Stewart Lansley: Enrichment at the top is deepening the recession

The paralysis can be traced to two contrasting trends - shrinking real wages and burgeoning (unspent) profits

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Spurred on by public outrage and political pressure, the Government is finally to take measures to rein in runaway executive pay. This is an important step. For years, indeed longer, too many bosses have been running their companies in their own rather than their firm's interest, while successive governments have watched idly from the sidelines.

But creating what David Cameron has called a "fairer, better economy" requires a much bigger leap – tackling an even more fundamental faultline in the British model of capitalism.

From the late 1970s, successive governments have allowed, indeed encouraged, the gains from growth to be increasingly colonised by a small business, financial and corporate elite. This has set the workforce adrift from economic progress and left ordinary citizens with a continually shrinking share of the economic cake. As a result, average real wage growth has been falling behind the rate of output of the economy, and at an accelerating rate.

It is this that has fuelled the towering personal fortunes of the modern age and the rise of inequality to pre-war levels. It is a trend that has continued since the 2008 crash. With ordinary living standards on a decade-long downward slide, and the incomes of those at the top continuing to rise, an even bigger gap has been opening up between the rich and the rest.

There is nothing new about middle and low income households being made to pay the heaviest cost of economic crises. Indeed, it has become something of an iron law of recessions, one best symbolised by the phrase used by Andrew Mellon, the US Treasury Secretary at the time of the 1929 crash. Mellon, a multi-millionaire, advised President Hoover that the route out of the crisis was "to liquidate labor".

Forty-five years later, at the height of the next global crisis, Arnold Weber, adviser to President Nixon, called on business to "zap labor". It was a cry that was widely heeded. For the next 30 years, the workforces of the UK and the US were made the scapegoat for the crisis of the 1970s. In both nations, the share of output taken by wages fell sharply.

The "liquidationists", it seems, are still in charge. Hidden away in one of its lengthy reports, the independent Office for Budget Responsibility has published a significant graph, one which predicts that the wage share in the UK will continue to fall until 2016 – by four percentage points. According to the Institute for Fiscal Studies, a couple with two children will be £1,250 worse off on average by 2015 compared with 2010 – a 4.2 per cent drop.

Of course, living standards have to take some of the pain during a recession, especially one as severe as this. Yet making the labour-force pay a disproportionate price for a crisis for which it is not responsible is not just a matter of fairness. It is also self-destructive economics. And while the majority of the workforce is being made worse off, big business and multi-millionaires are on a roll. Britain's top 1,000 super-rich are today sitting on fortunes that are collectively worth £200bn more than in 2004.

Outside of manufacturing, the largest corporations are enjoying booming profits. According to the Treasury, the corporate sector has a financial surplus worth 4.5 per cent of national output, one much higher than in the aftermath of the 1990s recession and even in the post-millennium boom years. While many small- and medium-sized companies have been badly hit by the downturn, the UK's top 100 companies added a combined £20bn in cash in 2011, a rise of a fifth over 2010.

Those seeking an explanation for today's deepening crisis need look no further. The paralysis can be traced directly to these two contrasting trends – shrinking real wages and burgeoning (but unspent ) profits. UK consumers now have around £100bn less in their pockets than if the cake was shared as it was in the late 1970s, before the 30-year long wage squeeze began. It is a sum – roughly equivalent to the size of the nation's health budget – that has effectively been sucked out of the British economy in each of the last three years, starving it of the oxygen it needs to escape the slump. It is like wiping out the spending power of a city the size of Manchester.

The impact would have been somewhat less damaging if business played a more constructive role in helping recovery. But the leaders of corporate Britain, who long ago dropped any sense of national responsibility, are allowing these near-record surpluses to stand mostly idle. Here is one area in which the UK has not run out of money; far from it. But surpluses that could be galvanised to kick-start the economy are awaiting an era of guaranteed and much higher returns. As a result, private-sector investment in the UK – activity that could trigger recovery – is nearly a fifth below its pre-recession level.

It was the skewed distribution of the national economic cake that was one of the key, if mostly ignored, factors leading to the 2008 crash. The same factors are now driving an apparently relentless slide into near-permanent slump. If the division of the cake now stood at its level of three decades ago, idle surpluses would be being spent by consumers, and we would be well on our way out of this mess. Herein lies the path not just to a fairer, but to a more robust economy.

Stewart Lansley is the author of 'The Cost of Inequality: Three decades of the Super-Rich and the Economy', published by Gibson Square

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