All this upward redistribution of income might have been justified, had it led to accelerated growth. But the fact is that economic growth has actually slowed down since the start of the neo-liberal pro-rich reform in the 1980s. According to World Bank data, the world economy used to grow in per capita terms at over 3 per cent during the 1960s and 70s, while since the 1980s it has been growing at the rate of 1.4 per cent per year (1980–2009).
In short, since the 1980s, we have given the rich a bigger slice of our pie in the belief that they would create more wealth, making the pie bigger than otherwise possible in the long run. The rich got the bigger slice of the pie all right, but they have actually reducedthe pace at which the pie is growing.
The problem is that concentrating income in the hands of the supposed investor, be it the capitalist class or Stalin’s central planning authority, does not lead to higher growth if the investor fails to invest more. When Stalin concentrated income in Gosplan, the planning authority, there was at least a guarantee that the concentrated income would be turned into investment (even though the productivity of the investment may have been adversely affected by factors such as the difficulty of planning and work incentive problems – see Thing 19). Capitalist economies do not have such a mechanism. Indeed, despite rising inequality since the 1980s, investment as a ratio of national output has fallen in all G7 economies (the US, Japan, Germany, the UK, Italy, France and Canada) and in most developing countries (see Things 2 and 6).
Even when upward income redistribution creates more wealth than otherwise possible (which has nothappened, I repeat), there is no guarantee that the poor will benefit from those extra incomes. Increasing prosperity at the top might eventually trickle down and benefit the poor, but this is not a foregone conclusion.
Of course, trickle down is not a completely stupid idea. We cannot judge the impact of income redistribution only by its immediate effects, however good or bad they may look. When rich people have more money, they may use it to increase investment and growth, in which case the long-run effect of upward income redistribution may be the growth in the absolute size, although not necessarily the relative share, of income that everyone gets.
However, the trouble is that trickle down usually does not happen very much if left to the market. For example, once again according to the EPI, the top 10 per cent of the US population appropriated 91 per cent of income growth between 1989 and 2006, while the top 1 per cent took 59 per cent. In contrast, in countries with a strong welfare state it is a lot easier to spread the benefits of extra growth that follows upward income redistribution (if it happens) through taxes and transfers. Indeed, before taxes and transfers, income distribution is actually more unequal in Belgium and Germany than in the US, while in Sweden and the Netherlands it is more or less the same as in the US.[3] In other words, we need the electric pump of the welfare state to make the water at the top trickle down in any significant quantity.
Last but not least, there are many reasons to believe that downward income redistribution can help growth, if done in the right way at the right time. For example, in an economic downturn like today’s, the best way to boost the economy is to redistribute wealth downward, as poorer people tend to spend a higher proportion of their incomes. The economy-boosting effect of the extra billion dollar given to the lower-income households through increased welfare spending will be bigger than the same amount given to the rich through tax cuts. Moreover, if wages are not stuck at or below subsistence levels, additional income may encourage workers’ investment in education and health, which may raise their productivity and thus economic growth. In addition, greater income equality may promote social peace by reducing industrial strikes and crime, which may in turn encourage investment, as it reduces the danger of disruption to the production process and thus to the process of generating wealth. Many scholars believe that such a mechanism was at work during the Golden Age of Capitalism, when low income inequality coexisted with rapid growth.
Thus seen, there is no reason to presume that upward income redistribution will accelerate investment and growth. This has not happened in general. Even when there is more growth, the trickle down that occurs through the market mechanism is very limited, as seen in the above comparison of the US with other rich countries with a good welfare state.
Simply making the rich richer does not make the rest of us richer. If giving more to the rich is going to benefit the rest of the society, the rich have to be madeto deliver higher investment and thus higher growth through policy measures (e.g., tax cuts for the rich individuals and corporations, conditional on investment), and then share the fruits of such growth through a mechanism such as the welfare state.
Thing 14
US managers are over-priced
Some people are paid a lot more than others. Especially in the US, companies pay their top managers what some people consider to be obscene amounts. However, this is what market forces demand. Given that the pool of talent is limited, you simply have to pay large sums of money if you are to attract the best talents. From the point of view of a giant corporation with billions of dollars of turnover, it is definitely worth paying extra millions, or even tens of millions, of dollars to get the best talent, as her ability to make better decisions than her counterparts in competitor companies can bring in extra hundreds of millions of dollars in revenue. However unjust these levels of compensation may appear, we should not engage in acts of envy and spite and try to artificially suppress them. Such attempts would be simply counterproductive.
US managers are over-priced in more than one sense. First, they are over-priced compared to their predecessors. In relative terms (that is, as a proportion of average worker compensation), American CEOs today are paid around ten times more than their predecessors of the 1960s, despite the fact that the latter ran companies that were much more successful, in relative terms, than today’s American companies. US managers are also over-priced compared to their counterparts in other rich countries. In absolute terms, they are paid, depending on the measure we use and the country we compare with, up to twenty times more than their competitors running similarly large and successful companies. American managers are not only over-priced but also overly protected in the sense that they do not get punished for poor performance. And all this is not, unlike what many people argue, purely dictated by market forces. The managerial class in the US has gained such economic, political and ideological power that it has been able to manipulate the forces that determine its pay.
The average CEO compensation (salaries, bonuses, pensions and stock options) in the US is 300–400 times the average worker compensation (wages and benefits). Some people are terribly upset about this. For example, Mr Barack Obama, the US president, is frequently quoted criticizing what he sees as excessive executive pay.
Free-market economists see no problem in this pay disparity. If the CEOs are paid 300 times more than the average worker, they say, it must be because they add 300 times more value to the company. If someone does not have the productivity to justify her high pay, market forces will soon ensure that she is sacked (see Thing 3). Those who raise issues with executive pay, like Mr Obama, are populists who engage in the politics of class envy. Unless those who are less productive accept, they argue, that people need to be paid according to their productivity, capitalism cannot function properly.
3
According to the OECD (Organization for Economic Development and Cooperation), before taxes and transfers, the US, as of mid 2000s, had a Gini coefficient (the measure of income inequality, with 0 as absolute equality and 1 as absolute inequality) of 0.46. The figures were 0.51 for Germany, 0.49 for Belgium, 0.44 for Japan, 0.43 for Sweden and 0.42 for the Netherlands.