Super Rich

The Rise of Inequality in Britain and the United States

George Irvin

• Publisher: Polity
• Year: 2013
• Print ISBN: 9780745644653, 9780745644646
• eBook ISBN: 9780745658872
• Edition: 1
• Topic: Economics
• Subtopic: Political Economy
• Index: Economics

In the past 25 years, the distribution of income and wealth in Britain and the US has grown enormously unequal, far more so than in other advanced countries. The book, which is aimed at both an academic and a general audience, examines how this happened, starting with the economic shocks of the 1970s and the neo-liberal policies first applied under Thatcher and Reagan. In essence, growing inequality and economic instability is seen as driven by a US-style model of free-market capitalism that is increasingly deregulated and dominated by the financial sector.

Using a wealth of examples and empirical data, the book explores the social costs entailed by relative deprivation and widespread income insecurity, costs which affect not just the poor but now reach well into the middle classes. Uniquely, the author shows how inequality, changing consumption patterns and global financial turbulence are interlinked.

The view that growing inequality is an inevitable consequence of globalisation and that public finances must be squeezed is firmly rejected. Instead, it is argued that advanced economies need more progressive taxation to dampen fluctuations and to fund higher levels of social provision, taking the Nordic countries as exemplary. The broad political goal should be to return within a generation to the lower degree of income inequality which prevailed in Britain and the US during the years of post-war prosperity.

1

Neo-liberalism and the Return of Inequality

Not since the Roaring Twenties have the rich been so much richer than everyone else…[the] nation needs an administration that will offer solutions for the scourge of income inequality.

Editorial, ‘It didn’t end well last time’, New York Times, 4 April 2007

Is Criminality Redundant?

Max Hastings, a former editor of London’s respectably conservative Daily Telegraph, is not known for holding strongly socialist views, but the extent of inequality in Britain has led him to write:

Today’s filthy rich are wealthier, healthier and more secure than ever…It seems remarkable that any high roller these days resorts to fraud to enrich himself. It is possible to bank such huge sums legally that criminality seems redundant.¹

There is now a voluminous literature on growing inequality in Britain and the USA, not to mention an avalanche of newspaper articles on City bonuses and ‘fat-cat’ salaries. For many years the conventional wisdom was that as countries grow richer, inequality at first rises but ultimately tends to fall when countries become fully industrialized.² Over the past thirty years, however, inequality appears to have worsened for the OECD countries taken together. This result is most strongly influenced by what has happened in Britain and the United States where income inequality today has returned to levels last seen in the 1930s. Squaring this trend with conventional economic theory has required telling a story about the growing premium placed on highly educated labour (including top entrepreneurial talent) in the ‘new economy’ while bemoaning the lack of dynamism of ‘old Europe’. An alternative story is traced in this book which looks more closely at the changing political and economic landscape of the period.

The rollback of the ‘welfare state’ – particularly in the UK, but also of its weaker US version set up under Roosevelt’s New Deal – is the main legacy of the Reagan-Thatcher years, underwritten by subsequent governments in both countries and whose international expression is the Washington Consensus.³ The neo-liberal revolution of the 1980s had two critical implications for the way we think about economics. Not only did it coincide with the decline and demise of the ‘socialist’ (USSR-style) centrally planned economy, but in Europe neo-liberalism signalled the re-emergence of unfettered free-market capitalism as an alternative to the dominant postwar social democratic consensus. Social democracy was no longer seen as a ‘middle path’ between unfettered capitalism and state socialism; instead, it became a hindrance to capitalist hegemony.

Underlying the Reagan-Thatcher political project were structural changes in both the USA and the UK; notably, the decline of industrial capital and the trade unions, the rise of the international financial sector and the growing importance of the two-tier service economy; i.e, low-wage and low-skill (e.g, McDonald’s and Wal-Mart) and high-tech (e.g, Microsoft and Goldman Sachs). The much-hyped ‘new economy’ has helped to fragment labour markets, change the structure of remuneration, weaken job security, undermine the bargaining power of trade unions and spread neo-liberal ideology. Growing inequality fed back into the political consolidation of neo-liberalism in a variety of ways, ranging from the shift towards individual and corporate donations in the funding of political parties, the concentration of media power in the hands of fewer owners and the commoditization and repackaging of politics into sound-bites and spin. In short, the modern Anglo-American model has challenged the European ‘welfare state’ version of the market economy under which a relatively strong, democratically financed state mediates conflicts between capital and labour and guarantees political and social cohesion and high levels of public provision.

It is crucial to emphasize that the Reagan-Thatcher project was itself a response to the decline of US and British industrial hegemony in the postwar period. Having been dominant globally for half a century, by the 1970s Britain was the ‘sick man of Europe’ and the USA was rapidly losing its manufacturing dominance, in part because of an inflation-financed war (Vietnam), but crucially because it faced stiff competition from reconstructed Europe and emerging Asia – what today we would call a ‘globalization’ effect. As the rate of profit fell⁴ and share prices stagnated, Wall Street complained increasingly that the fault lay with stodgy corporate executives whose salaries were paid regardless of performance; the mantra of ‘maximizing shareholder value’ began to be heard. Spurred on in the early 1980s by the appearance of corporate raiders and junk-bond finance, America’s corporations began to restructure by selling off entire divisions, becoming ‘lean and mean’ and looking for new ‘synergies’ through mergers. Above all, ‘maximizing shareholder value’ meant tying CEO remuneration to market performance, crucially through the use of share options, thus laying the basis for a quantum leap in executive rewards and the rise of a new class of super rich whose influence soon spread to Britain.

The Reagan-Thatcher period also saw the introduction of important legal milestones which would change the distribution of wealth and power. In the UK, the explosive growth of financial services accelerated after the large-scale deregulation and streamlining of City transactions under the ‘Big Bang’⁵ legislation of late 1986; this boost in comparative advantage gave London a decisive edge over Frankfurt and New York. The end of national wage bargaining and a variety of anti-union measures – symbolically capped by the defeat of the miners – constrained union activity; Britain’s strong exchange-rate policy favoured the financial sector and helped underpin long-term deindustrialization. Moreover, Britain’s relatively lax tax residency law, coupled with the absence of the direct taxation of land or financial assets and low rates of tax on income, helped make the country a leading tax haven.

The assault on welfare in the UK was not just a matter of bashing organized workers. Government statistics for the period 1980–2000 show the number of children in poverty having risen from 1.4 million to 4.4 million, and the number of pensioners with less than half the average income doubled.⁶ By the end of the century, not only was Britain less equal than other EU states at a comparable average income level, but its social and economic infrastructure was in tatters. Although, since 2000, a Labour government in the UK has made modest progress in alleviating poverty amongst pensioners and children, a 2005 Report from the Office of National Statistics (ONS) suggests that the growth in inequality that Britain experienced under Thatcher has not been reversed. The same Report notes that, when both direct and indirect taxes are counted, the poor in Britain pay a larger share of their income in taxes than do the rich. In the words of Francis Jones, the Director of the Office of National Statistics (ONS):

Inequality of disposable income increased rapidly in the second half of the 1980s, reaching a peak in 1990…After 1995/96 inequality began to rise again reaching a peak in 2001/02 – actually at a level very similar to that seen in 1990. From 2001/02, there was a small reduction in income inequality, although the latest figures for 2005/06 show an increase over the previous year, and the latest evidence suggests that inequality may be increasing again [my emphasis]. ⁷

What also seems to be true is that there is greater geographical clustering of poverty and wealth in Britain. A recent study by Dorling et al. (2007) shows the poor and wealthy becoming increasingly physically segregated from each other; moreover, the study suggests that in recent years, while the proportion of very poor households has fallen in Britain, the proportion of ‘breadline poor’ has increased.⁸

In the United States during the 1980s, airlines, trucking, banking and some utilities were deregulated while industrial concentration – as reflected in growing corporate mergers – would grow explosively in the 1990s. As top corporations became more concentrated, CEO pay grew disproportionately, aided by favourable tax legislation. Reagan’s Economic Recovery Act of 1981 greatly reduced the top rate of personal tax while extending corporate tax write-offs and easing depreciation rules; further tax reductions followed in 1986. Corporate tax before Reagan accounted for nearly one-third of total US tax revenue; today’s figure is less than 8 per cent. Income inequality grew strongly under Reagan and G. H. W. Bush, a trend that Bill Clinton in the 1990s did little to reverse. Indeed, the 1997 ‘Taxpayer Relief Act’ produced another bonanza for the wealthy: it is estimated for every $1 in tax savings going to the bottom 80 per cent, the top 1 per cent of income earners saved over $1,000 in tax. While swathes of unionized skilled workers lost their jobs as traditional industries disappeared, the remuneration of top CEOs grew. As the president of the New York Federal Reserve Bank, William J. McDonough, noted in a speech to mark the first anniversary of 9/11, in 1980 America’s top executives on average earned about forty times as much as the average worker; by 2000 the ratio was 400:1. Such a jump, he said, was impossible to explain by corporate performance.⁹ The situation has been summarized more recently by the Guardian journalist, Jonathan Freedman:

You can pick your stat[istic], ranging from the claim that just two men – Bill Gates and Warren Buffett – have as much money between them as 30% of the entire American people, to the findings by a federal reserve study that the top 10% of Americans now own 70% of the country’s wealth, while the top 5% own more than everyone else put together. There was a time when a company boss earned perhaps 10 or 20 times the salary of his lowliest employee. By 2004, that ratio between average chief executive and average worker had leapt to 431 to one, and the gap has got wider. It means that the average worker takes more than a year to earn what his boss brings home in less than a day. The result is grand houses on New York’s swankiest avenues that were, until recently, multiple apartments but which are now restored to the private homes they were a century ago. Makers of 200ft yachts report record sales. Economists say the last time such a yawning chasm separated rich and poor was in the Great Gatsby years, on the eve of the crash of 1929.¹⁰

London’s ‘Wealth-creating’ Square Mile

London today is booming, and the square mile of the City (London’s financial centre) is at the heart of the boom. Hardly a day goes by without a new story about how workers in the City’s major banks and financial houses are receiving huge bonuses. The average salary for somebody working in the financial sector in 2006 was reckoned to be £100,000, up by a fifth from the previous year. Nor has the current credit crunch stopped the rich (with a few exceptions) getting richer.

The impact on London’s economy is highly visible as these new entrepreneurs queue up at exclusive restaurants, and buy diamonds and luxury cars for their partners. It is a world of ‘you deserve it’ and ‘gorgeous gets what gorgeous wants’, apparently without limit, and nowhere is it more visible than in the property market where burgeoning demand and constrained supply have combined to raise the average house price in London to £300,000, nearly three times as high as in the north-east of Britain.

Those who wonder why New Labour is so relaxed about this state of affairs need look no further than the Treasury. With nearly one-third of the capital’s workforce in the financial or business services sector, London accounts for more than 20 per cent of the UK’s total income tax receipts, while receiving only 15 per cent of government spending. A study by Oxford Economic Forecasting suggests that London’s net contribution to public receipts is running at around £13 billion a year, enough to finance, say, the entire bill for replacing Trident missiles in two years. It is hardly surprising that Ed Balls, formerly Gordon Brown’s right-hand man at the Treasury, has been called ‘Minister for the City’.¹¹

And it is not just financial traders and deal-makers who earn big money. London is home to many who have come to the UK to avoid higher tax regimes in other EU countries. A recent study by the accountancy firm Grant Thornton concluded that Britain’s fifty-four billionaires, with assets of £126 billion between them, paid only £14 million a year in income tax.¹² The City is also perceived to be less tightly regulated than in other leading centres – including New York and Frankfurt – which is one reason why, since the Big Bang, London has prospered. Of course, London is not just about new wealth. Aristocratic fortunes made centuries ago continue to thrive. Take the 6th Duke of Westminster, who in 2005 was reported to be the third richest man in the UK and whose family fortune derives from the 17th-century inheritance of a large chunk of what is today Mayfair, Belgravia and Pimlico. Or take the Cadogans, Portmans and Howard de Waldens (or for that matter the Windsors), all of whom own prime chunks of urban real estate and who have made a vast amount out of rising property values in the past decade.¹³

Does London really ‘generate wealth’? The answer depends on whether one thinks ‘wealth generation’ is simply about making money – or, more precisely, making money out of other people’s money. It is certainly difficult to claim that those who make fortunes from rising property values are ‘generating wealth’. For classical economists like David Ricardo, the land...

Table of contents

• Cover
• Halftitle
• Title
• Copyright
• Contents
• List of figures
• Introduction
• 1 Neo-liberalism and the Return of Inequality
• 2 Do We Need Fat Cats?
• 3 The Rise of Neo-liberalism
• 4 America, Europe and the Welfare State
• 5 Happiness and Pareto
• 6 What About the Middle Class?
• 7 The Rising Cost of Inequality
• 8 Is the Consumption Binge Sustainable?
• 9 In Defence of Equality
• Notes and References
• Bibliography
• Index