US Outlook: The public is a mad dog, throwing itself against a wall. Rage against bankers and their outsize bonuses, far from diminishing with distance from the crash, is becoming more intense, now that the Wall Street train is back on the rails with barely a drop of gravy being spilled. The popular fury is fuelled by an acute sense of our own impotence. But what if this rage is not really about bankers at all?
The burning sense of injustice that underlies the present anger has its roots not in the calamities wrought by Wall Street last year, but more deeply. It has been forged over time, through waves of revulsion at fat-cat pay and hedge-fund greed. To find a balm, we need to confront the vast disparities of income that have been allowed to open up in our society.
It is a subject which has gained surprisingly little currency despite the centrality of income inequality, not just to the realisation of injustice now, but also to the economic causes of the credit crisis and recession.
Tell me if this is a coincidence. The income of the top 10 per cent of earners in the US has accounted for about 50 per cent of the total on only two occasions in the past 100 years, first in 1928 and then again in 2006-7. The two great crashes of the past century occurred the following years.
Thanks to the award-winning work of economists Emmanuel Saez and Thomas Piketty, we can trace income inequality over more than a century and see that, after flatlining for decades after the Second World War, it began relentlessly rising with the birth of the Reagan revolution in the US, and its intellectual twin, Thatcherism. Devil-may-care capitalism sent chief executive pay at the biggest US companies – not just in finance – to 275 times the average of their staff in 2007. It was a tenth of that in the mid-1960s. We may have been doomed to the present disaster for some time. J K Galbraith, in his definitive work The Great Crash, 1929, identified "the bad distribution of income" as one of five contributory factors to the stock-market plunge and subsequent Great Depression. With more money than they know what to do with, the super-rich spend on luxuries and speculative investments only to pull them back sharply when exuberance is exhausted and fear threatens to take over. This sort of economy is more volatile than one which is more broadly based.
And something else: the economics of envy. To the greed of the few, add the jealousy of the many, and the fear of being left behind. Those toxic "liar loans" and "ninja mortgages" were not, in the main, foisted on unsuspecting naïfs. They were grabbed for gladly by people who knew they were taking a risk for their extra holiday, for the extension they built to match their neighbours – or for that move to a leafier suburb to keep their kids out of a sink school.
Reversing the problem of rising inequality requires more than bashing banks. Governments shouldn't dictate pay levels in any particular sector of the economy, in any case. How, practically, could we? We agree bankers should be paid according to their performance, which means according to their profits (as measured over a cycle, we would now add). And banks' profits are what they are: the sum of thousands of transactions, often advice paid for by a client, or trades voluntarily entered into by other market players. Which particular activities do we want to deprofitise, and how?
Drag someone away from the angry soundbite and the problem is, suddenly, obviously intractable. Which is why none of the reform plans on the table – between the British government and the banks operating in the City of London, for example, or the G20 nations, or even the Federal Reserve's strictures this week – have anything to say about the level of pay, only about its structure.
None of this is to say that Wall Street doesn't need root and branch restructuring. Of course it does. And if regulators do their job, profits should moderate overall, as banks are prevented from juicing their returns with risk-taking on borrowed money. Shareholders should be the ones to set pay levels, and they should be roused from their behinds to do so. The only really legitimate tool that a government can wield on behalf of taxpayers is the tax system itself, and this it should wield without discriminating against employees of a particular profession.
Tackling the moral and economic problem of inequality implies an across-the-board approach. And it is an opportune moment to debate higher taxes on the highest incomes. Paying back skyrocketing government debt will require that those best able start to pay a fairer share.
Of course, I'm being naïve to suggest that debating redestributive taxes will be a civilised affair, particularly in this gutturally anti-tax nation. But are we getting anywhere otherwise?
For now, the Obama administration halves executive pay at the bailed-out companies still under its influence, only to expose how few people and how few companies it can touch (700 at seven). Admonishments on pay keep coming from politicians and central bankers on both sides of the Atlantic, but record bonuses keep coming, too, and so do the bumper payouts for top executives in other industries.
How much healthier it would be to tax these salaries and bonuses fairly, instead of railing against our inability to prevent them from being awarded in the first place. Maybe that way we can start to create an economy at ease with itself.
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