The Cost of Inequality: Why Economic Equality Is Essential For Recovery
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Many people would agree that a society in which a chief executive officer earns not five or 10 but 100 times as much as the average full-time worker is not a fair society. The Cost of Inequality argues that this kind of inequality also has an impact on economic growth. The deregulation of the financial sector has had knock-on consequences for our economy. Why invest in an industry with steady but slow- growing returns when there is a quick buck to make in finance? While in the post-war period the gains from productivity growth were equally shared between wages and profits, from the early 1980s almost all the gains were captured as profits. The result? On the one hand, huge flows of cash into the pockets of the rich; and on the other hand there is a reduced incentive to invest in production because of the lack of a market from wage-earners.
in Lending, October 2010. 408 Quoted in N Pratley, ‘Why Does Apax Want to Buy ISS’, Guardian, 8 December, 2010. 409 ‘European Banks Growing Bigger “Sowing the Seeds” of the Next Crisis’, Bloomberg, December 1, 2009. 410 Sunday Times Rich List, 2010, April 2010; Forbes, The World’s Billionaires, March 2011; Merrill Lynch and Capgemini, World Wealth Report, 2010 and 2011. 411 IDS, Directors Pay Report, 29 October, 2010. 412 A Sum, How the US Output Recession of 2007-09 led to the Great
capital necessary for its cultivation and the labourers by whose industry it is cultivated’.59 The division of the national wealth between earnings and profits is in part an issue of social balance. While excessive wages can threaten the future of firms, excessive profits mean unacceptable levels of inequality. Indeed, the profit share and the level of inequality tend to track each other over time. Because the income that derives from profits (through executive pay, share dividends, capital
sustainable economy. Britain—and the United States—does suffer from a crowding out problem, but one that stems from the way an excessive reliance on finance has stifled other parts of the private economy. Although there has always been something of a tension between finance and productive sectors, the interests of these two limbs of the economy have grown increasingly at odds. This is well illustrated by the impact of the boom in financial and industrial deal-making. Private equity takeovers,
even though they could increase profits by moving overseas. While most other bike companies have moved production to the Far East, Bromptons, the award-winning folding bike manufacturer, assembles its bikes individually in its west-London factory. In 2010, production increased to 28,000 bikes, 75 per cent of which were exported. The mutually owned building societies and the John Lewis partnership—which maintains a fixed maximum ratio between staff pay at the top and bottom—adopt a value system
prevent high levels of earnings being disguised as a capital gain, such gains should be taxed at the same rate as income with an adjustment to tax windfall gains more heavily than entrepreneurial success. Wealth should be taxed more heavily, with, for example, capital transfers being more highly taxed.425 The American academic, Robert Shiller—an economist with a strong track record in predicting financial bubbles —has called for a much more radical proposal on the tax system, that it should be