Fascinating piece by Jenni Russell in tonight’s Evening Standard, on the back of an extraordinary statement by the International Monetary Fund. After 60 years as the guardian of Un-compassionate Capitalism, the IMF has decided that inequality matters – not because it’s unfair, but because it actually damages the world economy. According to the IMF, inequality was a factor in causing the financial crash. Because most people haven’t got much better off over the last 30 years, they borrowed excessively to raise their living standards, while the filthy rich got filthier and much richer. The logic is remarkably appealing – the burgeoning wealth of a minority causes things like house prices to inflate beyond all realism, and everyone else borrows money (partly against their overvalued houses) to keep up.
Russell pulls out some terrifying stats about how economic growth has primarily benefited the rich since the 1970s. In America, 58% of all growth in income since 1976 has fallen to the top 1% of people – and the UK isn’t too far behind. That might sound a bit dry, but the implication is real: most people haven’t got very much better off for 35 years.
The reaction in the media, and among the public, has focused disproportionately on pay. Not just on bankers’ bonuses and chief executive salaries, but even on headmasters and council staff. In fact, most of the rise in inequality is down to markets and control of resources – it is about the distribution of wealth, not salaries. The fact that Fernando Torres now earns more each week than the average person might make in 10 years might seem grotesque, but there are millions of football fans (and at least one dodgy Russian billionaire) who’d pay a small fortune to see him play for their team.
Pay has played its part in the growth in inequality, but the serious stuff is about finance and the control of resources. It is no coincidence that the rise of inequality coincides relatively closely with the deregulation of financial markets. In today’s world, a man (and sadly it is still mostly men) can make a fortune without doing an honest day’s work in their lives. Financial services, international bond markets, foreign exchange markets and mergers and acquisitions all have their place in the economy (as the fundamentalists at the IEA will attest), but when people start doing this just to enrich themselves, they end up stifling innovation, destabilising the economy and making ordinary people pick up the pieces.
But if you think the solution to this lies in higher taxes, or tough action by the UK government, you’d be sadly mistaken. Today’s financial elites are incredibly mobile – and if they feel victimised in one country, they’ll move on. That’s a big part of the reason that successive governments have been so soft on the demonised bankers – hit them too hard and they’ll take their spending and taxes elsewhere. If you want to solve a big, global problem like inequality, you need to get the whole world signed up, to overhaul the rules of global capitalism. That is a colossal task – but if the IMF is on board, then anything must be possible.
