Govts & media are falling under control of the richest 1% - Development economist

Anthony Shorrocks: They are spread all around the world, of course, but concentrated in particular countries: the U.S. has the biggest number now, China is quickly catching up, Japan has always been close by, then there are main European countries. These are the countries where there are large numbers of people in the top 1%.

SS: Where do they come from mostly, this people? I am not talking only country-wise, but what’s the background of these people? Who are them?

AS: I think there’s a big mix of them. Traditionally, wealthy people have often inherited their wealth, but certainly in the last fifty years that has become less prominent. There’s a lot of self-made people, a lot of people these days working in finance area, people building their own businesses; we know now there’s lots of people in sports, in the media, in entertainment that do very well, and, certainly, well enough to get into the top groups.

SS: This wealth we’re talking about – do you mean money or is it financial assets, or is it something else as well?

AS: We cover all parts of wealth, all components – other people sometimes take a narrow view and just look at financial wealth, but we take this more comprehensive view, that includes all the assets, all their debts; and what we call wealth is the net value, their net worth.

SS: Will this trend prevail? I am talking about, will we continue seeing rich get richer while poor get poorer?

AS: In the period from 2000 up to the financial crisis, financial assets were not increasing as fast as non-financial assets, and wealth inequality, on the whole, was trending downwards in many countries and globally also. What has happened since financial crisis is that financial assets took such a big hit, that they jumped backed from that - stock markets have been booming, the last year has been just an exceptional year for…say, last two years have been an exceptional time for equity markets all around the world. So, financial assets have been increasing very fast. Wealthy people tend to have larger proportion of their assets in financial assets, and so they’ve done better than the average person in terms of wealth growth. So that is really what has been driving wealth inequality in the period since the financial crisis. So the question about whether inequality will continue to go up really depends on whether you think that financial assets are going to grow at the sort of rate in which they have been growing recently.

SS: Right, but we still have that 1% that keeps accumulating all this wealth – and I mean, I understand, this may sound like a naïve question, but where is the limit? I am saying, half of the world’s wealth is surely way more than one can spend in several lifetimes…what’s the point of hogging of this gold?

AS: Well, they don’t hog gold, of course, they have…

SS: It’s a figure of speech, obviously…

AS: Yes, yes. Well, if you ask me, what drives rich people to go on accumulating – sometimes, it’s just that they think it’s sort of competition, that they have to be one up over their friends and colleagues and competitors. Some of the richest people in the world have made quite big commitments to give their wealth away, eventually. This is true of Bill Gates, this is true of Warren Buffett and so on. So, I think some of this gets recycled back, and if you ask me what drives people to go on accumulating wealth – then I think sometimes, it’s just, as a say, they got so used to it, that they almost can’t stop.

SS: Old habits die hard, huh. But on the other hand, when you think about it, we’re talking about the richest owning more and more – but wealth, it doesn’t come from nowhere. Aren’t those people, that 1%, also creating wealth as well?

AS: I think that’s undoubtedly the case. Yes, you’ve only got… it’s easier to do that in the context of looking at individuals and seeing what they’re doing and seeing what their companies are doing, and how many people these companies are employing. If we just look at some of the very big wealth…young people that have become wealthy lately, the sort of people that now own Google, they own Facebook – they’ve created huge companies. We know people that have got Apple stock – these are creating lots of jobs for other people, and you’ve only got to look at… it’s easier, I think, to look at something like Forbes billionaire list, and go through each of the individuals. You’ll see that most of them, who have become very rich, they have made other people rich – not only shareholders in their company, but also the people that work for them. They’ve created a lot of employment, there’s no question about that.

SS: So you’ve been working on the issue of wealth distribution for years now. Why is this concentration of wealth dangerous?

AS: I think there’s reasons why people are concerned lately. One is that they think that wealth inequality is increasing, and somehow the world is changing to a point where some groups are doing rather better than others, and the question then is whether that’s going to tear society apart, because so many people regard it as unfair. So, there’s a concern that it is destabilizing, and potentially very harmful, not just for the people left behind, but also for those who are doing well at the moment, whether they can actually preserve their wealth indefinitely in the future. Because, we are talking about institutions, we are talking about, often, democracies, democracies decide governments, and governments decide tax rates… so these things can be changed over time. The other concern I think is that somehow, wealthy people often have a lot of control of some of the leaders in society, they have a lot of influence on the government, because they employ lots of people to put their case, and they also control a lot of the media in many countries. So, we are now having a situation where, perhaps, there’s concern that information that people get may be filtered through people who are predominantly in these wealthiest groups.

SS: That leads me to my next question, because you always were saying that those who have money, have the power. Would you say that the economic system is rigged in their favor? Are we seeing today a power grab by the world’s wealthiest elites?

AS: If look at share of ownership of newspapers, of TV-stations, radio-stations – you probably would see a trend that more and more of them are becoming, if you like, the toys of rich people. Of course, this is what we see in…we see these sort of trends, particularly, in Britain in, say, the ownership of football teams. In the past, they’ve been very much owned by local people, now everyone is running around trying to get some particularly rich billionaire from some remote country to take their football team over so that they can spend money on them. We see, I think, that rich people are looking for opportunities to get into situations where they can have more local power, and I think this is, again, part of the concern of people, when they see this on the ground.

SS: But this staggering inequality – is this is an accident, or could you relate that to state policies, could this be a result of state policies?

AS: When you say it’s staggering wealth inequality – in the sense, it’s been the norm for most of the history. What we got used to last century, was somehow wealth was being spread more equally, particularly in the country like Britain, where we do have good data and it allows us to look at trends. Hundred years ago, wealth inequality was very high, and was very much to do with landed wealth, ownership of land, ownership of property. Over the course of the last century, a lot of that was spread around, partly in response to higher levels of taxation, but also, because of spread owner-occupation. So this reduced wealth inequality… but now we seem to be moving back to the situation which prevailed a hundred years ago.

SS: So, how poor are the poorest people on the planet?

AS: Well, that’s quite interesting, because, of course, in wealth terms, the poorest people have negative wealth. They have debts and tend to be in rich countries, because, in the really poorest regions of the world it’s very difficult to get in debts. If you’re really talking about people who have a little bit of wealth, but rather low wealth, they are predominantly in India, in Africa, in a lot of countries which are just low-income countries, in which people really have very limited opportunities to accumulate assets.

SS: How big is that number of people? Can it be measured? I’m talking about poor people.

AS: Usually, if we talk about, say, the bottom half of the world, you could say that in wealth terms, they’re really quite poor. I mean, you only need something like $50 or something to get into the top half of wealth distribution, it’s a very small number.

SS: There’s another thing I’ve been thinking about - I mean, this whole inequality, could it be dangerous? Could we be looking for revolutions, for instance?

AS: That is of concern to people. When inequality has become quite severe, then, of course, there’s reaction to that, and in democratic societies, that can translate into votes – I don’t whether its violence or whether it’s more a political move towards, perhaps, policies, which may not be beneficial to economies – then may, in effect, may everyone worse off.

SS: Now, we saw the Occupy Wall Street movement come and go – and we’re going hear of that? Or we’re going to have more social movements of that type?

AS: I suspect so, it’s quite likely. You’ve only got to look at what’s happened in the U.S. in the last 30 or 40 years: the middle range of people, the middle class in the U.S. have really just stagnated, they’ve just stood still, their income has more or less stayed the same in real terms, but those about the medium have pulled away – so, we’ve got a group of people who are just being progressively left behind. They’ve managed to keep going and increase their consumption by going into debt further – so that’s the worrying trend. Inequality is being translated into higher debts for people in the bottom half of the distribution.

SS: Can extreme inequality hurt the rich eventually? I’m talking about lower economic growth or something like that.

AS: Well, there’s more than that. I mean, you can get people voting for expropriation of people’s assets, I mean, ownership of assets depends on, if you like, a social consensus: we all have to agree that people can own these assets, they’re sitting there in the house, they’ve got a legal title to it, but if enough people object, if they just decide that they’re going to impose penalty rates of taxes and so on, then those assets can be taken away. So, they can be expropriated, and of course, there’s lots of episodes in history, when that’s exactly been done. But of course, also, there’s this more worrying possibility, that if that does happen, then the whole economy, the whole society becomes destabilized, and then we can have very big contraction in economies and everyone can be very worse off. It’s almost like having a war – we all understand that war can be bad for everybody, and effectively you might think that this is being, if you like, a social war or an economic war, and the consequences could be very damaging.

SS: Also, it only goes so far in curing inequality in the market economy, right? How far can you go without turning all Marxist revolutionary? I mean, it’s only natural that those who are rich are not keen on sharing their wealth with anyone – and how do you make them?

AS: Well, they’re not keen on that, but of course that’s what… nobody’s keen on paying taxes either, but governments decide tax rates and people on the whole pay them. I suppose one reason why governments don’t do it at the moment is because they fear that if they start to increase tax rates, then people will move to other countries. But, if this is a general trend, then, maybe, lots of countries will undertake various redistributive policies. But also, people may see this as, somehow, the system has changed, the system has become unfair, it’s not the individuals themselves, perhaps who’ve been doing anything themselves which is bad, but it’s just the system has changed and we need to try to change it back in way that makes it fair for everybody. It’s like having the rules of the game – you know, we’ve just say, “The rules have changed in the way that we don’t like anymore, so we have to sit down and decide what the rules are”.

SS: You’re saying it’s the system that’s really to blame at this point, not individuals, but, some people being poor and others being rich – isn’t it just an inevitable fact of life, of capitalism?

AS: We don’t always have to just accept these things, because, people don’t get rich in vacuum – they get rich because of the sort of institutions, laws and situation in which they find themselves. You know, we have a whole lot of patents systems, company rights, ownership laws, protection of property – all of these things are there and that’s what really defines the rules in which people operate. So, those could be tweaked as well – I mean, we could effectively change the rules in such a way that some small percentage of people’s gains get diverted into other, more socially desirable, causes. It’s not necessarily just taxation.

SS: Right, but the problem is the rich who make the decisions ultimately…

AS: Well, that’s questionable, isn’t it? In democracies, it’s the majority of people. If we’re saying that the rich have expropriated that, then that’s the sort of issue that we’re talking about here - whether or not that’s not going to change as people become angrier and angrier at the way in which trends are going. Of course, as I’ve said before, I’m not sure whether these trends are going to continue, but if they do, I suspect that these sort of social developments will become more pronounced and they will eventually translate into some sort of action.

SS: Right, so then there are some who actually try to do something institution-wise. For instance, François Hollande introduced a millionaire super-tax at the beginning of his term, only to be faced with an exodus of millionaires from France to savor tax-pastures. How can one country tackle this problem without others doing the same?

AS: Well, that’s exactly the problem that I’ve mentioned – there’s some sort of tax competition here, and very often, countries are going out of their way to try to encourage wealthy people to come and reside and pay taxes in their particular jurisdiction. So, there has to be some sort of coordination, but also, perhaps not taxing individuals themselves but thinking about, let’s say, changing the rules… I don’t have any particular policies in mind, but people are not thinking enough off-the-wall, to really think of radical policies which are not simply “increasing tax rates” – because I think that, probably, there’s going to be so much resistance there, that that’s not the way to go.

SS: But, what it seems to me, is that Europe, in general, is dealing with this problem better than the U.S. – what do you think? I mean, if you look at Scandinavian countries that don’t shy away from massive taxes, their inequality rates are much lower…

AS: In fact, their income inequality rates are quite low, but their wealth inequality, as we’ve just discovered, and it’s one of our surprise conclusions, that they their wealth inequality rates are amongst the highest in Europe, not amongst the lowest. The reason, I think, for that, is that in the sense there are two groups of people there: there’s this sort of average person for whom they don’t have accumulate too much wealth, because the state looks after a lot of the reasons why people accumulate wealth – in particular, they have good retirement systems, so they don’t have to accumulate a lot for old age, the have good health systems, so they don’t need to worry so much about health in older age; but, of course, there’s another group, the entrepreneurs, who do develop businesses and do very well, so they are also doing very well. So, there’s a split between the people at the top who are pulling away from people in the middle who don’t really seem to have much need to accumulate a lot of wealth.

SS: I just want to talk a little bit about the European austerity, because it’s something that’s talked about a lot. We’ve seen societies, that were previously tinted towards equality, cut social programs, privatize, etc. – how can you tackle income inequality if any gains you can have, if you can even push them trough can be so easily reversed in the next election cycle?

AS: I think that’s just a problem of societies - when you have democracies, people can change their minds. I think it’s more important to try and think of policies which are sustainable in the long run. One doesn’t really want situation where tax rates go up and down just depending on what the flavor of government is. I think, it‘s more sensible to try to get together and see this is as a problem, see the potential problems caused by growing inequality – both Left and Right have an interest in identifying the problem, recognizing the problem, and trying to look for solutions which don’t involve this knee-jerk reactions of just putting up tax rates or reducing them. It doesn’t make sense in the long run.

SS: We were talking to Anthony Shorrocks - economist, author – we were talking about inequality in the world and the dangers that it entails. That’s it for this edition of Sophie&Co, I will see you next time.