An economic horror show

PUBLISHED : Tuesday, 01 November, 2011, 12:00am
UPDATED : Tuesday, 01 November, 2011, 12:00am


Despite the economic turmoil, unemployment and homelessness, some Americans do not have problems with jobs, money or housing.

Houston oil executive John Schiller built a new house in Cape Cod-style for just US$50,000 a couple of years ago. A bargain, you might think, except this was a playhouse for his four-year-old daughter. It is a two-storey structure occupying 170 sq ft, complete with a sink and running water, a refrigerator with ice lollies and a 32-inch flat-screen television.

Maybe it was a bargain because The New York Times, which wrote almost 2,000 words recently about the booming business of playhouses for children, reported that some cost up to US$200,000 each.

Across the Atlantic, Tamara Ecclestone, the 27-year-old daughter of Formula One chief Bernie Ecclestone, boasted that she was spending GBP1 million (HK$12.43) on a bathtub for her new GBP47 million London home. The socialite-entrepreneur said it was worth it because she spent so much time in the bath.

Clearly, there are a few winners along with far too many losers in modern Western economies. A spate of recent reports and statistics show just how yawningly the gap between rich and poor is growing. Political scientists Jacob Hacker and Paul Pierson say a 'winner-take-all economy' is developing.

The Occupy Wall Street protesters and their counterparts in London - who are about to be cleared off the pavements by an unholy alliance of God (St Paul's Cathedral), Mammon (the City of London Corporation) and force (the police) - claim to represent the 99 per cent of the world's people, who see the rich 1 per cent helping themselves while the dispossessed are left without jobs or resources.

In the United States, the share of total income going to the top 1 per cent - with incomes of US$368,000 and above - has increased from 8 per cent in the 1960s to 20.9 per cent today in a concentration of economic inequality not seen since the eve of the Great Depression.

The top 0.5 per cent, with incomes above US$558,000, have 16.8 per cent of US income, while the top 0.1 per cent, with about US$1.7 million, account for 10.3 percent. The mega-rich, the 0.01 per cent with incomes of more than US$9.14 million, took a huge 5 per cent of the total income.

Real median family income has been falling steadily for the past five years, while total wages as a percentage of gross domestic product have fallen from 49 in 2000 to below 44 last year. Big corporations, according to the Federal Reserve, held a record US$1.93 trillion in cash on their balance sheets last year.

The big bosses have done even better: last year the chief executives of companies on the Standard & Poor's 500 Index received average compensation of US$11.4 million, an increase of 23 per cent over the previous year. Average CEO pay to that of the average worker has increased to 343 times. In 1965, CEO pay was 26 times that of the average worker.

The US Congressional Budget Office reported that from 1979 to 2007, the incomes of the broad American middle classes (those in the 21st to 80th percentiles) increased by 1 per cent a year, while the richest 1 per cent saw a gain of 7 per cent a year.

The Gini coefficient, which measures inequality, is higher in the US than other rich countries and is about the same as places like Ghana, Nicaragua and Turkmenistan.

In Britain, big bosses enjoyed an even more extravagant year. A study by Income Data Services showed that earnings by directors of FTSE 100 companies rose by 49 per cent last year to almost GBP2.7 million each.

The pay increases of chief executives were a more modest 43 per cent, taking them to an average GBP3.8 million each, still below their American counterparts.

Even considering the natural suspicion of statistics lumping all CEOs and directors together and the fact that pay includes bonuses and other benefits, there is something unhealthy in a system where the masses struggle to find work while the bosses enjoy huge increases.

What is more worrying is the attitude of the CEOs. Martin Sorrell, an otherwise intelligent man who heads advertising company WPP, defended the pay increases, claiming they helped keep Britain competitive.

Interestingly, the Church of England may be happy to evict the protesters outside the cathedral, but the Vatican last week joined other notable commentators, including the Financial Times, Warren Buffett and George Soros, and issued a thoughtful but damning critique of the global financial system. The Pontifical Council for Justice and Peace echoed Pope John Paul II's damnation of 'idolatry of the market' and urged 'ethics over the economy'.

Critics are often told that skyrocketing inequality is the natural product of market forces. But Hacker and Pierson say politics - including curbs on labour, financial deregulation and tax cuts for the wealthy - has tilted the playing field in favour of the rich.

Unfortunately, Washington Inc seems mesmerised by the power of money. All the Republican presidential candidates promise more tax concessions for the rich, while President Barack Obama is unable to gain approval for his plans to create jobs in the face of opposition in Congress. All of this adds up to a recipe for the faster demise of the US as an economic and political power.

There is something unhealthy in a system [if] masses struggle to find work while bosses enjoy increases


The unemployment rate in New York State, as of September, or equivalent to around 759,000 jobless people