Today the protests that started in Wall Street, New York, have spread to many other cities in the world. The basic idea seems to be to protest in the financial sectors of these various ctities against the banking sector’s excessive salaries (at least for investment bankers) and against their excessive risk taking. Essentially, it is felt that this excessive risk taking is a prime cause of the current financial problems and yet those who are paying the highest price are the lowest earners (who are losing their jobs) while those in the banking sector are carrying on as if nothing has changed.
We were chatting about this at work a few days ago and I mentioned that I really liked that the slogan was “we are the 99%”. I said that this really encapsulates the problem that the top 1% of earners are taking a disproportionate amount of the income. In the US the top 1% take 24% of all the income while in the UK the top 10% (I couldn’t find a number for the top 1%) take 31% of all the income (up from 28% 10 years). What got a an argument going was that one of my older colleagues said that he didn’t see what difference it makes how much the top 1% (or 10%) earn as it all goes back into the economy. My immediate response was that this was essentially bollocks (although I didn’t actually use the word bollocks). The top earners are essentially extracting a large fraction of all the income every year, leaving less for the rest of us to share. Even if it goes back into the economy, it essentially goes back to them and, in fact, for the last few decades the top earners have been extracting an ever increasing fraction of the total income.
My suspicion is that this person was confusing income with wealth. It is possible that a viable economy could exist in which most of the wealth was held by a few people. If this wealth is reinvested in the economy then it would be acting to drive economic growth and would ultimately be paying our salaries. Since these few people essentially owned everything, all the money we spent would go back to them to be reinvested in the economy and the cycle would continue. I’m not suggesting that this would be a good thing, simply that in this scenario the wealth of the few would be driving the economy and my colleague’s argument would have some validity.
Income is, however, different from wealth. The more income the top earners take, the less there is for the rest of us. The question we need to ask is what is the optimal income distribution. If everyone earned the same, there would be no incentive to take risks or to work particularly hard. Similarly, if a few people took all the income how would the rest of us survive and how could an economy flourish if no one has any money to spend. My personal view is that in the US and the UK the income distribution has become so skewed (benefiting the few) as to be detrimental to the health of our economies.
It has certainly been argued that one of the reasons for the current financial crisis is that the skewing of the income distribution lead to a problem with consumer spending (most people didn’t have enough disposable income). To solve this, banks started lending money to people. The problem was that this didn’t increase these people’s incomes, it simply allowed them to spend money that wasn’t really theirs. The highest earners initially benefited in two ways. Firstly, people had money to buy products made by companies in which they had invested money. Secondly, these people had to pay interest on their loans, which again provided profit for companies which were primarily owned by the wealthiest. The problems started when people could no longer pay back their loans and many financial products (in which various debts had been bundled together and sold to other financial institutions) became worthless.
I certainly feel that there are both moral (we don’t really want children dying of poverty in the wealthiest countries in the world) and economic (a consumer economy needs people with disposable income) arguments as to why we need to have a more equal income distribution and I sincerely hope that these protest have some impact on the ideology of current government and provides an incentive to start working towards a more equal society, for the benefits of all of us.