|By the '50s the old rich where on skid row!|
There is now a body of opinion that warns us that the period 1910-2000 was in fact an anomaly. Thomas Piketty (The French Rock Star Economist) is clear that the long run data points to a future where developed economies are destined to have: low inflation, poor economic growth, stagnant populations and increasing share of capital owned by a very few. We used to think that the halcyon days from 1950 to the turn of the century were the norm and that we would continue to to see rising living standards and increasing equality.
The Great Recession of 2008-9 changed this consensus that within the business cycle we could expect prosperity and productivity to march ahead unencumbered. The global business cycle typically allows for about six years of “expansion” following a recession – the recent periods of “expansion” can be defined as 1983-1990, 1994-2000, 2002-2008 and it follows that the current “expansion” will last until 2017 and that we should be better off by the end of this cycle.
The reality is that if the next down turn comes in 2017 this period of expansion will leave many people worse off than when recession struck in 2008. The reasons for this are that growth has be anemic and that any expansion in national income (capital) has been soaked up by the a small number of the very rich – leaving the vast majority of us poorer and angry! But is Piketty’s analysis likely to hold water in the longer run – will secular stagnation and inequality be the name of the game?
As with any trend analysis the key is pick start and end dates that fit your prognosis – it’s important to do this before you start your research. Piketty has cleverly chosen his data sets to run from 1750 to 2000 - 250 years for which there is only really complete data for one fifth of the period. This unusual scoping of the data sets has allowed him to draw the conclusion that the natural state of affairs is where; growth is low, inflation is non-existent, population growth is stagnant, government debts are high and wealth is pooled into the hands of the very rich at the expense of others. This kind of near feudal state is apparently our lot in the long run. Considering the issue of capital consolidation alone and if one discounts the period for which there is really no data of sufficient quality (1750-1950)what one can see is that events (wars) and policy (fiscal initiatives) tend to dictate who gets what. To be clear, there is no inevitability for the continued unequal distribution of capital in the 21st Century.
The received wisdom (and government policies)for the last 25 years has been that growth can only generated by pandering to the greed of entrepreneurs – taxes on profits have been slashed, a blind eye has be turned to tax evasion, and wealth taxes have been ignored as countries compete to keep their investment dollars safe. This pandering to capital is the reason that the top 1% now own 35% of all wealth in the US and in the UK the top 1% own the same wealth as the bottom 55%! one might said that we have returned to la belle epoque!
|You can have it all - but at the expense of those who work for you!|
There is no doubt that there needs to be a redistribution of wealth from the owners of capital to those who provide the labour. Without this redistribution aggregate demand will fall, investment will dry up and stagnation may become the new reality. Turning the tide on Piketty’s nightmare vision of the future will require three components:
• Firstly, businesses taxes should be based not on profits (always easy to hide) but on sales and production. This approach combined with international efforts to raise taxes locally (where the business is transacted rather than where the business is domicile) will help enormously. Companies will have to pay higher rates of sales tax and pay higher rates of national insurance but no corporation tax. For example in the UK Amazon, Apple, Boots and Starbucks who avoid corporation tax in the UK would have to face higher rates of VAT on products they sell here and higher levels of National Insurance. This would also have the added benefit of leveling the competitive playing field making it easier for domestic businesses to compete with global rivals who avoid tax and use this advantage to buy market share.
• Second, we need encourage the wealthy to invest more productively rather than squirreling their wealth away in government bonds. This risk adverse investment approach has two impacts – it encourages Governments to run up big debts (they can always raise money at low rates) and takes productive capital out of the economy. The only way to achieve this is to have a more rigorous method of rating sovereign debt, with downgrade triggers invoked when indebtedness reaches certain levels. This would force governments to take their fiscal responsibly more seriously, reducing the size of the Sovereign bond market and driving capital into more productive investments.
• Thirdly, we need to take wages more seriously and encourage a high wage - high productivity economy. Minimum wages must be set at realistic levels that provide proper rewards for even to lowest paid. Without this where is the motivation to invest in productive technology? Also companies have a social duty to share profits sensible with employees and some employee ownership should be mandated – to recognise loyalty and contribution and this goes hand in hand to sensible company pension provisions. Companies who don't take their social responsibilities seriously should face one off fines to compensate their employees.
Employers will complain about the cost of doing business but there must be a re-balancing away from the owners of capital to those who do the hard work. Those on the far right will say that these measures amount to socialism that will drive business away from the UK - but this is nonsense! These changes could be implemented in a way that encourages business activity and to be clear there is no point in having a business friendly economy if all the rewards go to the business owners – business must provide a social good or it’s just a scam!