by Daniel Wortel-London

Obscene salaries are no longer sustainable and should be illegal. (Justin Pacheco, Wikimedia)

The daily news regularly features commentary about the outrageous and growing income inequality in the USA. The data support the outrage:

• In 1965, the CEO-to-worker salary ratio at the average U.S. company was 21-to-1. Today that ratio is 344-to-1.
• In 2022, CEO pay at 100 S&P 500 companies averaged $15.3 million, while median worker pay averaged only $31, 672, according to an Institute of Policy Studies analysis.
• Since 1978, CEO pay has increased 1,460 percent.

Many reasons can be cited for opposing large discrepancies in pay, including depressed morale of employees, diminished firm productivity, and widened gender and racial disparities. Another reason is their effect on the environment. High salaries tend to increase environmental impacts. And high pay, particularly high CEO pay, is dependent on—but also drives—the economic growth that is creating today’s societal and environmental crises.

To counter inequality in the USA, CASSE proposes adoption of a Salary Cap Act (SCA). The Act would create salary caps by major occupational sector, as Brian Czech proposed in Supply Shock. Almost no expansion of the Tax Code is entailed. The SCA would simply prohibit the issuance of salaries beyond the prescribed proportions (described below), making it a crime for employers to issue exorbitant salaries.

Exorbitant Salaries and Environmental Degradation

Generating money entails agricultural and extractive activity at the trophic base of the economy. Therefore, the need to pay exorbitant salaries results in more environmental degradation than paying for lesser salaries. Imagine, for example, the ecological footprint required to pay Elon Musk compared to a minimum-wage worker.

Highly paid individuals are more likely to purchase resource-intensive luxury goods, too. This is one reason why the USA’s top one percent of income earners was responsible for 23 percent of the growth in global carbon emissions between 1990 and 2019. And income inequality leads to inequality in political power, which helps CEOs lobby for policies that promote unsustainable growth.

Limiting the environmental impact of the economy entails limits on high salaries. (Richard Hurd, Creative Commons 3.0)

High salaries drive growth in less obvious ways as well. At many corporations, CEO compensation includes a generous grant of stock and stock options. These sweeteners motivate CEOs to strive for company growth, then use profits to buy back company stock, which raises its price and enriches the CEO even further.

For example, the compensation of oil company executives is intimately linked to exploring for new fields, extracting fossil fuels, and promoting consumption of their fuels and services, activities that contribute to the growth of the firm. As Richard Heede of the Climate Accountability Institute observes, “executives have personal ownership of tens or hundreds of thousands of shares, which creates an unacknowledged personal desire to explore, extract and sell fossil fuels.”

Moreover, high CEO compensation through stock options and bonuses encourages companies to take a short-term perspective that can involve boosting stock prices quickly through shortsighted sales or risky investments. The Enron scandal, for example, involved CEOs trying to quickly raise stock prices in pursuit of bonuses. Selfish and short-sighted decisions like these can take a serious environmental toll, and are disastrous at a time when companies should be committed to the long-term health of our planet.

Drivers of Unequal Pay

CEO pay has increased extensively in part because companies have grown larger and wealthier, which allows them to offer fatter salaries. It’s also because CEOs have increased their leverage over corporate boards and can therefore set their own pay more easily. But the greatest reason is because CEOs are compensated differently than ordinary workers: Some 80 percent of CEO compensation in 2021, for example, derived from vested stock awards and exercised stock options rather than “ordinary” salaries. CEOs are thus able to negotiate salaries that are orders of magnitude higher than the salaries of workers paid through more conventional means.

Policymakers have a deep toolbox for addressing pay inequality. They can, for example, ban or tax stock buybacks or deny public contracts to companies with excessively high pay inequalities. Measures like these are now law. The Inflation Reduction Act placed a 1 percent excise tax on stock buybacks, while San Francisco and Portland, Oregon have taxed companies with large CEO-worker pay gaps. Inspiration comes from outside the USA as well. The European Union will assist in bailing out failed banks only when their pay ratios are 10-to-1 or less.

Franklin Roosevelt called for a 100 percent tax on annual incomes above $1.2 million (in 2022 dollars). (Elias Goldensky, Public Domain).

But another, more direct remedy for pay inequality is salary caps. We’ve seen such caps in professional sports leagues for decades, including every major league in the USA except Major League Baseball. These caps are much higher than those prescribed in the Salary Cap Act presented below, but they achieve analogous purposes. Leagues use caps to keep overall costs down and ensure a competitive balance among teams. The USA would use salary caps to for purposes of social equity, but also to keep environmental impact at a lower, more sustainable level.

Salary caps, along with caps on wealth and other forms of income, have been proposed by various economists and progressive policymakers, occasionally with public success.   A referendum was held in Switzerland in 2013 to cap executive incomes; while unsuccessful, it emboldened major candidates in France and England to endorse similar salary caps. And campaigns for wealth and income caps have taken various forms in U.S. history, from Huey Long’s “Share our Wealth” campaign to Franklin Roosevelt’s call for a 100 percent tax on high incomes during World War II.

In the spirit of these efforts, CASSE proposes the Salary Cap Act.

The Salary Cap Act

The Salary Cap Act is designed to curb exorbitant salaries for purposes of social equity and environmental health. Salary caps are set and enforced by the Department of Labor. A separate provision addresses pay for self-employed workers.

The SCA defines “salaries” as wages, bonuses, tips, and other forms of compensation specified under Section 3401(a) of the Internal Revenue Code. This broad definition is meant to encompass forms of compensation, such as corporate stock options, which are not traditionally classified as “salaries.”

Section 4 describes the target and structure of the salary caps. The Secretary of Labor sets the caps for each of the 23 major occupational groupings in the Standard Occupational Classification (SOC) Codes maintained by the Bureau of Labor Statistics. The caps are set, and updated annually, to correspond to 1.8 times the salary of the 90th percentile of employees for each occupational grouping. (In other words, maximum salaries in each occupational grouping are 80 percent higher than the salary at which 90 percent of salaries in the grouping are lower and ten percent are higher.)

For example, the annual salary cap for managerial occupations would be set at $400,000, while the cap for food preparation occupations would be set at $81,270. Salary disparities would remain, but they would be far lower than the disparity today. The average CEO-to-worker pay gap across occupational categories is currently 344-to-1. Under the SCA, the ratio would be roughly 7-to-1.

We can respect planetary boundaries, or we can have billionaires, but not both. (Adrian Cadiz, Wikimedia)

Meanwhile, traditional and reasonable salary discrepancies among professions are still respected. For example, licensable occupations that require extensive training or years of graduate school warrant a higher range of salaries than those for occupations requiring little training or education.

The value of 1.8 in the maximum salary formula is chosen because the salary of the President of the United States is currently 1.8 times the 90th percentile of CEO salaries. We do not believe a CEO deserves to be paid more than the president. Still, the SCA’s maximum salary formula offers plenty of room to reward superior performance while curbing the social and environmental distortions of exorbitant salaries.

Section 5 describes how the Office of Labor-Management Studies in the Department of Labor will enforce the SCA. The Office will have the power to petition a court if it believes the Act has been violated. Companies found guilty will face criminal penalties of up to $100,000,000, imprisonment not exceeding 10 years, or both.

A concluding section requires net earnings from self-employment or employee ownership in excess of $400,000 be taxed at 100 percent. Salaries derived from self-employment are not included in the NAICS SOC codes, so it is necessary to “cap” these earnings through taxation rather than salary caps.

The SCA is designed to be both a stand-alone bill and a component of the larger Steady State Economy Act. It will not, by itself, end wealth inequality or ecological overshoot. But it will help apply brakes on incentives that drive economic firms to grow the economy beyond our planet’s carrying capacity.

We also encourage the voluntary adoption of salary caps prior to passage of the SCA. In addition to contributing to the social and environmental purposes of the SCA, such voluntary caps provide a boost to employee morale and cut costs for small businesses and nonprofit organizations.

The Salary Cap Act may be revised pursuant to reader responses and the input of CASSE allies.

Daniel Wortel-London is a CASSE Policy Specialist focused on steady-state policy development.

The post Introducing the Salary Cap Act appeared first on Center for the Advancement of the Steady State Economy.

by Daniel Wortel-London

Private planes are one example of carbon-intensive luxury goods. (Hush Hush, Flickr)

Even as nearly a billion people go hungry every day, the wealthiest one percent of the world’s population is purchasing ever-more expensive toys. Yacht sales grew by an average of 22 percent per year between 2014 and 2022. Private jet sales have boomed since the start of the COVID pandemic. The global luxury jewelry market, already huge at $56.5 billion, is expected to grow 8.2 percent between 2023 and 2028. And the luxury car market is projected to double from $1.17 trillion to $2.55 trillion over the same period.

This kind of luxury consumption can be criticized not only on ethical grounds, but also on scientific ones. Luxury transportation contributes disproportionately  to humanity’s carbon emissions. Jewels and furs produced for the wealthy lead to biodiversity loss and air and water pollution. Add the economic injustice and health damages faced by the millions of men, women, and children who work to produce these luxury “goods” and it’s clear that luxury consumption is a powerful driver of social and ecological “bads” across the world.

To help curb the excessive consumption of the uber-wealthy, CASSE proposes adoption of a Luxury Cap Act (LCA) by the U.S. Congress. It benefits from successful precedents. Canada, for example, passed a Luxury Tax applying to new cars, boats, and airplanes in 2023. Connecticut and other states levy sales taxes on luxury clothes and vehicles. Even the federal government passed an excise tax on boats, aircraft, jewelry, and furs in 1990, although these provisions were repealed during the Clinton administration.

As environmental damage and inequality mounts, conspicuous and wasteful consumption by the wealthy is a logical and defensible target for action.

The Full Cost of Luxury

What is the cost of luxury? Transportation offers instructive examples. For starters, aviation is responsible for around 3.5 percent of global warming, but more than half of that damage is caused by only one percent of the world’s population.

The wealthy’s outsize impact from flying results from several factors. First, they fly most frequently, with 70 percent of flights taken by just 15 percent of people. In addition, wealthy people often travel first class, leaving a carbon trail as much as seven times larger than the economy-class passenger’s. And of course many wealthy fliers have their own jets. These produce 5–14 times more pollution per passenger than commercial planes. In 2020, private flights in the USA pumped as many tons of greenhouse gases into the atmosphere as all bus travel nationally.

Jewels arrive to market at great social and environmental cost. (International Gem and Jewelry Show, Flickr)

Meanwhile, luxury yachts emit up to 1,500 times as much carbon dioxide as a family car. In the words of the environmental news outlet EcoWatch, they are “by far the worst asset to own from an environmental standpoint.”

Luxury automobiles are similarly wasteful: Compared to standard vehicles, they emit more carbon and use uncommon materials like rare woods. One study found that luxury vehicles produce, on average, 50 percent more carbon emissions than their conventional counterparts.

Carbon pollution isn’t the only harm caused by luxury consumption. Take jewelry, for example. Silver and gold mines cause enormous damage to ecosystems. Nine percent of the Amazon forest was lost between 2005 and 2015 as land was cleared for mining operations. Mining of precious minerals also contributes to air pollution via emissions of atmospheric mercury. These mines also use toxic chemicals like cyanide and sulphuric acid to separate metals from ores. The social and ecological costs of these operations can be horrific. In Nigeria, 400 children were killed in 2011 due to polluted drinking water from mining operations.

Then there’s luxury fashion. A recent study of nine luxury brands—like shoe and bag vendor Prada and general luxury retailer LVMH—found that the companies emitted 13.5 million metric tons of C02 to create products in 2021—as much as the economy of Lithuania. Luxury brands are often worse than their mass-market competitors at addressing labor exploitation in their supply chains. And the chemicals used to process luxury furs such as mink and sable contribute to water and soil contamination. In fact, fur clothing has the highest environmental impact of any textile.

These are just a few of the ways that luxury consumption damages the environment. The list could easily extend to a broad range of luxury goods and services from elite resorts and spas to private helicopter and airline tours. None of these indulgences is necessary, and all are harmful. Of course, curbing luxury consumption won’t solve all our environmental problems. But reining in these excesses would be a good start toward creating a more sustainable and equitable world.

The Luxury Cap Act

The Luxury Cap Act (LCA) is meant to curtail the production and consumption of socially and ecologically harmful luxury goods and services. It will empower the Treasury Department to impose taxes on these goods and services, a tried and true method of lowering demand. The LCA is designed to be both a stand-alone bill and a component of the larger Steady State Economy Act.

Following a short title, findings of Congress, and definitions, Section 4 of the LCA targets frequent flyers. It imposes an escalating tax beginning with the passenger’s second flight and increasing with each flight thereafter in a calendar year. The Federal Aviation Administration will be responsible for creating the database to track flight frequency for implementing this section. Exceptions are made for flight crews, passengers and crew on emergency and public service flights, and similar persons who need to fly regularly. Section 4 serves as a complement to CASSE’s broader Forgoing Flights for America the Beautiful Act, which proposes a broader curb on flying and airport expansion more generally.

Yachts like these are symbols and drivers of our ecological overshoot. (Frans Berkelaar, Flickr)

Sections 5, 6, and 7 impose taxes on luxury aircraft, boats, and passenger vehicles. The tax will equal ten percent of the price of any vehicle listed at more than $557,000 (in the case of aircraft), $223,000 (boats), and $70,000 (passenger vehicles). Aircraft used for seeding, fertilizing, and training, and boats used for commercial activities, will not be subject to this tax.

Sections 8 and 9 address furs, clothing, jewelry, and accessories like handbags and watches. Both sections impose taxes equal to ten percent of retail price greater than $10,000. Section 10 provides for adjusting these taxes for inflation, and Section 11 clarifies the provisions governing taxation in cases when luxury goods are leased rather than sold. This section reflects congressional precedent: in 1990 Congress passed the Budget Reconciliation Act of 1990, which levied taxes on furs and luxury clothing, as well as on luxury yachts, cars, and planes. Most of those taxes were gradually eliminated by Congress, but the LCA re-instates them.

The Luxury Cap Act may be revised pursuant to reader responses and the input of CASSE allies.

The excesses of the one percent cannot be allowed to degrade our planet any further. Such excesses constitute a problem serious enough to warrant federal legislation. Thus the Luxury Cap Act. Those who are not limited in lobbying (like a 501(c)(3) non-profit organization) might consider bringing it to their representatives in Congress.

Daniel Wortel-London is a Policy Specialist at CASSE.

The post Introducing the Luxury Cap Act appeared first on Center for the Advancement of the Steady State Economy.

Abstract

This article traces the history of ‘crowding out’, and its use as a justification for austerity and state deflation from its origins in the 1920s to its latest post-2010 incarnation. It examines why governments have kept turning to austerity and continue to justify it on the grounds that public sector activity crowds out more productive private activity, despite the accumulated evidence that this traditional pro-market formulation has failed to deliver its stated goals. It examines three other embedded forms of crowding out that have been highly damaging—leading to weakened social resilience and more fragile economies—but which have been ignored by both governments and mainstream political economists.

THE IDEA OF ‘crowding out’ has long been one of the central canons of pro-market economic theory. The concept was first promoted at an international conference of officials in Brussels in 1920 to discuss ‘sound economic policy’ in the postwar years. Given limited capital, asked the British delegation, will ‘Governments or private industry’ use it more productively? ‘The answer is … private industry’.1 This argument was then placed at the heart of a strategy of state-imposed austerity through cuts in public spending and wages applied in Britain and other nations in the early 1920s.

Following the short-lived boom at the end of the 1914–18 war, Britain, along with much of Europe, faced growing economic turbulence and surging dole queues, along with high levels of public debt from funding the war. With heightened public expectations of social reform, the coalition government Prime Minister, David Lloyd George, initially promised social reconstruction through higher state spending, especially on homes and schooling. Simultaneously, the Prime Minister faced demands from the owners of capital for a return to the pre-war status quo.

During the war, large chunks of the economy had been taken under state control, with the subordination of private profit to steer resources to the war effort. While the public was calling for a better society in return for the sacrifices of war, business leaders were demanding the dismantling of the heightened state intervention of the war years, lower rather than higher public spending, and the reversal of the strengthened bargaining power labour had enjoyed during the war years. Political and industrial clashes were the inevitable outcome.

Deepening recession and the fear of mounting unrest, fuelled by the shadow of Bolshevism, induced panic among the ruling political and corporate classes. In response, the government dropped its commitment to social renewal in favour of a programme of austerity, or state induced deflation. This involved severe cuts in public spending, including reductions in pay for police, teachers and other public servants—cuts dubbed the ‘Geddes axe’ on the advice of a committee chaired by Sir Eric Geddes, the Minister of Transport.

Economic revival, it was argued, depended on lower spending by the state, lower wages and a return to a balanced budget, with state spending matched by tax revenue. If the state had borrowed more to meet its high-profile postwar pledges on housing and education, it was argued, more efficient and more pro-value private activity would have been ‘crowded out’. The measures, based on the idea of an automatic trade-off between state and private activity, were, it was asserted, simply sound economics based on fundamental laws—and not to be tinkered with—of how the economy worked. These ‘laws’ drew on the doctrines of the early classical economists that free markets and minimal state intervention would bring equilibrium, stability, and optimal growth.

Austerity Britain

Since the 1920s, governments have repeated this strategy of austerity—based on the doctrine of crowding out—on several occasions. These include the early 1930s, the 1970s, the 1980s and the post-2010 decade. Despite the time gaps, these episodes have been marked by almost identical justifications and remarkably similar impacts.

One of the constant themes has been a replay of the balanced budget theory of the 1920s and 1930s. Another has been that public spending cuts and lower wages would release scarce resources for the private sector. In 1975, two Oxford economists, Roger Bacon and Walter Eltis, argued in Britain’s Economic Problem: Too Few Producers that Britain’s economic plight stemmed from too many social workers, teachers and civil servants and not enough workers in industry and commerce. Buying into this argument, the new Chancellor of the Exchequer, Geoffrey Howe, told the House of Commons in 1979, ‘[we need to] roll back the boundaries of the public sector’ in order ‘to leave room for commerce and industry to prosper’.2 In June 2010, launching another rolling programme of spending cuts in his first budget, the Chancellor, George Osborne, repeated this claim that public spending ‘crowds out’ private endeavour.

Again, the presumption was that a more robust economy requires more private and less state activity, along with the counter-intuitive idea that austerity was the route to growth and enterprise. The somewhat crude ‘private sector good, public sector bad’ mantra was widely echoed. ‘The next government is going to have many challenges’, wrote the Times in 2010, ‘but tackling a public sector that has become obese … is going to have to be a priority’.3 Channel 4 went a step further with a programme describing state spending as a ‘Trillion pound horror story’, while The Spectator magazine called it ‘the most important programme to appear on British television this year’.4

So, does the austerity/crowding out theory stand up? And if not, why has it been so widely applied? The accumulated evidence shows that it is at best a significant oversimplification of the way economies work. Crowding out of private by too much public sector activity might apply when an economy is operating at full capacity and employment, but the doctrine has only been applied in situations of economic crisis, high unemployment and inadequate demand. Even at full capacity, there is still a choice to be made about the appropriate balance between public and private activity.

Heterodox economists, such as John Hobson in the early twentieth century, had offered an alternative route to growth and out of crisis. His work, which had an important influence on J. M. Keynes, showed that recessions were the product of a shortfall of demand stemming from ‘under-consumption’ and ‘over-production’ triggered in large part by a lack of purchasing power among low- and middle-income households arising from extreme levels of wealth and income inequality.5

In the 1920s and early 1930s, slamming on the public spending brakes proved counter-productive. It cut demand and slowed recovery, with private as well as public activity ‘crowded out’. The strategy had minimal effect on improving the state of the public finances, but led to a retreat on social programmes, while unemployment never fell below one million in the inter-war years.

A hundred years on, the Osborne cuts have had a very similar, and predictable impact. They also came with a new label: ‘expansionary austerity’, but an identical message—that a smaller state would generate greater stability via lower interest rates, greater confidence and faster growth. In the event, the strategy turned out to be an additional assault on an already weakened economy, with the cuts in public spending having little or no impact on expanding private activity, while damaging the quality of Britain’s social infrastructure and weakening its system of social support.6 One critic, David Blanchflower, a former member of the Bank of England’s Monetary Policy Committee, concluded that, by destroying productive capacity and making households worse off, the austerity programme simply ‘crushed the fragile recovery’.7 In one estimate, rolling cuts in public spending were said to have shrunk the economy by £100 billion by the end of the decade.8 Another study showed that if real-terms growth in public spending at the 3 per cent level inherited in 2010 from the previous Labour government had been maintained and paid for by matching tax rises, Britain’s government debt burden would still have been lowered by 2019.9

None of this means that crowding out never occurs. It just takes very different forms from the process advanced in neoliberal thinking. There are three alternative and distinct types of crowding out at work that have consistently had a malign effect on both the economy and wider society, yet have not been systematically addressed in the mainstream economic literature or by relevant government departments.10 First, the idea that markets know best in nearly all circumstances has shifted the balance between private and public activity too far in favour of the former, thus crowding out the latter. Second, an increasing share of private activity has been geared less to its primary function—to building economic strength and creating new wealth—than to boosting personal corporate rewards in a way which fuels inequality, weakens economies and crowds out economic and social progress. Third, there is the way the return of the ‘luxury capitalism’ of the nineteenth century (triggered by the application of pro-inequality neoliberal policies) has come at the expense of the meeting of essential material and social needs.

The balance between private and public activity

The simple notion—private good, public bad—has long been overplayed by neoliberal theorists. Both have a role to play and the real issue is getting the right balance between the two. State spending plays a crucial role not just in meeting wider social goals, but in supporting economic dynamism and stability. Private corporations do not operate in a vacuum. The profits they make, the dividends they pay and the rewards received by executives stem from a too-often unacknowledged interdependence with wider society, including the state. Business provides jobs and livelihoods, while responding to consumer demand. Society provides the workforce, education, transport, multiple forms of inherited infrastructure and often substantial state subsidies.

History shows that while bad decisions are too common, carefully constructed and evidence-based state intervention can have a highly positive impact. Government responsibility lies in helping to shape markets, prevent market abuse, support innovation, share the burden of risk-taking in the development of new technologies, promote public and private wealth creation and protect citizens. It is now time to ask if these functions—from market regulation to citizen protection—have been underplayed.

Britain is a heavily privatised and weakly regulated economy. Among affluent nations, it has a comparatively low level of public spending, including social spending and public investment in infrastructure, relative to the size of the economy.11 A relatively low portion of the economy is publicly owned.12 With the cut-price sell-off of state assets, from land to state-owned enterprises, the share of the national wealth pool held in common has fallen sharply from a third in the 1970s to less than a tenth today. This ongoing privatisation process has also greatly weakened the public finances. Britain is one of only a handful of rich nations with a deficit on their public finance balance sheet, with net public wealth—public assets minus debt—now at minus 20 per cent of the economy. The balance stood at plus 40 per cent in 1970. This shift has greatly weakened the state’s capacity to handle issues like inequality, social reconstruction and the climate crisis.13

The emphasis on private capital as the primary engine of the economy has failed to deliver the gains promised by its advocates. Since the counter-revolution against postwar social democracy from the early 1980s, and especially since 2010, levels of private investment, research and development, and productivity—key determinants of economic strength—have been low both historically and compared with other rich countries. Several factors account for Britain’s relative private ‘investment deficit’. They include Britain’s low wage history, with abundant cheap labour dulling the incentive to invest, and the perverse system of financial incentives that makes it more attractive for executives to line their pockets than build for the future. There is also the preference given to capital owners—an increasingly narrow group—in the distribution of the gains from corporate activity. In the four years from 2014, FTSE 100 companies generated net profits of £551 billion and returned £442 billion of this to shareholders in share buy-backs and dividends, leaving only a small portion of these gains to be used for private investment and improved wages that support economic strength.14 With UK corporations increasingly owned by overseas institutional investors, such as US asset management firms, little of this profit flow has ended up in UK pension and insurance funds and back into the domestic economy.

Some forms of financial and business activity have played a destructive role. In a remarkable parallel with the 1929 stock market crash and the Great Depression, the 2008 financial crash and the financial crisis that followed were classic examples of the impact of uncontrolled market failure. They were the product of tepid regulation of the financial system that turned a blind eye to a lethal cocktail of excessive profiteering and reckless gambling by global finance. It was only public intervention on a mass scale to bail out the banks—and many of the architects of the crash—that prevented an even greater crisis.

Claims about the overriding benefits of the outsourcing of public services to private companies have been exposed by a succession of scandals involving large British companies like G4S and Serco and by damning reports of the consequences of outsourcing in the NHS, the probation service and army recruitment.15 Such claims were also undermined by the collapse of two giant multi-billion-pound behemoths—the UK construction company Carillion and the public service supplier Interserve (which employed 45,000 people in areas from hospital cleaning to school meals). In the ten years to 2016, Carillion, sunk by self-serving executive behaviour and mismanagement, liked to boast about another malign form of crowding out—of how it raised dividend payments to shareholders every year, with such payments absorbing most of the annual cash generation, rather than building resilience.

Extraction

A second form of crowding out stems from the return of a range of extractive business mechanisms aimed at capturing a disproportionate share of the gains from economic activity. While some of today’s towering personal fortunes are a reward for value-creating activity that brings wider benefits for society as a whole, many are the product of a carefully manipulated, and largely covert, transfer of existing (and some new) wealth upwards. Early economists, such as the influential Italian economist Vilfredo Pareto, warned—in 1896—of the distinction between ‘the production or transformation of economic goods’ and ‘the appropriation of goods produced by others.’16 Such ‘appropriation’ or ‘extraction’ benefits capital owners and managers—those who ‘have’ rather than ‘do’—and crowds out activity that could yield more productive and social value. It delivers excessive rewards to owners and executives at the expense of others, from ordinary workers and local communities to small businesses and taxpayers.17

Extraction has been a key driver of Britain’s low wage, low productivity and growth sapping economy. Many large companies have been turned into cash cows for executives and shareholders. A key source of this process has been the return of anti-competitive devices described as ‘market sabotage’ by the American heterodox economist Thorstein Veblen over a century ago’.18 In contrast to the claims of pro-market thinkers, corporate attempts to undermine competitive forces have been an enduring feature in capitalism’s history, contributing to erratic business performance and economic turbulence.

Far from the competitive market models of economic textbooks, the British—and global—economy is dominated by giant, supranational companies. Key markets—from supermarkets, energy supply and housebuilding, to banking, accountancy and pharmaceuticals—are controlled by a handful of ‘too big to fail’ firms. The oligopolistic economies created in recent decades are, despite the claims of neoliberal theorists, a certain route, as predicted by many distinguished economists, from the Polish economist Michal Kalecki, to the Cambridge theorist, Joan Robinson, to weakened competition, extraction and abnormally high profit. This new monopoly power, according to one study of the US economy, has been a key determinant of ‘the declining labor share; rising profit share; rising income and wealth inequalities; and rising household sector leverage, and associated financial instability.’19

Although they helped pioneer popular and important innovations, the founders of today’s monolithic technology companies have turned themselves from original ‘makers’ into ‘takers’ and ‘predators’. Companies like Google and Amazon have entrenched their market power by destroying rivals and hoovering up smaller competitors, a form of private-on-private crowding out of small by more powerful firms. Multi-billionaires in large part because of immense global monopoly power, the Google, Amazon and Facebook founders can be seen as the modern day equivalents of the American monopolies created by the ‘robber barons’ such as J. D. Rockefeller, Andrew Carnegie and Jay Gould through the crushing of competitors at the end of the nineteenth century.

The House of Have and the House of Want

The third type of crowding out follows from the way the growth of extreme opulence for the few has too often been bought, in effect, at the expense of wider wellbeing and access to basic essentials for the many. Today’s tearaway fortunes are less the product of an historic leap in entrepreneurialism and new wealth creation than of the accretion of economic power and elite control over scarce resources. It is a paradox of contemporary capitalism that as societies get more prosperous, many fail to ensure the most basic of needs are fully met.

In Britain, elements of the social progress of the past are, for a growing proportion of society, being reversed. Compared with the 1970s, a decade when inequality and poverty levels were at an historic low, poverty rates have more or less doubled, while both income and wealth have become increasingly concentrated at the top. Housing opportunities for many have shrunk and life expectancy rates have been falling for those in the most deprived areas. Mass, but hit and miss, charitable help has stepped in to help fill a small part of the growing gaps in the state’s social responsibilities. While Britain’s poorest families have faced static or sinking living standards, the limits to the lifestyle choices of the rich are constantly being raised. The private jet, the luxury yacht, the staff, even the private island, are today the norm for the modern tycoon.

In heavily marketised economies with high levels of income and wealth concentration, the demands of the wealthy will outbid the needs of those on lower incomes. More than one hundred years ago, the Italian-born radical journalist and future British MP, Leo Chiozza Money, had warned, in his influential book, Riches and Poverty, that ‘ill-distribution’ encourages ‘non-productive occupations and trades of luxury, with a marked effect upon national productive powers.’20 The ‘great widening’ of the last four decades has, as in the nineteenth century, turned Britain (and other high inequality nations such as the US) into a nation of ‘luxury capitalism’. The pattern of economic activity has been skewed by a super-rich class with resources deflected to meeting their heightened demands.

While Britain’s poorest families lack the income necessary to pay for the most basic of living standards, demand for superyachts continues to rise. The UK is one of the highest users of private jets, contributing a fifth of related emissions across Europe. The French luxury goods conglomerate, LVMH—Louis Vuitton Moët Hennessy—is the first European mega-company to be worth more than $500 billion. Resources are also increasingly directed into often highly lucrative economic activity that protects and secures the assets of the mega-rich. Examples include the hiring of ‘reputation professionals’ paid to protect the errant rich and famous, the use of over-restrictive copyright laws, new ways of overseeing and micromanaging workers, as well as a massive corporate lobbying machine.

The distributional consequences of an over-emphasis on market transactions is starkly illustrated in the case of the market for housing. Here, a toxic mix of extreme wealth and an overwhelmingly private market has brought outsized profits for developers and housebuilders at the cost of a decline in the level of home ownership, a lack of social housing and unaffordable private rents. The pattern of housebuilding is now determined by the power of the industry and the preferences of the most affluent and rich. Following the steady withdrawal of state intervention in housing from the 1980s—with local councils instructed by ministers to stop building homes—housebuilders and developers have sat on landbanks and consistently failed to meet the social housing targets laid down in planning permission. Instead of boosting the supply of affordable social housing, scarce land and building resources have been steered to multi-million-pound super-luxury flats, town houses and mansions. In London, Manchester and Birmingham, giant cranes deliver top end sky-high residential blocks, mostly bought by speculative overseas buyers and left empty. The richest crowd out the poorest, or as Leonard Cohen put it, ‘The poor stay poor, the rich get rich. That’s how it goes, everybody knows.’

There has been no lack of warnings of the negative economic and social impact of economies heavily geared to luxury consumption, most of them ignored. Examples include the risk of the coexistence of stark poverty and extreme wealth: of what the radical Liberal MP, Charles Masterman, called, in 1913 ‘public penury and private ostentation’, and what the American radical political economist Henry George had earlier called ‘The House of Have and the House of Want’.21 Then there was the influential 1950s’ warning from the American economist, J. K. Galbraith, of ‘private affluence and public squalor’.22 ‘So long as material privation is widespread’, wrote the economist, Fred Hirsch, in the 1970s, ‘the conquest of material scarcity is the dominant concern.’23

For much of the last century, policy makers have seen wealth and poverty as separate, independent conditions. But that view has always been a convenient political mistruth. If poverty has nothing to do with what is happening at the top, the issue of inequality can be quietly ignored. Yet, the scale of the social divide and the life chances of large sections of society are ultimately the outcome of the conflict over the spoils of economic activity and of the interplay between governments, societal pressure and how rich elites—from land, property and private equity tycoons to city financiers, oil barons and monopolists—exercise their power. In recent decades, the outcome of these forces has favoured the already wealthy, with the shrinking of the economic pie secured by the poorest. As the eminent historian and Christian Socialist, R. H. Tawney, declared in 1913, ‘What thoughtful people call the problem of poverty, thoughtful poor people call with equal justice, a problem of riches.24

Conclusion

These three alternative forms of crowding out have imposed sustained harm on social and economic resilience. Despite this, governments have continued to apply a long-discredited austerity-based theory of crowding out, while ignoring other, arguably more damaging forms of the phenomena. The latest application of the original theory since 2010 has inflicted ‘vast damage on public services and the public sector workforce’, without delivering the declared goal of ‘crowding in’ through faster recovery and growth, or improved public finances.25

Britain is currently being subjected to yet another wave of austerity, with the 2022 Autumn Statement announcing a new package of projected public spending plans, higher taxes and lower public sector real wages, again in the name of fixing the public finances and boosting growth.26 It’s the same short-term, narrowly focussed strategy that, by digging the economy into a deeper hole and cutting public investment, has failed time and again over the last 100 years.

Meanwhile, other damaging forms of the crowding out of key public services, value-adding economic activity and the meeting of vital needs, driven by over-reliance on markets, excess inequality and dubious private-on-private activity, are simply ignored or dismissed.

Notes

1 C. E. Mattei, The Capital Order, Chicago IL, University of Chicago Press, 2022, p. 156. 2 House of Commons, Hansard, 12 June 1979, col 246. 3 J. Tomlinson, ‘Crowding out’, History and Policy, 5 December, 2010; https://www.historyandpolicy.org/opinion-articles/articles/crowding-out4 J. Delingploe, ‘Britain’s trillion pound horror story’, The Spectator, 13 November, 2010. 5 J. A. Hobson, The Industrial System, London, Longmans, Green & Co., 1909. 6 C. Breuer, ‘Expansionary austerity and reverse causality: a critique of the conventional approach’, New York, Institute for New Economic Thinking, Working Paper no. 98, July 2019. 7 D. Blanchflower, Not Working, Princeton NJ, Princeton University Press, 2019, p. 172. 8 A. Stirling, ‘Austerity is subduing UK economy by more than £3,600 per household this year’, New Economics Foundation, 2019; https://neweconomics.org/2019/02/austerity-is-subduing-uk-economy-by-more-than-3-600-per-household-this-year9 R. C. Jump, J. Michell, J. Meadway and N. Nascimento, The Macroeconomics of Austerity, Progressive Economy Forum, March 2023; https://progressiveeconomyforum.com/wp-content/uploads/2023/03/pef_23_macroeconomics_of_austerity.pdf10 See S. Lansley, The Richer, The Poorer, How Britain Enriched the Few and Failed the Poor, Bristol, Policy Press, 2022. 11 K. Buchholtz, Where Social Spending is Highest and Lowest, Statistica, 28 January, 2021; https://www.statista.com/chart/24050/social-spending-by-country/12 OECD, The Covid-19 Crisis and State Ownership in the Economy, Paris, OECD, 2021; https://www.oecd.org/coronavirus/policy-responses/the-covid-19-crisis-and-state-ownership-in-the-economy-issues-and-policy-considerations-ce417c46/13 L. Chancel, World Inequality Report, World Inequality Database, 2021. 14 High Pay Centre/TUC, How the Shareholder-first Model Contributes to Poverty, Inequality and Climate Change, TUC, 2019. 15 National Audit Office, ‘Transforming Rehabilitation: Progress Review’, National Audit Office, 1 March 2019; https://www.nao.org.uk/reports/transforming-rehabilitation-progress-review/16 V. Pareto, Manual of Political Economy, New York, Augustus M. Kelley, 1896. 17 Lansley, The Richer, The Poorer. 18 T. Veblen, The Theory of the Leisured Classes, New York, The Modern Library, 1899; T. Veblen, The Engineers and the Price System, New York, B. W. Huebsch, 1921. 19 I. Cairo and J. Sim, Market Power, Inequality and Financial Instability, Washington DC, Federal Reserve, 2020. 20 L. Chiozza Money, Riches and Poverty, London, Methuen, 1905, pp. 41–3. 21 C. Masterman, The Condition of England, Madrid, Hardpress Publishing, 2013; H. George, Progress and Poverty, New York, Cosimo Inc., 2006, p. 12. 22 J. K. Galbraith, The Affluent Society, Boston, Houghton Mifflin, 1958, ch. 23. 23 F. Hirsch, The Social Limits to Growth, Abingdon, Routledge & Kegan Paul, 1977, p. 190. 24 R. H. Tawney, ‘Poverty as an industrial problem’, inaugural lecture at the LSE, reproduced in Memoranda on the Problems of Poverty, London, William Morris Press, 1913. 25 V. Chick, A. Pettifor and G. Tily, The Economic Consequences of Mr Osborne: Fiscal Consolidation: Lessons from a Century of UK Macroeconomic Statistics, London, Prime, 2016; G. Tily, ‘From the doom loop to an economy for work not wealth’, TUC, February, 2023; https://www.tuc.org.uk/research-analysis/reports/doom-loop-economy-work-not-wealth26 Chancellor of the Exchequer, Autumn Statement, 2022, Gov.uk, 17 November, 2022; https://www.gov.uk/government/topical-events/autumn-statement-2022

This article was first published in The Political Quarterly 

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Biography

• Stewart Lansley is the author of The Richer, The Poorer: How Britain Enriched the Few and Failed the Poor, a 200-year History, 2021. He is a visiting fellow at the University of Bristol and an Elected Fellow of the Academy of Social Sciences.

picture credit flickr

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