Rising Wealth Inequality and the Growth of an Ecosystem of Fake
The Rise of the Economic Libertarians — Thatcherism and Reaganism
In February 1975, following publication of the Selsdon Declaration (Ref. 1) outlining a radical set of right wing philosophies, ideological concepts and proposals based around a speech by Nicholas Ridley, Margaret Thatcher was elected leader of the British Conservative Party. The Institute of Economic Affairs arranged a meeting between a Nobel prize winning Austrian economist and philosopher, Friedrich Hayek best known for his defence of classical liberalism and Thatcher in London soon after. Subsequently, Thatcher visited the Conservative Research Department for the first and only time in the summer of 1975. A speaker had prepared a paper on why a “middle way” was the pragmatic path the Conservative Party should take, avoiding extremes of left and right. Before he had finished, Thatcher “reached into her briefcase and took out a book. It was Hayek’s The Constitution of Liberty. Interrupting the pragmatist, she held the book up for all to see. “This”, she pronounced sternly, “is what we believe”, and banged the Hayek book down on the table”. On 3rd May 1979 the Conservative Party ousted the incumbent Labour government with a parliamentary majority of 43 seats and the die was cast for major changes.
Ronald Reagan was 69 years old when he was sworn into office for his first term on 20th January 1981. In his inaugural address, which Reagan himself wrote, he addressed the country’s apparent economic malaise, arguing: “In this present crisis, government is not the solution to our problems; government is the problem.”
It can be strange how history can turn on terrible events, particularly if there is no presence to counter rightist bullies manipulated by background groups. This is disturbingly familiar to the situation in 2018, which is far worse. Some who enthused in the 1980s over the wonders of unproven “trickle-down” economic theories, later commented upon the awfulness of increasing inequality once reality dawned. In fact, the “Chicago School” monetarist economic theories were simply excuses for hammering labour forces, making it easier to hire-and-fire, encourage tax reductions and increase the freedom for a small few to make profits-at-all-costs.
Decline of The Middle Classes in OECD Countries
In most OECD countries a majority, about 70% on average, has long identified itself as “Middle Class” [MC], (see Figure 1 from OECD, Ref.2). In Northern and Continental European countries, as well as Italy and Turkey, that proportion identifying as MC is higher than income data would suggest, whereas the opposite now holds true for a group of countries including US, UK, Canada, Spain and Portugal, with the proportion in those countries considering themselves as MC (40–60%) having fallen significantly. Over the last ten years this fell from two-thirds to one half in the US and Canada. This probably reflects rising economic insecurity following the 2008 financial crisis, accompanied by a lack of confidence in future labour market and economic prospects. Higher job insecurity and income volatility may have pushed MC self-identification downwards as people feel less certain about maintaining their socioeconomic status in the future.
The usual grouping of higher MC proportions which have been maintained is clear, including all the Scandinavian countries, Netherlands, Germany, Belgium, France, Luxembourg (75–90%). It is suggested that the following list of symptoms explains much that has taken hold of substantial groups of people, particularly in England & America. This has led to damaging anger, fury and long-term mass psychological effects in certain sections of something Margaret Thatcher believed did not exist — society.
This anger results primarily from loss of work prospects and security plus rapid changes and uncertainty about the future for people and their children. The middle classes in some countries have effectively almost collapsed, with wealth flooding upwards and staying there rather than trickling downwards as was suggested might happen.
Distractions have been provided, accepted as softening comforts via an ever-cheapening celebrity culture, a terrible resort to crass narcissism, increased attention to mental trivialities, rising excesses of shopping, over-consumption of food, cheap drink and drugs. constant talk of imaginary “elites”, mistrust of experts and educated individuals and an explosion in general anti-intellectualism, always bubbling under in British and American cultures.
The Inequality “Bifurcation” — Anglo-U Vs Euro-L
There now increasingly appears to be a powerful but rather nasty cocktail present of the following symptoms, underlined and exacerbated by an “Ecosystem of Fake”, lies designed to confuse, ill-inform whole swathes of societies to ensure the maintenance of power, money and influence:
- Unbalanced socio-economics
- A “why-should-I-when-they-do-that” feeling
- Edited versions of past national histories
- Elevation of feelings above facts
- Festering social resentment
- Crass celebrity culture media
- Envy fed by belief in a “right” to perceived entitlement
- Imbued belief that all can be “special” individuals
- Severely fuelled egotism and false “group greatness”
- Clinging to exacerbated shallow materialism
- Complete lack of any spiritual thought or reflection
- Immense rate of societal change — insecurities
- Subconscious war-guilt
- Nasty racism and exceptionalism
The political Far Right continue to provide loud blaring populist siren backing for large business concerns and extraordinarily wealthy individuals. This well-worn set of theme tunes include claims about “destroying economies with high taxes”, attacks on “welfare scroungers” and the usual use of immigrants and foreigners as scapegoats. These deliberately over-played falsehoods have been used globally for decades by political right wings in hard times. The reality is that where taxes are higher, the MCs are usually rather strong, but the right tax levels must be carefully maintained, which has been the trick to pull off for social democracies which have worked and succeeded in Europe.
The reasons for the decline in earnings and size of the MC in countries such as Britain and the US are not due to high taxes, excessive immigration or greedy, crooked welfare scroungers, even if some media, political and industry groups and individuals would like voters to believe that. The following from the OECD-World Bank published in December 2016 (Ref. 2) lists three sets of key facts:
Key Facts 1
- Almost two-thirds of people live in middle-income households in OECD countries. In Emerging Economies, the equivalent figure is between one-third and one-half.
- The size of middle-income groups has slightly decreased in the last decades, but this happened mostly during the 1980s and 1990s. The rate of decline has slowed recently.
- Today, people in typical middle-income households are older, more educated, with fewer children than in the past.
- More than two out three people in the OECD consider themselves middle class.
- MC self-identification has fallen significantly in recent years, much more than income trends would suggest.
Key Facts 2
- A strong middle class contributes to higher levels of trust.
- Middle-class decline fuels social and political instability.
- A shrinking middle class can be a threat to economic growth.
Key Facts 3
- The MC plays a significant role in shaping the welfare state.
- Economic influence of middle-income groups compared to upper-income groups has been declining.
- The cost of typical MC goods, services and assets are rising faster than median incomes and driving some middle income households into debt.
The inverse of the key facts in list 2 is also true. Figure 2 (Ref. 4) shows groupings of two sets of countries, on the left five English speaking countries and on the right European countries plus Japan. There are clear indications that inequality in the English-speaking countries started to increase around 1979–1980, eventually returning to the levels seen before WW2, with a clear U-shaped reverse long-term trend.
As a further illustration of these trends (Ref. 5), in the UK, the well-known GINI coefficient rose steadily from ~25% in the late 1970s to ~ 35% until about 1990, then remained constant (see Figure 3). In addition, the proportion of British children living in relative poverty rose from around 15% in 1979–1980 to just under 35% in the early 1990s (see Figure 4).
It would be wrong to claim that increasing top income inequality has been a universal phenomenon. On the right side of Figure 2 it may be observed that in equally rich European countries and Japan, the development is quite different, in contrast to that seen for the English-speaking countries, with the income share of the rich decreasing, reaching a low point in the 1970s. However, top income shares did not return to earlier high levels; but remained flat or increased only modestly. The evolution of top income inequality follows an L-shape, with inequality in Europe and Japan much lower today than at the beginning of the 20th century.
Globalisation, Service Economies and Technological Change
Since the mid 1980’s inequality increases in most advanced countries have increased due to factors such as globalisation, technological change and the shift to service-based economies. Rules have been rewritten to make the situation more favourable for the rich, whilst being disadvantageous for everyone else. Large companies have been permitted to accrue more power over markets, while the influence of workforces has shrunk. Taxation and other policies have consistently favoured the wealthy.
Rigged rules also explain why the impact of globalisation has been worse in the US (Ref. 6). Concerted attacks on American unions has halved the number of unionised workers to about 11 % of the workforce. In Scandinavia, it is roughly 70 %. Weaker unions reduce worker protection against companies who want to drive down wages or worsen working conditions. Investment treaties such as the North Atlantic Free Trade Agreement were sold as a way of preventing foreign countries from discriminating against American firms, but these also protect investors against a tightening of environmental and health regulations abroad and enable corporations to sue nations in private international arbitration panels for passing laws that protect citizens and the environment but threaten a multinational’s profits. Such provisions enhance the credibility of a company’s threat to move abroad if workers do not temper their demands and weaken workers’ bargaining power even further.
Globalisation has benefited millions of the poor in emerging economies, particularly in China. However, data compiled and displayed in the World Inequality Report 2018 demonstrate that between 1980 and 2016, the steepest gains went to the world’s top 1%, which captured more than a quarter of the growth in the global economy. In early 2018, Oxfam International reported that just 42 individuals have as much wealth as the bottom 50% put together (see Fig. 5). The middle classes in the US and Western Europe have benefited the least from global growth, as have the world’s poorest” (Ref. 6).
Since the late 1970s productivity in North America and Western Europe has generally doubled, but wages for production and non-supervisory workers have stagnated, with virtually all the gains from increased productivity going to investors and owners. However, the salaries of the top 1%, including corporate executives and finance professionals, increased by over 150% between 1979 and 2012. This increased wage gap has played a major role in spiralling inequality (Fig. 6).
Financialization & the Erosion of Growth
One of the side effects of debt-fuelled speculation/spending is financialisation. The growth and increased prominence of a financial industry since the 1980s that produces no physical product is alarming and should be of great concern. Its very purpose is to properly allocate capital and resources to desirable, in-demand industries; whose very existence relies on the success of other industries. If the financial industry is able to properly allocate capital/resources, it is able to grow or shrink along with unsuccessful industries if a misallocation occurs. If a general “hollowing out” of production occurs in a country, something that is rarely disputed when addressing several late 20th and early 21st century North American and European industries, this would typically result in a smaller financial industry, not a larger one; yet the explosion of growth in the finance industry since the 1980s has been in stark contrast, simply because debt-fuelled investment speculation and debt-based spending has exploded since the 1980s.
Debt-fuelled investment speculation can be seen in Fig. 7which shows the three periods in the 21st century where long-term returns on stocks have been reduced, with each peak fuelled by different forms of speculation that ensure low future returns.
The dilemma is that debt temporarily inflates the price of desirable assets until the point in time where that debt needs to be paid back, which constrains economic growth if the majority of an economy has unproductive debt, which has not created an income stream to repay the principal amount borrowed plus interest. There are then defaults, write-downs, etc., which have a punishing effect, often leading to destruction or “evaporation” of investments and assets, together with plunging prices. This is because debt is always considered an asset by the issuer, yet in reality debt is not always an asset for the issuer. There are increasing improper claims of assets which effectively do not exist that can outnumber the actual underlying assets. Financialisation due to debt/leverage/speculation and the adding of layers and complexities has developed into a seriously dangerous situation.
The Growth of the Credit Bubble
After a brief period of optimism, world leaders, economists, investors, corporate executives and many others are back to worrying that the global economy is failing to take off as hoped. Yet those in power, and even most top economists, don’t seem to grasp why this is happening. They talk about weak consumer spending, the threat of deflation, wonder if interest rates are too low (or too high), worry about the effects of inequality, but continue with policies that favour the rich and punish the poor. Central bankers, stuck for new ideas, keep feeding the financial sector with cheap digitally created money in the hope that this will somehow boost spending, when all it does is inflate stock markets and re-inflate the credit bubble and the offshore bank accounts of the wealthy (Fig. 8).
There is little consensus or understanding of what is really wrong with the economic system. Most leaders don’t blame the system at all, claiming that if everyone simply spent more money, everything would be just fine. It matters not if you have not actually earned the money, just borrow more. If there can only be more “Growth” generated, everything will sort itself out and be rosy once again, just like before the crash. Debts will magically disappear. But the reality is that total global debt is now higher than ever (Fig. 6), the credit bubble is bigger than it was before the 2008 crash, the majority are still getting poorer, while the rich keep getting richer.
“Speculative manias gather speed through expansion of money and credit. . .there are many more economic expansions than there are manias. But every mania has been associated with the expansion of credit. In the last hundred or so years the expansion of credit has been almost exclusively through the banks and the financial system. In boom, entropy in regulation and supervision builds up danger spots that burst into view when the boom levels off.” — Charles Kindleberger
Financialisation, the prominence of the finance industry and the growing dominance of obscure types of investment becomes clear. Since the 1980s, it has grown due to temporary debt-based investment speculation and debt-based spending. Although financialisation is temporary, since debt constraints eventually cause a readjustment, the real danger is that the temporary misallocation-of-wealth that occurs rewards the financial industry in a boom/bust cycle. Investment that would have been used in other in-demand industries had productive debt been pursued is instead concentrated and used up in the financial industry and when coupled with the ability to influence politics this temporary reward/misallocation can cause a further entrenchment of an undeservedly rewarded industry — a further misallocation of wealth.
Conclusions
The empirical research of Roser and Ortiz-Espina (Ref. 4) demonstrates that political forces at work at a national level were highly important in determining how incomes have become distributed after the major changes of the early 1980s in the English speaking economies. A universal trend of increasing inequality everywhere would be in line with the notion that inequality is determined primarily by global market forces and technological progress. However, the reality of two markedly different inequality trends, namely the “Anglo-U” versus the “Euro-L” suggests that institutional and political frameworks in different countries have played a substantial if not dominant role. In other words, inequality is not inevitable, it has in fact been driven by policies and actions.
It is relatively simple to argue that this Anglo-U “Inequality Bifurcation” has had a severe effect in reducing the size and income levels of the middle classes in English speaking countries. This is due to adherence to the base lie of nonsensical “Trickle Down” economic concepts, which resulted in a “Spurt Upwards” of growth profits, which is basically where large amounts of money has gone, stuck and stayed, much of it lodged in offshore tax havens. This has occurred in tandem with the following symptoms:
- Deregulation and increased globalisation.
- Debt explosion, leading to massive upward money flows to very wealthy.
- Production of “unavoidable” QE bubbles which fuel future instability.
- Increased tendencies toward Corruption, Crash and Chaos.
- Inability of weakened elected governments to deal with change.
References
1. The Selsdon Group Manifesto — 19th September 1973 By Nicholas Ridley and Others.
www.selsdongroup.co.uk/manifesto.pdf
2. OCED/World Bank (2016), “The Squeezed Middle Class in OECD and Emerging Countries — Myth and Reality”, December 2016, p.4.
3. Roscoe, M. (2015), “Why Things are Going to Get Worse and Why we Should be Glad: An Inquiry into Wealth, Work and Values”
4. Roser, M. and Ortiz-Ospina, E. (2018), “Income Inequality”. Published online at OurWorldInData.org. Retrieved from: ourworldindata.org/income-inequality’ [Online Resource]
5. Resolution Foundation (2019) “What Does New ONS Data Tell us About Incomes and Inequality?”, 26th February 2019.
www.resolutionfoundation.org/comment/what-does-new-ons-data-tell-us-about-incomes-and-inequality/
6. Stiglitz, J. (2018), “The American Economy is Rigged”, Scientific American, November 2018 319, p. 56–61.
www.scientificamerican.com/article/the-american-economy-is-rigged/
7. Third Wave Finance (2017), “Financialization & the Erosion of Growth”, 16th May 2016.
thirdwavefinance.wordpress.com/2017/05/16/financialization-the-erosion-of-growth/
