Tinkering on the economic brink

We're locked into a slump unless we actively tackle the towering inequalities that led to financial crisis
Stop: Occupy Wall Street protesters
Billions suffer as billionaires proliferate ... Occupy Wall Street protesters walk through New York's financial district on 24 September. Photograph: Tina Fineberg/AP

Tinkering on the economic brink


For the last 30 years the proceeds of rising prosperity have been increasingly colonised by big business and a small rich elite. In the United States, living standards for most have been stagnant; in Germany, average real wages have not risen since the millennium.

Moreover, the income gulf has widened further throughout the economic crisis. In the UK, executive pay has continued to spiral, and this year seven out of 10 employees have had a freeze or cut in pay. Throughout the world, the number of billionaires rose by nearly a third between 2007 and 2010, while just over a thousand individuals enjoy a combined wealth of $4,500 billion, the equivalent of a third of the output of the American economy. In the US, corporate profits have risen sharply, with business taking advantage of the slump to shed labour, cut hours and halt pay increases. In the UK, large corporate cash holdings are at near-record levels.

Those seeking an explanation for why the global economy is tinkering on the brink of a second collapse need look no further. Squeezed wages, booming personal fortunes and idle corporate surpluses are a recipe neither for economic vitality nor recovery but for a sustained crisis.

For years it has been argued by the architects of market capitalism that a sharp dose of inequality would kick-start enterprise, boost growth and be good for us all. In the event, the main outcome of the post-1980 experiment has been an economy that is both much more divided and much more unhealthy.

Nor are these outcomes unrelated. There are four powerful reasons why the current crisis has its roots in excessive concentrations of income and wealth.


Second, concentrating income in fewer and fewer hands eventually leads to "bubble" economies. From the early 1990s, the surge in inequality unleashed a flood of footloose global capital – a mix of corporate surpluses, bank lending and burgeoning personal wealth. Bank assets in the UK ballooned four times faster than growth from the mid-1980s, while the value of funds invested by the rich more than doubled over the decade to 2008 to reach $39,000 billion. It was these "surpluses" that contributed to the bubbles – in housing, property and business – that eventually brought the global economy to its knees.

Third, the towering rewards that became available in finance distorted business incentives. The biggest money could be made through business strategies that were unproductive. Perverse incentives led to banks pumping uncontrolled supplies of credit into the world economy. Instead of the faster wealth creation promised, money poured into activity – takeovers, private equity, property and financial engineering – that delivered fortunes through the transfer of existing, rather than the creation of new, wealth and businesses and jobs.

Finally, excessive concentrations of wealth create dangerous concentrations of economic power, with finance and its lobbyists able to ensure measures like weak financial regulation by the state, lower taxes on the wealthy, and inaction on tax havens, which operate in the interests of a small commercial class. In more equal societies, as in the postwar era, finance is much more constrained.

The four mechanisms that link inequality and economic malfunction are still at work. Falling real wages are stifling demand in the world's richest economies. The globe's largest corporations are sitting on near-record volumes of cash, money that is mostly standing idle. When they are spent, they are likely to finance another wave of high-margin financial and industrial restructuring rather than the productive investment that creates robust economies. Bank assets are even larger today than they were before the crash, and the power of the City and Wall Street remains intact.

Until these issues are tackled and the great concentrations of wealth, income and power are broken up, the global economy will continue to struggle to recover, with much of the world locked into near-permanent slump.