Inequality and Austerity

As austerity programmes begin to bite across the developed world, it is quite natural that the issue of fairness should become more prominent. Sovereign debt is high - although not by historical standards, which is another story - largely because of the need for the state to compensate for the debt excess in the private sector. The financial sector grew rich on the back of this debt explosion. The Scottish banks were no exception. Originate and distribute models of lending, and mortgage lending in particular, meant that appropriate due diligence was often absent on the part of the lender. Ethical issues such as whether the lending, pension, or care bond, was appropriate to the circumstances of the individual were often swept under the carpet. Yet, when the bubble burst while many of the workers in the financial and property service sectors lost their jobs , the senior executives and key traders continued to receive high and rising salaries and bonuses. At the same time government's had to borrow to bailout the banks thus raising the present and future tax burden right across society.

It is, therefore, not unreasonable that the Occupy Wall Street movement and its offshoots across the world appear to have struck a chord with many people. But the OWS is about more than banking excess. It points to the rising inequality across western societies. A warning that was given firm empirical support on Monday (5 December) with the publication by the OECD of its Divided We Stand: Why Inequality Keeps Rising report.

The report finds that

"Income inequality among working-age persons has risen faster in the United Kingdom than in any other OECD country since 1975. From a peak in 2000 and subsequent fall, it has been rising again since 2005 and is now well above the OECD average." (See Figure 1)

I see no reason to doubt that the position in Scotland would be much different from the UK.

Figure 1

The report finds that technological progress has led to higher wage differentials benefitting workers with high skill levels. Hence, the importance of education a rising supply of skilled workers in limiting the rise of inequality. Globalisation is found not to play much of a generic role in widening wage inequality but the pressure from globalisation precipitated domestic policy and institutional reforms, which did widen the distribution of wages. But a key reason for widening income inequality in the UK is that taxes and transfers became less redistributive.

The report notes:

"Between the late 1970s and mid 1980s, the tax-benefit system in the UK offset more than 50% of the rise in market income inequality. This effect has fallen in the subsequent decades."

Against this background it is strange to read the following by Bill Jamieson writing in the Scotsman on 1st December:

"But addressing inequality by further taxes on the rich may prove a road with little mileage. The top 1 per cent of taxpayers in the UK are already providing 25 per cent of tax revenue. Back in the 1970s when we last faced economic misery, the top 1 per cent accounted for just 11 per cent of tax revenue."

What this comment fails to appreciate is that the reason for the top 1% paying a greater share of tax revenue is not that they are being taxed more heavily. Rather, because they are appropriating an ever greater share of income. Again as the OECD report notes the income share of the top 1% doubled in the UK between 1970 and 2005 rising from 7.1% to 14.3%. This occurred during a period when the top marginal rate of income tax fell from 60% in the 1980s to 40% in the 2000's before its recent rise to 50%. But what the report does not say is that this growth in the income share of the top 1% and, indeed, the top 0.1% is due to the explosion in CEO and senior corporate executive pay and bonuses not simply in banking but right across the corporate sector of the UK and the US. This growth cannot be justified rising performance - value of the marginal product - of the executives in question. It is largely down to a power relationships and corporate politics and represents a weakening in the power and control of shareholders over corporate executives.

It is for these reasons, coupled with rising austerity, that I expect that the campaigning of the OWS movement and its growing offshoots will become more central to US, UK and Scottish politics.

Comments

[Roy Grieve]

Brian Ashcroft is certainly justified in raising the issue of 'fairness' (Blog 12 Dec). There are, as he makes clear, at least two aspects of the present situation which are manifestly unsatisfactory from that perspective.

One is that the fat cats of the financial sector, whose greedy and reckless over-lending threatened to bring down the banks and plunged the world economy into recession, survive largely unscathed and unapologetic, while the rest of the community, having paid for the rescue operation, is being made to suffer the consequences of the financiers' incompetence. Further, there is real concern that, in the face of rising unemployment, the attention of policy-makers is focussed more on budget balancing than on a (Keynesian) strategy of stimulating demand and growth.

The growing inequality across western societies - as confirmed by the recent OECD report - ia another evidence instance of current inequity. Professor Ashcroft hits the nail squarely on the head in making the point that the ballooning salaries and bonuses of corporate (and indeed other) top executives have nothing to do with rising productivity or an increasing social contribution on their part - but everything to do with the greater economic power they have come in recent years to possess. Relative to rival claimants (shareholders, workers) the position of such executives has strengthened, enabling them to pocket a larger share of the proceeds.

Adam Smith long ago understood that in a capitalist economy the answer to the question of 'who gets what?' depends essentially on the relative economic clout of the parties concerned. Thus (Wealth of Nations, Book I, ChapterVIII):

What are the common wages of labour, depends everywhere upon the contract usually made between these two parties, whose interests are by no means
the same. The workmen desire to get as much, the masters to give as little, as possible. . . . It is not difficult to foresee which of the two parties must,
upon all ordinary occasions, have the advantage in the dispute, and force the other into a compliance with their terms.

Of course the economy is now very different from what it was in Smith's day, but nevertheless, putting aside (as we must) subsequent sophistries to the effect that 'factor' rewards correspond to 'marginal productivities' we can accept that Smith's insight into the question of 'who gets what?' still holds good.

There is indeed good cause for continuing public disquiet and protest.