This is how revolutions start…
I’m currently reading Tailspin by Steven Brill, and much of the data shared in this article comes from this powerful book. It’s obviously US centric, but the points he makes are just as relevant this side of the pond.
Since the 1970s the focus has moved from producing new assets and new goods to sell to one of moving around existing assets and creating ever more exotic financial instruments with which to do so. Long term incentives to grow the economy have been replaced with a short term trading mentality that also generates huge fees for the banks and hedge funds driving the process.
Unions have become weak and manual workers have seen their well paid jobs sent abroad to low cost countries like China and Vietnam.
For 41 consecutive years from 1929 to 1970 middle class incomes in America grew faster than that of the upper classes. In 1928 the top 1% owned 14% of all wealth, but this had dropped to 9% at the dawn of the decade that style forgot. The income share of the bottom 90% of American society rose from 52% in 1928 to 68% in 1970.
As maxi skirts replaced minis in 1971 the trend began a long reversal that continues to this day. By 2007 the top 1% owned a record 24% of all U.S. wealth, while the income share of the bottom 90% declined to 49% by 2012. More startling still is the aftermath of the 2008 financial crisis – incomes of the top 1% rose by 31.4% between 2009 and 2012 but for the remaining 99% the dial barely registered a 0.4% gain.
These inequalities seem to be here to stay – a 2016 study by Stanford and Harvard universities reported that children’s prospects of earning more than their parents dropped from 90% in 1966 to 50% half a century later.
It seems somehow appropriate that, when there’s bad news around, the mention of lawyers is never far away. From 1900 to 1970 the number of lawyers per capita remained steady. However, as the 1970s economy moved from making new assets to moving around bits of paper relating to existing assets the need for lawyers exploded. Mergers and takeovers, employment law, health and safety, tax planning and corporate response to consumer champions like Ralph Nader, the number of lawyers doubled in a decade. Another 50% were added to that number in the 1980s. By the mid 1980s the fees pouring into law firms were bigger than the entire steel or textile industries and on a par with motor manufacturing. By 2016 graduate lawyers were being offered $180,000 a year starting salaries, 235% above the national average income. It’s a good job we all have so much respect for lawyers and the great value they bring to our society…
Brill sums up the essence of our current dilemma with this quote:
“Legal and financial engineering, once meant to be instruments for gathering and organising the capital necessary for the research, development and production of goods, itself became the product”.
In other words, people are making a fortune moving existing assets around rather than creating new ones. And the long term interests of the economy are being sacrificed on the altar of short termism. In 1960, shares were held by their owner for an average of 8 years and 4 months. By 1980 the average ownership had reduced to 2 years and 9 months. By 2016 the average ownership period had shrunk to just 4 months. Board rooms have become similarly obsessed with manipulating the share price to trigger this quarter’s bonus, often using share buybacks to spread the same profits over fewer shared because they can’t think of a more productive way to deploy the capital. Research and development budgets get delayed or slashed so that more can be spent on engineering the stock price today. This is clearly not a sustainable model and is as much a manipulation of capitalism as the selective asset purchases by the Federal Reserve.
The bottom line is that, taking the last 50 years as a whole, the middle and working class have been slaughtered while the top few per cent have prospered. The differences are too big to explain away with the idea that the same opportunities exist for everyone. There’s a recognition slowly gathering momentum among the losers that they’ve been conned. That the unwritten social contract governing everyone’s behaviour has been torn up.
It’s these stirrings that cause people like Donald Trump to become electable against all expectations. This time Joe Biden might benefit from the combination of decades of steady but sustained impoverishment mixed with unease about how the Trump presidency has panned out. Most US elections seem to end up on a knife edge, decided by a few thousand votes in one or two swing states. If I was an American voter, I’d be worried about the damage that either could do at this critical point in democracy’s fragile history.
Just as the riots in the early 1980s were about a lot more than the Poll Tax, what we’ve seen so far in 2020 goes well beyond the murder of one man by over zealous police. We need political leaders who can revive economic growth in a way that positively impacts everyone, rather than simply deepening the moat around today’s winners. We need to stand up for real rather than crony capitalism and broaden the base of its beneficiaries.
Ah, leadership. Now there’s a word you don’t hear very often these days.
Until next time
P.S. You might want to watch my Money & Me interview with Steve Baker MP this Thursday. I never thought I’d get to discuss Austrian economics with a British MP but life is full of surprises…