The Cost Of Equality
Over the last three decades, Britain, the United States and a rising number of other nations have divided into a two-track economy. It is the first track, the one which makes money out if money, that has provided a super-fast route to personal wealth. The ‘money economy’ has and still is used to deliver big returns to those who control it – a small, powerful group of a few thousand top bankers, financiers and corporate executives running the world’s largest companies.
Nearly everyone else, in contrast, has ended up in the second track – the slow lane of the economy. This track – the ‘productive economy’ where businesses are built, new products devised and wealth and jobs created – is the one on which economic success depends. It produces the goods and services that make up economic output, provides the jobs for the bulk of the workforce and creates the wealth that enables living standards to rise. But while the first track if thriving, this one is floundering.
Actively supported by successive governments over three decades…the money economy has captured the dominant position, greatly out of proportion to the needs of the wider economy. In the process, finance has come to play a new role – that of a cash cow for the domestic and global super rich.
For two decades, Britain’s economic strategy had been built on a triple-formula – high and rising consumption, a low and declining wage share and soaring levels of borrowing. This model may have helped maintain growth and employment levels, but only by stroking property values and creating a debt mountain larger that in any of the other rich nations. It was an unsustainable model that finally imploded in the autumn of 2007.
The failure of Lehman Brothers had much to do with excessive executive rewards. In the UK, the obsession with fast returns also contributed to the under-investment and the nation’s poor record on competitiveness. Both dividend payments and executive rewards came to assume a greater priority over capital investment in the UK compared with competitors, even though this was rarely in the medium or longer term interest of the shareholders or companies.
The world in now locked into the most prolonged economic downturn for eighty years. Britain – along with much of the rich world – is facing an apparently intractable slump.
Despite the depth of the crisis, our policy makers are clueless about how to tackle it. There is one central explanation for this. The source of the problem continues to be misdiagnosed.
Britain, it is argued, needs a sharp dose of austerity to get itself out of this mess. It is a formula first promoted by Andrew Mellon, the US Treasury Secretary at the time of the 1929 Crash. This analysis is fundamentally wrong. Austerity is making the situation much worse than it needs to be. There is plenty of money in the system – it is simply in the wrong places and doing the wrong things.
The real cause of the present crisis is the way the economic cake has been increasingly unequally divided. While the workforce has been left with a shrinking share of the nation’s output, the lion’s share of growth has been colonised by big business and the very rich.
While ordinary households are being squeezed, other parts of the economy are awash with money. Britain’s top 1000 super rich are sitting on fortunes worth £250 billion more than in 2000. While many small and medium companies have been badly hit by the downturn, the UK’s top 100 companies added a combined £20 billion in cash in 2011, a rise of a fifth over 2010.
The result of this imbalance is economic paralysis. While the workforce is denied spending power the leaders of corporate Britain are allowing these near- record surpluses to stand mostly idle. There is enough money to kick-start the economy. It needs to be harnessed.
The lesson is clear. Economic inequality not merely drove is over the cliff on 2008, it is now sabotaging economic recovery. The solution? A much more equal society.