I wrote here last week that rising income inequality could easily have been the cause of our financial crisis. Very high incomes at the top of the tree have translated into toxic clouds of hot money hopping from asset class to asset class and leaving a trail of crashed bubbles behind.
Yet at the same time, squeezed incomes in the middle and falling real incomes plus rising unemployment at the bottom have meant low demand across Western economies. The result? Low growth and endless asset bubbles.
The solution to all this is tricky. The aim of any action is obvious. We need to rebalance the distribution of profits so that the top gets less and the bottom gets more. But how?
Some people interpreted my post as a Keynesian call for increased government spending. It wasn’t that. Regular readers will know that I already think the state is far too big (so I can’t really approve of more taxes and more state action) and that I think our current levels of debt are deeply destabilising (so I can’t possibly approve of more borrowing for more spending).
Some interpreted it as a call for more regulation on pay. But it wasn’t really that either. This government, for all its reducing red tape rhetoric, has turned out to be abnormally fond of regulation.
That’s not a good thing. I agree with those calling for shareholder votes on pay to be binding (who knew they weren’t already?). After all, if we want shareholders to act as owners – and if we want to banish short-termism in the markets, we do want them to act as owners – we should surely give them the kind of rights that are supposed to come with ownership.
But the other suggestions seem more like rules for the sake of reaction – and we have enough of those already. What I am really saying is that we need to rethink the way we treat our big businesses. Companies can only consistenly pay out vast bonuses because they consistently make what used to be called ‘super profits’ and so have the cash to do so.
Take our banks. They like to call themselves good citizens, but they are no more than oligopolistic gangs. Their managers make as much money as they do simply because the money is there. The average big bank makes more in profit than a business in any other sector could ever dare to dream of.
So the question we should really be asking is: “Why do investment banks make so much money?” And why do we allow the conditions that let them to continue? Why doesn’t our form of capitalism, such as it is, encourage competition?
But we also need to look at the lack of real competition among CEOs and top managers of all companies. They’re making incredible fortunes. In a normal, capitalist society, they wouldn’t just be making good money: the rest of the fortune would be in the pockets of workers or shareholders – workers because long-term sustainable businesses pay workers well, and shareholders because excess profits are supposed to accrue to owners.
That means we have to address the bonus system too (it is this that makes our managers so short-term in their behaviour towards workers).
Then we have to address the talent myth (I last wrote about this here: The myth of talent). The talent myth boils down to the idea that CEOs have some kind of rare and special talent worth tens of millions, when they just don’t.
My point, then, is not about taxing away the millions in ill-gotten gains at the top of our money tree. It is about dealing with the circumstances that allowed them to grab them in the first place.
I still think that is a job for shareholders, not government. Big fund managers have been pretty quiet for most of the financial crisis – at least in terms of their role in causing it via their foolish acceptance of performance-related pay and the talent myth. It is time for them to accept the long-term moral and financial duties that go with their work.