TRAGEDY OF RICHES

Dr Stephen Barber

Putting the Downturn into Perspective

TRAGEDY OF RICHES

• Credit Crunch is having profound impact on attitudes

• Entered a new era where we vilify those who we see as ‘the rich’

• Implications for longer-term policy

TRAGEDY OF RICHES

• Despite our great advantages, something is not quite right

• Politics is incapable of articulating a purpose to our riches leading to ‘the blame game’

• The problem is not our economics but our politics

TRAGEDY OF RICHES

‘Crony Capitalism’

‘Good Capitalism and Bad Capitalism’

‘ Can’t Have Something for Nothing!’

ANTI-RICH RHETORIC

Business leaders are ‘filling their boots’, ‘second rate

executives’ are ‘ripping off shareholders’. It’s time to

throw out ‘crony capitalism’

TRAGEDY OF RICHES

Vilification of a few rich men

Change of the times - Hester’s bonus was

twice the size last year

TRAGEDY OF RICHES

Is Britain Still Open for Business?

In 1989 11% of Sunday Times Rich List were from

overseas...

...by 2011, 16 of top 20 are migrants

TRAGEDY OF RICHES

• Central to elections across Europe – especially in France and Greece

TRAGEDY OF RICHES

Become a feature of the US elections

Electoral lifeline for Obama

But we are all rich!

OUR BUBBLE OF PROSPERITY

OUR BUBBLE OF PROSPERITY

• 2009 GDP per capita (Purchasing Power Parity)

– The European Union today (enlarged to include the poorer nations of

the East) had of a little under 30,000 International Dollars

– The more exclusive G7 at almost $39,000

– Sub-Saharan Africa by contrast reaches little over $2,000

• There are 1bn ‘hungry’ people in the world

• Early 19th century average incomes in Europe and Africa broadly the same,

as was life expectancy (about 40).

OUR BUBBLE OF PROSPERITY

But how rich are we?

HOW RICH ARE WE?

• A person with $20,000 post-tax income per year is in the world’s

wealthiest 4.6%

• $38,500 after tax, gets you into the top 1%

• In the USA 85% of the wealth is controlled by the richest 20% of the

population; the richest 1% of Americans own almost 35%

• Fidelity’s 2011 survey of those with investable assets of at least $1 million

(average $3.5 million).

– 42% said that they did not feel wealthy. To ‘feel rich’ respondents

needed at least $7.5 million!‘Wealth relativity’

HOW RICH ARE WE?

• Politics of greed, politics of envy

and now politics of hypocrisy

• We want someone to blame and

we do not want to take individual

responsibility

• We have all benefitted from the

bubble of prosperity

WHO PAYS?

• Company bosses saw a 10% pay increase in 2010 and a 17% increase in 2011

• In contrast, 99% of workers received pay deals worth less than the rate of inflation

• But are we dependent on the rich?

– The richest 1% of Britons earn 13% of

salaries but contribute 28% of tax

collected

WHO PAYS?

ECONOMIC STRENGTH

• 2009 London G20 meeting injected $1.1 trillion into

the global economy

• $8.42 trillion promised in bank bailouts enough to

end extreme poverty for 50 years according to Oxfam

• Contrast in global wealth

• Who is the 1% here?

TRANSLATION INTO POLICY

“The recovery plan and the financial stability plan are the immediate

steps we're taking to revive our economy in the short-term. But

the only way to fully restore America's economic strength is to

make the long-term investments that will lead to new jobs, new

industries, and a renewed ability to compete with the rest of the

world.”

Barack Obama addressing Congress 25/2/09

UNSUSTAINABLE CHEAT

• We demand conflicting policies from our politicians and punish those who do not deliver the impossible

• Collusion between voter and politicians which pretends we can have it all our own way

• Democracy is not widely valued and we tend to vote on bread and butter issues

• Post Ideological politics

POLICY BECOMES DIFFICULT

• Post Ideological politics

– Greater agreement but less consensus

– The easy decisions have been made

– Party politics makes difficult decisions harder because opposition is not made on ideological grounds

– Beauty contest

HARDSHIP & REJUVINATION

• It turns out the financial crisis was not a watershed

moment in policymaking terms

• We determined not to do anything substantially different

• Today’s backlash is against a perceived unfairness in our

economic system not a perceived political dysfunctionality

• But there are changes...

• Plan to eradicate the deficit during the Parliament – even more

ambitious than Darling’s Fiscal Responsibility Act

• Calls for a ‘Balanced Budget Amendment’ in the USA

• EU Fiscal Union will require Euro members to live within their

means, controlled from Brussels regardless of the ballot box

• Medium term trend away from debt financed spending

SOUND MONEY

SOUND MONEY

• But democracy makes it difficult for politicians to take the ‘difficult decisions’

RETREAT OF THE STATE

• As public spending is tighter, the state tries to do less

• New blurring between public/third/private sectors

• Talks localism but retains centralist instincts

• Also looks to the supply side to stimulate growth – cutting

taxes, regulations, etc.

• Infrastructure spending from international sovereign wealth.

COMPETITION STATES

“If you look at the troubles which happened in European countries, this is purely because of

the accumulated troubles of the worn out welfare society. I think the labour laws are

outdated. The labour laws induce sloth, indolence, rather than hardworking.”

Jin Liqun, supervising chairman of [Communist] China’s $400 billion sovereign wealth fund, 8/11/11

ECONOMIC FOCUS

• Few judged the peak of the last period of expansion to be a

‘boom’

• This was because inflation remained low, interest rates low

and growth steady

• Idea of stable economy and industrial policy emerging –

monetarist idea of controlling inflation, insufficient?

ATTITUDES

• We have become hostile to ‘the rich’ • We have become hostile to those on welfare• We are suspicious of ‘well paid’ public

servants and are more critical of spending• We approve cuts except where they affect us• Essentially we want someone to blame

END OF BUBBLES?

29

Pre-banking crisis housing bubble

Technology bubble

1920s equity bubble

17th century tulip bubble

BUBBLES

‘Someday, no one can tell when, there will be another speculative climax and crash. There is no chance

that, as the market moves to the brink, those involved will see the nature of the illusion and so protect themselves and the system. The mad can

communicate their madness; they cannot perceive it and resolve to be sane.’

J.K. Galbraith(1961, writing of the 1929 Crash)

30

POLICY FOCUS

• Policy makers focus on the economic system –

and ‘populist’ at that...

– Banking regulation

– Executive pay

– Welfare reform

• The 99%ers think they have

achieved this

WHAT IT WILL MEAN

• Small amount of legislative change and

shareholder power

• Conflicting pressure to reduce workplace

regulations and employee protections

• Interesting emerging debate about earnings

from work being taxed lower than earnings

from wealth

• Great opportunity for political argument

MEANWHILE

• Politics is not engaging...

Labour Conservative Lib Dem Couldn't be bothered0%

10%

20%

30%

40%

50%

60%

70%

80%

Series1

UK Local Elections 2012

POLICY NEEDS

• Our politics needs renewing not our

economics

• There are limits to the abilities of the state as

politics ‘becomes difficult’

• Politics has to become much more a multi-

directional process; less about party

advantage and more about ideas.

“What can’t go on forever, won’t.”Herb Stein