12 May 2012

What Poverty Is Really All About

Poverty is manmade. In Scandanavia and Germany the gap between the average wages of the  top 10% and lowest 10% is around 6 times. In the UK its around 12 times. In the US 20.

Yet GDP per capita is similar in all these countries, companies do just as well, CEOs just as competent. In fact it is arguable that economically the Germanic countries do better. Their public services are certainly better funded. Where is that bigger pie that right-wing ideology claims will provide for all when you lavish the rich with better rewards?

In simple terms it comes down to how you treat your less productive members of society.

There will always be a certain percentage - millions of people, who you could argue are never going to be economically viable. In the US they lock up 2.5m people, millions more are destitute, homeless. 50m unable to afford healthcare. It seems one thing inequality does do is make the poverty pie bigger. As Wilkinson and Picket demonstrate in their book 'the Spirit Level'.

Ultimately the political & economic system is refusing to offer these people a decent living wage. But the rightwing have a problem. They can drive wages down to subsistence level for many, but what do you do when economics says they are worth less than subsistence?

What I am getting at, is the strict limits (at least there should be anyway) of using only economics to justify political decisions. The morality of the poor so derided by the rich actually highlights an absence of morality at the top. When the rich blame the poor for poverty, it is the morality of the rich that should be questioned.

An economic model may suggest that even education spending is a waste of money when at the end, the product is unemployable. (A side point is that the US and UK sponge on other countries education systems through the 'brain gain' - paying higher wages by not spending on education/training, i.e. cheating those states that invest more).

And of course this all assumes that your economic model is determining wages fairly in the first place.

As anyone who has studied even basic economics should know. There are many distortions in markets, especially in the labour market. There is no such thing as a free market. But even where the market is as free as it can be and wages do reflect roughly what a person is worth to a company, are we getting a fair wage?

Wayne Rooney is paid a thousand times what the poorest professionals in the lower leagues get. Is he really a thousand times better footballer?

In terms of winning games he may be. In fact maybe even more. But in terms of skills, passing ability etc?

The problem is, Rooney only needs to be fractionally better than most to be able to command a market wage thousands of times better.

To the football club that wins, attracts crowds and has the resources, paying astronomical wages makes sense.

And, as the market distorts wages it also pressures politicians to move the burden of tax down the income scale. Inequality has grown fastest in the UK for both these reasons.

The market has no morals. It can pay what we all know are absurd amounts for negligible difference. And that is when the market is not rigged by nepotism and other corruption.

Social class inhibits opportunity for millions in poverty. The more unequal the society, the more inefficient the economy as potentially productive people stagnate.

Examples of distortion? Global capital allowed to move at will but not labour. Start ups impossible when a few companies dominate a market, can underprice or cartel to put barriers in place. So no perfect competition and no infinite firms then.

Competition stifled by political/media control. Lack of regulation can be more restrictive than lots. And economists remember the concept of perfect knowledge.

Then there are bigger distortions such as educational achievement. It is not just about what happens in the classroom.

Even if state schools had the resources of the private schools, things such as poor housing, violence in the home and in communities hold back the poorest. Indeed, building a million decent homes would do more for educational attainment than doubling spending in the classroom.

All these factors and many more allow companies to distort wages. Workers need income, capitalists can survive with their capital. Marx highlighted the importance of collective action. Capitalists like individualism because individuals are weak.

Neither is it correct to say the wealthy don't have enough wealth to make a difference to poverty. The top 10% have 53% of the wealth. The bottom 10% just 1.3%. You don't need clever maths to see that you could double the wealth of the poorest and barely dent the wealth at the top.

All this emphasises the importance of groups like Occupy raising awareness. Today in St Pauls London and around the world they are having a 'meet the 1%' day to highlight inequality.

Solutions? Surprisingly I make the case from the left in agreeing with the right that income and corporation taxes should fall. Taxes that ultimately increase prices indiscriminatory hit the poorest the most. We should not tax beneficial activities like productive earnings. I am a pigouvian tax man. To encourage employment we should only tax excessive income and wealth. Only profit taken out of a business should be taxed.

From the Greens to Ukip there is support for a Citizens Income. A non means tested basic income for all that guarantees a living. Best of all no financial disincentive to work.

Land taxes and environmental taxes would make up the shortfall from losing income and corporation tax. Half of wealth is in land and land prices rise and fall because of government action not individuals. This speculative profit is most in need of tax.

Above all, taxes need to redistribute more and a citizens income will ensure jobs pay. Employees on company boards should curb top pay. Regulate media ownership to ensure better diversity of views. If people learn to trust more, society will prosper. Heres hoping.

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