Remember all that stuff about how the credit crunch was going to usher in a new age of austerity? The financial industry would shrink; the gulf between the haves and the have-nots would close; and taxes would rise for the top earners, forcing them to contribute more to society.
Well, guess what? It didn’t happen.
In fact, we just had a “rich-get-richer” recession. U.K. data suggest the gap between the wealthy and the poor has widened. We can give up any idea that it is going to close by itself. The government usually bails out the rich; the wages that the highly skilled can command are rising all the time; and globalization means the well-off increasingly occupy a whole different economy than the rest of the country they live in.
While the U.K. economy as a whole may be struggling, people at the top end of the income range are doing surprisingly well.
A report last week by HSBC Holdings Plc, drawing on a YouGov Plc survey, concluded that the richest British households ― defined as those earning 100,000 pounds ($161,000) a year or more ― planned to increase their spending by 7.8 percent this year, even though some of that will be financed by saving less. Not much sign of austerity there.
The ordinary British family isn’t doing so well. The median pay increase was 2.2 percent in the last three months, less than inflation, which is running at 3.7 percent. In effect, the average person is getting poorer in real terms ― but those at the top are doing fine.
London, by far the wealthiest region of the U.K., came through the recession in better shape than the rest of the country, according to Henry Overman, the director of the Spatial Economics Research Centre at the London School of Economics.
“It’s simply not a middle-class recession and a greater representation of the middle class is in the south east of England,” he said in a lecture last month.
Incomes and jobs suffered less in London than the rest of the country. House prices did better and kept on soaring at the top end of the market. Prime London properties rose 5 percent in the past year, according to Savills Plc. But average house prices fell.
Of course, inequality has been rising for some time. In the U.K., the Gini coefficient, a widely used measure of disparity in incomes, rose from 28 percent in 1983 to 34 percent in 2008/9, according to the Office for National Statistics. A score of 1 means incomes are evenly distributed, while 100 means just one person holds all of a nation’s wealth. Since 2005, it has been relatively stable. Now inequality is rising again.
What’s true of the U.K. is probably true of most of the developed world. There’s nothing very unique about the British economy. In the U.S., the tax cuts introduced by President George W. Bush favored the rich. Wall Street pay has recovered fast, while average hourly earnings for ordinary workers rose only 1.9 percent last year. It’s a fair bet the same trends are evident everywhere.
That poses the question of whether the rich can just keep on getting wealthier than everyone else. Here’s why they will.
First, the bailouts just help the wealthy. Governments used to subsidize manufacturing industries. Now they rescue the banking industry, where most of the wealthy work. Central banks use quantitative easing to try and revive the economy. Yet that mainly works by boosting asset and commodity prices. If you invest in hedge funds trading oil futures, you’ll have done well from QE. If you are just the average guy who pays more to fill up the fuel tank of your car, then you’re the loser. In effect, banking bailouts and QE use the state to help mostly the rich.
Second, the premium attached to education keeps growing. One feature of all modern economies is that they favor the highly skilled over others. That’s why the rich are pulling away from the rest of society. If anything, the recession seems to have exacerbated that. When times are hard, public-sector, manufacturing and low-skilled service jobs are hit hardest. The more vital your skill, the more likely you are to be employed.
Third, globalization has allowed the very rich to increasingly cut themselves adrift from national economies. London’s bankers, lawyers and consultants are as much a part of the emerging-markets boom as they are of the U.K. economy, possibly more so. They arrange initial public offerings for Russian mining companies and restructure debt for Dubai property empires. What happens in the U.K. doesn’t make much difference to them. The same is true for the professionals working in most major business centers.
Some of those trends we can’t do much about. Some we can: We don’t need to bail out banks. And we don’t have to boost the economy by helping asset prices.
It was a nice idea that the credit crunch would narrow the widening inequalities that are opening up everywhere. But it hasn’t happened. Instead, societies will need to ask the question: Are we really comfortable with the huge gap between rich and poor? It won’t close by itself.
By Matthew Lynn
Matthew Lynn is a Bloomberg News columnist and the author of “Bust,” a book on the Greek debt crisis. The opinions expressed are his own. ― Ed.