Monday, 4 August 2014

Forget the 1 per cent, it's the 0.1 per cent you need to keep your eye on

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.

Graph reproduced courtesy of the Equality Trust

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.