What have the Super-rich and income-inequality got to do with the economic crisis? A great deal! Professor Sayer detailed the build-up to the crisis over the last 40 years how the massive expansion of the financial sector has enabled a tiny minority to get rich by taking advantage of the opportunities it affords for wealth extraction on an unprecedented scale. He also show how a finance dominated elite subordinated democracy, ensuring that governments supported the interests of the rich, including their use of tax havens to hide their wealth. It explains the remarkable success of the rich in making others pay for the crisis, while diverting attention from what they have done and continue to do:
It is no accident that Capitalism’s most successful decades in Europe and the U.S, – the 1950s and 1960s – were also the period when the share of national income cornered by the rich was at its lower. In fact, the rise of the rich is an integral feature of the crisis, just as it was of the Great Depression in the early part of the 20th century. There is also a big difference, this time, many of the rich have not only got richer in the build-up to the crisis, but also compare to their predecessors in the 1920s and 1930s, who then lost out, they are having a good crisis. While unearned income based on control of assets has always been a problem, it is grown steadily over the last 40 years. Financialisation represents ‘the revenge of the rentier’ after being side-lined during the mid-20th century. They’re active rather than passive rentiers – part of the so-called working rich –ever seeking out new ways of extracting wealth from the economic system through rent-seeking . Financialisation has been both cause and consequence of a shift from wealth creation to wealth extraction and, with that, a shift of wealth to the rich.
The financial sector’s activities affects the lives of every one of us. We need to open it up to public scrutiny and understand what it does- not only because we depend on it for loans and mortgages and entrust it with banking our pay and savings, but because we are having to bail out failed banks and rescue the system from itself. The 2008 crisis was not just a result of the malignant growth of the financial sector alone, but of the interaction between it and the so-called ‘real economy’. A capitalist economy needs not only producers of goods and services for sale, but also a financial sector. The trouble is, Finance has come to dominate rather than serve the productive sector of the economy. As Ann Pettifor puts it: Like a parasite the finance sector invades otherwise healthy economic bodies, rich and poor, and manipulates these to generate greater returns (interest and rent) for the finance sector itself. By doing so, it has weakened, and is weakening these host bodies. This includes individual, from students to home-owners to pensioners.
Capitalism has always depended on the movement of capital from low-profit ventures into high-profit ones. It’s all part of the process of creative destruction that has fuelled the incredible economic growth of the last 250 years. Yet, in the new financialised capitalism, the creativity lay not in long-term investment in goods and services, as it had done in productionist capitalism, but in finding ways of outsourcing activities to cheap labor providers in sweating existing assets for more income, speculating on price differences in different places and price movements and engaging in tax avoidance and creative accounting. Though finding cheaper labour is often claimed to increase efficiency, it just reduced the amount of demand in the economy because workers have less to spend. As a result, inequalities widened in almost every industrialised country: top salaries rocketed and the rich cornered much of the growth in income via dividends on shares and capital gains. Meanwhile the taxes they paid fell, and benefits for lower-income people were reduced. “Dividing the pie up more unequally, would allow the pie to grow faster, benefitting everyone”. It was claimed.
The shareholder value movement changed the nature of the firms. Top managers’ remuneration packages are heavily weighted with shares and share options. Instead of coherent groups of activities required for producing particular goods and services for profit, companies came to be treated as bundles of assets to be bought, dismembered and sold off in pieces, in whatever way delivered short-term profits for shareholders. Corporate buy back programs plunder the companies’ reserve, and reward management with shares, and pushed up the price of the shares by making them scarcer and reduced the amount of tax to be paid on dividends. The spectacle of major firms sacrificing long-term investment so as to produce short-term profits for absentee owners, and taking on debt unnecessarily, highlights the irrationality of financialised capitalism. Top management became focused on finding whatever ways it could to push up stock prices so that its shares and share options could be sold or realized at maximum personal gain, – again, a task made easier by deregulation.
Surplus capital floods the system, One of the hallmarks of financialsation is the spread of the practice of selling off anything that is believed to be able to produce a predictable income stream in order to get cash now. This process of value extraction is coupled with a key instrument in financialisation: ‘securitization’. Deregulation allowed the buyers of the securities to use them as collateral for borrowing, so streams of interest payments on loans suppose backed by collateral in the shape of houses were themselves used as collateral by holders of these asset-backed securities for borrowing. Cutting taxes on the rich reduces the revenue available to governments for the state sector, and high interest rates increase borrowing costs for government. This provides governments with arguments for cutting state spending by privatizing services. A colossal deficit is not such bad news for neoliberal governments: it provides them with an excuse for cutting welfare spending and public investment and selling off public assets that are likely to provide safe streams of income – effectively rent – for private companies.
Who were the main beneficiaries of the rise of finance? Around the world every year an astronomical number of transactions take place in the financial sector. While the majority may be automated, the more customized one provide rich pickings for intermediaries in financial and legal institutions who provide the services necessary for conducting them for fees and commission. The intermediaries are an essential part of the financial ecology and make up the majority of the working rich in the financial sector. Bank bonuses: ‘Heads I win, tails you lose’ – of course, the bonuses went only to a tiny proportion of bank employees at the top – executives, traders, salespeople, wealth managers and specialists in arranging mergers and acquisitions and new issues of shares for companies. U.S. capitalism was once described as ‘free enterprise for the poor and socialism for the rich’. How much more true it is now. The bailout in 2008 is a huge transfer of wealth from the majority of society to those at the top. Tax havens – many of the rich hide their wealth -are a major component of plutocracy. They are not just places that happen to have low taxes, but secrecy jurisdictions in which financial wealth can be hidden. They conceal who owns this wealth, how much they own and where it comes from.
The rich individuals and big businesses made political donations to parties primarily in order to buy influence and to further their self-interest. They want some bang for their buck, not only to get their favored party elected, but to get the right polices. The infiltration and capture of the state by the plutocracy has ben a walkover rather than a struggle: politicians have fallen over themselves to invite them in, often under the pretext that successful business people have special skills not found in the public sector. The political class is either from the rich class or in awe of it, and out of touch with the majority of voters.
Insider dealing; laundering drug money; evading sanctions against rogue states; taking over companies to load them up with debt, and raiding their pension funds; designing products that were doomed to fail in order to bet on them failing, or taking insurance out on other businesses’ products failing, and helping to undermine them so as to cash in; mis-selling mortgages and payment protection insurance (mostly useless but very profitable); credit rating agencies having a financial interest in the companies they are rating; fixing interest rate on interbank lending so as to conceal banks true position and maximize profits; engaging in trades that would make short-term gains while undermining long-term growth; forcing small business borrowers out of business so as to get their property and sell it … Are these practices criminal? Many are not actually illegal, amazing thought it may seem, and hence not officially criminal, though we might regard them as such. That many of these practices are not illegal speaks volumes about the capture of the state and the regulatory system by the financial sector.
In short, the wealth super-rich claimed is mostly dependent ultimately on the production of goods and services by others and siphoned off through dividends, capital gains, interest and rent, and much of it is hidden in tax havens. They are able to control much of economic life and the media and dominate politics, so their special interests and view of the world come to restrict what democracies can do. Their consumption is excessive and wasteful and diverts resources away from the more needy and deserving. Their carbon footprints are grotesquely inflated and many have an interest in continued fossil fuel production, threatening the planet.