It’s growing: the gap between rich and poor, fat cats and workers, in the UK and USA

Plenty of high powered executives will remind us that their own hard work and talent needs to be suitably generously rewarded. Fewer step up to the podium to brag that their profit-making talent is actually dependent on less privileged workers being paid as little as 11 cents per hour.

So, let’s look at whether relative hard work and talent is really being suitably rewarded.

The Chief Executive of Tesco was paid £5m in 2005. In 2006 the average employee will be paid £11,594, down from £12,713 a year ago. Bearing in mind the usual rational for higher earnings, is it credible to argue that the Chief Exec is 430 times more industrious and qualified than the average Tesco employee?

Of course, Tesco executives are not alone in creating the wealth that makes for soaring incomes. But, the real threat to a company’s competitiveness, they say, is not the fact that one super-exec can produce the same outputs as 430 mere mortals - it is the fact that the least well paid workers are forever demanding more pay than they ought to, forcing companies to seek harder workers willing to work for less.

Let’s assume for a moment that super-execs can really do the work of 430 average folk. What a wonderful opportunity this represents. By my calculations, the UK population need only nationalise all businesses and put 85,000 super-execs to work on average wages to produce enough savings to free the rest of us from the need to ever work again.

Alas, I fear the Chief Execs will resist being put to work purely in the interest of others. Supermen they may be, but self-less they are not.   In the US, whilst the national average income per head has doubled in real terms since the 60s, Chief Executive incomes have grown by a multiple of 11.   Meanwhile, those who depend on wages have gained little or nothing. The graph below (right) helpfully shows the rising ratio of the income of the richest fifth in society vs the poorest fifth in the US since 1975.

Note that the rising ratio on the right almost exactly mirrors the steep rise in Chief Executive incomes on the left.

Few economists would dispute that US society is becoming increasingly unequal. National income is being redistributed away from the majority earning the least to the privileged owners and controllers of capital. Legislative policies authored by and for the super-rich have, over the last 25 years, led to the systematic transfer of tax burden off the richest 5% onto working people.

President Bush makes no bones about whose interests he represents, hence his statement at a dinner fundraiser of the rich and wealthy… ‘"This is an impressive crowd - the haves and the have-mores. Some people call you the elites; I call you my base."

George Bush’s tax cuts for the wealthiest 1% in society is just one example of this cosy alliance between our leaders and those who frankly, already avoid paying more tax than a patriot ought to.

Of course, this could only happen in the USA, right? Erhh, no. Actually the size of the gap between the richest and poorest 20% of society has been growing in the UK since the late 1970s almost mirroring the USA (graph below). If you wonder how much privatisation and financial deregulation have to do with this, look to Russia (right) where, since the population were ‘liberated’ from the shackles of communism in 1990,  the rise in inequality has been acute.

Russia offers a timely warning of how the majority suffer when income loses all relation to hard work and talent and simply becomes proportionate to an already powerful person's access to capital and preparedness to steal value from others.

If our power elite can't set an example, we must make an example of them. One UN report warns that, at  the current rate, one third of the world's population will be slum dwellers by 2030 living on $1 a day. 

Ends | 15 Oct 2006 | The Leg

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Essential Reading:
Bush: Before and After
100 Ways of seeing an Unequal World by Bob Sutcliffe
The Spirit Level by Richard Wilkinson and Kate Pickett
An ordinary person's guide to Empire by Arundhati Roy

Related Viewing:
Senator Bernie Sanders on US wealth inequality and tax breaks for the rich at a time when the wealthiest 1% are taking 23% of all post tax US income.

Video: BBC TV, Jan 2010 - Responses to the 2010 Government Report - An Anatomy of Economic Inequality in the UK

Related Graphs:

Graph: Look what percentage of business/financial assets are in the hands of the wealthiest 1% in the US. And note that the bottom 90% are the one's saddled with all the debt and with all their wealth tied up in the roof over their heads. For this and other revelations read the recently updated 'Wealth, Income, and Power' by William Domhoff.

Graph: Given the option, 92% of 'regular' Americans say they'd prefer to live with the division of societal wealth labelled 'Ideal' above rather than the one labelled 'Actual'. The 'Actual' is the current status quo in the US (note the share of the lowest 40% doesn't even register). The 'Ideal' is Sweden's current split. The 'Estimated' split above shows what respondents guessed to be the actual division of wealth in the US. It greatly underestimates actual wealth inequality. Over 5500 respondents were involved. For more, see Building A Better America.



Graph: A US Congressional Budget Office report of June 2010 finds that between 1979 and 2007 the after-tax income of the richest 1% of Americans rose by 281%, whilst that of the poorest fifth rose by 16%.

Graph: Male mortality rates in Russia (green) compared to Belarus (red). Life expectancy for Russian men fell from 64 to 58 years between 1991 & 1994! Contributing factors? Sudden rapid privatisation producing unacceptably high levels of unemployment, wealth inequality, insecurity and related drink and drug abuse. Belarus wasn't in such a hurry to privatise. See Stuckler, King and McKee's analysis.

Graph: In afluent Western market democracies, no one is in danger of dying of starvation. However, there remain significant problems. Where the income gap between the richest and poorest 20% in a country or US state is larger, the problems are exacerbated. The result is detrimental not just to the poor, but to the vast majority of society.

The graphs published by Wilkinson and Pickett in The Spirit Level, suggest that many problems - low social mobility, high numbers in prison, low public trust, higher mental illness, drug use and obesity - tend to be worse in less equal societies.

Question: Do these problems hinge on perceived relative human worth as implied by relative rewards/income?

If so, 5 might just be the required magic number. Only when the top fifth of earners decide they can make do with earning 5 times more than the lowest paid 5th of earners (as in Finland, Sweden and Denmark) do these problems diminish. Without pay restraint at the top end, the problems persist.

Enter the 26 year old city trader of Liar's Poker. On the day his salary (before bonus) rises to $60,000 he starts to feel cheated. Why? Because he looks round and sees other traders being paid much more. Then a colleague explains:

"You don't get rich in this business...you only attain new levels of relative poverty."

Clearly, even the highest earners 'suffer' where top executive pay shows no restraint.



Graph: Excessive banker salaries a predictor of depression?

Graphs Above: From an AFL-CIO presentation called Extreme Inequality.

Note that in post WWII America incomes rose for all five broad income groups by similar percentages. Over the last 30 years the real income gains have been made only by the top earners.

Federal Reserve Board figures for 2004 put the net worth of the Top 1% in the States ($16.8 tn) - in excess of the total net worth of the bottom 90% ($15.3 tn).

Related Articles:

2011:
Regulator fines world's richest man's co for monopolistic practices
FTSE's top 25 company CEOs bagged 86% more pay in 2010!
FTSE 100 CEOs get 145 times the average wage (£3.7m on av.)
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M&S and Next among brands with sweatshops in supply chain
Apple's Chinese workers treated 'inhumanely, like machines'
JP Morgan CEO got $5m cash bonus and 50% pay rise in 2010
Goldman Sachs CEO paid $18.6m for 2010 as profits fell 38%
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Top 1% in USA control 43% of the nation's total financial wealth
Welfare states (Norway, Denmark, Finland...) beat USA on joy
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Deeping crisis traps America's have-nots

2010:
Indians producing fashion items for UK paid from 8p an hour
FTSE 100 Directors pay rises 55% in 12mths (austerity for all?)
1000 billionaires at the top, 3 billion with <$10,000 at the bottom
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15 mind blowing facts about wealth inequality in the US
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UK FTSE 100 CEOs pay was 81x their average worker's in 2009
Billionaire Tory party doner dodges £millions a year in taxes
UK: Bottom 20% saw income fall after 2005, top 20% saw it rise

2009:
NEF report challenges 10 enduring myths about pay and work
US: 80% of adults share just 7% of US wealth, 1% controls 42%
GE chief attacks 'meanness and greed' of business leaders
5000 UK bankers earn more than £1m
FT reports UK FTSE 100 boardroom pay doubled in a decade
AT Kerney report: richest 1% in UK hold 70% of wealth
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UK bankers paid 'far too much'
Salary of average blue chip company CEO in UK is now £791,000
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CEO leaves failed bank clutching his £693,000 pension
Men who made £1bn when banks were bailed out
Brazilian taskforce frees 4,500 enslaved farm hands in 2008

2008:
Gap between rich and poor in UK 'doubled in past 30 years'
Tesco sells clothes made by factory workers paid £7 a week
How Labour shifted taxation from rich to poor in the UK
Only 7% from lowest 1/5 of earners rise into the top 1/5 in US
Since 1913, only 1928 saw such unequal wealth distribution
PM seeks to abolish tax concession for workers on low wages
Cleaner in Tesco store in Malaysia paid 8p an hour
Stark contrast between CEO bonuses and company performance
Rich have estimated £3.5 - £6trn parked in offshore tax havens
Only 15% of UK voters think the wealth gap is about right
Barack Obama notes 'moral deficit' of excessive CEO pay
Tackling tax avoidance by UK rich could help low income workers
10 hedge fund managers earned $500m+ each in 2006
US 2006-7:wages stagnate, profits, poverty & wealth gap grow
Wealth of the world's richest climbs to $37 trillion

2007:
UK bankers & financiers taking record bonuses in 2008 Q1
Migrant fruit-pickers held prisoners on Florida farm
FTSE 100 bosses' pay doubled over the 5 years to 2007
Rising basic commodity prices disproportionately hit the poor
MD pay at 8x a check out girl's would be fair says UK survey
Unwaged 10 year olds found making Gap Kids clothes in India
Private equity partners pocket £50m each
Minimum wage for 16-17 years olds to rise to £3.40 an hour
Typical FTSE 100 boss now earns 100 times more than workers
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Some CEOs pensions 42 times more generous than employees'
The sweatshop high street - more brands under fire
For the first time, Britons' personal debt exceed Britain's GDP
75% of UK retail workers receive the minimum wage
Globalisation provokes backlash in rich nations
Inequality at 40 year high in the UK, and the public don't like it
High price paid for cheap UK clothes
Asda, Primark and Tesco accused over clothing factories
Africa: abutting every slum, castles of the unimaginably rich
BBC Director General paid £780,000 last year
Tesco investors attack executive bonus plan
Tesco has to play fair on wages for farmworkers
UK's richest work hardest to avoid paying income tax
OECD reports growing earnings inequality and insecurity
Highest top to bottom income gap since the 1930s in the UK
Private Equity Chief Exec's personal income was $398m in 2006
US top 1% earning largest share of national income since 1928
5 million more Americans in poverty since Bush elected
UK: 50% of all adults share just 7% of UK's wealth
UN puts UK bottom of 21 advanced nations
Britain's rich just keep getting richer
World's 50 richest individuals have combined wealth of £360bn

2006:
By 18 or 20 your life is largely mapped out for you in the UK
"Goldman Sucks" claim protesting cleaners
Fashion victims work an 80hr week at 5p an hour
The Farepak scandal lays bare a gross inequality
Social mobility in UK in decline
Typical FTSE 100 boss earns 86 times more than workers
FTSE top 20 make £96k per employee
Growing inequality produces poor health and unhappiness

Interesting:

'Though rich countries have preserved their overall tax revenues, corporations and rich folk have paid much less as a share of these...The rich have not only seen their wealth and income soar, but they have shifted their income out of personal income tax categories... For example, the richest 400 Americans booked 26 per cent of their income as salaries and wages in 1992, and 36 per cent as capital gains. By 2007 they recorded only 6 per cent as income and 66 per cent as capital gains... In contrast, the working population has seen its personal income taxes and social security contributions rise over the last thirty years, as their wages have stagnated' p199

'In the golden age of 1947-73 the US economy grew at nearly 4 per cent a year, while the top marginal tax rate was between 75 and over 90 percent. p204

'In 2005, the Tax Justice Network estimated that wealthy individuals hold perhaps $11.5 trillion worth of wealth offshore.' p26

[During the 80s US corporation tax receipts made up on average 9% of total US government receipts - down from, on average, 27% in the 50s. See Historical Table p32 -33, Buget for Fiscal Year 2011.]

'Corporations hold their profits offshore... only when they bring it back home to pay out as dividends to shareholders does it get taxed... this sharply reduces multinationals' cost of capital... and this in turn gives them a huge competitive advantage against smaller, locally based firms.'

'The construction of secret monopolies via offshore secrecy is pervasive in certain sectors ... such as constructing a local market monopoly by disguising the fact that a seemingly diverse and unrelated array of competitors in a market is in fact controlled by the same interests... [this] helps explain why, for example, mobile telophony charges are so high in some developing countries.' p165 [See Carlos Slim]

'Eurodad's aim is to underscore a vital point: the offshore world is the biggest force for shifting wealth and power from poor to rich in history.' p28

'Tax, not aid, is the most sustainable source of finance for development. Tax makes governments accountable to their citizens, while aid makes governments accountable to foreign donors. Many Africans know this very well.' p200

'Britain and the US, the two leaders of modern global finance, are now among the most unequal societies in the developed world. In Britain 0.3 per cent of the population owns two-thirds of the land... In a UNICEF league of twenty-one industrialised nations measuring child well-being, the UK came last, marginally behind the USA... Meanwhile, the 1,000 richest Britons had wealth of £335 billion by the end of Labour's term in 2010, up from £99 billion when Labour came to power in 1997. And that's just what we know about.' p277

'The culture of tax avoidance seems to have permeated British society... The consensus is now so widespread that Britain's tax authorities sold off nearly 600 of their own buildings in 2001 to a company, Mapeley, registered in Bermuda to avoid tax... In 2009 it emerged that the government minister in charge of cracking down on corporate tax avoidance had set up a business in Bermuda to avoid tax.' p275

From Treasure Islands: Tax Havens and The Men who Stole the World by Nicholas Shaxson

Tax Evasion Extra:
Worlds main grain traders use havens to avoid taxes in Argentina