circumstances. For the demand of their labour to be decided by the whims of the
market is particularly unfair given how their livelihood is contingent on the
proposed wage.
This ongoing divergence between the rich and poor
ceased to be something that can be selfishly ignored and swept under the
carpet, so to speak, a long time ago. With inflation persisting, though at a
modest rate, the middle and working class are being placed at a greater
disadvantage by the imperceptible effect of wage erosion. As the income gap is
left unaddressed, the cost of living – the ability to afford inalienable
necessities such as simple sustenance and shelter - is exhausting an increasingly
higher amount. Inevitably, as the cost of living rises, people become more
financially strapped, slipping towards the poverty line. Already, this
pernicious yet avoidable process is being experienced by some members of
society. To them, complete or partial dependency on governmental support
programs is viewed as the only possible recourse. Without the benevolent state,
and the payouts and other supportive measures it provides, there is no
possibility of reassurance for those at greatest vulnerability. To discard
visceral tendencies and be critical about this chosen response to
impoverishment will uncover the hardly subtle fact that, although payouts may
indeed be effectual, their efficiency and more importantly sustainability are
both questionable. With a ballooning budget deficit a principal problem in most
Western countries, a lenient stance towards inequality of income and
complete indifference towards its perpetuation is an awful folly; government
payouts will only account for a growing proportion of the budget, exerting more
pressure upon other public services – the police, health service, and emergency
services – which, because of neglection, will likely deteriorate in quality.
The once preeminent competitive position of the
UK is now and has been in a state of crumbling decline over the past three
decades, due in large part to a deteriorating productivity. At best, this may
seem remotely related to income inequality; on closer inspection, there is a
clear case of interdependency between the two. How this state of affairs has
come about is largely due to a changing perception of finance. Just watch the
10 o’clock news and undoubtedly presented in front of you will be more evidence
of the glorification of the stock market. Spurious claims about the stock
market have only further increased the sector’s popularity. But this growing
dependency on financialisation is not as wholesome as it might come across.
Rather than benefiting the economy through the creation of new capital, there
is an ongoing movement of existing capital – of both a financial and human kind
– to financial services at the expense of manufacturing. Now as a large part of
research and development is conducted in manufacturing, a crippling corollary
is that the industry has been subject to a worrying depletion in funding, and
the number of innovations engineered will be lower. Rather than useful, novel
inventions that will be of assistance to the ubiquitous person in ordinary
life, the innovations coming to fruition are ones related to finance; these are
exclusionary by nature and are of use to the small minority (whom,
incidentally, are financially secure) that engage in stock market activities.
In large part accountable for the 2008 economic crisis, the Collateralised Debt
Obligations (CDOs), essentially a complex derivative of mortgages, shows
quintessentially what type of innovation we can anticipate in the future. Even more recently, financial institutions have become increasingly dependent on what to the common layman would appear as a bunch of random letters and numbers thrown together, but what are properly known as algorithms. With these complex formulaes, the trade of financial instruments has been computerised, and, as a result, significantly expedited. High frequency trading, to assign a name to the process, is the latest practice in contention, and rightly so, as it disadvantages the likes of pension funds and ordinary investors, not to mention being the causation of unnecessary volatility. Today, businesses are viewed as expendable entities, only useful for their
instrumentality to profit. Nobody is concerned or impelled to care about the
vitality of manufacturing; in fact, ever since the indelible Thatcherism
period, the industry has been victim to unceasing antagonism, evidenced by the
downplaying of unionisation. The World Economic forum, a non-profit
organisation, carried out a systematic survey into the competitiveness of those
nations that viability allowed, and what it found was that the UK, having been
at respectable 7th place,
was demoted to 13th in
2009, respectively. The relationship between income inequality and the UK’s
competitiveness is inextricable – as more funds are absorbed by the
ever-proliferating pool of equities, derivatives, and the constancy of other
financial-innovations, investment into the industries with the greatest scope
for job creation is inexcusably negligent. Entrepreneurialism, too, is
expanding at a negligible rate, evoking a sense of pity for those with a
genuine zeal for creativity and audacity. Financialisation, in its culmination,
is now so ubiquitous that, increasingly, it is coming to be the only career
path for graduates of a business related discipline. This in itself is a waste
of talent and potential, given the trivial nature of the expected tasks, very
few of which are productive of societal well-being.
Warning: the next point may come across as a
far-fetched impossibility. Income inequality has innumerable characteristics;
for the following point, the one of relevance is its inherent apocalyptic nature.
That is, when it reaches a certain point, one not too distanced from today's, public goods (those that are essential for society to function, go
undersupplied in a purely market economy, and which only the government is able
to provide), will curtail in supply by such an amount as to warrant the
labelling of insufficiency, and what little is supplied will not be of a sound
quality. Just envisage such a scenario: while the rich live happily and hold a
disproportionate share of national income, a contagion is infecting more and
more swathes of people, the primary symptom of which is a manifestation of
poverty and immiseration. There will be no need to imagine this far
from rosy picture, in fact, as at some eventual moment in time it will become reality –
unless the problem of income inequality is decisively addressed. Secluded in
this privileged way of life, away from the prying eyes of the public, the rich
will have no reason to demand governmental services; vital amenities the
ordinary person is thankful for – the police, healthcare service, and
educational centres – will go underutilised. Of course, the rich of all people
need to feel secure and safe, and increasingly so, fostering a demand for a
privatised, but not necessarily more efficient, version of these publicly
funded amenities. Just take note of the burgeoning markets of private security,
private doctors and schools and the like. The primary (and probably only)
consumer group for this emergent market being, of course, the rich and superrich.
With no reason to use public services and less empathy shown towards their
poorer counterparts, the rich, as plainly selfish and greedy as it is, will
attempt to circumvent tax impositions to a larger extent than guilty of today.
So concerned with avoiding taxation the government will be implicated with a
shrinking budget to finance important public services. That noted, the crucial
investments into innovation, which have included advances in
biotechnology and perhaps the 20th century’s
most pivotal phenomenon, the internet, will not receive the much-needed funding
required. Underinvestment is a ruinous ailment, not only for the present day’s
populace but for future generations, too. Places of education, in particular,
are especially affected by this eventuality; underinvestment in, say, a public
school will have an implication on the quality of teaching. There is an
inextricable link between this underinvestment, which will only exacerbate to
an intolerable level, and the dilution of the wondrous notion of equality of
opportunity. Becoming properly educated is one of a very few means a child from
a disadvantaged background can use to guarantee his or her place at a reputable
organisation; so if education does succumb to this far from conclusive end,
then as a corollary, so will equality of opportunity. It is easy to dismiss
this scenario of course; surely a unified response by the governments of the
world will intervene and redistribute income more fairly by means of more
progressive tax rates, for example? But equally as so, why has intervention not
been forthcoming to such an extent to date? Why, then, will the governments of
the world decide to intervene at such a late date; surely the rich minority at
this point will have even more power and influence? How does the increasingly
powerless and feeble government enforce these redistributive policies? Sadly, if
anything the government will be acquiesced and become a
loyal servant to the elite minority.
On an intergenerational perspective – that is,
over several generations - rich families tend to remain rich;
one explanatory argument is how their children tend to excel in
education, outperforming poorer counterparts; this consolidates the
guarantee of a luxurious upbringing for their offspring, and so forth. This
particularly unfair aspect of income inequality is not necessarily overlooked,
but rather, being so ingrained in society to the extent that it has been
normalised, it is taken at face-value, for granted as such, and people feel no
reason to question whether it is fair or not. Societal positions are neither
immutable, nor easily malleable – it requires significant and sustained effort,
skill, and also luck and good fortune to progress from a lower
hierarchical echelon to one considerably higher. Technically speaking,
this inequity stems from an inverse relationship between income inequality and
social mobility. In other words, as the income gap widens, the offspring of
relatively poor and remotely well-off families will find it increasingly
challenging to progress up the hierarchical structure of society.
Money is the means to most ends; and, as such, education is one. Rich
families can afford to enrol their children into a life of exclusivity,
beginning at private schools. The juxtaposition in educational opportunity is
stark: on the one hand, the poor, often concentrated in the same
neighbourhoods, have no choice in where to send their children, limited to an
ordinary public school – disruptive pupils are more likely, overcrowding is
more likely, poor teaching is more likely; then, on the other hand, the rich
are able to choose from a preponderance of private schools. Surprise surprise,
it is in the United States that this problem, like several others discussed, is
most pronounced; only 9 percent of students enrolled at the most selective and
prestigious colleges come from the bottom half of the population (in terms of
income), while an overwhelming 74 percent are from the top quarter – for a
country that endorses “equality of opportunity”, such a statistic convincingly argues otherwise. A long time before school comes into
the parent’s contemplative thoughts, when their offspring is just a baby,
devastation by either reduced income or even forced redundancy (an increasingly
commonplace scenario), often means not only the sacrifice of sustained and
frequent one-to-one socialisation with the baby (a reduced wage necessitates
longer working hours), but perhaps even more important, there is a likelihood
that the baby will be brought into a family more prone to interfamilial
problems, whether that be domestic violence, substance abuse, or just neglect
of the baby. Unfortunately, this is a real and widespread problem. Equality of
opportunity is made even more untenable by the fact that rich families are able
to cover the associated costs of an unpaid internship, a benefit poor families
cannot afford. A pretty stark and illuminating statistic is that the average
income of Harvard University student’s parents is $450,000, placing them
comfortably in the top 2% income strata. With social mobility in a downward
descent, the problem of income inequality is made even more difficult to
tackle, and in time, overcome.
For those unsympathetic towards economics, I
apologise in advance as the following point is comprised of its fair share.
Conservative thinkers will be flabbergasted to be informed that a wage above
the going market rate is, in fact, desirable (yes, that means going against the
wisdom of the market!). Hypothesised by Alfred Marshall, the efficient wage
theory, for its actual name, puts forth an interesting premise: namely, by
guaranteeing employees a wage or salary greater than what the market asserts
(the sheer sacrilege!), their productivity will be higher. For Neoliberals
and Conservatives alike this will no doubt be viewed as heresy to Economics. As
discussed above, the dual forces of automation and outsourcing are both
responsible for the hollowing out jobs, especially ones providing a wage above
the nation’s average; for the poor, and increasingly the middle class, the
remaining opportunities consist of poorly paid, dissatisfying jobs - jobs being
taken on for the financial reward and nothing else. On this typically low wage employees have no reason to work
painstakingly and, thus, by decree of Marshall’s theory, productivity is
unlikely to rise anytime soon (unless of course there is a technological
breakthrough; but then again, this may result in redundancy). Importantly, this
is merely hypothetical and is not empirically and positivistically proven.
Yet it does present an interesting idea that is intuitively plausible.
I hate to bring further attention to the Great
Recession, the ripples of which are still with us today. But for the next point
such invocation is necessary. Unresolved even now, almost 6 years after
the downturn “officially” ended, what caused the sudden calamity
remains in deliberation. On the limitless discussion board, a handful of
partisans each with loyalty vouched to a different doctrine assert equally as
disparate analyses. Although some have argued against it, and in vain I may
add, the finance sector is to be held with a large degree of culpability. To
answer why is not in the scope of this blog; what is, however, is a closer
examination of the responsive policy chosen by those in power. Already
encumbered by huge fiscal deficits, fiscal policy was vociferously dismissed;
instead, and most ruefully, a scaling back of public expenditures and welfare
services was opted for. To recap, then: firstly the bankers and financiers were
kindly bailed out to the tune of £123.93 billion in the UK alone, and then
secondly, completely undeservingly, they receive more preferential treatment -
in a different form this time: rather than being subject to
more progressive tax rates, the government settled for a policy known for its
eviscerating tendencies, Austerity. What can be said about this perverse choice
of action is how the government, and more specifically, the empowered
officials, fell victim to naïvity, believing unquestioningly the
rhetoric and proclamations voiced by the financiers and bankers.
They curated the alarmingly idealistic image of finance as a
virtuous process, to which the government and
regulators ingenuously believed. It is a classic and exemplar case
of regulatory capture; an instance whereby the regulator has unwittingly
internalised the objectives and morals of the party under regulatory
supervision. The interests of the finance sector are thereby prioritised over
the common taxpayer – paradoxical, given how the mandate of regulation is to do
otherwise.
The redistribution (or, rather, maldistribution)
of income in effect today is both obvious and subtle in its consequences. It is
important to take account of both, given how subtly can often be more harmful
than conspicuity. A new (and hopefully profitable) investment is a cherished
opportunity for the rich. As the migration of income carries on travelling from
the poor to the rich, new investments can be pursued; more important, around
the feet of the rich now exists a more spacious and greater financial
cushioning to fall back upon if an investment turns sour. For this reason, the
chosen investments are of an increasingly risky nature,
reflected commensurately by their higher return. While an unfruitful
bet is always a possibility, it does not have the same deterring effect
illustrated by the relatively poor because of the huge difference in personal
wealth. It is less likely for someone with a below-average income to make
investments, however with less disposable income, they become even more
risk-averse and show a greater degree of reluctance towards investment and
related activities. That part of their income is place at jeopardy is the
deciding deterrent - even if there is a potentiality
of gaining a significant monetary return. For those with millions or
billions, a privileged life can be preserved and financed by simply
putting a few million aside for strictly investment purposes - and of course,
this is on top of their 7-digit salary. As an activity, investment is
exclusionary, only those with a specific personal wealth can turn
their inclination into practice; this is an unavoidable aspect of course,
but it is one that as a result of, puts a restrictive straitjacket upon who and
who cannot engage in these high payoff gambles (as that's what they essentially
are).
Inequalities of any kind are, by their very nature, divisive. This rings particularly true for income inequality. Too busy jet-setting around the globe, the plutocratic minority seldom interact with the rich; likewise, the rich seldom interact with the well-off; and the well-off seldom interact with the poor. Pervading around all societies, in varying degrees, is an implicit (and increasingly explicit) class division; that is, a hierarchical arrangement that purposefully assorts each individual a societal status in accordance with a myriad of determinants. Akin to the bizarre sorting hat that appears in the first Harry Potter film, rather than different houses, the process of class division assorts each individual a different social pecking order. Within unequal societies, class division is deeply entrenched. The problem with this obvious case of stratification is how it is inhibitive towards a society promotive of trust; a society in which individuals can walk down a road without trepidation, without the fear of being victimised by some form of physical violence. Alienated amongst those of the same “class”, interaction with a person outside of this class (particularly of a “higher class”) is not actively encouraged or performed, except out of necessity. In isolation from other classes, a gradual erosion of empathy towards one another emerges. A loss of empathy, in turn, leads to a loss of trust. A loss of trust, in turn, leads to society in which cooperativeness and communitarian values are compromised. A loss of cooperativeness, in turn, leads to an apathetic rich; they no longer feel morally obligated to be charitable and philanthropic. In such a dystopian-esque society, people are constantly on edge, worried about being subject to some form of crime (with no empathy towards each other crime is viewed as permissible), and as a consequence, there is a subsequent effect upon stress and, as substantiated by research, longevity. This vicious set of events is just waiting for some form of impetus to knock over the first domino, to which the remaining ones will quickly follow. Income inequality could well be this impetus.
Inequalities of any kind are, by their very nature, divisive. This rings particularly true for income inequality. Too busy jet-setting around the globe, the plutocratic minority seldom interact with the rich; likewise, the rich seldom interact with the well-off; and the well-off seldom interact with the poor. Pervading around all societies, in varying degrees, is an implicit (and increasingly explicit) class division; that is, a hierarchical arrangement that purposefully assorts each individual a societal status in accordance with a myriad of determinants. Akin to the bizarre sorting hat that appears in the first Harry Potter film, rather than different houses, the process of class division assorts each individual a different social pecking order. Within unequal societies, class division is deeply entrenched. The problem with this obvious case of stratification is how it is inhibitive towards a society promotive of trust; a society in which individuals can walk down a road without trepidation, without the fear of being victimised by some form of physical violence. Alienated amongst those of the same “class”, interaction with a person outside of this class (particularly of a “higher class”) is not actively encouraged or performed, except out of necessity. In isolation from other classes, a gradual erosion of empathy towards one another emerges. A loss of empathy, in turn, leads to a loss of trust. A loss of trust, in turn, leads to society in which cooperativeness and communitarian values are compromised. A loss of cooperativeness, in turn, leads to an apathetic rich; they no longer feel morally obligated to be charitable and philanthropic. In such a dystopian-esque society, people are constantly on edge, worried about being subject to some form of crime (with no empathy towards each other crime is viewed as permissible), and as a consequence, there is a subsequent effect upon stress and, as substantiated by research, longevity. This vicious set of events is just waiting for some form of impetus to knock over the first domino, to which the remaining ones will quickly follow. Income inequality could well be this impetus.
In similar vein, the more unequal a society is,
the greater the incidence of mental health problems. In part, the capitalistic
system, and its adjunct consumerism, are at blame; the values that both
processes perpetuate – narcissism and ostentatious individualism – create a
needless awareness of one’s self-consciousness. People are less concerned about
absolute improvements; rather, what matters are relative improvements, in other
words, ones vis-à-vis other people. To be affected by a feeling of inferiority
in the presence of others is likely to, (and research proves it does), ignite
common mental health problems: anxiety, depression, and personality disorder,
as well as turning to short-lived palliatives, such as alcoholism and/or drugs.
Fashion and designer clothes construct and symbolise a particular style,
affiliative of a particular subculture or group. Individualism is indeed a
praiseworthy notion, and clothes, to take one example, are just a representation
of one’s individual identity. The problem lies with the absurdity of this
variation of individualism; people who simply cannot afford the “in” clothes
are ostracised and alienated. Exclusion from a group for something so trivial
as what one is wearing is not the supposed purpose of life; individuals are
supposed to interact and be mutually beneficial to one another. The very notion
of consumerism is fundamentally flawed, too; why encourage never-ending
consumption given the limited, finite number of resources on the planet?
Anyway, that is a completely different story. As I was saying before that minor
digression; in more unequal societies, the difference in material possessions
and outward appearance is wider. Stressfulness is one of the unpleasant
side-effects of this poisonous ailment. Everybody knows that stress can
cause long-term harm to the sufferer; what very few people know is how it can
change how the stomach functions. As a result, the body for some biologically
reason deposits fat around the affected person’s abdomen, rather than their legs.
That being said, it is no coincidence that obesity is on the rise. Food is
viewed as a route to respite, to escape the anxieties of life – this
illustration of “comfort eating” is almost exclusively manifested in the
consumption of high cholesterol foods, high sugar content foods, and fast-food.
For pregnant women stress is particularly alarming; research has confirmed a
relationship between stressed pregnant women and their offspring being brought
into a life that presupposes stress. Adapted to deal with stress, their
metabolism will be relatively slower, a problem in itself as obesity will be a
more likely to be fixture in later life. In more primitive times when the
problem of food shortages and paucity were an omnipresent worry, such
resilience would be beneficial, even life-saving; in today’s world, however, a
world characterised by an abundance of food (in the developed world at least),
obesity is a more probable outcome.
In an utopian world of perfect equality, crime would be a long
forgotten problem of pastimes. That an overwhelming proportion of criminal
offenses are committed by individuals on the fringe of financial sufficiency
and insufficiency is not surprising. The more unequal a society is, the more
the whole notion of class division is acknowledged and valorised. For those at
the bottom of this social hierarchy, they lack the financial means to present
themselves in the same materialistic way as those in the higher classes. Even
above a specific income threshold in which the necessities of life are
affordable, the person is forced to forgo other goods and services, ones of no
intrinsic value, no actual utility, but are nonetheless meaningful for other
purposes, as an affirmation of a particular style or status, for example.
People would not be forced to go to such extremes, to commit such offenses that
could rightly brandish them as a criminal and sharply constrain and restrict
what opportunities are pursuable in later life or not, if their life was
satisfying and fulfilling. In the throes of desperation, crime quickly gains an
allure that reconstructs the questionability of the activity. Money dominates
almost all facets of life; without money, therefore, participation in
societal life is curtailed. Income inequality is, by definition, the uneven
spread of money and can therefore be noted as a direct cause of crime; the more
unequal the distribution of money is, the more people will be living on the
breadline, so to speak, and will be inclined (out of necessity rather than
choice) to engage in activities deemed as illegal and unlawful. The
characteristics of a society ravaged by income inequality are, in general, a marked
level of individualistic concern, and by extension of this, an unusually tight
embrace of consumerism. It constructs an idealised image of what people ought
to look. Conformity to this image is a way of attaining acceptance. The
individualistic predisposition found in unequal societies, places a significant
emphasis on status. Between individuals, status competition is a constantly
ensuing anxiety. This point relates closely to research undertook by Harvard
Medical School based psychiatrist, James Gilligan. His research found a common
motive in the provocation and use of violence to be in response to “the feeling
of shame and humiliation – a feeling that is painful, and can even be
intolerable and overwhelming – and replace it with its opposite, the feeling of
pride”. Thus, for those living on a stagnant income, even falling, the
attainment of these idealised “images” are an insurmountable distance away and
simply unachievable, and as a direct result, a feeling of shame and humiliation
is evoked.
Solutions
The outlook for completely eliminating income
inequality once and for all is dim and, to be candid, neither very likely nor
desirable. A partial mitigation is a more achievable and less ambitious goal.
Such a multifaceted problem is of particular difficulty to address – how does
one isolate the myriad of underlying causes and influences? Indeed, in this
section I will attempt to do just that.
The first easily identifiable area in which
improvement ought to be sought, and one which the manufacturing industry is
heavily burdened as a result of, is the scary perversity of incentives
inculcated into financiers. There was and still is, albeit to a lesser extent,
a misalignment between the motives of the financial sector and societal
well-being. What this means, ultimately, is how the ultimate objective or telos of the sector being strived for, is incompatible with societal well-being. This
misalignment is infectious, and can be found in an increasing number of
industries. Once again, the finance sector reins victorious on how distorted
incentives are. Society has been subordinated to personal enrichment.
Worryingly, innovation is infected too – why else would
the financiers create these super complex financial instruments
other than for their own well-being? Their main merit is the diversification of
risk, but this is often done by complicating the intricacies of the instruments
insofar as making them indecipherable and incomprehensible to
regulators. When Warren Buffett, an investor extraordinaire, worth $67.6
billion dollars as of 2014, makes direct reference to derivatives as “financial weapons
of mass destruction", it is probably worth taking note. In
principle (and in accordance with the marginal productivity theory), the wage
paid to an employee is supposed to be an exact reflection of societal good
derived from the work. In reality, of course, this far from the case, and
particularly so for financiers – they contribute very little to society, but
extract obscene amounts of money. Given the ultra-competitive nature of
finance, newcomers, after securing an exclusive place at whichever hedge fund,
equity house, or investment bank it might be, are so determined (to the extent
of it being mistook for religiosity zeal) to impress their senior, that the
immorality surrounding the conducted practises is simply viewed as acceptable,
being openly and unabashedly perpetuated. Regard for the ordinary person or
business is implicitly disparaged – all that is of importance is appropriating
a sizeable return, by whatever means are necessary and irrespective of any harm
caused. The collectives of individuals entrusted with these inordinately large
sums of money, are done so with one thing in mind: the expectation of a return.
Importantly, it is other people’s money at risk of being lost in this
high-stake speculative game; the investor has no emotional attachment towards
the ultimate outcome – any money lost due to the vagaries of the market is at
loss to someone else. It is this exact indifference that encourages trading
reminiscent of the kind preceding the 2008 crisis. By changing this
relationship into one in which the financier has something at stake, something
to loss, be it their salary or the position itself, a feeling of
cautiousness upon their decisions and a direct acknowledgement of the risk
entailed in the beyond-audacious investments will be induced. If they have
something to loss it will make them think twice – and, as a result, an
environment for safer and more secure investments will be created. This is not
as easy as it may seem; financiers are expected to make a return - if this
return is unforthcoming, therefore, people will view the investor (and also the
financial firm they work for) as incompetent and unreliable, and are unlikely
to be a repeat customer. That poses the question of how a more cautious
environment is to be promoted, one devoid of the significant risk of today, if,
by going against the norm and not to pursuing the notably riskier bets, a
reasonable return is less likely, and as a result, a simultaneous decline of
reputation and custom is more likely?
The large and powerful investment banks publicised for their
participatory roles in the 2008 crisis are far too comfortable in their
behaviour – they have very little reason to be cautious about which trades are
pursued; any unfruitful bets are cushioned and subsumed by the
government,
being reimbursed out of the taxpayers’ pocket. To the ordinary economist, this
is known as “moral hazard”, an instance whereby one party is assured by another
and is therefore able to behave recklessly in the knowledge that if failure or
bankruptcy arises recapitalisation will be provided. In this context, party A
(the financial institutions) are reassured by party B (the government), and
thus in times of crisis party B will intervene and provide recapitalisation.
The nature of this problem can be remedied with relative ease. A
straightforward solution is to separate the financial institutions into two
opposingly different categories: on one hand would be retail banking, under
which ordinary banks and the like would fall; banks that handle everyone's
personal saving and are a source of credit for individuals –
characteristically, these are more risk-averse and have little involvement in
the so-called ‘casino banking’; then, on the other hand, investment banking,
constituted by the banks and institutions that actively partake in derivative
trading and other complex trades. (In fact, these institutions are often
referred to as "non-banks"; it appears contradictory at first, but
the name makes sense because they have neither a lending nor depositing
function - the two defining aspects of a bank). Retail banking will be placed
under close surveillance, to ensure adherence to the stringent conditionalities
placed upon which banking activities and trades are permitted is abided by. Investment
banking, conversely, is fully autonomous and unrestricted in which trades are
permitted; with this privilege, however, the bank or institution automatically
forfeits the safety net of government intervention, of much convenience in
times of crisis. This would be implemented with the intention of promoting a
more critical and wary approach to investment, an intention made all the more
likely given the withdrawal of the government as a lender of last resort
function. It would inject a healthy dose of realism into the matter; as a call
on the taxpayer is no longer an option - any money lost is irretrievable, lost
for good. Something reminiscent of the discontinued Glass-Steagall act of 1992
would be wise. Complementary to this measure, a removal of the cloak of secrecy
encompassing the financial services sector will assist in making the sector
more transparent. That such opacity is deemed necessary is reason to speculate
about the scrupulosity of the activities; notably risky practises, in turn,
will be discouraged.
Overleveraged positions – that is, when
liabilities exceed equity/when a company is heavily indebted (for example, the
Lehman Brothers had a leverage ratio of 30.7 times during the 2008
crisis) – are characteristic of large financial firms; they are very telling
of their activities, too. Taking on board such precariously large sums of money
is instrumental and supportive of the hostile takeovers, or “centralisation” in
Marxist terms. This is exactly what businessmen have bore witness to and distraughtly experienced over the past
decades. The very commonality of these buyouts is indicative of an
individualistic culture; if companies are bought, dismantled and sold in quick
succession how are they supposed to prosper and grow? What motive is there for
research and development funding? It is an abject and sorry state of affairs,
and cannot, should not, be casually overlooked. This is all very anticipatory,
however; for those scouting out potentially lucrative companies, it is done
with only one objective in mind: the maximisation of share value. And it seems
rationalisation of the workforce, laying off lots of workers, is the quickest
and simplest expedient to realise this objective – even if
the inflated share value is short-lived. At the heart of this problem, and
where I believe it stems from, is the excessively glorified shareholder
culture. What is needed, then, is a suitable replacement in place of this
irremediably bad culture; a new paradigm that is emphatic of the common
employee, of their needs and expectations, and, equally as important, a
dissociation from short-termism. As a complement, the central government and
the according department could draw up and ratify a new ownership law. What is
special about this particular ownership law is the stipulation of a minimum
number of years, in which a new owner or set of owners of a recently taken over
company are required to remain in ownership until dissolution is permitted. The
financial gain of buying and selling companies in quick succession will cease
to be possible, and thus opportunistic financiers will be thwarted in
their attempts to do so. Rather, acquisitions and takeovers will become a
heralding sign, the beginning of a harmonious relationship between two
growth-orientated companies. That is not to say takeovers ought to be banded outright.
Because that would be equally as disastrous as allowing them
to continue unfettered. Instead, a takeover should only be permitted on
receiving a thumbs up from the relevant regulatory power.
It would be naïve to describe the current craze
of shareholder dominated companies as a sound organisational structure.
Shareholders and heavily compensated seniors will no doubt provide a personal
endorsement, but for the remaining employees, the remaining majority, it serves
of no benefit. Change is required; specifically a change of organisational
structure. One in mind, and which could revolutionise how companies operate, is
an employee-ownership structure, whereby all employees are of equal value. This
abstraction of equal value is then transformed into practise by introducing a
profit-sharing scheme. No, this is not some dream of a communistic diehard –
the owner(s) or CEO(s) will of course receive a salary multiple, ten or perhaps
even twenty times that of the workers on the production floor; importantly, though, it
will have no resemblance to the excesses of today, where CEOs enjoy salaries
one hundred times the average yearly wage. The sense of equality is further
reinforced by an allocative share scheme, in which each employee receives a
significant number of shares. Indeed, equality is not the only benefit,
employees have good reason to work harder in an attempt to increase the share
price (a higher share price generally means higher or more frequent dividend
payouts). In turn, this concrete linkage between the employee and the company’s
very existence gives reason to work vigorously, manifested in a higher
productivity. The associative problems of a lack of autonomy and feeling of
subordination and inferiority, synonymous with hierarchical and employer-owned/shareholder-owned
companies, are quickly forgotten, too. Rather than being coerced into
the completion of a task, employee-ownership structures are
characteristically democratic. In contrast to hierarchical-structured
companies, boardroom meetings are a congregation of actual employees, not
representatives of important shareholders; in direct involvement with the
company on a daily basis, these employees can provide intricate accounts of how
the business is functioning. In Germany, a large proportion of companies
embrace a type of capitalism that would be consider deviatory in the US and UK,
known as “Rhenish capitalism”. Individualism is replaced by an encompassing
concern of the entire workforce; it is frequently referred to as a “stakeholder
culture”. To have representatives of workers, regional governments, and
environmental groups present at major discussions is a common sight. All these
theoretical benefits are all well and good, but, ultimately, what matters is
how does the theory stand in practise. Well, to use the example of Mondragon
Corporation, a cooperative of Spanish origin, it does mightily well. Beginning
as a 120-employee strong company, rapid and sustained growth has allowed the
cooperative to expand by such an amount that the current employee count stands
at 80,321 and annual sales equate to billions.
Manufacturing, as discussed above, is gripped
firmly by an insidious malady, and has been for a worrying number of years.
Part of reason to how this condition has developed is firstly, a severe lack of
provisioned capital, and secondly, because a large part of available loans are
usurious (that is, the proposed interest rate is unsustainably high). This is
far from incurable, of course. The government has the means to remedy both
problems. A logical solution is the creation of a governmentally-ran institution,
whose mandate and purpose would be to appropriate funds to mainly manufacturing
companies, at a competitive interest rate and attractive terms. At present, the
majority of manufacturers, approximately 85%, lend finance from a measly four
lenders. More competition is desperately needed. In the meantime, however, this
proposal would stimulate the dormant manufacturing industry into activity
again.
An overhaul of the current taxation rates, of
which are more than palatable for the rich, is not like some commentators argue
without warranty or unreasoned, but is increasingly required by necessity –
they are simply too modest and are in need of being hiked upwards. It is
presently the poor and middle class who are suffering by implication of the
regressive taxation rates (this means the poor pay a greater proportion of
their income in tax than the rich); to them taxation is something to be
accounted for in their ever-dwindling budget, an unavoidable obligation that is
heartfelt; to the rich it is a mere inconvenience. Robert Shiller, an American
economist, proposes a novel and interesting tax regime, completely disparate to
any before. Built on the premise of linking a change in income to a
corresponding but proportionate change in tax, the proposal would predictably
sever and mitigate inequalities. Importantly, everyone would be subject to it,
and thus the argument, or ad hominem rather, frequently touted by the
super-rich expressing concern over their cohort being unduly discriminated
against will be void of substance. The fallacious proposition recycled by those
on the Right, arguing that the rich need to receive impunity from more
progressive taxes, so to preserve the sanctity of incentives is not even worth
repudiation. Research by the trio Thomas Piketty, Emmanuel Saez, and Stefanie
Stantcheva, found current tax rates to be far from excessive, and are, if
anything, extremely modest, even benign. What they found, interestingly, was a
percentage of 70% to be an optimal tax rate (that is, the one that would generate
the most tax revenue). Of course, on first impressions 70% may appear unfair
upon the millionaires (the irony). Then again, the only reason income tax is
currently so low in comparison to period after World War 2, is because the
efforts of past governments, led by Right Wing and Big Business sympathisers,
many of whom had vested interest in lower taxes, spouted a bunch of rhetoric
about how laissez-faire capitalism (or Neoliberalism, as it’s known today)
was the most advisable economic system.
Surrounding the whole idea of tax havens is an
impermeable mystique. For those aware of tax havens, it is common knowledge
only a small melange of people and companies successfully seek benefit from
their existence. For the remaining 99%, a large majority of whom are not even
consciously aware of these centres of secrecy and clandestineness, never mind
their discreditable activities, they are detrimental. This is despite the fact
tax havens are essentially insatiable black holes with a particular liking for major
Western government’s tasty tax revenues. It is disconcerting to know tax havens
are ignored by these same governments. In times of strict and painful Austerity
measures, surely the
“miraculous” disappearance of billions of taxable income
should be a priority? If prompted, intergovernmental action could indeed outlaw
such activity and demand more transparency, insofar as making tax havens
undesirable. Two parties are guilty of wrongdoing; firstly the superrich, and
secondly, the country in which the tax haven is located. Of course, neither
would vouch support towards policy that could potentially undermine their
prospering relationship and result in a disassembly of the activity, given the
inevitable loss of income. Regardless, the affected major governments need to
come together and enact a concerted unified response. If unsuccessful in
achieving its end (the abolition of tax havens), a last resort and expedient as
such is a temporary protectionist strategy. This does not mean something so
extreme and punitive as a complete embargo of trade, but rather a partial
tariff of say 20 or 30%. In doing so, it will send a strong message to the
select number of governments playing host to tax havens. The message would be a
complete intolerance towards tax havens. At the centre of balance of payments
(BOPs) theory, is the assertion that it is impossible for the countries of the
world, in aggregate, to be in either surplus or deficit
(that is, a state whereby outflows exceed inflows, and vice versa). In general,
developed countries tend to be in deficit, while developing and mainly emerging
countries do not, instead running surpluses. Overall, the deficits are
cancelled out by the surpluses, at least in theory. This is the problem,
however: the current world position defies and contradicts this central
theoretical belief: developing and emerging countries do not run balance of
payments accounts that are correspondingly diametrical to their developed
counterparts (that is, if the developed country is in deficit of £2 million,
the developing country is in surplus of £2 million; therefore cancelling to
£0). There is a major imbalance; the world’s balance of payments account is in
fact negative – in other words, money has quite literally disappeared (or so it
seems). Of course, the accounting of the world’s balances of payments is not a
straightforward feat; mistakes are almost inevitable, and indeed this explains
at least part of the discrepancy – but not all. Recent research by Gabriel
Zucman, a London School of Economics (LSE) professor, has made a substantial
contribution in understanding this perplexing matter. With his main finding,
the mystery of the imbalance is solved. It is because of massive off-the-book
movements of finance to off-shore bank accounts and tax havens. In short, this
imbalance is unaccounted for money. Worryingly, the amount in question is not a
tuppence either, but rather, at a conservative estimate, about 10% of global
GDP.
Among the working class pervades an indifference
towards anything politicised. They have been effectively depoliticised. For
something so important and powerful as politics to be utterly unengaging,
especially to such a mass of people, is disturbing. Within this
disenfranchisement, however, lies potentiality; if summoned and effectively
mobilised, these swathes of people who feel a modicum of empathy at most
towards their political masters can come together in unity and make a point too
noticeable to be ignored. Other more hesitant folk, too, will be galvanised and
prompted into participating in the show of resistance, not only in the country
in which the demonstration is occurring but also abroad, in countries afar.
Indeed, it would be foolish for people to become disillusioned by what can be
achieved with demonstrative action. At the very least, though, the emotive
nature of the subject will be captured and transformed into media publications
to bring awareness to the problem (not the mainstream ones of course, that
would be wishful thinking, but the multiplicity of
smaller outlets popping up all the time). Such
drastic action is at a breaking point; soon it will performed by necessity, and
once materialised it could be unprecedented in numbers and passion. As the
inequalities so protrusive in society continue to worsen unabatedly, more
people will begin to suffer silently until a revolutionary approach
is viewed as the only alternative left.
Exploitation, as anyone whose read Marx will
know, is one of many unavoidable ills of capitalism; not just in respect to
humans, but also the environment. Companies are accumulating massive riches by
happily and unashamedly polluting the atmosphere, by causing irrevocable harm
upon the environment. It is a very profitable business, mainly because the
environmental damage is not monetised and charged upon the business. These
unaccounted for externalities (as they are known in Economics) are of
massive benefit to the company; they allow these companies to continue their
reckless consumption of the Earth’s resources at very little cost. For inhabitants
in close proximity to the source of pollution, the activity is often to their
detriment, affecting negatively both their lifestyle and longevity
(think about air pollution, for example). One alarming example is
deforestation. The rate at which the process is expanding is the very
definition of unsustainable. Not to go all science-ey, but this has obvious
implications upon climate change and global warming, quickening both processes;
it also, and this is more harmful for the immediate future, leads to the permanent relocation of parochial tribes and the complete and unnecessary callous extinction of
endangered wildlife. For the sake of perspective, a statistic I have found
on the http://wwf.panda.org/ website estimates the effect of deforestation to
be accountable for the displacement of 12-15 million hectares of forest every
year - or the equivalent of 36 football fields per minute. There is good news,
however. These externalities can be accounted for through a process of
internalisation. Put simply, what this means is that the externality is
internalised and the real cost of the activity, that is, the private cost (e.g.
hiring labour) and the environmental cost, are incorporated together and
accordingly charged upon the company. Additionally, a heavier tax
imposition upon the companies at fault for this environmental degradation is
required. Ecologism is in a state of neglect and corruption. But by duly extracting a more equitable sum of these companies, a sum that is a more appropriate reflection of the real (rather than superficial) cost behind their
activities, the revenues can be reinvested into the community, into new
projects to create employment.
Despite the intrinsic value of education, it
remains a vastly underappreciated and, to a certain degree, underutilised
service. The present educational curriculum is not necessarily poor as such,
but rather, some components are in need of a tweak to ensure the benefit
captured from the service is maximised. Given the important implication of
education, this ought to be a priority for all governments. A sound education
allows students to acquire essential skills, the very skills that differentiate
him or her from homogeneity. To properly highlight this point, I will call upon
the marginal productivity theory, as previously discussed. In general, the wage
of an employee is an approximate reflection of their productivity and
“contribution” to the company. One route to a higher productivity is
specialised knowledge; or, in other words, becoming educated. This is why a relatively poor
education, especially in the current job climate, is inherently stifling; it
makes procurement of such intangibles as specialised knowledge more difficult
to secure and assimilate. That is not to suggest a complete overhaul of the
education system is an obvious panacea. Partly this is the answer, and
reshuffling the education system is indeed required; but equally, if not more,
as important, is a continual readjustment to the curriculum and material being
taught. We live in a world predominated by technology – and it is very
welcoming for a number of reasons. But it also has a more sinister side: with
the constant progression and innovation that it spurs, skills and knowledge
procured from education are entering obsolescence at a faster rate than ever
before. On entering the job market, a large part of the material learnt in
education quickly loses meaningfulness; the application of such knowledge
ceases to be in demand. This underlines the importance of updating the core
syllabuses on a yearly basis, and it cannot be understated; if ignorance
prevails, and only a significant but one-off change is made, people will
benefit from an initial demand for their skills and knowledge. Then, as
technology advances and this line of expertise is no longer demanded, it will
be condemned to the graveyard of “skills and knowledge of days gone by”, along
with the high wage.
In the UK and among an unhealthy number of
European nations, the austerity experiment has been nothing short
of counterproductive. In some cases, the economic slump it was supposed to
amend has actually been deepened. As a direct result of austerity, public
services are in a state of chronic underinvestment. The central intention
of the policy, reducing the government debt, is indisputably
sound. Yet this very debt remains, practically undiminished. Debt per se
is not the only problem either, there are the concomitant periodic
interest repayments to worry about too. (Given austerity’s
contractionary immanence, this should not come as a surprise to
anyone). As of 2013, the financial burden upon the UK taxpayer of only servicing the debt (that is, paying the interest repayments) was a
not-so-small sum of £45.1 billion. For the sake of perspective, this sum
is the equivalent to 6% of total governmental expenditure. Do
not let this small percentage detract from the substantiality of the
amount. Each pound is being spent on a cause of no avail to the UK
taxpayer and general population at large. We find ourselves in a state of
regression, retrograde; the economic fruits painstakingly amassed over several years were
destroyed in a matter of months during the 2008 economic crisis. The economy,
as a result, relapsed into a less developed state. That being said, it is
therefore excruciating to have no choice but to sit by passively while such
wastefulness is in plain sight. To see such a grotesque amount of the money
being whittled away on a purpose of no utility to the ordinary person can and
should be stopped; there is a necessity for it to be utilised in a more
efficient, more productive way. The need for intervention has turned into
desperation. However, like always, there is no utopian solution, and all the
courses of action available are, to one degree or another,
contentious. And this is particular true for what I believe to be the most
well adapted action to tackling the problem - a tax upon wealth. It
will be predictably despised and resisted by the small minority who
fit the criterion on whether or not they are affected by the policy. Importantly
though, the arguments in favour of the policy outweigh the arguments against it
by a significant and clear margin. Firstly, it will generate a sum sufficiently
large to cancel out and eradicate government debt in its entirety. Secondly,
too, the deep structural wealth inequalities within society will be disrupted
and upset. A specific threshold will be set, at which level an individual
will be levied with the tax if their personal wealth is equal to or above it.
If the total value of wealth is significantly above the threshold, a
correspondingly higher rate of tax will be levied. Wealth and income
are categorically different and not interchangeable concepts.
Dividends, rent, and interest each constitute a form of wealth. In general, wealth
provides a source of income, often one that the holder of wealth has no
contribution in generating; but as the purchaser and owner of the wealth, (a
thousand shares, for example), they have an entitlement to a constant flow of
income, (a thousand dividends in the e.g.). For wealthy individuals, the
stock market and financial meccas of the world have opened up a new avenue in
which further fortunes can be amassed. Simply by choosing successful companies,
they are guaranteed high yielding returns, returns in the region of 10%. Risk
is the main determinant on what return one receives from an investment. The
more risky an investment is, the greater the return. Thus, the average return
can potentially be substantially higher than 10% depending on how much
underlying risk there is across the portfolios. When the amount in
question is multiple millions, the subsequent return is significant. In
the initial periods after implementation, the tax percentages would be small -
nothing exceeding 2% for the wealthiest individuals down to 0.5% for the less,
but by definition, still very wealthy. As of April the 8th, Bill Gate's
personal wealth totaled $79 billion, up by $16 billion since 2012. Other
wealthy individuals, too, are having their personal wealth rise at such a rate.
The proposed tax regime, then, would not be too confiscatory; it would
implicate a modest amount relative to absolute totals. It would be a recurrent
tax, being carried out on a yearly basis. This would provide these individuals
with more than enough time to accumulate the amount forgone as a result of the
tax. Another important aspect is experimentation. If these individuals are
cosily living off their capital gains (be it rents, dividends, or interest),
and their overall wealth, in most cases, is not diminishing, the government
should not be dissuaded in enforcing a higher tax rate. Progressively,
government debt will at some eventual point be entirely nulled. At which point,
taxation revenues and other forms of government income will no longer be
preordained for debt services - instead, the money will be available to spend
on more productive uses such as the debilitated public services.
The
last solution, and one that can be deployed in the foreseeable future, is
through the medium of politics. That is to say, through political
participation, through suffrage, and more generally, through democracy. To
correct these deep imbalances, people need to become politicised, their current
apathy needs to broken and galvanised into interest and discernment of what
politics can achieve. This means, in other words, espousing left-leaning
parties, ones that emphasise the virtues of equality, collectivism, and
sustainability. In the UK, until recently, this would have been met by an
impasse, a hopeless situation with no routes to the planned destination (that
is, a left-leaning party). But this has changed, with the meteoric rise of the
Green Party, a party that, for the first time in my (admittedly relatively
short) life of twenty-one years, I have become a fully pledged member to. I
encourage others to, first, read the party's manifesto and, second, evaluatively
decide whether the policies resonate with you. If they do, then spare a small
sum and - become a member, and the fruits of the decision - more equality,
environmentalism, a curtailed and more accountable financial sector,
recognition of the rich's moral obligation to contribute more to the government
kitty, inter alia - will be immeasurable.
Conclusion
If you have made it to this point in the blog, I commend your perseverance as
admittedly, at parts, it can become tedious. But from the majority of the
writing I hope you have gathered a more informed picture of why income
inequality matters and how it directly infringes on your life and liberty.
Equally so, I hope you have realised the growing urgency, necessity in fact, for
some form of action, directly and indirectly, to tackle the systemic causes of
the process. There is no easy way to go about this, however. For each of the
proposed solutions there is often a corresponding shortcoming – some of which
make the policy counterproductive and void. Globalisation is largely at blame.
The globalised element within finance allows companies and individuals alike to
move their personal finances readily from one bank to another,
out of one jurisdictional area into another. Of course, as is the case with tax
havens and off-shore bank accounts, once the finance has been moved it is out
of the government’s tantalizing reach. Nationally, a country is at complete
impotence, unable to appropriate income rightfully belonging to the government;
globally, as in between a whole host of different countries, and the likelihood
of retrieving the income is heightened. More cooperation, therefore, will be
beneficial to all involved. All countries are suffering, to one degree or
another, from the same woes of income inequality. That a cooperative, unified
approach has not been more forthcoming is surprising. The sooner cooperation is
collectively agreed upon, the sooner the proposed solutions can be implemented
without worry of circumvention.
Qualitatively, a society marked by income inequality characteristically has a greater incidence of mental health problems, obesity, alcohol and/or drug dependency, and crime. Class division (or segregation) and inequality of opportunity are both more pronounced, too. Quantitatively, wages are suppressed among low-income earners (these jobs, too, often provide low job satisfaction), more people are taking on debt as a means to affording basic necessities, and financial governmental assistance is a more commonplace. In general, income inequality is prerequisite to a lower standard of living. To put into perspective how detrimental income inequality can be upon society, the United States spends six times as much on the penal system and prisons than education. At what point does the government want to rid itself of stubbornness and concede to having a deep structural problem?
Qualitatively, a society marked by income inequality characteristically has a greater incidence of mental health problems, obesity, alcohol and/or drug dependency, and crime. Class division (or segregation) and inequality of opportunity are both more pronounced, too. Quantitatively, wages are suppressed among low-income earners (these jobs, too, often provide low job satisfaction), more people are taking on debt as a means to affording basic necessities, and financial governmental assistance is a more commonplace. In general, income inequality is prerequisite to a lower standard of living. To put into perspective how detrimental income inequality can be upon society, the United States spends six times as much on the penal system and prisons than education. At what point does the government want to rid itself of stubbornness and concede to having a deep structural problem?
In countries in which income inequality is acute, there is an
overemphasis upon money. Money is viewed as some transcendental object; the
ultimate means. The more emphasis put on money, the more people will defile
themselves to new levels of overt individualism. In a money-orientated world,
people will hold others in disdain for increasingly insignificant reasons.
Abound in society are multitudinous problems and illnesses, some irreparable
and insurmountable; others rectifiable and surmountable. It is the former that
need more attention and funding. The ones stemming from income inequality –
crime, obesity, mental health problems, drug and alcohol dependency, debt
dependency, lack of equality of opportunity, poverty, and so on – constitute
the latter; they are neither irreparable nor insurmountable. They all have a
common denominator: income inequality; it is the underlying spurring factor; without
the process, the resultant problems would not be in society to the extent they
are. If the process is not hampered, and ultimately eradicated, then these
problems will only worsen. It is a contagion as such – uninhibited, income
inequality will spread and go to more extreme levels, as will these associative
problems; inhibited, income inequality will become more palatable and
sufferable. Our encounter with income inequality to date has been wholly
negative. It has brought nothing but harm and misery. If left uninhibited, and
on the basis of our past experience, what hope is there for a more civil, fair,
and just society? There will be no hope - and left, for our successors, our posterity, will be a society filled with envy, deceit, and iniquity. To end (it's been a journey, I know), I will leave a quote which, in my eyes, effectively sums up the present income inequality, by the revered economist, Vilfredo Pareto:
If a certain
measure A is the cause of a loss of one franc to each of a thousand persons,
and of a thousand franc gain to one individual, the latter will expend a great
deal of energy, whereas the former will resist weakly; and it is likely that,
in the end, the person who is attempting to secure the thousand francs via A
will be successful.
Only that, rather
than a one-off expropriation of a thousand francs (or whatever currency it may be), what we are seeing before us
today, is the same process but placed on an endless repeat cycle.
P.S. Please share this blog with anybody who may have an interest in the area, or better yet someone who is not aware of the great inequalities that seem to go by without notice. Information is everything.
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