On wealth, the right is wrong

To get rich is glorious, as Deng Xiaoping famously said. But the US Republican right have made another Great Leap Forward to claim that the rich are also gloriously important to the economy because they produce jobs and thereby stimulate growth.

Questions about the contribution of the rich are especially important just now when western economies are in a continuing slump, unemployment is stubbornly high and Republicans offer their creed of small government, diminishing taxation and making the rich richer as the panacea to end the world's slump.

Unfortunately for the Republicans, the US and probably the world, the claim that the rich should be encouraged by lower taxes and more opportunities to make even more money is bogus. Worse, pursuing this claim could do enormous damage not only to economies but to political and social order.

Globally, from the US to the mainland, Hong Kong, India and even Japan, the rich are getting ever richer and taking a bigger share of the pie, while the poor are being pushed to the margins. The Organisation for Economic Co-operation and Development, the club of rich industrial countries, last month warned that inequality was becoming one of the biggest challenges for governments.

The philosopher Plato said the income of the highest paid should never be more than five times that of the lowest paid. What would he think now? The chief executives of the 100 largest companies in Britain in 2009 earned 81 times the average pay of full-time workers. In the US in 2010, when wages were stagnating and unemployment was high, total realised compensation of chief executives of the S&P500 companies increased by a median of 36.47 per cent, and the highest paid CEO took home US$145 million.

OECD secretary general Angel Gurria warned last month that: 'Inequality has become a universal concern among both policymakers and societies at large. Today in advanced economies, the average income of the richest 10 per cent of the population is about nine times that of the poorest 10 per cent.' In the US, the richest 10 per cent get 14 times that of the poorest 10 per cent. Even in traditionally egalitarian countries, such as Germany, Denmark and Sweden, the income gap has risen from 5 to 1 in the 1980s to 6 to 1. In Japan, South Korea and Britain, it is 10 to 1.

Inequality in the US is worse than in the Roman Empire, according to an article in the Journal of Roman Studies. Professor Walter Scheidel and Dr Steven Friesen calculated that at the zenith of the empire in the year 150, the top 1 per cent of Roman society controlled 16 per cent of wealth. The top 1 per cent in the US control 40 per cent. The pair calculated a Gini coefficient for the Roman Empire, 0.42-0.44, against 0.468 for the US.

Throughout the Asia-Pacific region the Gini coefficient is rising. This measurement is a popular tracker of equality: if the coefficient is 0, there is perfect equality between all people, virtually impossible; at the other end of the scale is 1, where one person collects all income; above 0.45, inequality is getting dangerously high.

According to the OECD, which uses a percentile scale with 100 instead of 1, the Gini coefficient for the Asia-Pacific region is 39.6, higher than the 31.0 for OECD countries. But some leading economies showed extremely high numbers, notably Indonesia with 57, India with 53.6, Hong Kong with 52.5, Singapore with 47.8, and the mainland with 46.2.

The US and many countries are on a dangerously slippery slope, especially where outsourcing of jobs, part-time work and short-term contracts are on the increase, cutting the wages of the people who bake the pies while CEOs take bigger bites.

Henry Blodget, who runs the Business Insider website, last month humorously savaged the claims of the super-rich to be the sole progenitors of wealth and jobs. He imagines an economy, Millionaire's Island, on which the richest 1 per cent of Americans are placed with their wealth.

So what happens? 'There will be a massive grab for all of the island's resources. This will probably lead to years of violence and wars, in which many of the island's new residents will be killed off,' writes Blodget.

Slowly, Blodget builds up the economy, allowing property rights, small government, food, shelter and other necessities. On the way, some of the rich will have to do dirty jobs, and be able to charge massive sums - at least until other bankers come along, realising that their skills are not worth much in this marketplace.

Only with a growing, sophisticated economy and widespread income can entrepreneurs flourish, claims Blodget. 'Entrepreneurs and investors actually don't create jobs, at least not by themselves. What creates jobs is a healthy economic ecosystem, of which entrepreneurs and investors are only parts. The more important part of the job-creation engine is a huge base of people and companies with plentiful disposable income.

'To create self-sustaining jobs, companies need to sell their products into a marketplace that wants them and can afford them. The marketplace needs laws, law-enforcement, property rights, transportation systems, resources, rules, and other attributes of healthy free-market economies ... Without all those things, entrepreneurs can't create jack.' Congress and the Republicans forget this at their peril.

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Hong Kong's ranking in a list of the world's most unequal economies, based on the Gini coefficient. Namibia ranks first.

Source: CIA World Factbook