I’ve always been rather mistrustful of the Occupy movement’s
neat division between a 1 per cent prospering like there’s no tomorrow versus a
99 per cent struggling to make ends meet. There is, it seems obvious to me, a
large segment of society in western economies that is materially quite well off
and possessing a distinct wish for business as usual to prevail, rather than
hoping for radical change.
I still think that caveat is valid, but, on closer
reflection, maybe Occupy rather underestimated the problem. The real winners of
capitalism are not actually the 1 per cent, but those even higher up the income
ladder.
Consider, for example, this frankly mind-blowing graph from
the UK’s Equality Trust, showing
how income is distributed in Britain:
This graph requires, perhaps, some rubbing of the eyes, but
some pictures, as they say, are worth a thousand words. It shows two explosions
of income growth in the 0.1 per cent income bracket. Firstly, from an average
of around £460,000 in 1993 to £840,000 in 2000. And then, most breathtakingly,
from about £750,000 in 2000 to over £1.3 million in 2009. In the middle, there
is a dip around the time of the dotcom stock market crash, and, after 2009, the
real doozy economic crash kicks in and incomes fall to where they were in 2005
or 2006. The 1 per cent, meanwhile, saw a spurt of income from around £215,000
in 2003 to £315,000 in 2009. Nothing to be sniffed at but nowhere near as
spectacular as the wealth surges achieved by their 0.1 per cent cousins. The 1
per cent are not millionaires, unlike most of the British Cabinet, who are.
Nice work if you can get it, you might say. But these ‘earnings’
don’t, in the main, come from work. One of the insights you gain from ploughing
through Thomas Piketty’s Capital in the
21st Century is that income from capital only predominates over
income from labour when you get to the 0.1 per cent, or even higher (the graph
above, by the way, is put together using data from Piketty’s World Top
Incomes Database).
“The share of income from labour always decreases rapidly as
one moves progressively higher in the top decile [the top 10 per cent], and the
share of income from capital always rises sharply,” writes Piketty, “ … income
from capital assumes a decisive importance only in the top thousandth [the 0.1
per cent] or top ten thousandth [the top 0.01 per cent].”
What is income from capital? It is income that flows
automatically from the ownership of assets. It takes the form, Piketty tells
us, of “rents, dividends, interest, profits, capital gains, royalties and other
income that comes from merely owning capital in the form of land, real estate,
financial instruments, industrial equipment.” What has rather masked the giant
land grab of wealth that has been going on the last 15 years, is that
inequality of income from labour has also grown massively. Piketty documents
the rise of the ‘super-manager’, a phenomenon particularly pronounced in the
US, but one that has also happened, to a large extent, in Britain and France: corporate executives who earn millions and
whose huge incomes seem to bear no relation to either merit or productivity.
But concentration on this patent rubbishing of the meritocratic principles on
which the economy is alleged to rest, hides the even greater funnelling of
wealth into the hands of people who don’t even have to get out of bed to
receive it.
It is remarkable how successive UK governments have
obediently furthered the interests of the 0.1 per cent, people whose interests,
you might imagine, are not in desperate need of any furthering. The 0.1 per
cent income explosion, shown in the graph above, gives pre-tax income.
Meanwhile, the tax they pay on that income has been drastically cut. The top
rate lies at 45 per cent but was 83 per cent in the 1970s. Corporation tax, a
tax on the profits of the corporations the 0.1 per cent largely own, has been
reduced from 33 per cent in 1997 to 21 per cent, and will be shrunk further to
20 per cent in 2015. Capital gains tax, a tax of the profit you make from
selling masses of shares for example, was slashed from 40 to 18 per cent in
2007. And when the financial crisis arrived, the British government responded with
a £375 billion state subsidy programme, known as Quantitative Easing, which
raised the value of assets such as equities and bonds, by
a quarter.
Ignorance and confusion
With regard to inequality, Piketty has exposed “our
collective ignorance and confusion,” says Stephanie Flanders (ex-BBC economics
editor and now chief market strategist for JP Morgan Fleming), in a review of Capital in the 21st Century.
The confusion stems, in part, from the fact that the official measure of
inequality in the UK, the Gini Coefficient, reflects only mutedly, as the graph
below shows, the phenomenal income spurts of the 0.1 per cent.
Indeed, inequality fell somewhat in the immediate aftermath
of the financial crisis, as both the capital-dominated income of the 0.1 per
cent took a hit (cushioned to an enormous degree by government) and those
further down the income ladder weathered income declines. According the UK Office
for National Statistics, the top 20% (entry requirement £36,466 a year) of
households have seen their income drop by 5.2 per cent since 2007. Inequality
has been falling, paradoxically, while median incomes have endured
their longest period of contraction since the 19th century.
Inequality has just recently started
rising again, by the way, as the torrent of misery inflicted by the
government on those at the bottom of the income pyramid, begins to show up in
statistics.
What will happen in future to the incomes of the 0.1 per
cent? If economic growth is slow but uninterrupted, their income will resume
its spectacular rise. If, however, further shocks are in store, as seems
likely, it may well be that their wealth will be hit again. And government may
not have the resources to step in to save them.
The patrimonial middle class
I referred to an important caveat at the start of the post
and, if you read Piketty, you get an idea of why Occupy’s 1 per cent/99 per
cent division is both an underestimate and, at the same time, a simplification
of the situation. When you look at the rise of the 0.1 per cent, especially in
the context of real wage decline, it’s tempting to assume huge swathes of
society have been locked out of prosperity. But that is not the case. Go back a
hundred years, says Piketty, and you can see vastly greater concentrations of
income and wealth. Then in Europe, the top 10 per cent owned virtually
everything and the bottom 90 per cent were frozen out. This was a time of the
phenomenal growth of Marxist and syndicalist workers’ movements, which was no
accident.
Since that time, says Piketty, we have seen the emergence of
what he calls the “patrimonial [property-owning] middle class”. Though wealth
is still extremely concentrated, this middle class, estimated by Piketty at 40
per cent of the population, has appropriated an important share of wealth. “Tens
of millions of individuals – 40 per cent of the population represents a large
group, intermediate between rich and poor – individually own property worth
hundreds of thousands of euros and collectively lay claim to one-quarter to
one-third of national wealth: this is a change of some moment,” he writes.
Piketty describes the emergence of this middle class as
“fragile” and it seems we are witnessing the end of the affair, as, for
example, the proportion of those renting their homes increases and those with
mortgages declines. But it will take a long time to unravel and, at present, different
parts of society seem to inhabit separate universes. And the universe of the
0.1 per cent is the most hidden of all.
Piketty’s telescope on that universe indicates the supreme
importance of income from capital. As awareness of the scope of inequality has
grown, interest in alternatives such as the Mondragon collective of
worker-controlled cooperatives in Spain, has risen. Mondragon has an income
ratio of 6 to 1, in contrast to the income ratios of 300 to 1 present in many
corporations, it is pointed out, approvingly. But the important characteristic
of Mondragon is not just its much lower income gap, but the fact that income
from capital, the income gleaned from profits, goes to all members of the
co-operative, and is not syphoned off by a tiny elite. So much flows from the
ownership of capital.
