The banks have brought it on themselves

I wrote earlier this week about the effect that the distribution of wealth might have on prosperity. The general argument is that there is a limited number of innovators in each population. There is also a limited amount of capital.

The key to economic success, then, is to have an environment in which enough innovators can get enough capital to create growth. Clearly, the more widely wealth is spread around, the more likely this is to happen.

The problem today? It is getting less rather than more widely spread around, something clear in almost any statistic you care to look at. A note from the High Pay Centre pointed out earlier this week that there are now 26,000 Britons taking home more in a month than those on the average wage take home in a year (so over £20,000), for example.

At the same time, the share of national income going to the top 1% of the population has risen to 15.5%. That’s more than double the number in 1979 and brings us roughly back to where we were in the 1930s.

A flick through the papers tells you similar things at an anecdotal level. This week’s Observer came with a double-page story on how the “new global elites” are buying up Europe – wealthy Russians are apparently popping up in £40m estates all over Tuscany and Sardinia.

You might say that this doesn’t much matter. After all, we all have more access to capital than we did in 12th century Italy, for example (thanks to everything from banks to equity markets to Zopa). So, if we have a fabulous idea, we are bound to be able to get the money to develop it from somewhere.

You may be right. We’ll have to wait and see. But whatever the reason, history does consistently show that relatively equal societies with robust liberal institutions grow faster than the opposite (please no comments about communism – it isn’t really the same thing and you know that).
 
It is also the case that the residents of relatively democratic states don’t like extreme inequality. And that they particularly don’t like it in recessions.

One of the common reactions to my initial column on this was to berate me for suggesting that there should be any more government intervention into the distribution of wealth. But I didn’t actually suggest anything of the sort.

I’ve spoken about this problem many times over the last few years. And on each occasion I have pointed out that governments don’t usually get smaller in times of crisis. They get bigger – moving into all sorts of areas that were once considered none of their business.

But early on the in the financial crisis, at least big corporates and banks had a something of a choice. They could either be seen to be doing something about excessive pay bonuses, and so on themselves, or they could sit back and wait for popular protests to push governments into doing something about it.

Inexplicably, they appear to have opted for the latter. Hence the bonus restrictions out of Europe, the endless talk of wealth taxes and the like.

I would have liked the solution to rising inequality to be less government (so more competition and fewer oligopolistic industries) rather than more government, but that isn’t the way it looks like it’s going to go. And those running our big firms and our banks? They have only themselves to blame.