TRAGEDY OF RICHES Dr Stephen Barber Putting the Downturn into Perspective
TRAGEDY OF RICHES • Credit Crunch is having profound impact on attitudes • Entered a new era where we vilify those who we see as ‘the rich’ • Implications for longer-term policy
TRAGEDY OF RICHES • Despite our great advantages, something is not quite right • Politics is incapable of articulating a purpose to our riches leading to ‘the blame game’ • The problem is not our economics but our politics
TRAGEDY OF RICHES ‘Crony Capitalism’ ‘Good Capitalism and Bad Capitalism’ ‘ Can’t Have Something for Nothing!’
ANTI-RICH RHETORIC Business leaders are ‘filling their boots’, ‘second rate executives’ are ‘ripping off shareholders’. It’s time to throw out ‘crony capitalism’
TRAGEDY OF RICHES Vilification of a few rich men Change of the times - Hester’s bonus was twice the size last year
TRAGEDY OF RICHES Is Britain Still Open for Business? In 1989 11% of Sunday Times Rich List were from overseas... ...by 2011, 16 of top 20 are migrants
TRAGEDY OF RICHES • Central to elections across Europe – especially in France and Greece
TRAGEDY OF RICHES Become a feature of the US elections Electoral lifeline for Obama But we are all rich!
OUR BUBBLE OFPROSPERITY • 2009 GDP per capita (Purchasing Power Parity) • The European Union today (enlarged to include the poorer nations of the East) had of a little under 30,000 International Dollars • The more exclusive G7 at almost $39,000 • Sub-Saharan Africa by contrast reaches little over $2,000 • There are 1bn ‘hungry’ people in the world • Early 19th century average incomes in Europe and Africa broadly the same, as was life expectancy (about 40).
OUR BUBBLE OFPROSPERITY But how rich are we?
HOW RICH ARE WE? • A person with $20,000 post-tax income per year is in the world’s wealthiest 4.6% • $38,500 after tax, gets you into the top 1% • In the USA 85% of the wealth is controlled by the richest 20% of the population; the richest 1% of Americans own almost 35% • Fidelity’s 2011 survey of those with investable assets of at least $1 million (average $3.5 million). • 42% said that they did not feel wealthy. To ‘feel rich’ respondents needed at least $7.5 million! ‘Wealth relativity’
HOW RICH ARE WE? • Politics of greed, politics of envy and now politics of hypocrisy • We want someone to blame and we do not want to take individual responsibility • We have all benefitted from the bubble of prosperity
WHO PAYS? • Company bosses saw a 10% pay increase in 2010 and a 17% increase in 2011 • In contrast, 99% of workers received pay deals worth less than the rate of inflation • But are we dependent on the rich? • The richest 1% of Britons earn 13% of salaries but contribute 28% of tax collected
ECONOMIC STRENGTH • 2009 London G20 meeting injected $1.1 trillion into the global economy • $8.42 trillion promised in bank bailouts enough to end extreme poverty for 50 years according to Oxfam • Contrast in global wealth • Who is the 1% here?
TRANSLATION INTO POLICY “The recovery plan and the financial stability plan are the immediate steps we're taking to revive our economy in the short-term. But the only way to fully restore America's economic strength is to make the long-term investments that will lead to new jobs, new industries, and a renewed ability to compete with the rest of the world.” BarackObama addressing Congress 25/2/09
UNSUSTAINABLECHEAT • We demand conflicting policies from our politicians and punish those who do not deliver the impossible • Collusion between voter and politicians which pretends we can have it all our own way • Democracy is not widely valued and we tend to vote on bread and butter issues • Post Ideological politics
POLICY BECOMES DIFFICULT • Post Ideological politics • Greater agreement but less consensus • The easy decisions have been made • Party politics makes difficult decisions harder because opposition is not made on ideological grounds • Beauty contest
HARDSHIP & REJUVINATION • It turns out the financial crisis was not a watershed moment in policymaking terms • We determined not to do anything substantially different • Today’s backlash is against a perceived unfairness in our economic system not a perceived political dysfunctionality • But there are changes...
SOUND MONEY • Plan to eradicate the deficit during the Parliament – even more ambitious than Darling’s Fiscal Responsibility Act • Calls for a ‘Balanced Budget Amendment’ in the USA • EU Fiscal Union will require Euro members to live within their means, controlled from Brussels regardless of the ballot box • Medium term trend away from debt financed spending
SOUND MONEY • But democracy makes it difficult for politicians to take the ‘difficult decisions’
RETREAT OF THE STATE • As public spending is tighter, the state tries to do less • New blurring between public/third/private sectors • Talks localism but retains centralist instincts • Also looks to the supply side to stimulate growth – cutting taxes, regulations, etc. • Infrastructure spending from international sovereign wealth.
COMPETITIONSTATES “If you look at the troubles which happened in European countries, this is purely because of the accumulated troubles of the worn out welfare society. I think the labour laws are outdated. The labour laws induce sloth, indolence, rather than hardworking.” Jin Liqun, supervising chairman of [Communist] China’s $400 billion sovereign wealth fund, 8/11/11
ECONOMIC FOCUS • Few judged the peak of the last period of expansion to be a ‘boom’ • This was because inflation remained low, interest rates low and growth steady • Idea of stable economy and industrial policy emerging – monetarist idea of controlling inflation, insufficient?
ATTITUDES • We have become hostile to ‘the rich’ • We have become hostile to those on welfare • We are suspicious of ‘well paid’ public servants and are more critical of spending • We approve cuts except where they affect us • Essentially we want someone to blame
END OF BUBBLES? Pre-banking crisis housing bubble Technology bubble 1920s equity bubble 17th century tulip bubble
BUBBLES ‘Someday, no one can tell when, there will be another speculative climax and crash. There is no chance that, as the market moves to the brink, those involved will see the nature of the illusion and so protect themselves and the system. The mad can communicate their madness; they cannot perceive it and resolve to be sane.’ J.K. Galbraith (1961, writing of the 1929 Crash)
POLICY FOCUS • Policy makers focus on the economic system – and ‘populist’ at that... • Banking regulation • Executive pay • Welfare reform • The 99%ers think they have achieved this
WHAT IT WILL MEAN • Small amount of legislative change and shareholder power • Conflicting pressure to reduce workplace regulations and employee protections • Interesting emerging debate about earnings from work being taxed lower than earnings from wealth • Great opportunity for political argument
MEANWHILE • Politics is not engaging...
POLICY NEEDS • Our politics needs renewing not our economics • There are limits to the abilities of the state as politics ‘becomes difficult’ • Politics has to become much more a multi-directional process; less about party advantage and more about ideas.
“What can’t go on forever, won’t.” Herb Stein