Philobiblon

A shorter version was originally published on Blogcritics.

Stewart Lansley’s The Cost of Inequality: Three Decades of The Super-Rich and the Economy is full of figures to make the blood boil.
* According to Forbes, the number of American billionaires jumped 40-fold in the 25 years to 2007. In that period general US incomes stagnated in real terms, but the aggregate wealth of the top 400 soared from $169 to $1500 billion. (p. 7)

* The average pay of chief executives of Britain’s biggest 100 companies grew by 11% per annum in real terms 1999-2006; for other fulltime employees the figure was 1.4%. (p. 24) In the US chief execs’ pay ratio to workers’ from 1960 (42 to one) had leapt to 334 to one by 2007. (p. 25)

* To make it global, the combined wealth of the world’s 1000 richest people is almost twice as much as the poorest 2.5 billion. (p.27)

It makes the point that most of us have been around for long enough can feel instinctively – all of this is not some kind of inevitable way of things, but a relatively recent, and relatively sudden, development. In the early 1970s “most rich nations … were characterised by unprecedented levels of equality” (p. 14). In the US from the start of the Thirties to the mid-Fifties was known as “the great compression”. In the UK it was known as the “great levelling”. (p. 14). The trend slowed and then came to a halt in the 1970s, then went into reverse, returning to levels of inequality of the Twenties: “almost half a century of economic and social progress had unravelled in little more than two decades”. (p. 15)

The symmetry is amazing. In the US the top 1% took, at its lowest point in 1976 8.9% of the national income, but by 2007 this had risen to 23.5% – the same level it had been in the late Twenties. (p. 20) In this economic “megashift” the top 30 US family and individual fortunes were, collectively, 10 times the size of the same group 17 years earlier – this is more like 19th century leaps. (p. 22)

There’s original thinking in The Cost of Inequality, chiefly in its historical framing that shows the circle we’ve made back to the Twenties (and in same place back to 19th-century robber baron capitalism). And if not entirely original, it powerfully develops its argument for the causes, and the consequences. Lansley concludes that it was the slump in the power of organised labour in the 1980s that allowed real wage growth to fall behind profit growth in productive capacity while profits soared (p. 30)

As to why this has caused huge economic imbalances, at the basics, it is obvious – purchasing power couldn’t buy the extra output being produced (between 1980 and 2007, real wages in the UK rose by 1.9%/year, but economic capacity grew by 1.9% – p. 55), so, particularly in the US and UK, the government allowed, indeed encouraged, massive increases in lending to private individuals. This greatly increased the size and profits of the financial sector. There were thus, from finance and other industries, huge amounts of liquid cash sloshing around the world, at every increasing speed, passing regularly through London and New York, with regular stops in tax havens.

“Little of this circulating pool of hot money ended up in sustainable, wealth and job-creating investment. Money poured into hedge funds, private equity houses, takeovers, commodities and commercial property. … large speculative deals … offered, at the time, spectacular returns. Asset prices and business values soared. Deal-making and corporate restructuring became highly complex mechanisms for transferring existing rather than creating new wealth.” (p. 32) Once again, we’re back to 1929.

On that loss of union power, in the US the proportion of private sector employees who are unionised has fallen from a quarter in 1979 to 7% today. Fifty million Americans say they want union representation but can’t get it. The minimum wage was at the poverty line in 1980, but a decade later had fallen 30% below it. In the UK the post-war peak was also 1979, with more than half the workforce unionised, 13.5 million. BY 2009 that figure as 6.7 million, a quarter of its potential. (p. 42)

So in the Fifties and Sixties the share of wages as a percentage of GDP was steady at between 58 and 60%. There was a brief leap in the Early Seventies in Britain, but was back at 59% at the end of the 1970s, and has steadily declined since then, by 2008 being down to 53%. (p. 44) This is close to the level of 1870. (p. 47) The UK and the US are the most extreme examples, but the trend is seen across the developed and developing world: “In 51 out of the 73 countries for which data are available, the share of wages in total income declined over the past two decades”, said the ILO in 2008. (p. 55)

Meanwhile, finance kept leaping up. In Britain, tragically, there were few voices speaking against this. In the UK: “Labour’s love affair with the city led to a huge influx of foreign funds which helped keep the pound at uncompetitive levels. While manufacturing output and employment continued to shrink, finance and the service economy prospered. In the three decades to 2008, the number of jobs in manufacturing fell from just over 7 to just over 3 million.” In the UK share of GDP output peaked at slightly over 10% in 2008, while in the US it was 7.5%, France 4.6% and Germany 3.8%.(p. 70) Pick now the most successful economy… And while in 1960 the assets held by the ten largest UK banks ere equivalent to 40% of GDP, by 2010 they were nearly five times the size of the national economy – proportionately higher than anywhere except Switzerland and Iceland. (p. 119) Cause to be very afraid… And even more so … financial sector debt grew from 46% of GDP in 1987 to 245% in 2009 – £3400 billion – double that of the non-financial sector and four times public sector debt.” (p. 259)

Lansley sets out clearly the mess: “In the months before the onset of the credit crunch, the City led the world in several complex financial areas holding a 40% share of global equity trading, nearly a third of international foreign exchange and a fifth of international bank lending.” (p. 96) And all of this cash sloshing around the markets was not going to productive investments. By the mid-2000s, the biggest US banks were getting returns on equity of over 20%. In 2004 the stock market valuation of US financial companies (an expectation of long-term profits) was 29% of non-financials. In 1979 it had been 7%. (p. 99)

Meanwhile, traditional stakeholder capitalism was replaced by the towering god of shareholder value. Stock options were the golden calf that removed any qualms executives might have had about the orgy of cost-cutting. “It was clear that the quickest way to add 5 points to your stock price was to lay off 50,000 workers…. Bosses of the top 50 US companies that sacked the most staff earned 42% more than their peers” (p. 118). And pay in the City soared. IN the 1970s the average City employee earned about a fifth more than the average professional. Now that’s more than 100%. Fees for deals have escalated to pay for this – typically 5 to 8% per deal, and big business rarely queries, and competition is never by cost-cutting in this area. (p. 133)

And short-termism reigns. The Bank of England says shares were held for an average of five years in the 1960s. By 2007, this was seven months. In the early 1990s the proportion of “UK PLC” held by hedge funds grew from less than 1% in the early 1990s to about 15% today, with up to 70& of US and 50% of traded shares in London accounted for by hedge funds and similar groups. Hedge fund – wealth mainly from rich individuals – share of global cash rose six fold between 200 and 2007, from $450 billion to $2600 billion. (p. 215)

The sources mostly of The Cost of Inequality mostly aren’t original – this is a new synthesis rather than original research, although none the worse for that. There’s clearly a lot of drawing on contemporary media, but that means lots of useful facts and quotes are gathered in one place. Well worth remembering that at the annual Mansion House lecture,in June 2007, soon to be Prime Minister Gordon Brown offered the City adulation: “I congratulate you on these remarkable achievements, an era that history will record as the beginning of a new golden age for the City of London. I believe it will be said of this age, the first decades of the 21st century, that out of the greatest restructuring of the global economy, perhaps even greater than the industrial revolution, a new world order was created.” Eight weeks later, the whole economy imploded. (p. 97)

And the words of George Soros: “The salient feature of the current financial crisis is that it was not generated by some external shock like OPEC. The crisis was generated by the system itself.” (p. 163)

It’s seldom that I resoundingly agree with Max Hastings, but this sets it out plainly (from 2005): “It seems remarkable that any high roller these days resorts to fraud to enrich himself. It is possible to bank such huge sums legally that criminality sees redundant.” (p. 23)

That of course relies on a rather narrow definition of criminality. Breaking the global economy for the personal benefit of a tiny group of people, could be considered, in most people’s terms, a pretty bad thing to do….

Yet despite that, as Lansley concludes, his comparison with the Twenties eventually breaks down. The Depression led to a complete rethink about banking regulation and the reversal of the soaring income inequalities of the time. Yet now, “despite the scale of the meltdown and the massive rescue of the banking system the economic orthodoxy of the last 30 years remains largely intact… The British Treasury still recoils from policies that might ‘distort the market’. There has been a good deal of hand-wringing about the role of the banks and of the regulators, but as yet, no substantive challenge to the dominant belief in the virtues of self-correcting markets, powerful finance and high levels of inequality.” (p. 276)

What alternatives? Well Lansley suggests Robert Shiller, a US academic, and his “Rising Tide Tax System”, which would see taxes automatically become more progressive if inequality increased. This would act as an automatic stabiliser. There’s lots more here – but this really is a book you should read. And generally “a much tougher tax regime”.

Put The Cost of Inequlity together with Treasure Islands and