Refurbishment of the Teatro Colón in Buenos Aires, March 31, 2010
Book Details
Andrew Sayer
WHY WE CAN'T AFFORD THE RICH
414pp. Policy Press. £19.99 (US $35.95) .
978 1 4473 2079 1
Inequality is a growing problem but the solution is far from clear
EDWARD N. LUTTWAK
For a reviewer, no sin is greater than to cite one's own work when one is supposed to present another's, especially a book as substantial as Andrew Sayer's Why We Can't Afford the Rich. But sin I must, because it is important to recognize that the discovery around 2013 of the long-term trend towards increasing inequality (I time it by the huge response to Thomas Piketty's Capital in the Twenty-First Century) was anticipated as early as 1993, both in my own work – as a very part-time economist – The Endangered American Dream, and by others, more qualified no doubt. These books were well published, politely reviewed for the most part – and yet utterly ignored in political reality, even though the simple argument was documented, perhaps over-documented, with a relentless parade of statistical series centred on the deflated hourly pay rates of non-farm, non-supervisory employees in a whole slew of industries.
They demonstrated that by 1977 or so, the long-term increase in the hourly wages of American employees – the very engine of the American Dream – decelerated and then practically stopped. Separating out overall averages, it emerged that hourly pay rates were no longer growing even in the best-paid sectors, such as mining or the unionized car industry, while there was a concurrent decrease in the numbers so well employed. Unemployment was not rising in the United States, because there were fewer European-style rigidities, legal or cultural, and fewer unemployment benefits, and the minimum wage is set low; so that instead of European unemployment levels, in the US low-paid employment could keep expanding in retail trade, fast food, private security and such. But the drop from manufacturing pay rates to such service pay rates was huge, at least a 4:1 difference, one that implied entirely different ways of life: the former with house, pick-up truck and children in higher education; the latter with parental or rented lodgings, a battered car, and nothing else.
That seemed very alarming, because by 1993 the sinister immiseration process had outlasted any possible cyclical or otherwise temporary causes, while the sovereign remedy insistently proposed (as it still is, by the statistically ignorant) – increasing skill levels, was clearly a non-starter because well-paid work itself was migrating away, and because people earning a few dollars per hour would not be able to educate anyone, let alone employees for companies such as Apple, Microsoft, Google or Facebook (whose total employee numbers in any case remain modest as compared, notably, to WalMart's 1.4 million employees in the US alone).
It is true that high-tech pay rates were and are even higher than the highest industrial wages of old, indeed much higher, so that in high-tech regions Victorian employment patterns have been re-created: too-busy-to-live high-techies employ retinues of nannies, housekeepers, dog walkers, cat-minders, pool boys and personal shoppers. None is of course called a servant, certainly not by their employers, but the economic and thus the social gap is even larger than it was in the days of under-parlourmaids, because no personal-service job, however well paid, can begin to compare to stock-option earnings, which can of course make even doctors and lawyers into the equivalent of under-parlourmaids.
The new American servant class, moreover, is very much better off than most of those who work in impersonal service jobs, because for every hedge fund executive, there are vast numbers of near-minimum wage employees. In most parts of Europe where such jobs are precluded by high minimum wages, there is instead chronically high unemployment, with more of it now in the superimposed cyclical crisis, and still more in such places as Sicily's Bagheria, where the official 40 per cent unemployment rate is thoroughly misleading in both ways: first because some of the listed unemployed works in the black economy (which pays poorly, however), while the employed are in large part the useless or counterproductive employees of the municipality, province, region or state.
Worse still, when classic industrial employment disappeared in urban centres, such as Baltimore or Rochdale or Thionville, nothing could replace it, except welfare dependence and all its unlovely corollaries that go unnoticed but for the occasional outbreak of violence. Much less dramatically, but much more significantly, the long-term slide in earnings is manifest not just in certain benighted streets of Baltimore, Rochdale or Thionville, but across the breadth of society in the United States, as well as in most parts of Europe. The consequences are both concrete and measurable, as well as invisibly corrosive until they emerge in the form of increasingly immoderate political preferences: in the US within the Republican and Democratic coalitions, in Europe in distinct political parties variously labelled as populist or xenophobic, but certainly anti-European, (i.e. anti-system).
In the US, the accumulated consequences of declining or stagnant earnings are measurable in family net worth averages: between 1989 and 2013 (which comprises both "boom" and "bust" years), the inflation-adjusted net worth of the median family of each of the four racial or ethnic groups were: non-Hispanic whites, $130,102 and $134,008 (that is, a wealth increase of around $4,000 in twenty-four years, very much less than in past periods since 1776); starting lower down, Hispanics of any race did better relatively at $9,229 and $13,900, but that number cannot comprise owned housing except in fringe areas; non-Hispanic blacks, $7,736 and $11,184, remain at the bottom of the pile, and are mostly lodgers, not householders; Asians and other minorities did much better at $64,165 and $91,440.
These numbers come from a much less radical source than Andrew Sayer's declaredly radical work: the Federal Reserve Bank of St Louis (William R. Emmons and Bryan J. Noeth's "The Middle Class May Be Under More Pressure Than You Think", online at stlouisfed.org). Their implication, however, is decidedly radical, nothing less than the end of the American promise of ever-increasing prosperity.
As for the causes of the epochal change, even back in 1993 there were several different hypotheses. The most obvious was the increasing integration of advanced economies with lower-wage economies, or globalization, a term still new in those days (as the then chief executive of Caterpillar put it, why should our US workers earn more than our Mexican workers?). But that was also the only argument that was disallowed, because professional economists could only shudder at the ignorance of those who did not know their David Ricardo, and therefore did not understand that Free Trade is always better for all, given that each time a barrier is removed, the many beneficiaries can easily compensate the few losers. Among my reviewers, it was the eminent Robert M. Solow (in the New York Review of Books) and the already well-known Paul Krugman (in the purpose-written Pop Internationalism) who mocked the crude intellectual error of blaming globalization, and both thought it irrelevant that compensation for freer-trade losers is not actually paid at each remove, that being irrelevant to the validity of the theory.
Where I and others more qualified, such as Robert Reich in The Work of Nations (1991), came up short was in offering remedies, because, while blaming freer trade, I was not about to recommend autarky; while Robert Reich, on becoming Bill Clinton's Secretary of Labor in 1992, was entrapped in the false "up-skilling" solution. Nor was I ready to support sharp tax increases to redistribute income, let alone wealth, if only because I would have been a redistributor rather than a redistributee.
Things are different now, because in most industrial countries inequality in itself has become the central issue rather than the processes that generate it – because there is no longer the hope of redirecting them – and any number of policy remedies can now be proposed by those like Andrew Sayer who argue that when the 1 per cent takes all the growth, the remaining 99 per cent should use their vote to take it back, or some of it, at any rate, by voting for politicians who will do it for them. That is what the book is about, and Sayer proceeds very systematically with arguments that may be disliked but which are internally coherent, and with facts that are excessively selective at times but not dubious in themselves. Most important, Sayer does not invent economic mechanisms in the way that populists often do, never forgetting that cake-making must come before cake-distribution, even while rejecting each version of the argument that redistribution inhibits growth.
After taking 118 pages to demonstrate that the rich take too much of total wealth in ways that most people view as legitimate, indeed as desirable in principle, but which Sayer deems unjustified (e.g. "Shares and dividends: a bizarre institution"), using the dread word usury along the way, after focusing on the evils of rentier incomes, he arrives at the standard objections to redistributive policies. Proceeding systematically, he starts with "don't the rich create jobs?", answering that in fact they destroy jobs because if poorer people in greater numbers had their money, they would consume more. Aware that supply is also needed, which in turn requires investment, which requires wealth, he answers the objection by first praising entrepreneurship as wealth-creating but then arguing that pressures to deliver "shareholder value" (any mix of appreciation, buy-backs and dividends) inhibit the innovative risk-taking that makes entrepreneurship valuable.
Next he notes the concrete value of social entrepreneurship (a cycle club can add value), and then argues that the state (adding "yes, the state") can also be entrepreneurial, mentioning the creation of the British National Health Service; but he notably fails to give examples of state enterprises that use the taxpayer's capital efficiently, which are indeed surprisingly hard to find, given the immense number of state enterprises world-wide. It is remarkable in how many of them the employees diminish the people's wealth even without theft (all too common) and without corrupt giveaways ( a simple device, but it made many a Russian oligarch), by simply paying themselves too much perfectly legally. In South America, for example, state-owned entities commonly pay a double aguinaldo, the second salary paid for the Christmas month of December, which thereby becomes a triple salary.
Thus Andrew Sayer fails to note that rather important extra way for the richer than average to become richer, if not very rich: the average pay rates of state-owned enterprises are almost always higher than non-state pay rates, often much higher. And things become worse when the state subsidizes private or institutional activities, which invariably redistribute upwards, sometimes egregiously: a few years ago, it emerged that the Buenos Aires Opera, whose ticket prices are high and thus bought only by the relatively wealthy, nevertheless received a subsidy of US$100 million for a major refurbishment, i.e. all Argentinians were paying for a few rich opera-goers (by comparison, the Royal Opera House in London received £26 million in 2013).
Of course the Buenos Aires Opera is a mere bagatelle as compared to the redistributive effects of the global warming panjandrum now raging across the world, from the especially afflicted West Coast of the United States all the way to China: it is a very powerful way of impoverishing the poor while enriching the rich both broadly and very narrowly: who gets to receive solar-panel installation credits? Certainly not Baltimore lodgers or Thionville denizens of rent-controlled HLMs (habitation à loyer modéré). Who gets to buy subsidized hybrid cars and super-subsidized electric cars? Certainly not those driving older second-hand cars, or none. Narrowly, i.e. when state money is given to specific companies "to fight global warming", things are much worse: the billionaire owner of Tesla cars was given $1 billion or so to produce its fancy electric cars that only a few of the subsidizing taxpayers could ever buy, and that is normal because all known environmental restrictions and initiatives redistribute from the poorer to the richer, but the rather "green" Sayer does not pursue that track. Indeed, in his global warming paragraphs, he takes the highly conventional view that proving global warming is man-made is the same as proving that it must be stopped, without even trying to calculate benefits as well as costs (Canada and Kazakhstan could feed the world, etc), these being things worth looking at given the global redistributive effect of global warming policies, most recently ruining the livelihoods of American coalminers.
To reach his conclusion, Sayer proceeds systematically through all the objections. After addressing the innovators' claim to great riches, citing the vacuum-cleaner entrepreneur James Dyson as well as Steve Jobs et al, incidentally noting their propensity to export jobs to overseas plants, he concludes that they deserve two cheers and millions, not three and billions. He replies to the argument that the rich will emigrate if taxes rise by noting that very rich Norwegians stay and pay, as do some Swedes, so that rich Londoners would do the same rather than live in Dubai down the road from Islamic State. Philanthropy is dismissed on the grounds that the state should provide, and his penultimate point is that inequality causes ill health.
At the very end the prescriptions are uncompromising, indeed extreme in their totality, but again very well presented in detail. Sayer wants not only steeper income tax tables, but also substantial and very progressive wealth taxes, to which he would add Piketty's "exceptional" tax, a one-time levy (a huge one) to pay off national debts and unburden fiscal regimes everywhere (he does not pause to contemplate what profligate legislators would do without the national debt to restrain them), stiff inheritance taxes, and much higher corporate taxes regardless of inter-company transfers, all of the above preceded by global bank data-sharing so that fiscal authorities everywhere would know who has what, as the Internal Revenue Service in the United States mostly already does (it also has a functioning court system to deter evasion by swift imprisonments, a thing mostly impossible elsewhere).
I of course oppose Sayer and will resist redistribution in any way I can, but must recognize that what was politically premature in 1993 has now arrived. David Cameron's victory, amply justified by bold economic growth policies nevertheless had to overcome the inequality argument, which has now propelled Corbyn's improbable rise, while Hillary Clinton's royal progress has become a ragged scamper as the Socialist Bernie Sanders forges ahead (desperate, she abruptly turned on the fat cats that have lavishly funded her family, her family's non-profit profiteering, and her own campaigns). Even Republicans are talking about wage stagnation, with some pursuing the argument into Andrew Sayer territory – without the wealth tax, of course.
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