on February 2, 2012
This excellent book looks at how huge and growing inequality affects Britain's economy. It complements Richard Wilkinson's splendid The spirit level, which looks at inequality's moral and social effects.
Since 1980, Britain has had three recessions, 1980-81, 1990-91 and 2008-09, in which output fell by 4.7 per cent, 2.5 per cent and 6.4 per cent.
These crises resulted from worsening relations between the classes: Thatcher's attack on the working class cut wages, causing a fall in demand. Inequality is not the cause of the crisis: it is an effect of the current state of the class struggle.
As two IMF economists, Michael Kumhof and Romain Rancière, wrote, "The crisis is the ultimate result, after a period of decades, of a shock to the relative bargaining powers over income of two groups of households, investors who account for 5 per cent of the population, and whose bargaining power increases, and workers who account for 95 per cent of the population (and whose bargaining power has fallen)."
The ruling class, primarily its financial component, loot the productive economy. We, the vast majority, suffer a slump. Since 2005, our living standards have fallen every year. The Office for Budget Responsibility forecasts that our real take-home pay will keep falling till 2016 at least.
Thatcher's hero Milton Friedman said in 1980 that Britain's industry should be allowed to fall to bits. Financial services would fill the gap. Thatcher embraced this view and enforced it. Labour followed Thatcher.
Thatcher removed lending controls, enabling the growth of credit card companies, loan companies and building societies turned banks. But between 1979 and 2009, financial services generated only 140,000 new jobs.
It is not that the state is `crowding out private endeavour', as Osborne claimed, but finance is crowding out industry. In Britain, the economy grew by 2.2 per cent under Thatcher and Blair, by 3 per cent between 1950 and 1973, pre-Thatcher.
Between 2000 and 2008, Britain's real growth rate was not 3 per cent a year, but 1.5 per cent. 1.5 per cent was Brown's bubble borrowing. Between 2000 and 2007 consumers' spending grew by £55 billion more than their income. A rise in debt means creating money without wealth.
Finance grows from debts and fees. If a typical British and a typical Dutch person save exactly the same amount for their retirement, the Dutch person will get a 50 per cent larger pension. When we are sold pensions at a charge of 1.5 per cent a year, this will mean 38 per cent of our possible income being lost to fees over the lifetime of our pensions.
British companies invest less in R&D than their competitors. In 2005 they spent £17 billion on R&D, but between 2000 and 2008 they spent £86 billion a year on mergers, which destroy wealth and jobs, but paying vast fees to those who financed the mergers.
Between 1999 and 2007 domestic bank lending tripled, but their lending to manufacturing halved, to just 2.4 per cent of all loans: £1000 billion went to property investment, just £50 billion to manufacturing. Between 2008 and 2010, banks doubled the rate of interest they charged on loans to small businesses.
In the first half of 2010, Britain's top five banks made £15 billion profits (largely by financing mergers). But they lent less than they got in repayments. In 2009 Barclays paid £113 million corporation tax on record profits of £11.6 billion - a 1 per cent rate! Also in 2009, 300 staff at government-owned RBS got more than £1 million each.
New rules, Basel-III, drawn up by bankers, impose tighter controls on banks, but won't be implemented till 2019 and won't prevent other crises, according to Mervyn King. As he said, "Of all the many ways of organising banking, the worst is the one we have today."
Lansley rightly urges the need for a National Investment Bank to provide affordable loans and grants for industry and infrastructure projects. Of course, the EU would try to stop us creating such a bank.