As even its harshest critics concede, neoliberalism is hard to pin down. In broad terms, it denotes a preference for markets over government, economic incentives over social or cultural norms, and private entrepreneurship over collective or community action. It has been used to describe a wide range of phenomena—from Augusto Pinochet to Margaret Thatcher and Ronald Reagan, from the Clinton Democrats and Britain’s New Labour to the economic opening in China and the reform of the welfare state in Sweden.
Democrats and Republicans can’t agree on much, these days. But the profound threat that Vladimir Putin poses to our republic is one. John McCain has suggested that Russian interference in the 2016 campaign was an attack on “the foundation of democracy.” Hillary Clinton has called it a “a cyber 9/11” and “a direct attack on our institutions.” Senators, congressmen, and commentators — from both sides of the aisle — have voiced similar sentiments.
This rhetoric might be a tad hyperbolic, but it isn’t wildly so. A large (and growing) body of evidence suggests that Russian agents aided the campaign of an American presidential candidate, in hopes of furthering their own special interests — and, perhaps, gaining a sympathetic ear at 1600 Pennsylvania Avenue. In pursuit of this end, the Kremlin disseminated mendacious propaganda over American social media and cable news, while using stolen emails to discredit their preferred candidate’s opponent. It’s possible that Putin might have even explored leveling an attack on our electoral infrastructure itself — thereby directly barring some Americans from having their voices heard at the ballot box.
In a liberal democracy, the legitimacy of a state is founded on the integrity of its elections. Spread doubt about the latter, and the former starts to fall away. If Americans believe that their leaders do not derive their power from the popular will, but merely from the favor of shadowy puppet-masters, then civic engagement and social trust will decay. Voter participation will decline, along with confidence in public institutions. And these developments will, in turn, make it easier for bad actors to manipulate the democratic process. Eventually, cynicism about democracy could make some voters welcome the prospect of authoritarian rule. This is why it’s so vital that Russian interference in our elections is investigated and deterred.
That’s also why Congress must not pass President’s Trump’s regressive tax cuts.
That may sound like a non sequitur. The debate over tax policy in the United States is generally framed as a conflict between rival economic theories. Democrats may claim that cutting taxes on the rich will slow the economy, or drive up the debt, or force cuts to popular domestic programs. But few would put supply-side cuts on a list of threats to liberal democracy in the United States.
And yet, the idea that increasing economic inequality and sustaining popular sovereignty are incompatible endeavors wasn’t always alien to our politics. In fact, as the Roosevelt Institute’s Marshall Steinbaum recently noted, the New Deal reformers who brought robustly progressive taxation to the United States understood the policy as a means of altering the distribution of power in society. That the rich can easily convert their wealth into political dominance was a common-sense proposition for Americans born into a Gilded Age. Thus, the point of confiscatory top marginal rates wasn’t to maximize efficiency or growth — but to limit the monied elite’s capacity to shape the American political economy to their whims.
This argument for soaking the rich is just as salient now as it was in the robber barons’ heyday: In 2016, American billionaires aided the campaigns of their preferred presidential candidates, in hopes of furthering their special interests — and perhaps, gaining a sympathetic ear at 1600 Pennsylvania Avenue. In pursuit of this end, well-heeled donors funded propaganda campaigns through social media and television advertisements, while a few sought to use stolen emails to discredit their preferred candidate’s opponent. Some right-wing plutocrats even financed efforts to impose voting restrictions and felon disenfranchisement laws — thereby directly barring some Americans from having their voices heard at the ballot box.
Some may take exception to this (implicit) analogy: American elites attempting to influence our elections through political speech — and Russian operatives trying to do so through cyberattacks — are categorically different phenomena. This is certainly true; but it also does nothing to negate the premise that the political influence of American multi-millionaires, billionaires, and corporations undermines the integrity of our democracy, in many of the same ways that Russian interference does.
Does anyone really believe that RT has done more to distort Americans’ understanding of — and faith in — their political system than Rupert Murdoch’s Fox News? Or that Sputnik has had a more corrosive influence on American discourse than Robert Mercer’s Breitbart? Or that Putin’s oligarchs have done more to disconnect American policy from the popular will than the funders of the Koch network? Or that the Kremlin’s interference in our politics has done more to damage public confidence in our institutions than K Street’s?
Such claims are facially absurd. The furor over Russia’s election hacking is justified. But the discrepancy between how seriously our political elites take the threat that Russian meddling poses to our democracy — and how blithe they are about the one that concentrated wealth poses to it — is not.
It’s true that discussions of big money’s corrosive influence aren’t wholly absent from the American political conversation. But they are typically confined to debates over campaign finance laws. This is unfortunate — and not merely because the Supreme Court has erected a mountainous roadblockon the path to federal reforms. So long as the wealthiest 0.1 percent of Americans own as much as the bottom 90 percent, the threat of creeping plutocracy in the U.S. will remain — even if Citizens United and Buckley v. Valeowere somehow overturned. After all, campaign donations are just one of the many ways that well-heeled elites influence the political process — and not necessarily the most effective. Charles and David Koch’s most fruitful investments weren’t made in discrete presidential campaigns, but in funding a political network that cultivates and mobilizes conservative activists throughout the United States — and think tanks and lobbies that shape elite opinion in D.C.
It is hard to see how one can impose tight restrictions on political organizing and policy research in a free and open society — let alone, one with constitutional protections of speech as robust as our own. Pushing for more public financing of elections should be part of any plan for limiting the influence of big money in politics. But steeply progressive taxation is just as essential to that goal — and liberals would do well to emphasize this point in the upcoming debate over Donald Trump’s tax plan.
The president’s initial framework for tax “reform” would deliver 80 percent of its benefits to the top one percent of American earners, according to a preliminary analysis from the nonpartisan Tax Policy Center. It’s possible that the Republicans’ final plan will be a bit less regressive than that — but not much less so. The heart of Trump’s package is a giant tax cut for corporations, which will deliver the bulk of its (figurative and literal) dividends to wealthy shareholders and corporate executives. Other core provisions of the plan include the abolition of the tax on estates worth more than $5.5 million and a giant cut in the rate paid by wealthy “small business” owners (including the owner of a little mom-and-pop shop called “the Trump Organization”).
The stakes of these regressive cuts might strike some Americans as abstract. After all, as they raid the federal treasury for their billionaire benefactors, Republicans do intend to set aside a bit of hush money for the witnesses in the middle class. And since the GOP does not (currently) plan to attach spending cuts to their tax package, most American households will come out ahead in the near-term. Progressives can (and should) argue that these tax cuts will threaten popular domestic programs down the road. But Democrats shouldn’t rely exclusively on decrying the tax cuts’ second-order effects; not when the first-order one is to exacerbate economic inequalities that are strangling our democracy.
And there is no question that reducing the tax burden of the wealthy will swell those inequalities. Conservatives maintain that such disparities in income are a worthy price for the economic growth that supply-side tax cuts will provide to all Americans. But as the economists Thomas Piketty and Emanuel Saez have documented (along with countless other members of their profession) the correlation between regressive tax cuts and economic growth exists in Republican dogma, not empirical reality:
[D]ata show that there is no correlation between cuts in top tax rates and average annual real GDP-per-capita growth since the 1970s. For example, countries that made large cuts in top tax rates, such as the United Kingdom or the United States, have not grown significantly faster than countries that did not, such as Germany or Denmark.
While the Reagan tax cuts did not give the U.S. a significant edge over its peers in economic growth, they did give America’s economic elite a far larger share of growth than their peers in other Western countries. Crucially, this is not solely due to a predictable increase in the American rich’s post-tax income: Between the 1970s and 2013, the top one percent’s share of pre-taxincome more than doubled from under 10 percent to over 20. This is not because globalization and automation inevitably create a winner-take-all economy. Japan and continental Europe have been reshaped by those forces, and yet saw no similar explosion in the income share of their rich.
Conservatives might attribute the growth in the one percent’s share to the beneficent incentives of low income-tax rates: Wealthy Americans responded to tax cuts by producing more, and thus increased their pre-tax income. And yet, if growth in the one percent’s paychecks wildly outpaces growth in the broader economy, then the rich probably aren’t getting richer by creating more value — but by extracting it. As Piketty and Saez write:
[W]hile standard economic models assume that pay reflects productivity, there are strong reasons to be sceptical, especially at the top of the income distribution where the actual economic contribution of managers working in complex organisations is particularly difficult to measure. Here, top earners might be able to partly set their own pay by bargaining harder or influencing compensation committees.
Naturally, the incentives for such “rent-seeking” are much stronger when top tax rates are low. In this scenario, cuts in top tax rates can still increase top income shares, but the increases in top 1% incomes now come at the expense of the remaining 99%. In other words, top rate cuts stimulate rent-seeking at the top but not overall economic growth – the key difference with the…supply-side, scenario.
Thus, even if tax cuts for the rich aren’t financed by spending cuts, ordinary Americans have nothing to gain from them — and much to lose. Since the Reagan tax cuts, workers have seen their share of productivity gains plummet; the gap between the wealth of rich and poor households — along with that between white and black ones — has exploded; the middle class has become more reliant on debt to finance their homes, automobiles, and children’s educations; the amount of money that corporations and wealthy individuals invest in influencing American politics has skyrocketed; and policy-making has become ever-more tilted to the needs of these economic elites as a result.
Virtually everything that we fear Russian interference could do to our democracy, these inequities have done already. Over the past four decades, Americans have become increasingly convinced that their nation’s political and economic systems are rigged against them. In November 2015, a Public Religion Research Institute (PRRI) survey found 64 percent of Americans agreeing with the statement, my “vote does not matter because of the influence that wealthy individuals and big corporations have on the electoral process.” One year later, 75 percent of 2016 voters told Reuters/Ipsos that they were looking for a “strong leader who can take the country back from the rich and powerful.”
Meanwhile, social trust, civic engagement, voter participation, and confidence in public institutions have all fallen precipitously. Polls show Americans are losing faith in democracy itself, and are growing more sympathetic to authoritarian appeals.
Absent this context of disillusion and distrust, it’s unlikely that Trump’s demagogic campaign (or the Kremlin’s attempts to aid it) would have stood much chance of success.
“The economic royalists complain that we seek to overthrow the institutions of America,” Franklin Roosevelt famously said at the 1936 Democratic convention. “What they really complain of is that we seek to take away their power. Our allegiance to American institutions requires the overthrow of this kind of power.”
As Republicans work to consolidate the power of those royalists in the coming months, Democrats should (once again) call for their overthrow.
Miatta Fahnbulleh, a former academic turned policy wonk who has worked for three prime ministers and the Labour party, is not your typical thinktank chief.
Fahnbulleh arrived in the UK from Liberia in 1986 and her family successfully claimed asylum in the UK, settling in Tunbridge Wells, Kent. “My childhood in Liberia had a massive impact,” says the 38-year-old. “You see abject poverty and extreme wealth, you see how the family you were born into affects your life and you understand why inequality is wrong. It’s not just that it perpetuates itself, it’s that it’s fundamentally wrong and it needs to be changed. And that’s my core, that pursuit of economic justice.
“Coming from two of the poorest countries in the world [Fahnbulleh also witnessed the deprivation in her mother’s home country, Sierra Leone] and seeing kids forced to fight in the civil war and being robbed of their childhood can’t help but colour your values,” she says. But while the economic and social injustices in Liberia are extreme, the UK is far from an egalitarian oasis, she says. “Whether you take the Brexit vote, or whether you take the shock results of the last election – you know there is something happening in the country. My read on it is that people are fed up. They are frustrated by an economic model that they think doesn’t work for them. The social contract defined the postwar period: if you worked hard, if you did the right thing, you would get on – but more importantly, your kids would do better than you. The fact is, that is now crumbling. And people have said, ‘we’ve had enough and we want change’.”
Fahnbulleh joins the New Economics Foundation(Nef) as its chief executive in mid-November from another thinktank, the Institute for Public Policy Research (IPPR), where she was director of policy and research. “For progressive politics, both are really important, but they play two different roles,” she explains. “IPPR has worked within the system and secured some really great changes and wins on social justice – on issues around the minimum wage, for example. Nef has always been the outlier, the radical outsider proposing ideas long before they become the status quo. And you need both for societal transformation: within-system change and without-system change.”
Nef also spends a considerable amount of time on community organising – helping community groups, workplaces and local people both run campaigns and feed into policy reports. This bottom-up approach also attracted Fahnbulleh to the job. “We’ve just done a big piece of work on housing, and new models of ownership and how we can drive that – but also on tenant voice. And we’ve been working on the Blue New Dealfor coastal towns, looking at how we can empower local – often really deprived – communities to bring in new, sustainable jobs. It’s about economic and social justice. We need an economic model that puts the environment front and centre in the fight against inequality.”
Fahnbulleh thinks the election has heralded Nef’s moment. “The fact that every single party went into the last election and said the economy doesn’t work for all signals a massive shift. I think that creates the space for the kind of change that we haven’t seen in a really long time. If you look across the political spectrum, the big questions are: what’s the alternative to this broken system – and how do we get there?”
The living standards crisis, which became integral to Labour’s 2015 general election campaign, still hasn’t been resolved and is key to political apathy and disgruntlement, she argues. “There are reasons why the public are so cheesed off. We’ve basically had a sustained period of declining wages: between 2008 and 2021, we will have seen the longest period of earnings stagnation for 150 years. And people are just fed up with that. You then add the fact that we’re also seeing huge increases in inequality. From 1979 to 2012, the share of income growth that went to the bottom 50% was 10%. The share of income growth that went to the top 10% was 40%.
“My sense is that people are willing to put up with that if they are seeing incremental improvements in their living standards. But as soon as you get to the stage where we see our wages flatline, it means you have these huge divides in wealth and people are feeling poorer, year after year. Their tolerance for a system that is fundamentally wrong has hit a buffer.”
If Labour is a government in waiting, Nef will clearly have a huge role in influencing the economic policy put forward by the shadow chancellor, John McDonnell. And Fahnbulleh will be key to steering that ship. “We have got an opportunity, in the next five years, to be at the forefront of a lively debate about what kind of economy we want – and what an economy that actually works for the many and not the few looks like. Nef should be leading that debate, because, quite frankly, we started it.”
Family: Married, one three-year old son.
Lives: South-east London.
Education: Beechwood Sacred Heart school, Tunbridge Wells; PPE BA Lincoln College, Oxford; master’s in economic development, London School of Economics; PhD in economic development, London School of Economics.
Career: 13 November 2017: chief executive, New Economics Foundation; December 2016 to November 2017: director of policy and research, IPPR; October 2015 to December 2016: consultant on devolution and local economic growth; May 2013 to September 2015: policy adviser to the leader of opposition, Labour party; July 2011 to May 2013: head of cities in the policy unit, Cabinet Office; June 2008 to July 2011: deputy director and previously senior policy adviser, prime minister’s strategy unit; December 2006 to 2008: consultant, International Projects Group, PKF (UK); October 2005 to November 2006: Post-doctoral research fellow and lecturer, LSE.
Interests: Reading, travelling and basketball.
Meanwhile a new kind of bank is multiplying – providing food for those who can no longer make ends meet. Austerity policies fall most heavily on those at the bottom while the top 10%, and particularly the top 1%, are protected. Generally, the less you had to do with the crisis, the bigger the sacrifices – relative to your income – you have had to make.
Youth unemployment has soared – in Spain and Greece to over 50%; this is an outrageous waste of young lives, and in many countries it’s become clear that young people are unlikely to experience the prosperity their parents enjoyed. How ridiculous that the answer to our economic problems is seen as wasting more of our most important asset – people.
Meanwhile a political class increasingly dominated by the rich continues to support their interests and diverts the public’s attention by stigmatising and punishing those on welfare benefits and low incomes, cheered on by media overwhelmingly controlled by the super-rich.
But, while the divide between the rich and the rest has certainly grown, how can it be claimed that we can’t afford the rich?
Here’s a short answer
Their wealth is mostly dependent ultimately on the production of goods and services by others and siphoned off through dividends, capital gains, interest and rent, and much of it is hidden in tax havens. They are able to control much of economic life and the media and dominate politics, so their special interests and view of the world come to restrict what democracies can do.
Their consumption is excessive and wasteful and diverts resources away from the more needy and deserving. Their carbon footprints are grotesquely inflated and many have an interest in continued fossil fuel production, threatening the planet.
Of course, this brief summary leaves out many qualifications, not to mention the actual argument and evidence. Some readers may agree straightaway, some may have a few objections, but others may respond with incredulity, perhaps outrage, for to claim that we can’t afford the rich is to imply that they are a cost to the rest of us, a burden. Aren’t the rich wealth creators, job creators, entrepreneurs, investors – indeed, just the kind of people we need? Don’t entrepreneurs like Bill Gates deserve their wealth for having introduced products that benefit millions? Aren’t the rich entitled to spend what they have earned how they like? What right has anyone to say their consumption is excessive?
Couldn’t the rich cut their carbon footprints by switching to low-carbon consumption? Wouldn’t the world miss their philanthropy and the ‘trickle-down effects’ of their spending? In fact, isn’t this book just an example of ‘the politics of envy’ – directed at those whom former UK Prime Minister Tony Blair used to call ‘the successful’? Shouldn’t we thank, rather than begrudge, these ‘high net worth individuals’?
It’s the objections regarding the alleged role of the rich in wealth extraction, as opposed to wealth creation, that present the biggest challenge and occupy the bulk of this book, though I’ll attempt to answer other objections too. In the process it will become clear that this is not about the politics of envy – a cheap slur used by those who want to duck the arguments and evidence – but the politics of injustice. I don’t envy the rich, in fact I regard such envy as thoroughly misguided. But I resent the unjust system by which the rich are allowed to extract wealth that others produce and to dominate society for their own interests.
What’s more, this is not only unjust but profoundly dysfunctional and inefficient, and it creates inhumane, rat-race societies. The time is ripe for examining where the wealth of the rich comes from. The Occupy movement has very successfully highlighted the growing split between the top 1% and the 99%, and the dominance of politics by the 1%.
The rich have made a remarkable comeback since the 1970s – the end of the post-war boom – rapidly increasing their share of national income in a large number of countries, Britain included. We are now getting back to early 20th-century levels of inequality between the rich and the rest. Having cornered ‘only’ 5.9–9% of total income before tax in the UK in the early 1950s through to 1978 – ‘The Golden Age of Capitalism’ – the top 1% of ‘earners’ now hoover up 13%.
The early post-war period was a time when the majority of the population shared in the post-war boom, with low-income households doing slightly better than others and the top 5% growing at slower rates, albeit from a higher base. But from 1979 the majority of incomes stagnated or grew only slowly, while the poorest fifth suffered a substantial loss and the rich roared ahead, swallowing up most of the spoils of economic growth, with the top 0.01% enjoying a 685% rise in real income!
This divergence has continued since the crash; indeed the gulf is widening as a result of austerity policies, which disproportionately hit those on low to middle incomes, contrary to the rhetoric of ‘We’re all in it together’.
In fact, the inequalities within the top 1% are much greater than between them and the 99%. Those in the top 1% in the UK have incomes ranging from just under £100,000 to billions. What’s more, the richer they are, the faster their income has grown: the top 0.5% have increased their share faster than the rest of the 1%, but not as fast as the top 0.1%, while the top 0.01% (ten-thousandth) have enriched themselves even faster.
Inequalities in wealth – the monetary value of individuals’ accumulated assets minus their liabilities (debts) – are even wider than income inequalities, and increasing. In the US, the top 1% own 35% of the nation’s wealth and the bottom 40% a mere 0.2%! In the UK in 2008–10, the members of the top 1% each had £2.8 million or more (14% of the nation’s wealth), though, given the opportunities for the rich to hide their wealth, this is almost certainly an underestimate. Twenty-eight per cent of wealth in the UK is inherited, not earned. Half of the population had wealth of less than £232,400, and the poorest 10% had less than £12,600.
In the US, the top 0.01% have gone from having less than 3% of national wealth in the mid-1970s to over 11% in 2013.
The richest one-thousandth – currently those with more than $20 million – own over a fifth of the country’s wealth.
Oxfam 2014 data:
• The richest 85 people in the world own as much as the poorest half of the world’s population, all 3.5 billion of them!
• 46% of the world’s wealth is now owned by just 1% of the population.
• The wealth of the richest 1% in the world amounts to $110 trillion. That’s 65 times the total wealth of the bottom half of the world’s population.
• Seven out of ten people live in countries where economic inequality has increased in the last 30 years.
Have the rich got richer because those at the top have become more enterprising, dynamic wealth creators? Are today’s capitalists – or entrepreneurs, as they like to call themselves – so much better at leading economic development than their more moderately paid predecessors of the post-war boom?
The economic data suggests the opposite. Growth rates have been slower than in the post-war boom. The rich are clearly not taking the same share of faster growth, but an increasing share of slower growth. So how have they done it?
The rich are not only getting a bigger proportion of nations’ gross incomes, but keeping more of it, thanks to massive drops in top rates of taxation.
From the 1930s onwards, tax rates on the rich soared, topping 90% in the UK, US, France and, briefly, Germany. It’s hard to believe this now when they have fallen to less than 50%, with many governments repeatedly trying to drive them down still lower. The sky did not fall down when top rates of tax were high, indeed the economies of these countries boomed, yet we are now told in severe tones that taxing the rich merely restrains growth.
To show why we can’t afford the rich we need to do more than find out just how rich they are and describe how they got their money and spend it. We need to do something that most books on the rich and the financial crisis fail to do – question the legitimacy of their wealth. But it is important to realise just how rich the rich are. I don’t want to put readers off with an indigestible mass of figures, but some are needed, especially as few people realise how unequal our society is and just how wealthy the rich are.
In the US the boundary isn’t quite so sharp, with the 4% below the top 1% getting a slight increase in share of national income since the post-war boom, though nothing like as big an increase as those above them, but it’s at the top of the 1% where the big gains have been made.
The richer people are, the higher the proportion of their income is likely to be unearned, through being based on power rather than some kind of contribution.
The UK has 63.9 million people and yet many of their most important needs could be met several times over just by the collective wealth of the richest 1,000. (Could there be a solution here?) When people worry about the effect of an ageing population on the pension bill and the NHS bill, we need to remember that just the annual growth of the wealth of the super-rich could easily pay for it. This is a ridiculous and obscene misallocation of resources. And why should we celebrate the growth of the financial sector, but see the growth of the health sector as a problem? Globally, according to the Bloomberg Billionaires website, the top 100 billionaires controlled $1.9 trillion in 2012, adding $240 billion that year. Oxfam calculates that just over a quarter of this – $66 billion – would have been enough to have raised everyone in the world over the $1.25 per day poverty line.
With a ‘net worth’ of $76 billion, Bill Gates of Microsoft is the richest person in the world, according to the 2013 Forbes list of billionaires. Second, with $72 billion, and for many years the first, is Carlos Slim Helu, a Mexican who took over his country’s telecommunications industry when it was privatised – a nice example of the consequences of privatising state monopolies.
Warren Buffett, whose candid statement about class war heads up this introduction, is fourth.
The richest woman, at ninth, with $52.5 billion, is Christy Walton, who inherited part of the Walmart fortune. Three other members of the Walton family are in the top 20. Rupert Murdoch, the media mogul, with $13.5 billion, comes in at 78th.
Very few of the rich and super-rich are celebrities. The wealthiest, Steven Spielberg, with $3 billion, is 337th on the Forbes list. Next is Oprah Winfrey, at 442nd with $2.7 billion.
In the UK, the Sunday Times often uses a montage of photos of celebrities to publicise its Rich List, but as in the US, few of them reach the upper levels. The highest (2012), Paul McCartney, with £665 million, owes his high position partly to marrying Nancy Shevell, an American heiress. Author J.K. Rowling, came in at 148th, the Beckhams at 395th. Most of the super-rich above them are unknown to the vast majority of British people.
The top six in the UK are all foreign nationals resident in the UK, attracted by special tax deals open to them: Alisher Usmanov (first, with £13.3 billion) owns Russia’s biggest iron ore producer; second is another Russian, Leonard Blavatnik, who’s involved in a range of industries including music, aluminium, oil and chemicals; in third place, the Hinduja brothers inherited their father’s conglomerate, with interests in power, automotive and defence industries in India and overseas; Lakshmi Mittal, in fourth place, is an Indian-born steel magnate who owes much of his wealth to buying up former Soviet state enterprises when they were privatised; Roman Abramovich (fifth), from Russia, best known in the UK for his ownership of Chelsea football club, owns an investment company with interests in a wide range of sectors, particularly oil; Norwegian-born Cypriot citizen John Frederiksen (shipping and oil) is sixth.
‘Non domiciles’, like these individuals, take advantage of a rule unique to the UK and Ireland that allows those who can claim to be linked to some other domicile to escape UK tax on their income and capital gains in all of the rest of the world, providing they do not bring the money into the country.
At eighth, the richest British-born person on the list is the Duke of Westminster, with £7.8 billion, who inherited property in Lancashire, Cheshire, Scotland and Canada and prime sites in London.
Although only a minority of the super-rich around the world list their speciality as finance, most of those in non-finance business are nevertheless also heavily involved in finance, in playing the markets and making deals25 and, of course, steel, power or telecommunications companies and the like are chosen for financial gain.
Why have the rich got a bigger share?
The return of the rich over the last four decades has been closely associated with developments in capitalism. Most important has been the rise of a new political economic orthodoxy, called neoliberalism.
Initiated aggressively by Margaret Thatcher and Ronald Reagan in the 1980s, it was consolidated with more stealth by their successors, New Labour as well as Conservative, Democrat as well as Republican.
Now, after the crash of 2007–08 and in the ensuing recession – exactly when it has most clearly failed – it is being imposed with renewed vigour. It has three key features.
Markets are assumed to be the optimal or default form of economic organisation, and to work best with the minimum of regulation. Competitive markets supposedly reward efficiency and penalise inefficiency and thereby ‘incentivise’ us to improve. Governments and the public sector, by comparison, are claimed to be inferior at organising things – monopolistic and prone to complacency, inefficiency and cronyism. Governments should therefore privatise as much as possible.
Financial markets should be deregulated and there should be ‘flexible labour markets’ – political code language for jobs in which pay can fall as well as rise and in which there is little security. Where parts of the public sector can’t be privatised, league tables should be established and individuals, schools, universities, hospitals, museums, and so on should be made to compete for funds and be rewarded or penalised according to their placing.
Democracy needs to be reined in because the ballot box can’t match markets in governing complex economies; people can express themselves better through what they buy and sell.
Unsurprisingly, neoliberals keep their anti-democracy agenda under wraps.
The rise of neoliberalism also involves a political and cultural shift compatible with its market fundamentalism. Through a host of small changes in everyday life, we are increasingly nudged towards thinking and acting in ways that fit with a market rationality.
More and more, the media address us as self-seeking consumers, savvy investors, ever pursuing new ways of supplementing our incomes through ‘smart investments’.
Risk and responsibility are transferred to the individual. Job shortages are no longer acknowledged, let alone seen as a responsibility of the state: there are just inadequate individuals unable to find work: ‘skivers’, ‘losers’. No injustice, just bad choices and hapless individuals. The word ‘loser’ now evokes contempt, not compassion.
Those unable to find jobs that pay enough to allow them to cope and who still need the welfare state are marginalised, disciplined and stigmatised as actual or potential cheats. State health services and pensions are run down and replaced by private health insurance and private pensions.
You’re on your own, free to choose, free to lose, depending on how you navigate through the world of opportunities and dangers.
Instead of seeing ourselves as members of a common society, contributing what we can, sharing in its growth, pooling risks and providing mutual support, we are supposed to see ourselves as competing individuals with no responsibility for anyone else.
Want to jump the queue for medical services? Click here. Want to give your child an advantage? Pay for private tuition. We should compete for everything and imagine that what is actually only possible for the better off is possible for everyone; everyone can win simultaneously if they try.
We are expected to see ourselves as commodities for sale on the labour market, but also as ‘entrepreneurs of the self’. Hence the rise of the cult of the curriculum vitae (résumé) and self-promotional culture.
Education is increasingly debased by efforts to turn it into a means for making young people in this mould.
Some people – probably many readers of this book – may want to resist these tendencies, but in a neoliberal society it is impossible to avoid them totally, not least because in so much of life using markets (disguised as ‘choice’) and competing in league tables have become the only choices we can make.
Neoliberalism has ushered in a shift in the economic class structure of the countries it has most affected.
It involves not only a shift of power and wealth towards the rich, marked most clearly by the weakening of organised labour in industrialised economies and the enrichment of the 1%, but a shift of power within the rich: from those whose money comes primarily from control of the production of goods and services, to those who get most of their income from control of existing assets that yield rent, interest or capital gains, including gains from speculation on financial products.
The traditional term for members of this latter group is ‘rentier’. Many of the changes noted in 1 and 2 above benefit them.
Neoliberalism as a political system supports rentier interests, particularly by making the 99% indebted to the 1%.
A different approach: ‘moral economy’
The deregulation and spectacular growth of finance are central to neoliberalism and the rise of the rich – and to the biggest economic crisis since the Great Crash of 1929.
There has been a small avalanche of books on the financial crisis of 2007, some of them illuminating, many merely providing superficial narratives of successive financial disasters and the key players in them, served up with journalistic brio. Some critiques have targeted the hubris of the financial sector, identifying mismanagement, poor judgement and questionable legality.
But some have seen the credit crunch and recession as evidence of something more basic – capitalism’s crisis-prone nature.
Why We Can’t Afford the Rich isn’t just about the financial crisis, dire though it is. It’s about what underpins and generates such crises – the very architecture of our economy. It treats the economy not merely as a machine that sometimes breaks down, but as a complex set of relationships between people, increasingly stretched around the world, in which they act as producers of goods and services, investors, recipients of various kinds of income and as taxpayers and consumers.
The problems it identifies are as old as capitalism, though they have become much more serious with the rise of finance over the last 40 years. It goes beyond a focus on irrationality and systemic breakdown, to injustice and the moral justifications of taken-for-granted rights and practices. It’s not only about how much people in different positions in the economy should get paid for what they do, but about whether those positions are legitimate in the first place.
Is it right that they’re allowed to do what they’re doing?
There is of course a long history of critiques of capitalism aimed at different targets: alienation, insecurity and poverty; the treadmill of working and consuming; economic contradictions and irrationalities; and environmental destruction. There are useful things to learn from all of these critiques, but at the current time, when the rich have increased their power so much, and inequalities have widened, I believe we need a new line of attack, one that focuses on the institutions and practices that allow this to happen.
Too many books on economic justice, and especially on the economic crisis, take as given the very institutions and practices that need questioning. This book is about the injustices of some long-standing economic relations that have come to a head in the crisis. It could be described as an example of ‘moral economy’. By this I mean not moralising about greed but assessing the moral justifications of basic features of economic organisation. It’s about the huge differences between what some are able to get and what they do, need and deserve.
What people should get is a difficult issue, particularly where it’s a matter of what we think people deserve or merit, but in the case of the rich, it can be shown that what they actually get has more to do with power. I shall argue that basically, the rich get most of their income by using control of assets like land and money to siphon off wealth that others produce. Much of their income is unearned. What’s more, over the last 35 years, particularly with the increasing dominance of the economy by finance – ‘financialisation’, as it’s sometimes called – the rich have become far richer than before by expanding these sources of unearned income.
This book is not only about money and goods, but about the very language of economic life, for the history of our modern economy is partly one of struggles over how to describe or categorise economic practices, as this affects what we see as acceptable or unacceptable: words like ‘investment’, ‘speculation’ or ‘gambling’ invite different evaluations. Who wouldn’t prefer to be called an ‘investor’ rather than a speculator or gambler? But what do such terms mean and what practices fit them? When a top banker is described as having ‘earned’ £x million, we might question what ‘earned’ means in such a context: is it just what they’ve managed to extract from the economy?
This struggle over words has been largely won by the rich and powerful, so how we speak about economic life systematically conceals their activities. Mainstream economics has proved to be a helpful if largely unwitting accomplice to this process, fearful of anything that might be construed as critical of capitalism.
To show why we can’t afford the rich we need to go into some basic economic matters, but in a different and yet simpler way than usual. Most basically, we need to remember something that has been forgotten in modern mainstream economics: economics is about provisioning. As anthropologists and feminist economists have reminded us, it’s about how societies provide themselves with the wherewithal to live. Provisioning requires work – producing goods, from food and shelter through to clothes and newspapers, and services, such as teaching, providing advice and information, and care work. Almost all provisioning involves social relations between people, as producers, consumers, owners, lenders, borrowers and so on. It’s through these relations that provisioning is organised.
Some kinds of provisioning take place through markets; some do not. The market/non-market boundary does not define the edge of the economy: unpaid work in preparing a meal for someone is as much an economic act as preparing pizzas for sale – or selling computers or insurance. Most economists and political theorists think of economic actors only as independent, able-bodied adults, forgetting that they all started off as helpless babies, unable to provide for themselves and dependent on others, and who sooner or later reach a stage where, whether for reasons of illness, disability or age, they become unable to contribute to provisioning themselves and others.
There is nothing exceptional about these conditions. We all go through them: they are universals. We can never pay back our parents for all the work they did for us, just as future generations will never be able to pay their parents back. Dependence on others, particularly across generations, is part of being human; it derives from the fact that we are social animals, ‘dependent rational animals’, as the philosopher Alasdair MacIntyre put it; we cannot survive on our own.
Robinson Crusoe depended on having been brought up in society; the newborn Crusoe wouldn’t have lasted more than a few hours on his own. And like Crusoe we depend on the resources of the earth to survive; we cannot flourish if we damage the planet.
No one would deny the right of children to be fed (‘subsidised’) by their parents when they are too young to contribute anything in return. But would it be OK for me to buy up the company that currently provides your water and slap an extra 10% on your bills so that in effect you subsidise me, enriching me greatly? Would that be a defensible form of dependence?
Or if I seized a park or beach that you had visited regularly all your life and charged you for access, would that be all right? Dependence can be defensible or indefensible; it depends.
Because we are so dependent on each other, there are always likely to be questions of fairness and justice where economic activities are concerned. Are you being paid fairly? Is it right that some get so much/little, and pay so much/little tax? Should students pay for their university courses? Should you get interest on your savings? Should there be more/less/no child benefit? More money for carers, or none? Who should pick up the bill when a company goes bankrupt, and who should pay for clearing up a derelict site left by deindustrialisation? Who should pay for pollution?
These and other such questions are about moral economy. I believe we need to think much more about them – about whether our familiar economic arrangements are fair and justifiable, instead of taking them simply as immutable facts of life – or equally bad, as matters of mere subjective ‘preferences’, or ‘values’, beyond the scope of reason.
Individuals may sometimes give more than they get, or get more than they give, for justifiable reasons, as in the case of parent–child relations, but sometimes they do so for no good reason other than power. Sexist men free-ride on the domestic labour of women for no good reason. This free-riding is particularly likely where people or organisations are very unequal in power. Minority control of key assets that others need is a crucial source of power and inequalities.
Because they can.
Important though it is to think about moral economy, it’s different from explaining economic arrangements. Few of our ways of doing things in economic matters are arrived at through democratic decision or careful deliberation on what is good and fair. Most are products of power. Usually, the best explanation of what people do and what they get in economic matters is because they can.
Why do chief executive officers (CEOs) of big companies pay themselves such vast amounts? Because they can. They may offer justifications, but these are not only invariably feeble but redundant. They can get their pay rises even if the majority of people think they’re unjustifiable. And usually the fuss over their pay hikes dies down in a week or two anyway.
Equally, when we ask why care workers get so little for doing work that clearly benefits people, the answer is because that’s all they can get, given their limited power. What we think people should justifiably get or contribute is one thing, and what they can actually get is another. Justifications and explanations are usually different.
Many of the defences of existing economic institutions are surprisingly weak, but particularly if people start treating those arrangements as natural – as ‘just how things are’ – they can persist on the basis of power.
The landowner and the stranger
Here’s an example of a taken-for-granted economic institution – private ownership of land by a minority.
You may know the story of the stranger who trespassed on a landowner’s land and was told to ‘get off my land’, whereupon the stranger asked the owner how he got this land. ‘From my father’, was the answer. ‘And where did he get it from then?’ ‘From his father’ . . . , who got it from his father, and so on. ‘So how did one of your ancestors get this land in the first place?’ asked the stranger. ‘By fighting someone for it’, said the landlord. ‘Right’, said the stranger, ‘I’ll fight you for it. If it was all right for your ancestor to seize the land in the first place, it must be all right to seize it back now. And if it wasn’t all right for them to seize it, it should be seized back now!’
The story is striking but it’s not clear what a better alternative might be. Would private ownership of land be OK if it was divided up equally so everyone had some? Or should land be publicly owned with individuals renting plots from the state, with the use of the rent revenue to be decided democratically? What the story does, at least, is jolt us out of our uncritical acceptance of the institution of minority land ownership. At this time of crisis we need much more jolting.
Mainstream economics takes the particular features of capitalism – a very recent form of economic organisation in human history – as if they were universal, timeless and rational. It treats market exchange as if it’s the essential feature of economic behaviour and relegates production or work – a necessity of all provisioning – to an afterthought.
It also focuses primarily on the relationship between people and goods (what determines how many oranges we buy?) and pays little attention to the relationships between people that this presupposes. It values mathematical models based on if-pigs-could-fly assumptions more than it values empirical research; so it pays little attention to real economies, having little to say about money and debt, for example!
Predictably, the dismal science failed to predict the crisis. When the UK’s Queen Elizabeth asked why no one saw the crisis coming, the economists’ embarrassment was palpable.
I’ll be drawing on the work of thinkers who had a more critical view, including, in chronological order, Aristotle, Adam Smith, Karl Marx, John Maynard Keynes, the Christian socialist R.H. Tawney and many recent so-called ‘heterodox economists’ and political commentators. Significantly, many of the latter did predict the current crisis.
Capitalism: a mixed bag
While this is as much a critique of capitalism as a critique of the rich, capitalism is both good and bad in a host of ways. There is no doubt, in particular, that it has produced unprecedented growth in technology and science and led to the integration of formerly largely separate parts of the world, as eulogised by Marx and Engels in The Communist Manifesto.
Marx and Engels were less prescient as regards the improvement in living standards for many workers, who turned out to be better off being exploited than not being exploited, though that does not mean there were no losers or that there cannot be better alternatives to capitalism.
The media have a depressing tendency to favour simple stories of good versus bad over ones that portray the world as a complex mix of good and bad. This book should not be seen as ignoring the benefits capitalism has brought; nor, in criticising it, to be legitimising the state socialism of the former Soviet Bloc.
‘Neither Washington nor Moscow (former or contemporary!)’ would be my slogan. A recent Russian saying goes: ‘Marx was completely wrong about communism, but damn, it turns out he was right about capitalism!’
I don’t think he was entirely right about capitalism by any means, though his thinking on its dynamics and on its generation of inequalities was more illuminating than most. But I’ll draw on plenty of other thinkers too, many of them in varying degrees critical of Marx. If you’re wondering whether I’m a Smithian, Marxist or Keynesian or whatever, my answer in each case is yes and no: yes where I think they’re right, no where I think they’re wrong.
The belief in a just world
For New Labour and Conservatives it’s become an article of faith to deny that the rich are rich because others are poor. To get ahead, any career politician has to parrot this claim; it helps to keep corporate funders of their political parties happy, as well as media owned by the super-rich. No evidence or argument is needed, apparently; they just have to profess the belief, as if swearing on the Bible.
This book shows that whatever they might want to believe, the rich are indeed rich largely at the expense of the rest. How tempting it is for not only the rich but also the merely comfortably-off to imagine that, through their own efforts and special qualities, they deserve what they have, disregarding the fact that by the accident of birth they were born into an already rich country and in many cases an already well-off family within it that gives them significant advantages. How easy to overlook that they rely on getting cheap products made and grown by people from poor countries, who are no less hard-working or deserving but can be paid much less because they have little alternative.
But it’s not only the rich who believe that they deserve their wealth. Many in the rest of the population think so too: ‘they’ve earned it so they’re entitled to it’ is a common sentiment, even among those on low incomes. This is an example of what US psychologist Melvin Lerner called ‘the belief in a just world’. In economic matters, it’s the idea that, roughly speaking, we get paid what we deserve and deserve what we get paid.
Believing the rich deserve their wealth may seem a pleasingly generous sentiment, though assuming the poor also deserve their lot does not. It produces an unwarranted deference to the rich. As Lerner noted, the belief in a just world is a delusion, a kind of wishful thinking. Who wouldn’t want to live in a just world, where need was recognised and effort and merit rewarded, while their opposites were not? But it doesn’t follow that we do.
Understandably, since the 2007 crash, people have become more critical of the rich, especially those identified as bankers. Yet, according to recent surveys of public attitudes, they are even more critical of those at the bottom, scorned as ‘welfare mothers’, ‘chavs’, ‘trailer trash’, ‘scroungers’ and so on. What’s more, it seems that as societies become more unequal, their members become less critical of inequality!
The rule of the rich Economic power is also political power. The very control of assets like land and money is a political issue. Those who control what used to be called ‘the commanding heights of the economy’ – and increasingly that means the financial sector – can pressure governments, including democratically elected ones, to do their bidding. They can threaten to take their money elsewhere, refuse to lend to governments except at crippling rates of interest, demand minimalist financial regulation, hide their money in tax havens and demand tax breaks in return for political funding.
Investigative journalists have revealed the circulation of individuals between political posts and positions in key financial institutions, and the role of powerful lobby groups in maintaining the dominance of unregulated finance, even after the crash. Prominent financial institutions have been involved in illegal money laundering, insider dealing and manipulation of interest rates, yet in the UK no one has been prosecuted and, where banks have been fined, the fines have not been imposed but arrived at by negotiation, as ‘settlements’! They have infamously pocketed gains while the losses they have incurred have been dumped on the public, who have suffered substantial drops in income and services as a result.
Of course, many politicians are already from an upper-class background in which supporting the rich is as natural as breathing, but even if they are not, ‘our representatives’ have become increasingly unrepresentative of the majority of the population at large.
Even if they want to resist, they face an environment dominated by financial interests.
The problem of the rich goes beyond issues of how they get their money, to how they spend it. Their massive spending on luxuries distorts economies, diverting producers from providing goods and services for the more needy. It’s a waste of labour and scarce resources.
In some cases, it makes things worse for those on low incomes, for example, by driving up house prices beyond their reach. The super-rich have so much that there is no way they can spend all of it on things they can use, so they recycle the rest into further rounds of speculation, buying up property, companies and financial assets that generate little or no productive investment, and merely siphon off more wealth that others have produced.
No one treads more heavily on the earth than the rich. Private jets and multiple mansions mean massive carbon footprints. Yet the inconvenient fact is of course that even though most of us have smaller footprints, in the rich countries they are still seriously in excess of what the planet can absorb. Even if we could afford them in money terms, we cannot afford high-carbon, high-consumption life-styles if we are to stop runaway global warming.
We are in deep trouble, not just because of the economic crisis, but because it’s overshadowed by a bigger and more threatening crisis – climate change. The solution to the economic crisis is widely thought to be growth. But that will only accelerate global warming.
The rich countries need to switch to steady-state or ‘degrowth’ economies to save the planet, but capitalism needs growth to survive; it’s in its DNA.
Soviet state socialism proved no better environmentally. We need a different model. If that seems a gloomy conclusion, there is a very important and positive counter message: that beyond a certain level, attained already by most people in rich countries, well-being is not improved much by further increases in wealth, and well-being tends to be higher in more equal countries.
Above this threshold, well-being is improved by greater equality, reductions in stress, exercise, being with others, both caring for and being cared for, developing interests and skills and projects and experiencing the world at large beyond the confines of narrowly defined jobs.
Ending the rat race will do us, and the planet, a lot of good.
Why we can’t afford the rich.
by Andrew Sayer
get it at Amazon.com
Universal basic income as a response to both falling demand and the rising sharing economy.
Discussing the future of work is all the rage these days. Some say we’re on the verge of the robot apocalypse of jobs. Others say jobs will always be created in sufficient numbers (and at sufficient rates) and that everything will be fine. Regular readers know where I fall on this particular question, that either way, our goal should be eliminating as many of the jobs as possible that we as humans don’t enjoy doing.
However, what doesn’t tend to get discussed is the flip side of all of this, which is the fruits of the all the work by humans and machines, the limited amounts any of us as humans can consume them simply because of limited time, and how our consumer preferences are being permanently and irrevocably altered by short-sighted greed.
… continued at Steemit
The easiest way to return to Golden Age tranquility and equality is to empower fiscal policy.
During the post war Golden Age, from 1950 to 1973, US median real wages more than doubled. Today, they are lower than they were when Jimmy Carter was president. If you want an explanation why Americans are pessimistic about their future, that is as good a reason as any. In a recent article, Noah Smith examines the various causes of the slide in labor’s share of national income and finds most explanations wanting. With a blind spot common amongst economists he doesn’t even investigate the most obvious: politics.
Take a look at this chart. From the end of World War II, productivity rose steadily. Until the 1972 recession wages went up alongside it. Both dipped, both recovered and then, right around the time Ronald Reagan became President, productivity continued its upward trajectory but wages stopped following. If wages had continued to track productivity increases, the average American would earn twice as much as he does today and America would undoubtedly be a calmer and happier nation.
Collectively we are richer than we were 40 years ago, as we should be, considering the incredible advances in technology since them, but today the benefits of productivity increases no longer go to workers but rather to owners of stocks, bonds, and real estate. Wages don’t go up, but asset prices do. Rising productivity, that is to say the ability to make more goods and services with fewer inputs of labor and capital should make us all more prosperous. That it hasn’t can only be a distributional issue.
The timing suggests Ronald Reagan had something to do stagnating wages. That makes sense. Reagan cut taxes on the rich, deregulated the economy, eviscerated the labor unions and created the neoliberal order that still rules today. But perhaps an even more significant change is the tiny, technical and tedious shift from fiscal to monetary policy.
Government has two ways of affecting the economy: monetary and fiscal policy. The first involves the setting of interest rates, the other government tax and spending policy. Both fiscal and monetary policy work by putting money in people’s pockets so they will spend and thereby stimulate the economy but fiscal focuses on workers while monetary mostly benefits the already rich. Since Ronald Reagan, even under Democratic presidents, monetary has been the policy of choice. No wonder wages stopped going up but real estate, stock and bond prices have gone through the roof. During the Golden Age we shared the benefits of technological progress through wages gains. Since Reagan, we have allocated them through asset price inflation.
Fiscal policy, by increasing government spending, creates jobs and so raises wages even in the private sector. Monetary policy works mostly through the wealth effect. Lower interest rates almost automatically raise the value of stocks, bonds, and other real assets. Fiscal policy makes workers richer, monetary policy makes rich people richer. This, I suspect, explains better than anything else why monetary policy, even extreme monetary policy remains more respectable than even conventional monetary policy.
During the Golden Age, fiscal was king. Wages rose steadily and everybody was richer than their parents. Recessions were short and shallow. Economic policy makers’ primary task was insuring full unemployment. Anytime unemployment rose over a certain level, a government spending boost or tax cut would get the economy going again. And since firms were confident the government would never allow a steep downturn, they were ready and willing to invest in new technology and increased productive capacity. The economy grew faster (and more equitably) than it ever has before or since.
During the 1960s, Keynesian economists thought they could “fine tune” the economy, using Philips curve trade offs between inflation and unemployment. Stagflation in the 1970s shattered that optimism. Inflation went up but so did unemployment. New Classical economists decided in the long run, Keynesian stimulus couldn’t increase GDP, it could only accelerate inflation. Keynesianism stopped being cool. According to Robert Lucas, graduate students, would “snicker” whenever Keynesian concepts were mentioned.
In policy circles, Keynesians were replaced by monetarists, acolytes of Milton “Inflation is always and everywhere a monetary phenomenon” Friedman. Volcker in America and Thatcher in Britain decided the only way to stomp out inflationary expectations was to cut the money supply. This, despite their best efforts, they were unable to do. Controlling the money supply proved almost impossible but monetarism gave Volcker and Thatcher the cover to manufacture the deepest recession since the Great Depression.
By raising interest rates until the economy screamed Volcker and Thatcher crushed investment and allowed unemployment to rise to levels unthinkable just a few years before. Businessmen, union leaders, and politicians pleaded for a rate cut but the central bankers were implacable. Ending inflationary expectations was worth the cost, they insisted. Volcker and Thatcher succeed in crushing inflation, not by cutting the money supply, but rather with an old fashioned Phillips curve trade off. Workers who fear for their jobs don’t ask for cost of living increases. Inflation was history.
The Federal Funds Rate hit 20% in 1980. Now even after a few hikes, it is barely over 1%. The story of the past 30 years is of the most stimulative monetary policy in history. Anytime the economy stumbled, interest rate cuts were the automatic response. Other than military Keynesianism and tax cuts, fiscal policy was relegated to the ash heap of history. Reagan of course combined tax cuts with increased military spending but traditional peacetime infrastructure stimulus was tainted by the 1970s stagflation and for policymakers remained beyond the pale.
Fiscal stimulus came back, momentarily, at the peak of the financial crisis. China’s investment binge combined with Obama’s stimulus package probably stopped the Great Recession from being as catastrophic as the Great Depression but by 2010, fiscal stimulus was replaced by its opposite, austerity. According to elementary macroeconomics, when the private sector is cutting back its spending, as it was still doing in the wake of the financial crisis, government should increase its spending to take up the slack. But Obama in America, Cameron in Britain and Merkel in the EU insisted that government cut spending, even as the private sector continued to retrench.
It is rather shocking, for anyone who has taken Econ 101 that in 2010, when the global economy had barely recovered from the worst recession since the Great Depression, politicians and pundits were calling for lower deficits, higher taxes and less government spending even as monetary policy was maxed out. Rates were already close to zero so central banks had no more room to cut.
So, instead of going to the tool box and taking out their tried and tested fiscal kit, which would have created jobs and had the added benefit of improving infrastructure, policymakers instead invented Quantitative Easing, which in essence is monetary policy on steroids. Central Banks promised to buy bonds from the private sector, increasing their price, thereby shoveling money towards bond owners. The idea was that by buying safe assets they would push the private sector to buy riskier assets and by increasing bank reserves they would stimulate lending but the consequence of all the Quantitative Easings is that all of the benefits of growth since the financial crisis have gone to the top 5% and most of that to the top 0.1%.
A feature or a bug? The men who rule the planet are happy that most of us think economics is boring, that we would much rather read about R Kelly’s sexual predilections than about the difference between fiscal and monetary policy but were we to remember that spending money on infrastructure or health care or education would create jobs, raise wages, and create demand which the economy craves, we would have a much more equitable world.
One cogent objection to stimulative fiscal policy is that it has the potential to be inflationary. Indeed the fundamental goal of macroeconomic policy is to match the economy’s demand to its ability to supply. If fiscal policy gets out of hand (as arguably it did in the 1960s when Lyndon Johnson tried to fund both his Great Society and the Vietnam war without raising taxes), demand could outstrip supply, creating inflation. But should that happen, we have the monetary tools to cure any inflationary pressure. Rates today are still barely above zero. Should inflation threaten, central banks can raise interest rates and nip it in the bud.
Fiscal and monetary policy both have a place in policymakers’ toolkits. Perhaps the ideal combination would be to use fiscal to stimulate the economy and monetary to cool it down. Both Brexit and Trump should have told elites that unless they share the benefits of growth, a populist onslaught could threaten all our prosperity. The easiest way to return to Golden Age tranquility and equality is to empower fiscal policy to invest in our future and create jobs today.
2017 August 6