Thursday, 13 October 2016

Rich get richer... and the result is Brexit and Trump

I strongly commend Barack Obama's piece in last week's Economist outlining the economic policy challenges that will face his successor. [Click here for the full article.] He presents an overview of the problems before pointing the finger at the causes.

Two few stand-out sentences:
"I believe that changes in culture and values have also played a major role. In the past, differences in pay between corporate executives and their workers were constrained by a greater degree of social interaction between employees at all levels—at church, at their children’s schools, in civic organisations. That’s why CEOs took home about 20- to 30-times as much as their average worker. The reduction or elimination of this constraining factor is one reason why today’s CEO is now paid over 250-times more."
So your factory worker or bank teller is on $35,000 a year, while the CEO earns $8,750,000 a year.

And percentage-wise, the CEO pays less tax. And then while the factory worker may end the year deeper in debt than the year before, the CEO is unlikely to be able to spend $8,750,000 over the course of a 12 month period. And so, the CEOs' wealth accumulates, their families get richer...
"In 1979, the top 1% of American families received 7% of all after-tax income. By 2007, that share had more than doubled to 17%."
Their money is tied up in fancy real estate, cars and other playthings - but the bulk of it is capital - money that's shifted around the planet by fund managers or (increasingly) by family offices in search of higher yields. Capital can sit around in banks earning scant interest. It can buy treasury bonds earning low yields. It can be invested in businesses - a higher risk, but those who hedge their investments and choose stocks wisely do better than those who merely park their cash in a deposit account. And capital can be gambled on foreign currency exchange movements.

Capital is merciless. Since the EU referendum we've observed the pound falling. By 17% against a basket of major currencies in less than four months.

What you won't here from the politicians or read in the papers is what's going on beneath the surface, capital invested in the UK weighing up the pros and cons of moving elsewhere. Private equity funds, not having to report to shareholders, in particular. They don't need to worry about activists when upping sticks and moving somewhere more profitable, somewhere less uncertain.

Capital has benefited from one-off events such as China's opening up the world, as well as technological advances such as  IT and automation which increase the profitability of many businesses over time. The profits have gone into the pockets of the owners of capital.

The pound's fall from $1.49 on 23 June to $1.21 yesterday shows that the markets can punish British consumers for their vote in a manner that's so relentless, so determined, that no EU leader nor bureaucrat could ever accomplish.

Capital is the master. It pays well the people who keep the system moving - the directors and managers, the politicians, the senior policy-makers in government, the top media commentators who shape public opinion. But when the accumulation of wealth - of capital - at the very top of society starts to accelerate alarmingly, which has been happening since the 1980s, the spinning wheel starts to wobble.

The (uneducated) poor do foolish things. There are many of them, enough to vote in stupid things or stupid people that make no sense. Their lack of education leaves them open to manipulation; the narcissistic, sex-pest son of a billionaire can tell them he's not part of the elite. Newspaper owners who live in offshore tax-havens can tell them that migrants steal their jobs and ponce off the state at the same time*. And they believe, and vote accordingly, and the results of that vote will result in their lives being more miserable than ever - while capital silently moves on, flowing around their isles of misery to more profitable jurisdictions.

Barack Obama:

Economies are more successful when we close the gap between rich and poor and growth is broadly based. This is not just a moral argument. Research shows that growth is more fragile and recessions more frequent in countries with greater inequality. Concentrated wealth at the top means less of the broad-based consumer spending that drives market economies.

This makes sense. Question: how to achieve this? By taxing the rich 'until the pips squeak' (to use the quote attributed to British Chancellor of the Exchequer Denis Healey in 1974)? To 'eat the rich', as many anarchists claim they'd like to do?

I'm a believer in the theory of nudge - non-proscriptive suggestions, rather than the zakaz and nakaz approach passed down to Poland from the Tsarist Russian prikaz. Taxation would not hurt - higher income taxes for money earned that no longer go towards to the day-to-day upkeep of the salary earners and their families should be taxed at a higher rate. Of course there should be an incentive to strive, to reach for a higher standard of living, but their comes a point when additional improvements become incremental. A bigger yacht, a third holiday home, a million-dollar painting. But in general, the rich, the super-rich, the 1%, should become very aware of their privileges and give back far more, in terms of charitable activities and donations, being less ostentatious about their wealth, living a visibly more austere lifestyle, rather than flaunting it in the mass media.

For anyone having to live from month to month, in a state of stress about their personal finances, such flaunting of wealth is obscene. Couple that state with a poor education, and an inability to distinguish cause-and-effect in politics and in economics, and you can understand why the poorer quintiles vote for any old blarney to the effect of 'vote for x and your life will be better', in the same way that a consumer may reach for a new skin cream or dieting aid that promises better results than what they used before.

Now more than ever, the ultimate recipients of the largesse created by the capitalist system should show their gratitude for the privileges they were born into, and contribute more.

This time last year:
Respect for pedestrians' lives? Not among Polish MPs

This time four years ago:
Autumnal gorgeousness in Warsaw

1 comment:

Adam said...

After reading your insights, put it down to karma, to mood, to a sense of prevailing smugness (not yours), or to a resigned sense of inevitability - whatever, I was compelled to find and re-watch this series

by the author of Cathy Come Home Jeremy Sandford starring Patricia Hayes. Go figure?

Best regards,