The rich and the Western sovereign debt crisis

Abstract

The Occupy London group is asking for a real debate in politics and economics, rather than the closed-down debate in Westminster politics and also the City of London. They are right so to do, because no real responses are coming from either, other than the ya-boo of the Commons and the “banking is complicated” of the City. This short paper raises an issue which both groups must address, says the author, if they are to have any integrity. The countries where major financial crises in sovereign debt have occurred in the West are also the ones which are most unequal in terms of the distribution of income and wealth. Author Alan Starkey is an economist and sociologist with a strong theological pedigree.

The structural problem of the rich

The Occupy London group is asking for a real debate in politics and economics, rather than the closed-down debate in Westminster politics and also the City of London. They are right so to do, because no real responses are coming from either, other than the ya-boo of the Commons and the “banking is complicated” of the City.

This short paper raises an issue which both groups must address if they are to have any integrity. It seems that the countries where major financial crises in sovereign debt have occurred in the West are also the ones which are most unequal in terms of the distribution of income and wealth.

The raises the likelihood that this inequality has helped generate many of the financial crises in which we are now embroiled. The City as an extreme concentration of wealth is asked to address this fact, and the Conservatives, as a Party which backs the wealthy, is also asked to address it.

For the last three decades, since Thatcher came to power, we have been taught that the wealth creators have made us rich. Actually, most of this has been myth. We have had an oil bonanza of substantial proportions which is now largely played out and the economies of China and India have replaced our domestic industries and services with cheaper imported goods which have enhanced our living standards but destroyed most of our industrial base.

We have also had a credit boom which has enabled many people to buy now, usually overpriced houses, and have the effect of helping people feel affluent until the debt bites, as it has. Meanwhile both Conservatives and Labour Governments have increased sovereign debt, largely to avoid taxing the rich and powerful, who have grown more rich and more powerful. They have falsely claimed kudos (fittingly a Greek word) for what they have not done for our well-being.

As a result of these changes the United Kingdom has moved from being one of the more equal parts of Europe in income distribution to being more unequal than Italy and Spain.

This is a significant long term change which has damaged the United Kingdom economy. Neither the Conservatives nor the City of London can pretend that it is not there. This paper raises the issue of what kind of structural issue it might be.

Inequality and Public Debt

An association does not show a causal link. Moreover, when two such complex categories as inequalities of wealth and income and sovereign debt are under consideration, the links between the two are likely to be multiple, but it is clear as the gap in the table below intimates that the two are strongly related. Broadly speaking, most of the countries facing a fiscal crisis have Gini coefficients (the normal measure of income inequality) in the upper thirties and low forties, while the European countries not so threatened have levels of mid to upper twenties and low thirties.

Countries Gini Coefficient (UN) Sovereign Debt/GDP (IMF)

Greece 34.3 130%
Italy 36 118
United States 40.8 100
Belgium 33 100
Ireland 34.3 93
France 32.7 84
Portugal 38.5 83
Canada 32.1 82
Spain 34.7 65
United Kingdom 36 77

Denmark 24.7 44
Germany 28.3 74
Netherlands 30.9 66
Norway 25.8 54
Sweden 25 42
Switzerland 33.7 40
Luxemburg 26 20

In one sense the task of this article is already completed. Simple inspection suggests that this relationship is significant. Are the Conservative Party and the City of London willing to accept that this might be so and discuss it, or are they going to revert to Ya Boo and banking is complicated? If they opt out, then we simply have a blustering rich political and economic establishment of toffs, and not a real nation. We who occupy London, Hartlepool, Luton, Wolverhampton are not going to be fooled.

But the debate is what the relationship between these economic realities might be, and below a number of options are set out.

The relationships between Wealth, Poverty and Sovereign Debt

These theses merely set up discussions which should take place. For several decades all of these arguments have been swept under the thick pile carpet.

1. The rich have avoided taxation. The wealthy have had access to political power, often as a result of funding political parties, and have reduced taxes for high income earners, so that overall taxes are weakly progressive, or even regressive.

This is not realized, because the rich make so much fuss about the taxes they pay, but since Thatcher until now, the poorest fifth pay a higher proportion of their gross income in taxes than the richest fifth. We in the UK tax the poor harder than the rich. Because poorer groups can scarcely be taxed more and the wealthy have avoided any taxes which diminish their income and wealth, there has been a tendency for the ability to tax to decline and as a result sovereign debt has climbed. There may be tax avoidance and the use of tax havens.

2. The rich are fond of government debt. The rich want to get income without work through investing their accumulated wealth in secure financial assets. Until recently there has been nothing more secure than sovereign debt, and it has therefore been a preferred form of investment as the rich have accumulated wealth.

This process happens through a range of financial intermediaries. You have already seen the problem. If the rich like sovereign debt and through normal market processes generate more of it, then the level of national debt is slowly racheted up, and that has happened in Britain, and elsewhere. Thus, it is possible that the rich have encouraged a sovereign debt rise. Overall, it is possible in a range of European countries that the need of the rich for a secure source of rentier income has raised levels of sovereign debt.

3. The Financial Sector Avoids Taxation

One of the biggest sources of taxation revenue revenue is VAT. It is levied on most transactions of goods and services, other than those generated by small companies, but for some obscure reason banks are VAT exempt. Moreover, through off-shore banking and many other manoeuvers, the banks seem to be grossly undertaxed. This may partly explain the expansion in this sector. Of course, ad hoc bank taxes were used in the crisis, and the Tobin tax has been discussed at length, though the banks have thus far avoided it. Though it was been proposed in Europe the Cameron/Osborne Government has opposed it.

The time has come for a thorough independent review of the taxes paid, and avoided, by the financial sector. The City of London, a state within a state, should be required to open its books and reconsider whether it is a private company or part of normal local democracy. Elsewhere, we will note massive windfall profits which have come the way of banks and are presently untaxed. Low taxes of the financial sector adds to sovereign debt.

6. The Rich milk Public Expenditure

One of the changes over the last few decades is the way in which rich private companies have been able to tap into vast areas of government expenditure. Contracts are drawn up which frequently cost the earth and amount to bonanza time for these companies. Tens of billions goes to drug, defence, accounting, legal, service providers, private health companies, building, infrastructure, energy, transport and other private companies.

We need to know what proportion of annual Government expenditure goes to these private companies. The information seems unavailable. Many of these contracts in health, transport, defence, drugs and elsewhere have been shown to be vastly overpriced. We need to assess how much public money is leaking from government into private business profits. It must be vast.

A Real Debate

How these contribute, in the UK and elsewhere to the increase in sovereign debt is open to debate, but they are an important part of the debate which should be taking place.

The rich have not told the truth about taxation, tax avoidance, the economic impact of their operations and have gradually increased power over the economy, until they have delivered a mess for the rest of us.

The Conservative Party has parroted that Labour is to blame when the responsibility of both parties for sovereign debt increases is clear. Cameron should cease his Ya Boo and grow up. There are also other questions to answer. How can it be either just or make economic sense that top “earners” (that word here beggars belief) are given a hundred times the income of normal competent workers doing their job well. “Wealth creators” have become good at claiming credit for the work of others.

In all of these situations insufficient notice has been taken of the vast process of accumulation which the rich have undertaken over the last few decades, the tax regimes which they have put in place, and the structural distortion of economies which has followed from this. The words of the apostle James to the rich, read in St Paul’s, are “You have piled up riches in these last days… Your life here on earth has been full of luxury and pleasure. You have made yourselves fat for the day of slaughter.” (James 5: 3-5) The time has come for some public honesty from the rich and the City of London.

THE AUTHOR

© Alan Storkey is is an economist, sociologist and artist. He did postgraduate work in sociology at the London School of Economics and a doctorate in economics (consumption theory) at the Vrije Universiteit, Amsterdam, studying under Bob Goudzwaard. His first academic post was in sociology at Stirling University from where he went on to direct the Shaftesbury Project. Contact: alan (at) storkey.com

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