It doesn’t matter that the gap between rich and poor is growing, said a headline in The Times last Friday. “As long as the poor have not been getting poorer, which they clearly have not, and everyone’s standard of living is rising, why does it matter that the rich are getting richer?” The answer from The Times’ Antonia Senior is that it does not. I think that she is wrong, very wrong.
I wrote a little about the myth of ‘talent’ last week. But the key point here is that the recent rise in financial inequality (now at its highest level since the second world war) is not about a huge rise in very successful entrepreneurs – who are, of course welcome to get and stay as rich as they like.
Instead, it’s about the huge rise in grossly overpaid employees of public companies and of governments. About the likes of Adam Crozier, who is said – on the basis of absolutely no evidence whatsoever – to be worth going on £16m. About the likes of Lloyd Blankfein, an employee of Goldman Sachs, being paid tens of millions of dollars in bonuses every year. And about the heads of failing British councils being paid £200,000 plus pension and limitless expenses (more than the Governor of the Bank of England).
This matters because it makes us less entrepreneurial than we could be. Why go through the exhausting process of starting a business when you can be an M&A specialist or a quango leader?. It also matters because it makes the general population feel that high earners don’t deserve their wealth (which mostly they don’t). And that in turn makes us feel happy to support high tax rates for top earners – tax rates that then penalize real entrepreneurs and stifle real growth.
But this kind of inequality matters most because it poisons society and makes us all unhappy. If you look at studies on happiness – of which there are many – you will find that one of the main problems we have is that we are not able to judge our possessions in absolute terms – we don’t think “I’m so lucky I have a car of my own”. Instead, we judge them in relative terms – “I wish I had a Range Rover like the one the people next door have”.
So the more that other people have, the more we think we need in order to be happy too. We all suffer from what the social scientists call “reference anxiety.” The upshot? If the people next door suddenly get richer, we’ll be less happy than we were even if our own circumstances do not change at all. In his book ‘Luxury Fever’, Robert H Frank suggests that this influence is so strong that most people would agree to make less money, as long as they were sure to make more than their neighbours. In other words, they would be happier to make £40,000 when everyone else is making £30,000, than £50,000 when everyone else is making £60,000. Nasty stuff isn’t it? That’s why inequality matters.