Inequality is rising as the super-rich get even richer, taking on some of the trappings of an "aristocracy", some argue. But is upward mobility under threat?

We live
in an age of widening economic inequality. It is most striking in the US and the UK
but it is happening in Communist China, in Russia
and even in supposedly egalitarian social democracies such as Sweden and Norway. This, at least, is the view
of Chrystia Freeland, a wealth analyst and author, expressed at a recent TED
conference in Edinburgh.

She
said that in the 1970s the uppermost “one per cent” accounted for about 10 per
cent of the annual income of the US, whereas today their income has
more than doubled to above 20 per cent. Even more striking, she thought, was
the trend at the very top of the income distribution ladder. The 0.1 per cent
in the US
today accounts for more than 8 per cent of the national income. They are where
the “one per cent” was 30 years ago.

The
Sage of Omaha

In
2005 Robert Reich – who had been the secretary of Labour in the Clinton administration of
the 1990s – analysed the wealth of two very rich men - Bill Gates and Warren
Buffett. He found that it was equivalent to the wealth of the bottom 40 per
cent of the US
population – 120 million people.

Buffett
– himself no mean watcher of the wealth phenomenon – likes to point out that in
1992 the combined wealth of the people on the Forbes 400 list – and this is the
list of the 400 richest Americans – was $300 billion. Chrystia Freeland
continued: "You didn't even need to be a billionaire to get on that list.
Today that figure has more than quintupled to 1.7 trillion. I probably don't
need to tell you that we haven't seen anything similar happening to the middle
class, whose wealth has stagnated if not decreased.”

“We're
living in the age of the global plutocracy, but we've been slow to notice it.
What's driving it? One set of causes is political. Lower taxes; de-regulation,
particularly of financial services; privatisation; weaker legal protection for
trade unions; all of these have contributed to more and more income going to
the very top,” she said.

Crony
capitalism

"A
lot of these political factors can be broadly lumped under the category of
“crony capitalism” – political changes that benefit a tiny group of
well-connected insiders but don't do much good for the rest of us. Getting rid
of crony capitalism is incredibly difficult. Think of how hard reformers of
various stripes have tried to get rid of corruption in Russia over
many years, or how hard it is to re-regulate the banks, even after the most
profound financial crisis since the Great Depression. Or even think of how
difficult it is to get the big multinational companies – including those whose
motto might be `don't do evil’ – to pay tax at a rate even approaching that
paid by the middle class," she said.  

Her
words echoed the famous utterance of journalist and book author Chris Hedges,
who was commenting in 2011 on the fact that no bankers had gone to jail in the
US for causing the crisis of 2008: "In today's political system, there is
currently no way to vote against the interests of Goldman Sachs."

Freeland
thought that crony capitalism was one obvious cause of income inequality and
stated that it was universally unpopular – a view shared by the right-wingers
in the Tea Party to the left-wingers of Occupy Wall Street. "After all,
no-one is actually in favour of crony capitalism, " she said. As she did
so, she also acknowledged the legitimate fears that "arrivistes" and
other high-net-worth individuals had when they heard militant talk about income
redistribution, in the same way that someone who had hoarded food wisely for a
bleak mid-winter might fear militant talk of food redistribution.

The
twin engines

When
she looked at the economic causes of surging income inequality, she was in no
doubt what they were: "Globalisation and the technology revolution, the
twin economic transformations that are changing our lives and transforming the
global economy, are also powering the rise of the super-rich."

This,
however, was where her argument started to become opaque. She did not define
the meaning of "globalisation," an ambiguous word at the best of
times. The nearest she came to doing so was when she spoke of i-Phones,
dishwashers and T-shirts being made by globalisation, implying that the
replacement of cheap goods in established industrial countries by cheaper goods
among the manufacturers of poorer, developing countries was something
revolutionary rather than the 19th Century phenomenon with which economic
historians are so familiar. She did, however, refer obliquely to the phenomenon
that has often been discussed in these web-pages: the rise among
ultra-high-net-worth individuals of "new money" from entrepreneurs,
especially those with stakes in large corporations.

She
commented that anyone with a good idea now had "almost instant, almost
frictionless access to a global market of more than a billion people," a
phenomenon that certainly is fairly new and global. She linked this to the rise
of celebrity and "superstars" in every field, including law and
dentistry. The one example she gave was of Bernard Touati, a celebrity dentist
who services other celebrities including film stars and Russian oligarchs.

Changing
the rules of the game

When
looking on the dark side of this phenomenon, Freeland thought that it was only
too easy for what one might call "meritocratic plutocracy" to become
crony plutocracy. She cited the Amazons, Apples, Googles and Starbucks of this
world as corporations that allegedly manipulated the international tax system
to lower their tax bills massively, but went on to claim that the problem was
wider than this.

"Why
stop at just playing the global political and economic system as it exists to
your own maximum advantage? Once you have the tremendous economic power that we
are seeing at the very top of the income distribution and the political power
that inevitably entails, it becomes tempting as well to start trying to change
the rules of the game in your own favour. It's what the Russian oligarchs did
in creating the sale-of-the-century privatisation of Russia's natural resources. It's
one way of describing what happened with the deregulation of financial services
in the US and the UK," she
said.

Towards
a new aristocracy

A
second matter that worried Freeland was the ease with which the world's
meritocratic plutocracy was becoming an aristocracy. "One way of describing
the plutocrats is as `alpha-geeks’. They are people who are acutely aware of
how important highly sophisticated analytical and quantitative skills are in
today's economy. That's why they are spending unprecedented time and resources
educating their own children,” she said.

"The
middle class is spending more on schooling too, but in the global educational
arms-race that starts at nursery school and ends at Harvard, Stamford and MIT,
the 99 per cent is increasingly out-gunned by the `one per cent’. The result is
something that economists Alan Krueger and Miles Corak call the `Great Gatsby
curve’.

This
phenomenon deserves some explanation. This is a chart that plots the positive
relationship between inequality and intergenerational social immobility in
several countries around the world. Krueger, the chairman of the US Council of
Economic Advisors,  introduced the world
to it last year in a speech he gave at the Center for American Progress on 12
January. On the X axis he placed income inequality, with countries like Denmark and Sweden on low figures and the South
American countries at the high end towards the right.  On the Y axis he placed "intergenerational
earnings elasticity", a phrase which denotes a statistical correlation
between a parent’s economic standing and his children’s. The higher the
intergenerational elasticity, the less social mobility a society offers and the
more of a role childhood upbringing plays when compared to individual talents
and capabilities.

The
curve - actually a very straight line with various countries either side of it
- showed a fairly steep upward incline from low figures for both X and Y axes
up to high figures on the right of the graph. These figures, often replicated
by other statisticians, demonstrate that as income inequality increases, social
mobility decreases. Corak, on whose work Krueger partly based his findings, has
plotted the same curve with figures from a wider set of countries than
Krueger's. Freeland summed up the findings with the pithy phrase: "The
plutocracy may be a meritocracy but, increasingly, you have to be born on the
top rung of the ladder to even take part in that race."

The
hollow middle class

One
of the subjects that has most fascinated American academics for the past decade
is the alleged stagnation of the fortunes of the middle class since 1970. (Some
commentators argue that this stagnation does not take account of changes to
household sizes in countries such as the US.) Middle-class numbers are
burgeoning in China and India, however.

Freeland
warned: "In contrast with the industrial revolution, the titans of our new
economy aren't creating that many jobs. At its zenith, General Motors employed
hundreds of thousands; Facebook has fewer than 10,000. The same is true of globalisation.
For all that it is raising hundreds of millions of people out of poverty in the
emerging markets, it's also outsourcing a lot of jobs from the developed
Western economies. Since the late 1990s, increases in productivity have been
decoupled from increases in wages and employment. That means that our countries
are getting richer; our companies are getting more efficient; but we're not
creating more jobs and we're not paying people, as a whole, more."

This
finally seemed to point to a definition of "globalisation" at last:
the phenomenon of offshoring labour and creative talent by means of modern
telecommunications, especially when organised by world-girdling corporations.
The lesson that Freeland drew from the rise of the meritocratic plutocracy that
oversees this phenomenon was that the populations of the West had to reach a
"new New Deal" with their governments. Reality, however, shows that
in the BRIC (Brazil, Russia, India
and China)
countries and others, there is an explosive growth in the ranks of the middle
classes even though the super-rich are also becoming even richer. Social
mobility is not dying everywhere, except perhaps at the very top.

Chrysta
Freeland is the author of "Plutocrats: The Rise of the New Global
Super-Rich and the Fall of Everyone Else."