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Tuesday, January 24, 2006

Politics of Envy = Actual Existing Capitalism Is Crap

Do you remember the damning with faint praise Marxism suffered not so long ago? "It works well in theory, but it doesn't in practice, does it?" Where on earth does that leave Actual Existing Capitalism? (I remember a study of the American Economic Review fromabout 15 years back which found that 54% of the articles pulblished in it contained NO empirical material from the real world.) Now for some stuff with empirical data from the "real world". A couple of them are a bit old, but I was waiting for the right moment to produce them (a bit like one-liner put-downs: you shouldn't squander them in the heat of the moment).

A nation of Bransons? That's rich
Heather Stewart, The Observer, Sunday August 28, 2005

From the beaches of Barbados to the hills of Provence, New Labour's finest have presumably spent their summer doing what most of us do on holiday: pondering their purpose in life.

A little-noticed publication from the Office for National Statistics last week could have provided them with helpful food for thought. In 'Focus on inequality', the ONS published a new set of graphs which illustrated powerfully some pretty shocking facts about the shape of Britain since Labour came to power.

Here's one: the absolute cash gap between rich and poor has widened since 1997. If you are in the bottom 10 per cent of earners, your weekly wage will have gone up by an average of £28 since 1997. If you are in the top 10 per cent, you'll have enjoyed a £119 a week rise. The gap is no longer widening in percentage terms, as it did very rapidly in the 1980s, and government officials suggested last week that this in itself was a triumph. Yet inequality seems stubbornly to have failed to reduce.
Maybe that doesn't matter. Equality sounds like an old-fashioned, old Labour value rooted in the 'politics of envy' and carries with it a dark threat that Britain's cherished entrepreneurs - the Alan Sugars and Richard Bransons - should be cut down to size.

When John Sunderland, the Confederation of British Industry's president, told Gordon Brown at the CBI annual dinner, 'Don't give the goose that lays the golden egg a hysterectomy', he wasn't only crying out for a new speechwriter. He was rehearsing an appealing argument: if you clobber success, people will not strive, will not create jobs, will not contribute to society.

There is no doubt some truth in that. But whether income inequality matters depends on how serious are its consequences. And a government-sponsored report published by the Department of Health this month demonstrated that the ramifications of the gap between rich and poor ripple far beyond the champagne bars of the City.

Experts monitoring the 'health inequalities' which Labour has pledged to tackle, found that the difference in life expectancy between the richest and the poorest in society has continued to grow since 1997.

The report did place its findings in a positive context: health outcomes have improved dramatically across the income scale over the past century, and for some killers, such as cancer and respiratory disease, great strides have been made in narrowing the gap between the outcomes for different income groups.

But the fact is, if you're poorer, you die younger - and that's more true now than it was in 1997. You are also more likely to lose your baby in childbirth or in its early years if you're in the lower income groups: and again, the gap has widened. In 1997, infant mortality rates were 13 per cent higher for the poorest groups than for the average of the population as a whole; by 2003, the difference was 19 per cent.

These bare facts alone read as an indictment of a progressive government in its third term, but what matters much more than the size of the divide between rich and poor is how difficult it is to clamber up - or fall down - from one group to another. If everyone who reaches the top of the pile is a striver, making the best of their native talents to work their way to success and reap the rewards, perhaps we could see them as the 'deserving rich'. Perhaps we might not even begrudge them a few extra years on the planet, to 'lay the golden egg' for everyone else.

Yet on many measures, social mobility - the opportunity to climb out of the social group you are born into - has actually declined. Research sponsored by the educational charity the Sutton Trust found earlier this year that children from affluent homes have benefited most from the rapid expansion in university places over the past 15 years.

Since the mid-1980s, the proportion of children from the richest fifth of households collecting degrees has more than doubled, from 20 to 47 per cent; while in the poorest fifth of households, just 9 per cent of children now graduate, up from 6 per cent.

And as another ONS chart made clear last week, education is still the key to earning power: graduates earned an average of £632 a week in 2003, while people without a degree but with a clutch of GCSE passes grossed £350.

Britain also scores badly on social mobility compared with other countries. Only Americans face more barriers to breaking away from their family backgrounds, says the Sutton Trust research. In the US things are improving, but on this side of the Atlantic the chances of someone from the bottom of the social pile reaching the top, is actually lower now than it was in the 1950s. The Bransons and the Sugars are very much the exception rather than the rule.

Unfashionable though it is, it's hard not to stray into the realm of class here. After all, the evidence suggests that although the landed gentry are mostly long gone, and today's inequalities are dwarfed by those of Dickensian England, the son of a merchant banker still has radically different prospects to the son of a carpet fitter. Today's class structure is different from that of 50 or 100 years ago, but it still sets expectations, limits life chances, and at worst, shortens life expectancy.

There are two routes a government which cares about these issues can take. One is simply to attack the bare inequalities themselves, through redistribution. Labour has been brave enough to undertake some of this, in a relatively quiet way. The Chancellor's byzantine and much-criticised system of tax credits has been critical in helping to boost the post-tax incomes of the poorest in society, and in particular, in helping to tackle poverty among children and pensioners. The Health Inequalities report singled out the child poverty efforts as helpful in improving health outcomes for the poorest people.

But the second and more politically palatable route is public service reform - fighting to eliminate differences in the quality of healthcare received by rich and poor, and rebuilding the education system to open up opportunities for bright children from all social groups.

This is ostensibly what Labour has been doing for the past eight years, and there have been some notable successes. But too often Labour's approach seems to be rooted more in dinner-party conversations among the middle class (there's that word again), than in a principled attack on the unfair advantages of children born with a silver spoon in their mouths.

The Department of Health's response to the report on inequalities was a characteristic piece of new Labour fiddling: they promised to send 'health trainers' to some of Britain's most deprived areas, presumably to walk around saying 'put that fag out,' or 'you don't want chips with that, you want a nice salad'. Perhaps they'll send Patricia Hewitt, the Health Secretary.

Probably we should not be terribly shocked that in a fast-growing, successful economy, there are some people doing extremely well, and others who have fallen behind, But when the rich can buy their children a place on the gravy train, and even buy themselves a few more years of life - and that is now more, not less, true than when Labour came to power - the leaders of a government that calls itself progressive deserve to be having serious existential crises on their sun loungers.

Perhaps I'm being cynical, but however bad the country and its people are doing, the pointlessly rich seem to do very well.

The next piece is by Jonathan Freedland, someone I don't always (ok, very rarely) agree with, but is someone who can write in a very clear manner. If only everyone else on "the left" could write in the same way as he does. When I had my Ph.D viva my external examiner said that I wrote "like someone talking in a pub". If I had a well rehearsed one-liner ready (and didn't have my thesis on the line) I should have replied "And your point is?". When I told my Ph.D supervisor he commented that "He should know". Anyway, enough academic bitchiness! Here's Mr. F...

It may be beyond passé - but we'll have to do something about the rich
The gap between extraordinary wealth and desperate poverty is growing steadily wider in Tony Blair's Britain
Jonathan Freedland, The Guardian, Wednesday November 23, 2005

If you want to be deeply unfashionable, just read on. If you want to enter terrain so wildly out of date that mere mention of it has become taboo, then you've come to the right place. Brace yourself. Late last month two bankers strode into Umbaba, one of London's most modish watering holes, and asked the bartender to fix them a drink. Not any drink, you understand, but the most expensive cocktail he could concoct. He set to work, blending a Richard Hennessy cognac that sells at £3,000 a bottle, Dom Perignon champagne, fresh lemongrass and lychees - all topped off with an extract of yohimbe bark, a West African import said to possess aphrodisiac powers. He called it the Magie Noir - and he charged £333 a glass. The bankers ordered two rounds for their table of eight. Their final bill for the night: £15,000.

Those same men, or their colleagues, may well have invested £200,000 in a Bentley or Aston Martin, or they might have paid celebrity hairdresser Nicky Clarke £500 for what the salon describes as an "aspirational haircut". They are the customers sought by the London estate agent who offers a three-bedroom flat in Kensington as a "starter home" for £2.25m. They are the target reader of the newly launched Trader magazine, with its ads for private jets or five-storey yachts (complete with submarine).

This is the world of the super-rich, financiers pulling in salaries and bonuses in the millions, and sometimes tens of millions, of dollars. They are partners in hedge funds and private-equity firms - buying, selling and gambling in jobs that most mortals barely comprehend. They spend money on vast estates or wild fancies. Sometimes the splashing out is literal: a favourite pastime is spraying champagne in the manner of a formula one winner. (In August one London banker fizzed away £41,000.)

Nothing new in all this, you might say. The rich, like the poor, are always with us. But that would be wrong. Robert Peston, City editor of the Sunday Telegraph, estimates that this year no more than 200 to 300 hedge-fund managers will carve up $4.2bn of pure profit between them. These sorts of payouts are on a scale unimaginable in the past, at least outside the handful of individuals who either invented a new product or owned a tangible resource: Bransons or Rockefellers. That they should come, as regular as a salary, to those who, by their own admission, create nothing is a new development. (And buying up once-public companies in their entirety is essentially a new field.)

It is the sharpest edge of a striking trend, one that shows the truth behind that lefty slogan about the rich getting richer. When Margaret Thatcher came to power in 1979, just under 6% of national income went to the top 1%. That figure stood at 9% a decade later, but under Tony Blair it has risen to at least 13%: a tiny group taking nearly an eighth of our collective wealth.

Does it matter? Some will insist not; only envy could make us begrudge a young man spending five figures on a drinks bill. As long as we're getting by, who cares if Joe Banker can buy a Ferrari the way the rest of us buy a pint of milk? In the years after Thatcherism and the fall of the Soviet Union, we're meant to have moved on from such concerns. Only the tragically retro, those trapped in a Scargillite time warp wearing a Citizen Smith beret, still care about such things. When the prime minister was asked in 2001 whether it was possible for anyone to earn too much money, he caught the spirit of the age when he replied, "Not really, no. Why does that matter?"

I know it's frightfully old-fashioned, but I beg to differ. For the story about the £333 cocktails emerged in the same week as Shelter reported that children were being forced to sleep in kitchens, dining rooms and hallways because of cramped housing affecting 500,000 families in England alone. Of these, three in four said that the lack of space was damaging their children's education or development; many spoke of depression and anxiety. And the scale of the problem has remained unchanged since 1997.

To my mind, there is something deeply wrong here. If one man can spend £15,000 plying his pals with a syrupy cocktail, while another lays out blankets for his child to sleep in the kitchen then we know the system is broken. This is not some narrow criticism of the Labour government, but rather a challenge to our assumption that we are a civilised society at all.

For we imagine such gross inequalities to come tinged in sepia. They belong to the Dickensian dark ages, a cruelty so distant we render it now only as nostalgic entertainment: Oliver Twist at the cinema, Scrooge on the West End stage.

But the truth is that the injustice of extraordinary wealth alongside desperate poverty is no museum piece. It is alive and present in 21st century Britain.

The United States got there first, of course. US economists and others have long been worried that their society is returning to the Great Gatsby days of the 1920s: they note that great mansions converted to public use, as nurses' homes and the like, after 1945, are now reverting to private residences once more, as if the pre-1929 plutocrats are back. You can see the same process in Notting Hill in west London: huge structures that would have contained 10 flats a decade ago restored to the single homes of the Victorian age.

It's not just lefty whingers, consumed with class envy, who are noticing all this. Leo Hindery, the multimillionaire chairman of HL Capital, told the BBC last year: "You're setting up a class system the likes of which we've never seen in the world. The most obvious precedent is the French revolution, where the gap between the extremely wealthy and the middle class grew to be so acute that social unrest ensued."

He may be on to something. Experts have long known that relative inequality, not just poverty, adversely affects the health of those at the bottom: by seeing those so much better-off than themselves, people feel excluded, even blaming themselves for failure. Others wonder about the prospects for social mobility when those at the bottom cannot even see the top. The evidence also shows that the spending habits of the super-rich trickle down, so that those with little money feel pressured to spend cash they don't have (a phenomenon reinforced by the Posh'n'Becks celebrity culture of constant, conspicuous consumption).

Talk to anyone in politics about this and they will look at you blankly: this is the deadest of dead letters. Labour won't touch it for fear of seeming like anti-wealth, socialist dinosaurs. Few yearn for a Maoist-style cap on salaries, but there are other options. One would be for everybody who has a pension to realise that they are, through their pension funds, shareholders in big companies - and can therefore demand a change in the behaviour that currently sends cash flowing into the pockets of the Magie-Noir-swilling classes.

Another would be to raise the basic rate of tax on the very rich: not to the 80% or 90% that scared the Rolling Stones and their ilk abroad in the 1970s, but perhaps to 50%. If Labour can't stomach that, it could simply crack down on tax evasion: some of the very richest of the super-rich don't pay a bean in tax.

Above all, we need to start talking about it. Like wearing flares or tight tank tops, people will mock at first. But this issue's coming back - just watch.

I don't envy (honest!) people who earn huge heaps of money. However, as with a certain male appendage, it is not so much you have, but what you do with it. Whatever happened to noblesse oblige? You can't help where you were born in society and how you were brought up but if you act as if you apart from society don't winge if society gets on your back.

It also helps if society thinks you've earned it. That's why I don't think most people have a gripe about decent sportspeople, artists, writers, musicians & actors making a fair bit of dosh, particularly as most sportspeople & pop/rock musicians have only a limited shelflife, and others ie actors can have up and down careers. However, it is a different kettle of fish with mediocre middle (and more than middle) management, satirised in the Dilbert cartoon strips. What on earth do many of them do? You ask them!

Nice work if you can get it: chief executives quietly enrich themselves for mediocrity: The days of management and staff sharing benefits and sacrifices are behind us
Larry Elliott, economics editor, The Guardian, Monday January 23, 2006

Cast your mind back a quarter of a century or so. It's early 1979, the Winter of Discontent, the country is paralysed by strikes and Mrs Thatcher is just around the corner. Britain has the reputation as the sick man of Europe.

In those days, the chaps facing the unenviable challenge of running the UK's top firms earned a decent wedge - around £200,000 in today's money. Enough for a top of the range Jag and a family runabout, a house in the stockbroker belt with a decent bit of a garden, a couple of family holidays a year, and a bit left over for a savings plan. No question, the boys in the boardroom were doing all right for themselves: they earned slightly less than 10 times as much as the average worker on the shop floor.

Now scroll forward into the new millennium. It's 2002, five years into the Blair premiership and the global economy - in the aftermath of the dotcom collapse and the terrorist attacks on 9/11. Britain is no longer the sick man of Europe, but seen as a paragon of virtue by the custodians of global economic rectitude - the International Monetary Fund and the Organisation for Economic Cooperation and Development.

Wages for those on the shopfloor have gone up but, once inflation has been taken into account, not by a lot. By contrast, the package (which is what it is called these days) for the chief executive has become a lot more generous. Instead of earning a little more than £200,000, the boss of a FTSE 100 company can expect to make about £1.4m a year - 54 times as much as the typical worker. That's enough not just for the home in the stockbroker belt, but a place in the Cotswolds and a weekend retreat in France as well. A couple of Porsches, a BMW and a sporty little Golf for the kids litter the drive and there's a yacht moored on the River Blackwater.

It has to be said that when the crème de la crème of British business shows up at the World Economic Forum in Davos this week they will still be put in the shade by their American counterparts. The annual WEF talkfest in the Swiss Alps is a chance for the great and good of the corporate sector to compare notes. When it comes to comparing notes about executive remuneration there's nothing to touch Uncle Sam. Back in 1980, the ratio of CEO to worker pay in the US was the same as in Britain at the start of the 21st century: 50 to 1. By the end of the boom in the 1990s, it stood at 525 to 1, before falling to 281 to 1 in 2002 following the collapse in share prices.

Politics of envy

At the end of the 1970s, the idea that a chief executive in Britain would be earning 54 times as much as one of his workers would have been pretty-much unthinkable, Indeed, the Keynesian post-war settlement had been based on the idea that management and workforce should share the benefits of the good times and both make sacrifices in the bad times. The Thatcher-Reagan revolution put paid to such quaint notions.

The new thinking was that industry needed a spring-clean by a new breed of managers who would improve efficiency, boost sales, raise profits and boost shareholder value. And if these new corporate titans saw their pay go through the roof, so what? These guys were at the cutting edge; they were transforming dysfunctional economies and were worth every penny they got. Such was the philosophy that took root in the Thatcher years and was embraced whole-heartedly by New Labour. Critics were dismissed with a wave of a hand and the claim that objections to the talented getting rich were the politics of envy.

Even so, there have always been those suspicious of the notion that there has been a step-change in corporate performance, not least because the biggest corporations are responsible for about one-third of the output of the economy and there does not seem to have been any commensurate step change in GDP. That's true of Britain, where trend growth was a bit more than 2% in 1980 and is still a bit more than 2% today.

An impressive study* of corporate performance in Britain and the United States takes the argument one step further. It looks at the companies that make up the FTSE 100 index in Britain and the S&P 500 in the US and finds that executive enrichment is rarely justified by improved performance.

Take the FTSE 100. The research from the University of Manchester shows that in the two decades from 1983 to 2002 - when the supposed revolution in boardroom behaviour was in full spate - the sales of the top 100 quoted companies on the stock exchange rose by an annual 2.7%. Pre-tax profits rose by the same amount, the market valuation of the company rose by 18.2% and the pay of the chief executive by 26.2%. Another measure of corporate performance - return on capital employed - shows a smilarly modest performance. In 2002, a bad year for the corporate sector admittedly, the rate of capital employed was 3.6% for the FTSE 100.

One counter-argument that could be deployed in favour of management is that they are being rewarded for boosting the market valuation of their companies. The study says that none of the three reasons for the sharp increase in share prices in the 1990s - irrational exuberance on the part of investors, declining interest rates and higher levels of stock-market saving by the middle-classes, had much to do with the management of the companies. "In our view, US or UK giant-firm management can neither take the credit for the general increase in share prices during the 1990s, nor entirely avoid responsibility for mediocre rate of capital employed in many firms or for modest aggregate sales growth in any group of giant firms over the same period."

Redistribution of wealth

There has, however, been a real shift in focus, so that the beneficiaries of corporate success (such as it is) are no longer the workers and the general public as a whole but shareholders. And given that there is evidence that only households in the top half of the income distribution in the UK and the US hold shares, this represents a significant redistribution of money and power.

But although there is little in the data to suggest that the cult of the CEO that emerged in the 1990s has much of substance to back it up, nor is there much evidence that they were ruthless labour shedders either. Between 1983 and 2002, the headcount for the FTSE 100 was up by 22% - half the rate of increase for sales and profits.

In some ways, the conclusion drawn by the Manchester research is even more damning. "... the analysis suggests that giant-firm CEOs are neither the value-creating heroes of strategy texts and the business press, nor the pro-capital, anti-labour villains of the Left. Instead, the group analysis suggests that giant-firm CEOs might be just another averagely ineffectual officer class whose role is to manage events and avoid disaster but not to produce high performance or glorious victory."

Ironically, one of the few firms where the long-run increases in profits did justify the size of the chief executive's pay rises was GlaxoSmithKline, and it was Jean-Pierre Garnier who felt the full force of shareholder anger at the size of his package. For the most part, the study says, CEOs have been "value skimming", making a big show of doing all the things beloved of the management gurus but in reality quietly enriching themselves for mediocre performance. Nice work if you can get it, in other words.

*Financialisation and Strategy: Narrative and Numbers; Julie Froud, Sukhdev Johal, Adam Leaver and Karel Williams; Routledge; £85 hardback, £29.99 paperback.


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