Inequality and no ‘Trickle-Down’

Mean & Average

Why New-Right economic policies have been sub-standard

By Gwydion M. Williams

[Written in 2005, well ahead of the crisis of 2008]

The 1990s system of ‘Limited-Sovereignty Globalisation’ is overestimated even by its bitter critics. It’s seen as a harsh road to greater wealth. For most of the population, it’s been a harsh road to less wealth. A system that rewards speculators and damages the real economy. But a greedy ‘Overclass’ of detached rich people has done nicely.

GNP is a very imperfect measure of real wealth. But even in terms of GNP, the period 1980-2000 has been bad for everyone who followed New Right policies. Worst of all for Russia, where they had no other ideas and capitulated completely and suffered a continuous and disastrous decline during the Yeltsin years. The collapse of the 1991 coup caused rejoicing at the time but very little on its tenth anniversary.

Economic success in the period 1980-2000 correlates very nicely with ignoring New Right notions and sticking to the older Keynesian formulas – controlled markets, controlled currencies, cautious opening to global trade where some definite benefit can be seen. China – easily the most successful developing economy – is a unique mix, a social-democratic system with a Leninist party running it. To call this ‘capitalism’ and cite it as a success for New Right policies is ridiculous.

“Trade has doubled as a percentage of our economy since the early 1970s, and there is no doubt that globalization has played a significant role in the worsening distribution of income here… it has generally been assumed that globalization has helped spur economic growth throughout most of the world. Even critics of globalization, and of the IMF and World Bank, have generally accepted this assumption. They have argued that these institutions have focused too much on promoting growth and not enough on other goals such as alleviating poverty and protecting the environment.

“From 1960-1980, output per person grew by an average, among countries, of 83%. For 1980-2000, the average growth of output per person was 33%.

“There is no region of the world that the Bank or Fund can point to as having succeeded through adopting the policies that they promote -or in many cases, impose -upon borrowing countries. They are understandably reluctant to claim credit for China, which maintains a non-convertible currency, state control over its banking system, and other major violations of IMF/Bank prescriptions. And in both India and China, their opening to trade took place about a decade after the increase in growth began.” (The Emperor Has No Growth: Declining Economic Growth Rates in the Era of Globalization. By Mark Weisbrot, Robert Naiman, and Joyce Kim, September, 2000, available at www.cepr.net).

I’m one of those who’ve always insisted that the New Right is mostly degraded Keynesianism. I’ve also emphasised that although the economy as a whole has been damaged, the richest 10% have done better than Keynesianism allowed.

The Left in the 1960s and 1970s did an expert job of undermining the Keynesian semi-capitalist system, under the impression that breaking it would guarantee that an ideal socialist system would suddenly spring into existence. Keynesianism was not of course described as semi-capitalist; if it had been, the whole Thatcherite / Reaganite development would have been much easier to follow.

“The last quarter century of globalization has clearly failed to raise the wages and salaries of the majority of the US labor force. We can see this by looking at the real median wage, which is about the same today as it was 27 years ago. This one statistic tells a very big story, a fact that the more ardent advocates of globalization either don’t understand, or pretend that they don’t. Median: that means the 50th percentile, i.e., half of the entire labor force is at or below that wage. This includes office workers, supervisors, everyone working for a wage or salary-not just textile workers or people in industries that are hard hit by import competition or runaway shops. Real: that means adjusted for inflation, and quality changes. It is not acceptable to argue, as is often done, that the typical household now has a microwave and a VCR. That has already been taken into account in calculating the real wage.” (Ibid., page 7)

Medians have the merit of showing in numeric terms that extra money for a few well-off people does not benefit the rest of the society, and is most likely to be at their expense. To illustrate, I’ve drawn up a table of wages for an imaginary factory. In all cases, the ‘mean’ or arithmetic average wage is well above what most of its employees get. But the degree of difference varies a lot, and the various patterns favour different groups:

Initial spread of incomes Salary  
Managing Director (1) 100,000
Managers (9) 60,000
Supervisors (20) 35,000
Technicians (15) 25,000
Shopfloor workers (40) 18,000
Trainees (10) 15,000
Cleaners (5) 10,000
Average salary 22,600  
Median salary 18,000  
Thatcherite development Salary % gain/loss
Managing Director (1) 160,000 60.00
Managers (9) 85,000 41.67
Supervisors (20) 45,000 28.57
Technicians (15) 31,000 24.00
Shopfloor workers (40) 22,000 22.22
Trainees (10) 14,500 -3.33
Cleaners (5) 9,000 -10.00
Average salary 28,950 28.10
Median salary
22,000 22.22
Reagan-style development Salary % gain/loss
Managing Director (1) 200,000 100.00
Managers (9) 110,000 83.33
Supervisors (20) 45,000 28.57
Technicians (15) 27,000 8.00
Shopfloor workers (40) 18,500 2.78
Trainees (10) 13,000 -13.33
Cleaners (5) 8,000 -20.00
Average salary 30,000 32.74
Median salary 18,500 2.78
Keynesian alternative Salary % gain/loss
Managing Director (1) 150,000 50.00
Managers (9) 90,000 50.00
Supervisors (20) 52,500 50.00
Technicians (15) 37,500 50.00
Shopfloor workers (40) 27,000 50.00
Trainees (10) 22,500 50.00
Cleaners (5) 15,000 50.00
Average salary 33,900 50.00
Median salary
27,000 50.00
Sub-Keynesian alternative Salary % gain/loss
Managing Director (1) 125,000 25.00
Managers (9) 75,000 25.00
Supervisors (20) 43,750 25.00
Technicians (15) 31,250 25.00
Shopfloor workers (40) 22,500 25.00
Trainees (10) 18,750 25.00
Cleaners (5) 12,500 25.00
Average salary
28,500 25.00
Median salary 22,500 25.00
New-Right unrestrained? Salary % gain/loss
Managing Director (1) 250,000 150.00
Managers (9) 130,000 116.67
Supervisors (20) 38,000 8.57
Technicians (15) 25,000 0.00
Shopfloor workers (40) 15,500 -13.89
Trainees (10) 11,500 -23.33
Cleaners (5) 6,500 -35.00
Average salary 29,475 30.42
Median salary 15,500 -13.89

People can be puzzled by an ‘average wage’ which seems much more than most people get. But if incomes are divided by number of employees, that’s bound to happen and a few ‘fat cats’ can create a statistical illusion. (If there were a few people thirty, forty or a hundred feet tall, the average height for males might be seven foot six even though half were five foot nine or less.

In my model, I leave out unemployment, and also I credit Reaganism with a small rise in cash income for ordinary workers, which has probably not happened.

“In the United States, the median real wage is about the same today as it was 27 years ago. This means that the majority of the labor force has failed to share in the gains from economic growth over the last 27 years. That is drastically different from the previous 27 years, during which the typical wage increased by about 80% in real terms.” (Ibid).

The report does not ask why this is possible in a democracy. I’d say it was because US democracy has proved a rather bad tool for the self-interest of the majority. Starting with the desire to produce another Switzerland, a Republic dominated by secure farmers and small craftsmen, it ended up with something very different. The whole culture favours a gambler’s mentality: people overestimate they own slim chances of joining the Overclass. There whole self-identity is bound up with what they’d like to be, not what they are.

Britain is not the same, the mainstream have more self-confident and are better at defending their own interests. Yet as my examples showed, there is a marked difference in interest between the ‘top ten percent’ and the rest. They do much better under a Thatcherite or Reagan-style development, even though everyone else does worse and the economy as a whole does worse.

The ‘top ten per cent’ includes more than just managers, ‘middle managers’ may well be outside it and are perhaps worse off with the extra stress and a culture of unpaid overtime just to keep a not particularly good job. But it does include some journalists, media people and academics, as well as the top end of the legal profession.

Very much the sources of New Labour, you should note. The big cause of the Labour Left’s failure back in the 1970s was its determined exclusion of the actual working class in favour of middle-class people who would say whatever was necessary to advance their careers. And in the same spirit, the move to workers control was opposed by most of the left, with Arthur Scargill leading the opposition and rejecting an offer to put the Miners Union in charge of the coal mining industry

“Russia has been perhaps the biggest failure of all, suffering a decline in GDP (over 50%) rarely seen in the absence of war or major natural disaster. The number of poor people (living on less than $4 dollars a day) soared from two million to 60 million by the mid-nineties. Some of the errors made here were specific to transitional economies-most importantly the rapid privatization in the absence of necessary legal and institutional structures, and the enormous destruction of physical and social capital that resulted. But other mistakes were part of the IMF’s modus operandi: contractionary macroeconomic policies and reckless liberalization of not only trade, but the capital account (which combined with the other incentives to de-capitalize existing industries led to enormous flight of capital out of the country). Perhaps most importantly, as Stiglitz has noted, there was “a misunderstanding of the very foundations of a market economy” (Ibid., page 14.)

Russia’s ‘Capitalist Democrats’ made much the same error as Germany’s Social-Democrats made in 1918, they thought that their wartime foe had ceased to be their foe when they discarded the things that enemy propaganda had been directed against. But Britain was scared of Germany as a successful industrial competitor, regardless of Prussianism or autocracy. The USA saw Russia as menacing regardless, and celebrated the decline of Russia and Japan as credible rivals.

Britain’s former policy towards Europe is called ‘Balance of Power’, but would be better named ‘Permanent Destabilisation’. Since Britain could not hope to dominate Europe, Britain made sure that the rest of Europe was always fighting itself. And the USA is sometimes playing the same games, though they currently see Europe as an ally and class China as too tough to get tough with just for the moment.

A UN table cited by the report also shows a relatively strong performance of China under Mao. Despite the Cultural Revolution, China in the period 1960-1980 did better than South Asia or South-East Asia in the period 1980-1998. China also did better than Latin America in the period 1960-1980. Latin America has ‘reformed’ since 1980, and done much worse. China and India meanwhile have also opened up to the outside world, but very much on their own terms and not as New Right orthodoxy would propose.

In China and India, a lot of the benefit has gone to the top ten percent. But the working mainstream has also done well, as far as I can tell. The ‘middling 50%’ have done OK, only in the USA are ordinary people so ashamed of their own mundane lives that they will consistently and determinedly vote in favour of the rich, if they vote at all. And there seems rather more left-wing resistance to the policies of President Jiang that there are dissidents eager to go further.

“The Communist Party has closed one of the mainland’s key theoretical journals as part of an attack on those who oppose the decision of President Jiang Zemin to end a ban on membership by private business people… Staff at Zhenli de Zhuiqiu (Seeking Truth) said yesterday authorities had ordered the closure of the monthly magazine after 11 years, ahead of publication of the August issue, and that its 10 employees would retire or be moved to other jobs. Editor Yu Quanyu was likely to retire. No reason was given for the closure, they said.

“The monthly has been devoted to the theory of Marxism, Leninism and Mao Zedong Thought and its application to China.

“Sources said Mr Jiang ordered the closure, angered over opposition within the party to his speech on its 80th anniversary on July 1, in which he lifted an 80-year ban on private business people joining the party.

“Many party members, especially veterans of the war against the Kuomintang, have written to Mr Jiang, saying his decision was a mistake and that he announced it without proper consultation within the party.” (South China Morning Post website, Tuesday, August 14, 2001)

In Chinese terms, President Jiang is a centrist, and also obliged to retire soon. Currently the left is much stronger and better placed than pro-Western forces. Which may explain why China won the 2008 Olympics. Behind the scenes, America probably encouraged it.

A move to multi-party democracy in 1989 would have dropped China into the same mess as Russia now suffers. A move to multi-party democracy right now could lead to a hard-left Maoist party winning a democratic majority.

China is joining the WTO, but warily and with a lot of safeguards. The trashing of the former Warsaw Pact countries and the financial crisis that hit the West’s allies in East Asia serve as dire warnings. I’d say The Emperor Has No Growth is less critical than it should be of what happened:

“For example, in just the last three years the IMF and its allied creditors have made serious policy errors that have undoubtedly reduced cumulative economic growth for hundreds of millions of people. In the Asian financial crisis, the Fund’s drastically tight monetary policies (interest rates as high as 80% in Indonesia) and fiscal austerity deepened the recession and threw tens of millions of people into poverty. Although the regional economy has now recovered, the lost growth and increased poverty is still significant 7 .And Indonesia, the largest of the five crisis countries (including South Korea, Thailand, Malaysia, and the Philippines) with more than 50% of their total population, has yet to recover, after a 13.4% decline in GDP in 1998.

“In Russia in 1998, the IMF insisted on maintaining an overvalued fixed exchange rate, which required raising interest rates as high as 150%. These policies not only led to excessive foreign debt burdens, but also maintained a speculative bubble in the financial sphere, and drained the real economy of investment capital. The overvalued rouble kept imports artificially cheap, hobbling domestic production, and exports overly expensive-until the currency collapsed in August of 1998. The IMF supported a similar policy in Brazil. The government raised interest rates to more than 50% and borrowed billions from the Fund in November of 1998 to stabilize its overvalued currency-only to have it collapse just a few months later.” (Ibid., page 11)

Are you sure that was an accident? Wealth and potential growth was destroyed, as with insure-and-burn scams, but some people obviously did very well out of it. Speculators like George Soros, who despite his criticism of New Right ideology remains committed the imposition everywhere of Western commercial values. Also ‘Judeo-Christian values’, which in practice means the common elements of the Protestant and Catholic branches of Christianity, except that help from rich and clever Jews is welcomed these days.

An ‘open society’, he calls it, but no society has ever managed to live that way unless it has been through a period of highly authoritarian rule which establishes what people can and can not be ‘open’ about. Commercial values had to be hammered into British and European society across several centuries. The Irish Famines of the 1840s destroyed one of the last distinct populations in Western Europe who were content just to live without reference to commercial values, which is why the British middle class was quite willing to sit back and let it happen. They themselves were products of the bitter British civil wars of the 18th century, and the actual process of industrialisation took place under a Constitutional Monarchy where ‘democracy’ was a term of abuse and where only a small minority of the adult male population could vote.

The elements that coalesced into global culture were formed in several different cultures before coming together in Western Europe. Civilisation as such was invented in the Middle East, the alphabet also came to Greece from the Phoenicians, who also pioneered the idea of self-governing city states. From China came the key developments of gunpowder, printing plus paper and the magnetic compass. Positional numbering came from Hindu culture, algebra and much else from the Islamic world. And the key synthesis occurred in Latin-Catholic culture and only later spread to their Germanic-Protestant neighbours. (England is just one branch of the Germanic peoples, though hostility to Germany in the 20th century obscured English origins as invaders from what is now Denmark and north-west Germany.)

The positive aspects of modern civilisation are possible because of the unintended teamwork of several different civilisations with utterly different and often opposed values. To declare it a race that the Germanic-Protestant peoples won is to miss the point. A race can be run with any set of opponents, or no opponents at all. But no one culture was adequate to making the breakthrough into a technological world.

Making it a ‘race for wealth’ and forbidding cultural protectionism will impoverish the human race by destroying a great deal of potential and diversity. Even cultures that have not so far contributed anything critical may do so in the future: no one in 1500 would have seen Western Europe as promising compared to other centres of civilisation.

Keynesianism was a better economic system than the current ‘Limited-Sovereignty Globalisation’, and also maybe worse culturally. It seemed to be heading for a Wellsian World State that would have imposed a benevolent uniformity on populations that would have been well fed, well educated but made rather homogeneous.

I call the present system ‘Limited-Sovereignty Globalisation’ because it will not let the nations of the world live as they please, yet also has no intention of accepting responsibility for the poor and needy. ‘Free markets’ are supposed to be the cure – never mind that market forces have made for less equality. Also it’s a surreal sort of freedom, one that comes with a mass of ‘anti-dumping’ rules and enforcement of copyrights, not a free-for-all but just freedom for the rich and lucky.

We’ve seen the New Right future. And it damn well has not worked.

First published in Labour & Trade Union Review, 2005

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