23 Things They Don't Tell You About Capitalism

Since the 1980s, in many (although not all) of these countries, governments that espouse upward income redistribution have ruled most of the time. Even some so-called left-wing parties, such as Britain’s New Labour under Tony Blair and the American Democratic Party under Bill Clinton, openly advocated such a strategy – the high point being Bill Clinton introducing his welfare reform in 1996, declaring that he wanted to ‘end welfare as we know it’.

In the event, trimming the welfare state down proved more difficult than initially thought (see Thing 21). However, its growth has been moderated, despite the structural pressure for greater welfare spending due to the ageing of the population, which increases the need for pensions, disability allowances, healthcare and other spending directed to the elderly.

More importantly, in most countries there were also many policies that ended up redistributing income from the poor to the rich. There have been tax cuts for the rich – top income-tax rates were brought down. Financial deregulation has created huge opportunities for speculative gains as well as astronomical paycheques for top managers and financiers (see Things 2 and 22). Deregulation in other areas has also allowed companies to make bigger profits, not least because they were more able to exploit their monopoly powers, more freely pollute the environment and more readily sack workers. Increased trade liberalization and increased foreign investment – or at least the threat of them – have also put downward pressure on wages.

As a result, income inequality has increased in most rich countries. For example, according to the ILO (International Labour Organization) report The World of Work 2008, of the twenty advanced economies for which data was available, between 1990 and 2000 income inequality rose in sixteen countries, with only Switzerland among the remaining four experiencing a significant fall.[1] During this period, income inequality in the US, already by far the highest in the rich world, rose to a level comparable to that of some Latin American countries such as Uruguay and Venezuela. The relative increase in income inequality was also high in countries such as Finland, Sweden and Belgium, but these were countries that previously had very low levels of inequality – perhaps too low in the case of Finland, which had an even more equal income distribution than many of the former socialist countries.

According to the Economic Policy Institute (EPI), the centre-left think-tank in Washington, DC, between 1979 and 2006 (the latest year of available data), the top 1 per cent of earners in the US more than doubled their share of national income, from 10 per cent to 22.9 per cent. The top 0.1 per cent did even better, increasing their share by more than three times, from 3.5 per cent in 1979 to 11.6 per cent in 2006.[2] This was mainly because of the astronomical increase in executive pay in the country, whose lack of justification is increasingly becoming obvious in the aftermath of the 2008 financial crisis (see Thing 14).

Of the sixty-five developing and former socialist countries covered in the above-mentioned ILO study, income inequality rose in forty-one countries during the same period. While the proportion of countries experiencing rising inequality among them was smaller than for the rich countries, many of these countries already had very high inequality, so the impacts of rising inequality were even worse than in the rich countries.

Water that does not trickle down

All this upward redistribution of income might have been justified, had it led to accelerated growth. But the fact is that economic growth has actually slowed down since the start of the neo-liberal pro-rich reform in the 1980s. According to World Bank data, the world economy used to grow in per capita terms at over 3 per cent during the 1960s and 70s, while since the 1980s it has been growing at the rate of 1.4 per cent per year (1980–2009).

In short, since the 1980s, we have given the rich a bigger slice of our pie in the belief that they would create more wealth, making the pie bigger than otherwise possible in the long run. The rich got the bigger slice of the pie all right, but they have actually reducedthe pace at which the pie is growing.