Rising inequality – fundamental changes required

I am currently working in Sri Lanka at a very interesting time in the nation’s history. Ten days ago the nation elected a new president and ousted the bevy of officials that had been linked to the previous, rather dictatorial and seemingly corrupt regime, that had held a iron grip on power for years. The daily newspapers in Colombo each day are now devoting multiple pages to discoveries that are coming to light about the ways of the previous regime. Some previous officials have had their passports confiscated amid rumours of other politicians and their families making quick getaways to Middle Eastern nations to avoid prosecution. Arrests are being made to roundup the corrupt former government officials. The editorial this morning said that the past government had allowed “a certain person, who was accused of corruption amounting to billions of rupees, to leave the country soon after the presidential election results were announced”. I guess everyone knows who Mr Certain Person is. There was a cute report about the discovery of a ‘double cab’ (truck) which had gone missing from the Presidential secretariat’s car pool being found hidden in a saw mill. What you find in the poorer nations is that the corruption is fairly transparent and crude in its implementation and is often enforced by a martial regime. In the more advanced nations, the corruption is more subtle and harder to detect. Oxfam’s latest report (January 19, 2015) – Wealth: Having It All and Wanting More – considers the manifestations of this corruption and its pervasive nature.

Oxfam also published the – Data and Calculations – that accompany the Report.

I won’t go into detail about the numerical findings of the Oxfam Report – they are stark and horrific if you value equality of opportunity and collective development.

I also won’t go into the arguments that are now surfacing about the accuracy of the data. There was a conservative on the BBC last night raving on about how the data is poor and the estimates are just extrapolations and distorted by quantitative easing and more insipid pleading – totally avoiding the issue. Typical response.

I was reading Ronnie Wood’s autobiography at the time where he describes the fine art of hotel room trashing. My response to the BBC segment was to work out how the TV might go out the window without killing someone. I turned it off instead.

Facts:

1. “In 2014, the richest 1% of people in the world owned 48% of global wealth, leaving just 52% to be shared between the other 99% of adults on the planet.”

2. “Almost all of that 52% is owned by those included in the richest 20%, leaving just 5.5% for the remaining 80% of people in the world.”

3. “If this trend continues of an increasing wealth share to the richest, the top 1% will have more wealth than the remaining 99% of people in just two years”.

4. “In Australia, the richest 1% are as rich as the poorest 60% of Australians.”

5. Since 2010, “the total wealth of the poorest half of the world in current US$ … has been decreasing” while the wealth of the richest 1 per cent “have seen their wealth accumulate even faster over this period”.

6. The FIRE sector is the “the most commonly cited source of wealth for billionaires on this list” – in other words, the wealth has been predominantly accumulated through non-productive activities. More about which later.

7. The other dominant sectors in generating individual wealth were “the pharmaceutical and healthcare sectors”, which “achieve extremely high profits and therefore command substantial resources which they use to compensate their owners and investors”.

What is the issue?

There are two major issues: (a) economic; and (b) political. They are clearly interlinked.

Oxfam talk about the “morally questionable” nature of rising economic inequality. See – Working for the Few: Political capture and economic inequality – published January 20, 2014.

But even if you don’t buy into that value system, it is now clear that the trickle down claims made at the outset of the neo-liberal period are lies. Please read my blogs – Trickle down economics – the evidence is damning and Inequality and growth and well-being – revolutions have occurred for less for more discussion on this point.

Rising economic inequality is bad for economic growth. It undermines the capacity for individuals to invest in education, which is the most reliable source of economic development (skill development).

In the 2014 paper, Oxfam also highlight the political ramifications. They say that:

In many countries, extreme economic inequality is worrying because of the pernicious impact that wealth concentrations can have on equal political representation. When wealth captures government policymaking, the rules bend to favor the rich, often to the detriment of everyone else. The consequences include the erosion of democratic governance, the pulling apart of social cohesion, and the vanishing of equal opportunities for all.

In yesterday’s Report, Oxfam further note that the sectors which generate the largesse that goes to the most wealthy also spent “millions of dollars” lobbying governments to pressure them to introduce policy structures that perpetuate the inequality.

For example, the “financial sector is … the largest source of campaign contributions to federal candidates and parties”. Further, in 2013, “the pharmaceutical and healthcare sectors spent more than … any other sector in the US” on lobbying. Similar trends occur in the EU.

During a period that the Ebola outbreak threatened a world crisis, pharmaceutical companies spent 6 times more on lobbying than on assistance to Ebola prevention.

Oxfam notes that the “largest increase in wealth between 2013 and 2014 by a single pharma-related billionaire could pay the entire” losses in output that the Ebola crisis will cause in “Guinea, Liberia and Sierra Leone”.

Oxfam also enlighten us on where this lobbying cash goes – mostly to manipulate government spending and tax changes which are designed to favour the donors.

They note that:

Lobbying on tax issues in particular can directly undermine public interests, where a reduction in the tax burden to companies results in less money for delivering essential public services.

Which is a statement that buys into the neo-liberal logic itself. The lobbyists come from sectors that lead the charge when it comes to berating governments about fiscal deficits and spending on income support etc.

But as they are mouthing off their attacks they are also manipulating governments to hand out as much public spending in the form of corporate welfare that goes largely into their own pockets.

It is an audacious hypocrisy that abounds. And the rest of are largely silent because we have bought the myth that regulation is bad, that welfare for the poor erodes incentives and all the rest of the nonsense.

When I was an economics student (formerly that is, rather than in the ‘lifelong’ learning sense), it was constantly pushed down our throats that free market allocations are the most efficient because they respond to the preferences of all consumers. It was obvious to me from the outset of this indoctrination that a system of allocation that responds to spending will distort the allocations in favour of those who spend the most.

The market is driven by dollar votes. The more you spend the more power you have. So even at the most elementary level the concept of a free market is flawed. There is no such thing. It is preferences backed by cash rather than the latent desires that the market responds to, even in the abstract theoretical models.

But then once the inequality reality is overlaid onto that narrative and we recognise the massive spending that is designed to lobby for particular policy environments, which further distort the market allocations, we realise that the concept of the free market that is taught in economics programs throughout the world is a myth.

It is a convenient metaphor to give the impression that we all have a chance and the market will deliver outcomes according to our efforts.

Marx long ago recognised that crises occur when those that had overproduced were unable to access any of that production. Unemployment occurs when there is not enough spending to absorb the production (so output is overproduced relative to spending) and it also denies those who had been part of the productive output teams an income.

In the 1940s, Kalecki talked about the “captains of industry” who had a vested interest in opposing government policies aimed at creating full employment. Please read my blog – Michal Kalecki – The Political Aspects of Full Employment – for more discussion on this point.

Now these “captains” do not engage in much industry even. They dominate the financial sectors.

The corruption in Sri Lanka appears to be fairly crude, which isn’t to say it is not incredibly lucrative. But pinching a “twin cab” or as was discovered this week “some 68,000 wall clocks with the pictures of the former President” and a fellow MP on their face in warehouses, is pretty small time stuff.

How does that compare to Enron or the rating agencies being paid to give the top ratings to financial products that were never able to justify that sort of quality rating nor the conflict of interest being disclosed or Goldman Sachs deliberately conniving with the Greek government to deceive the European Commission during its transition into the common currency?

And the countless other examples of corruption that combined to create the GFC and its aftermath?

What to do?

I know there will be comments about the need to trash Capitalism per se or that I am part of the financial market conspiracy etc but I don’t find those sorts of suggestions very helpful.

I do not support the retention of global Capitalism and favour collective ownership but I can wax lyrical about that until the cows come homeand meanwhile people are starving in Africa and Asia and will continue to do so.

I know palliative care maintains the system but I prefer to think about solutions that will help today rather than sip on the latte and pontificate about an abstract in the future.

It is clear that “financial deregulation, skewed tax systems and rules facilitating evasion, austerity economics” etc all favoured the wealthy and allowed increased shares of national income to be redistributed away from low income workers without a fundamental change to Capitalism occurring. It was also done largely by lobbying governments to make policy changes.

I agree with Oxfam that within the Capitalist logic, “this dangerous trend can be reversed” (while the latte set plot and scheme and design our glorious socialist future – and I might participate in those discussions too).

During the full employment era after WW2, governments clearly mediated the class struggle between labour and capital. The political reality forced even conservative governments to maintain income safety nets and to invest in public education and public goods.

One of the major reasons that inequality fell in the period after WW2 until the late 1970s was because governments invested in skill development through formal education and training.

Another major reason was that these newly skilled workers were then able to get jobs at pay rates that allowed for a more complete participation in society.

We adopted a collective approach to inclusion and employment and were not satisfied if there were rising numbers of our fellow citizens being left behind on the station as the train accelerated away.

The progressive side of politics has to abandon their obsession with markets and economic rationalism. The government only exists to act as our agent to ensure that the thing we call the economy works for all of us and in 2015-speak, within the limits set by our natural environment.

It makes no sense for low income groups to support political movements that advocate policies that deliberately undermine the welfare of those groups. The Tea Party in the US are the ultimate suckers in this regard.

Curency-issuing governments can always reduce income and wealth inequalities if there is a political will to do so. As citizens we have to lobby our politicians to ensure that will is engendered.

1. A massive boost to public education is required

All the research evidence points to the conclusion that education is a major and effective vehicle for reducing inequality.

It provides enhanced opportunities for the poor to participate in the formal economy. It leads to higher productivity and therefore higher sustainable real wages (sustainable here means within inflation limits).

It allows individuals to cope more effectively with changing technology, which in the past might have rendered their productive capacities irrelevant.

There is no excuse for governments to underfund public education. During the 1980s and 1990s, many of the poorest nations were subjected to so-called structural adjustment programs (SAPs) by the IMF as part of the neo-liberal plan to extract more surpluses for the so-called first world. This was in the early days of the growing neo-liberal policy dominance.

The IMF claimed that if governments cut their deficits (same old same old) that economic development would follow. I have worked in several poor countries and have never witnessed development following austerity. Quite the opposite in fact.

The IMF programs would target government spending on health and education, forcing the governments of the poorest nations to introduce harsh cuts to those programs.

The so-called Enhanced Structural Adjustment Facility (ESAF), which was the IMF’s concessional lending facility for the least developed countries, caused lower economic growth, rising income and wealth inequality among those nations that had to endure them.

In Africa, per capita incomes fell when ESAF was forced on the nations.

Far from helping achieve debt relief, the SAPs (ESAFs) led to increased debt burdens as economic growth faltered. No IMF official ever went to prison for malpractice.

The children of those nations that were deprived a more complete educational opportunity are now the poor adults that maraude the streets searching for pennies.

Inequality rose as a result.

2. Widespread job creation programs are required

Ignore all the talk that large-scale public sector job programs just create boondoggles. Please read my blogs – Boondoggling and leaf-raking … and The ultimate boondoggle courtesy of slack government policy – for more discussion on this point.

The greatest boondoggle in history is the financial and legislative support governments provide to the financial sector.

Governments should ensure that everyone who wants a job always has access to one, even if it is a minimum-wage public sector job under a – Job Guarantee. The minimum wage should be set to allow for a meaningful life within the social aspirations of the nation.

The minimum wage should never be set on so-called capacity to pay arguments emanating from the private sector. The minimum wage should be a statement of the aspirations of the society not the private costs and benefits of the capitalist sector.

If the capitalists cannot afford to pay the set wage then they either invest more in higher productivity workplaces or cease to exist.

Please read my blog – Minimum wages 101 and Increase minimum wages and give job guarantees for the low paid– for more discussion on this point.

Poverty is principally caused by unemployment or lack of access to income. A commitment to full employment is an essential starting place if we want to reduce income inequality.

I reject the progressive call for basic income guarantees, which just turn individuals who desire to be productive into supported consumption units.

Please read my blog – Employment guarantees are better than income guarantees – for more discussion on this point.

3. A major redistribution of national income is required

Workers must be able to participate in productive growth via real wages growth. I have written about that extensively over the last twenty years.

Please read my blogs – Redistribution of national income to wages is essential – for more discussion on this point.

4. Major financial market changes are required

I am on the public record as advocating legislative changes that would make most (around 98 per cent) of all speculative financial transactions illegal. This would seriously cut into the capacity of the wealthy to further expand their fortunes at the expense of others.

I would also nationalise banking – a topic I will write about in the future as I do more work on operational design of a functional banking system.

Please read the following blogs – Operational design arising from modern monetary theory and Asset bubbles and the conduct of banks for further discussion.

5. Change political rules

Oxfam correctly points out that there has to be increased public disclosure of lobbying etc. International tax loopholes and holes in tax governance have to be changed.

Clearly, all political parties should be prevented from accepting money from anyone. All campaigns should be funded by the public purse and limits set.

Media organisations should be more closely scrutinised for partisanship and fined heavily for breaches.

Conclusion

These are among the reforms I would introduce within the Capitalist system. They are all economically feasible in the sense that the currency-issuing government would be able to fund them and sustain them financially.

At present they are politically infeasible, which is where the progressive argument has to focus.

But, first, progressives have to overcome their TINA mentality when it comes to macroeconomics and abandon the mainstream ideas that have led to austerity. Claiming that they support a Robin Hood tax (for example) as a fairer way of raising income for governments to spend is not a credible progressive response.

1. They should be advocating the wiping out of most of the financial sector.

2. They should be educating the public that a sovereign government is never revenue constrained because it is the monopoly issuer of the currency.

More meetings today!

That is enough for today!

(c) Copyright 2015 Bill Mitchell. All Rights Reserved.