Having been born in the Netherlands and having a Dutch mother with a strong social conscience, I was taught that inequality presented a powerful moral challenge. Fairness was deeply ingrained in the Dutch who have created one of the world’s more egalitarian societies. It is not surprising therefore that the desire to tackle economic inequality has been a recurrent and profound motivation in my life. I have observed first hand the impact economic inequality has on so much of what is going wrong in our society. I fear that if we want to have peaceful co-existence between societies on this globe in the age of digital communication those forced to live impoverished lives are likely to become both rebellious and hostile.
The English writer Will Hutton’s latest book makes a direct attack on our “moral deficit of integrity” which is so linked to inequality: “The cancer of inequality produces results that are catastrophic. Trust evaporates. There is no sense of common purpose. Creative social, economic and political interaction and deliberation becomes impossible.”1
The manifest unfairness of the growing socioeconomic divide in such wealthy nations as the US and the UK presents a moral challenge to all of us as human beings. There is general agreement that economic equality cannot be granted, as human rights are, without seriously infringing on the rights of others. Any attempt to impose a utopian economic equality is rejected by economists because this would always entail totalitarian tyranny. Equality of opportunity, however, is naturally accepted as a desirable goal in order to prevent the extremes of individual frustration as well as the multiple perils of social disaffection.
A generation ago the outspoken sociologist Ralf Dahrendorf declared that: “A society which claims to be civil but tolerates the exclusion of significant numbers from its opportunities, has betrayed the values on which it is based. The citizens of such a society cannot be surprised if its values are flaunted not just by excluding themselves but by anyone one who sees what is going on, and notably the young… The combination of greedy individualism and new exclusion is a high price to pay for macroeconomic success in a free society.”2
Inequality has been a persistent plague to man starting with the Old Testament and the early Greek City States. The rich, who generally lived off the rental income of their lands as well as from commerce, were pressured to return some of their wealth by catering to the needs of their fellow citizens in the crowded cities. The services they provided in Athens included paying for food supplies, gymnasia, public baths, theaters and festivals. The reputation of the wealthy depended on the quality of the distractions they provided and were commemorated with the inscriptions on statues and monuments which we can still read today. This is a far cry from what billionaires like Charles Koch in the US or the Barclay brothers in the UK provide for their fellow citizens in our times.
The capitalist world as presently constructed is a monument to inequality: Those who live in the favelas of Rio or the gigantic slums of Lagos do not inhabit the same world as those living in the urban centers of the advanced nations. Despite the fact that there is more than enough food to feed every human being, the World Food Program estimates that 800 million people barely have enough food to survive. At the same time some five dozen billionaires possess as much wealth as the poorest of the planet’s 3.5 billion people. This is because the laissez-faire market, which rules capitalism, depends on unequal rewards and privileges inherent in the competitive race for ever greater profits.
Enhanced by the new technologies, which generally make it easier to substitute machines for human efforts, the inequalities of income have risen substantially over the past four decades in both the US and Europe. The global expansion of trade, deregulation, capital flows, and freer markets have also served to narrow the income gaps between nations while widening them inside the economically advanced nations. The introduction into the global economy of more than 1.6 billion workers in China, India and the emerging nations, while improving the lives of those who had been blighted by desperate poverty, inevitably lowered the demand for unskilled or untrained labor in both America and Europe. The extraordinary pace of innovation has left many of the younger generation, as well as those who had worked in the crumbling manufacturing industries, jobless.
Because economic inequality can be measured in many ways, such as by income, consumption, wealth, or distribution, different strategies have emerged on how to combat it. The best information we have on the highest incomes apparently comes from tax returns. The income gap between men and women as well as between races have narrowed over the past three decades even as inequality between individuals has risen. The intensive research by the French economist and scholar, Thomas Piketty, last year revealed the extent to which birth mattered more than talent or effort. “The risk of a drift toward oligarchy is real and gives little reason for optimism,” he warned.3
Wealth inequality, Piketty pointed out, rises exponentially on the returns on capital and exceeds those of both wages and output. This partially accounts for why the UK and the US have had such dramatic increases in wealth inequality while at the global level — driven by India and China — they have fallen. At the same time, Piketty points out that we have entered the era of the “conspicuous reward” in the form not only of pay but of bonuses, shares and options. While the growth of productivity in corporations may be marginal, the managers ensure that the gains go to profits which assure the price rises of shares along with executive remuneration rather than rewarding the work force.
The current extravagant corporate pay rises are described by Piketty as “meritocratic extremism.” Instead of performance, “super-salaries” are determined by social and psychological status. Remuneration committees in the pyramids of corporate structures engage in pay races to make certain that their top executives are close to the Mt.Everests of pay.
Piketty is certainly keener on wealth redistribution than his critics at the Economist who totally dismiss his proposal for a global tax on wealth. The writer/editors at this magazine underwrite the proposition that “Some inequality is needed to propel growth… without the carrot of large financial rewards, risky entrepreneurship and innovation would grind to a halt.”4 The IMF (International Monetary Fund), on the other hand, after prolonged studies suggested that income inequality slows growth, causes financial crises and weakens demand. It also causes the increase of social tensions between those starting out on their own (the 18-25 age group) and those who are retiring on pensions.
Americans have been the great promoters of the collective dream of upward mobility and economic opportunity. In the 19th and 20th centuries it was believed that if you worked hard and played by the rules you would advance. The “rags to riches” myth was used to legitimize any existing inequalities. It also served to give illusory hope to the aspirational while assuaging the guilt of the privileged. The mainstream consensus also was that a growing economy “raises all boats,” while the “trickle down” theory of economics, much favored by President Ronald Reagan, has since been shown to be a fraud. The wealth of the very rich has grown immensely in the past two decades while the income of the lowest has hardly budged. Today there is little chance of mobility for those who work on low wages. The dream of the rich, however, is burning brightly because of their low rates of taxation, exemptions and the light regulatory touch on business. They are likely to get even richer. The myths and belief systems that sacrificed jobs and productive assets on the altar of politically protected deal-making created the debt bubble of 2007-8 and the subsequent chronic instabilities.
Americans tend to be less egalitarian than Europeans. They regard the gaps between top and bottom in the US as acceptable. Americans, as well as Chinese and Indians, tend to put more emphasis on the equality of opportunity. They believe that such income gaps can be fair if workers can move up the economic and social ladders. It is consequently fascinating that while Britain and the US have the longest working hours (and the least vacations and holidays) they also have highest inequality ratings. Nor do the number of working hours necessarily make them better off. For example, the Dutch earned an average of $42,000 per capita while working 1,400 hours a year while the British earned $36,000 by working 1,650 hours annually according to the OECD (The Organisation for Economic Co-operation and Development).
While an equality of income could never be feasible nor even desirable, the remuneration of the top corporate earners in the US and the UK has been entering dangerous territory. Larry Ellison at Oracle and Les Moonves of CBS each earned $67 million in 2013 while David Zaslav of Discovery received a staggering $156 million. The wealthy executives asked “Why should we be paid less than those who kick a ball or sing catchy tunes?”5 I write “dangerous territory” because the electorates are becoming uneasy that the soaring incomes of those at the top are achieved by cutting the wages and benefits of those at the bottom. Are there not figures beyond which a maximum pay differential is unacceptable? The differentials in national governments are far more strictly controlled: In the UK the pay differential between the heads of government departments and the lowest paid is about 12 times, in France it is about 15 times, and in the US the differential of federal employees seldom passes 16.
Billionaires in the US buy enormous political influence not only through their campaign contributions, but through their tax-exempt think tanks and captive media outlets. The steady deregulation of the financial markets are the clear result of money politics. The corporations which the wealthy control demand that workers make wage concessions while Washington makes tax concessions in what ultimately becomes a race to the bottom. The wealthy have used their political power to slash social programs in order to cut budget deficits. The result is that in the US one in four children lives in poverty while the richest get billions of dollars in mortgage interest deductions on their large houses.
In the US, the one percent of the wealthiest are far more politically engaged than the rest of the population in making campaign contributions and in contacting and influencing members of Congress who may help in preserving their wealth. The Republican party favors the economic interests of the rich by giving them preferential treatment on capital gains over wages and salaries. Coupon clippers and heirs to large estates call the tunes in what is becoming patrimonial capitalism. 6 Some of their spokespersons, like Rep. Paul Ryan, call for the elimination of tax on dividends, capital gains, interest and estates. Those living off inherited wealth would pay no taxes at all!
The advanced nations of the world have built capitalist societies which encourage the greed, competition and envy upon which inequality flourishes. Critics like Aldous Huxley and Owen Jones have pointed out that if we can build societies based on such negatives, we could also build one based on cooperation, solidarity, and compassion which would encourage greater economic equality. Huxley, writing in the late 1930s, declared that “The most propitious environment for equality is constituted by a society where the means of production are owned cooperatively, where power is decentralized, and where the community is organized, as far as may be, in a multiplicity of small, inter-related self-governing groups of mutually responsible men and women.”7 Historically, the income of those working in co-operatives has differed far less than those working for corporations. Shareholder groups with limited liabilities are in marked competition with one another in attracting the brightest and best. This creates a demand for executives which can only be filled by paying the highest salaries.8 The resulting inequalities are inevitable. I have repeatedly called for the transformation of corporations into self-managed cooperatives, but the laws in both the US and UK continue to favor corporations and discourage cooperatives at every turn. Neither country has a cooperative the size of Mondragon in Spain which employs some 75,000 workers world-wide and has annual sales of around $13 billion.
Death duties and taxation have been the principal ways in which the redistribution of wealth has been made by nation states. The Economist, which is editorially opposed to limitations on wealth, suggests that “taxes on the wealthiest should be phased in slowly so that they can liquidate assets rather than cut spending.”9 Piketty has suggested a wealth tax of 1 per cent for people who have between $1 million and $5million in real-estate, shares, bonds, art treasures etc., 2 per cent for those holding more than $5 million and 10 percent per year for whose with fortunes of more than a billion dollars. However, Piketty admits there is no likely way such a wealth tax could be imposed by our existing political structures. Robert Solow, the Nobel laureate in economics from MIT is likewise highly pessimistic about the capacity of American politicians to redistribute income in the near future.
I ask: is it not time for new paradigms when it comes to economic inequalities such as austerity measures on the poor, the growing oligarchy, electoral funding and lobbying by the rich, and corporate tax avoidance? Governments could narrow inequality by attacking crony capitalism, supporting and developing more solid safety nets for the poor, investing intensely in the education of the young from the ages of 3 to 21, strengthening rather than weakening the bargaining power of the labor unions, and curbing the excessive privileges and power of corporations. All governments could begin by taxing capital gains at the same rate as wage earners and holding all the multinational banks and corporations responsible and accountable to international laws and taxation. The use of exotic financial instruments now spreading via the internet should be brought under international controls and inspection. Mega-institutions should be broken up into smaller units so that none should be regarded as “too big to fail.” Regrettably, the US tax system has become riddled with loopholes and deductions. This must end. The list of ways inequality could be reduced could go on for pages, but finally imposing effective reforms would mean giving more people (and that means nearly all of us) new vistas of opportunity. Campaigning for such essential changes cannot wait. It must begin now.
1Will Hutton, How Good We Can Be, (2015)
2Ralf Dahrendorf, The Churchill Lecture, November 22, 1995
3Thomas Piketty, Capital in the 21st Century, (2014)
4“Inequality v growth,” The Economist, March 1, 2014, p.80
5Michael Skapinker, “The battle to align risks and rewards,” The Financial Times May 1, 2015
6Eduardo Porter, “Inequality feels wrong…”The New York Times, March 27, 2014
7Aldous Huxley, Ends and Means, (1938) p.169
8see: Yorick Blumenfeld, Dollars or Democracy, (2004)
9The Economist, April 11, 2015, p.75