The state we’re in — capital and the cost of living crisis

While the ‘cost of living crisis’ may refer to the day-to-day, Thomas Piketty’s economic blockbuster Capital in the 21st Century reveals that the forces driving it might be anything but. The cost of living crisis may not be a temporary state of post-recession poverty after all. Instead, it may be a systemic consequence of macro-historical economics.

Capital in the 21st century

Piketty’s 700 page tome covers a lot of ground. But the important point for us here is that that at the same time as income gains progressively favour the rich — FTSE 100 CEOs earned an average 202:1 against the minimum wage in 2010, up from 124:1 just ten years before — the rate of return on capital is pulling away from income growth.

In a capitalist economy, gains made from capital will always be higher than growth achieved through income (i.e. working), but after a lull in the post-war west, capital is growing as a proportion of national income. That is to say, of that measly 0.8% GDP growth we currently show in the UK, around 30% is attributable to capital — up from around 20% in the 1970s, returning to the 40% it was before World War I.

And when the income figures Osborne uses to show wages are keeping pace with inflation are pulled upwards by those FTSE bosses, that leaves a pretty meagre scrap of growth for the rest of us to squabble over.

Job creating trickle-down

A meagre scrap of growth would be fine if it was a meagre scrap of a lot of growth. But there are two large problems here that play into the cost of living crisis:

  1. GDP is still relatively low
  2. Capital accumulation is both self-perpetuating and relatively isolated from the rest of the economy

The first point is self-explanatory. The second directly contradicts the famous Thatcherite ‘trickle-down effect’ which is the basis upon which every tax cut for high earners and every back channel HMRC corporate tax deal rests — the identification of wealth as a ‘job creator’.

Of course capital is integral to investment in business — which creates jobs, which increases real incomes across the board. But it’s a smaller proportion than The City would have us believe.

In theory, a rich person’s wealth is rarely hoarded. If kept in cash, it’s used by banks to lend to others. If bonds, it’s used by governments to build schools. If investment, businesses buy materials and hire staff. But when the general consensus is that GDP growth and real incomes divorced somewhere in the 1980s, clearly this relationship has broken down somewhere along the line.

You only have to look at how divorced the financial industry (upon which so much of the UK’s growth relies) is from the rest of the economy to see the failure of the trickle-down effect. The FTSE bounced back to normal a long time before the first green shoot appeared outside the Square Mile. Even if we were to take the official wage figures at face value, real recovery only began for most of us at the beginning of 2014, while the FTSE was back to pre-recession level as early as 2011.

What’s blocking investment from reaching the man on the street? Firms more interested in paying dividends than hiring staff have a lot to do with it. As do firms sitting on enormous cash piles. Banks refusing to lend means anything held in cash is not circulating in the economy. When public spending is being cut, gilts pay for nothing except their interest. All of which create self-perpetuating loops of capital investment, barely scraping the sides of the wider economy.

Them and us

A certain amount of inequality is desirable both economically and socially. It’s the scale of that inequality that becomes problematic. The warning from Piketty’s analysis is that the proportion of capital in income is only going to rise — hitting 19th century levels of aristocratic privilege by the mid 2100s — and that this is systemically self-fulfilling unless we intervene.

Money breeds money, and when inheritance becomes the dominant path to riches — a state Piketty envisages returning (with marrying into a wealthy dynasty the next best option), wealth coalesces into a dwindling pool of individuals while the rest of us battle with generational costs rather than benefits. This is already happening. The 85 richest people in the world have as much wealth as the poorest 3.5 billion.

Capitalism only works properly within a limiting regulatory framework, as Will Hutton forcefully argued in Them And Us, and Nobel prize winning economist Paul Krugman regularly argues in his New York Times blog. Too much laissez-faire and you end with a winner-takes-all, zero-sum economy. Witness the near-monopolies of Amazon, Facebook, Google; enabled by the wild west of an unregulated online marketplace. Unfettered competition inevitably results in no competition at all. But when de-regulation has been the policy du jour for decades, how can such a framework be formed?

Labour’s touted solutions to the cost of living crisis: energy price freezes, extending childcare et al. are significant but small, ad hoc engagements with short-term problems rather than the fundaments driving them. The real solutions are big, bold, systemically transformative and politically suicidal.

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