Loretta Napoleoni: Rogue-Economics
Rogue economics is a maze of market-orchestrated interdependencies and curious contradictions: financial aid has impoverished Africa, while high-sugar food donations have triggered epidemic diabetes in its population. Rogue economics is the uncontrollable power which is erasing centuries of social improvements: slave and child labour make Asian products competitive in the West. Rogue economics is the brutal force of unregulated markets: days before 9/11, al Qaeda’s sponsors carried out one of the biggest insider trading operations in history. Rogue economics is the bastard child of Western capitalism and the business partner of globalization’s outlaws: market totalitarianism, crime and terror, the feral economic forces unleashed by the global market.
In this book I try to expose the paradoxical economic connections created by these new market forces. The world we live in is governed by different rules than we suppose, and the global economy is becoming our worst enemy.
“Meet Mr. and Mrs. Middle America, children of the post World War II American dream. They live in the suburbs of a Midwestern town, and this is as far as the similarities with the dream go. Mr. Middle America is a construction worker who, during the recession of the 1990s, waived most benefits to keep his job in a local construction company. Mrs. Middle America is neither a Doris Day look-alike nor is she a housewife. More likely, she is overweight and overworked. Employed as a nurse at a nearby hospital, in her spare time she assists neighbours without medical insurance. The occasional tax free extra cash is crucial to make ends meet. In 2006, the couple’s household income was $46,326, $2,000 lower than in 2001, the year the last recession ended.[i]They have $3,800 in the bank, $8,000 of credit card debt[ii], no stocks or bonds and reside in a $160,000 house with $90,000 still left on the mortgage. Husband and wife shop at Wall-Mart, eat at MacDonald and regularly buy lottery tickets in the hope to win their way out of the middle class. That is Middle America’s overwhelming dream.
In fifty year, less than the lifetime of one generation, the American dream has turned into a nightmare. Debt and income inequality are at the root of such transformation. Let’s look at income inequality.
A seminal work produced by Ian Dew-Becker and Robert Gordon, two US economists, shows that from 1997 to 2001 the bulk of the US growth has enriched superstars actors, athletes, media moguls, so called celebrities as wells as corporate CEOs, among which former members of Enron board of directors. The US economy is growing, but the new wealth is not distributed evenly. From the mid 1990s, the top 1% of the US population has earned 24% of new wealth while the bottom 50% had to split less than 13%. Income inequality is fast growing also in Europe, the widest gap between rich and poor can be found in the United Kingdom. Tony Blair, UK prime minister, once said that reducing the salaries of soccer star David Beckham was not a priority, yet in the light of these new statistics Blair should reconsider such statement.
A growing percentage of tickets purchased to watch football matches or movies now goes to fund salaries of superstars, ranging from a few to tens of million dollars. Thus less money is available for other people involved in the business, from those who cut the grass of football fields to managers of cinemas, yet these are the people who put together the show. Robert Gordon estimates that real median earnings per hour have hardly increased at all in the US – not merely under George W. Bush administration but over the period 1966-2001. That means that a middle-income earner would have to work more hours today than five, 10 or even 25 years ago to obtain basic modern necessities. Inequality seems to have broken the link between productivity and real earnings, this explains why the monetary divide between a cameramen and a movie star has widened exponentially. The most serious consequence of such phenomenon is the impoverishment of the middle class. Between 1966 and 2001, in the United States real median earnings, better known as the salaries of the middle class, those sandwiched between the rich and the poor, have risen only by 11%. Yet over the same period the earnings of the top 10% of the population, the wealthiest people, have increased by 58%. The super-rich, a tiny 1% of the population enjoyed a 121% increase in their income. Finally, the income of the extraordinary rich, the 0.01% of the population, which includes movie stars such as Tom Cruise and Wall Street moguls such as Soros, rose 617%.
What is shocking is that this massive flow of cash is originated by the gravitation of the salaries of rich individuals and not by returns on investment, i.e. what is making their wealth soar are not sudden jumps in share prices held in their portfolio but rising fees perceived for their work. Another negative consequence of income inequality is the concentration of wealth in the hands of a shrinking segment of society. In 1966 the top 1% of the US population perceived 24% of non-wage income, which includes return on investment such as share prices and dividends; in 2001 this percentage jumped to 34%. Productive capital, therefore, is not any longer been diluted among the population, mostly because the middle class is too poor to buy shares.
Across the world, the fastest growing accumulation of wealth is taking place among corporate bosses and investment bankers. Top corporate executives account for more than half of the incomes in the elite 0.01% of the US income distribution. The ratio of the pay of US chief executive officers to average wages rose from 27 in 1973 to 300 in 2000, i.e. the gap between middle ranking management and board of directors is widening. In 2004, the directors of the FTSE 100, the index of top companies quoted at the London Stock Exchange, enjoyed a median salary shy of 3 million dollars a year. In a good year, partners of top hedge funds can take home billions of dollars.
A paper published by the National Bureau of Economic Research in the US warns that income inequality in the US is returning to where it was almost a century ago, during the so called ‘gilded age’, when the divide between rich and poor peaked. A new class of super rich, who do not mix with common people, is slowing taking control of the world’s economy. History warns that extreme income inequality can be disastrous. Professor Tony Atkinson, a leading expert on income distribution, showed that in the 1980s inequality in the United Kingdom worsened far more than in other European countries. Eventually this trend was halted by the recession of the 1990s, by far the most serious slow down in economic growth experienced by a European country in the post World War II era.
The ‘Gilded Age’ of the roaring 20s ended with the crash of 1929 and the great depression. A decade of wild unemployment unveiled the perils of keeping the wealth of nations in the hands of few people. Luckily, the British economist John Maynard Keynes came to the rescue. He suggested among massive government intervention in the labour market, the introduction of new policies to trigger a steep decline in income inequality and to distribute share ownership among the population. Today we may not be so lucky.”
> Loretta Napoleoni
[i] Centre on budget and policy priorities, Poverty remains higher, and median income for non-elderly is lower than when recession hit bottom
[ii] Gerald J. Swansin, America the Broke, Doubleday, New York, 2004 p 15
In this book I try to expose the paradoxical economic connections created by these new market forces. The world we live in is governed by different rules than we suppose, and the global economy is becoming our worst enemy.
“Meet Mr. and Mrs. Middle America, children of the post World War II American dream. They live in the suburbs of a Midwestern town, and this is as far as the similarities with the dream go. Mr. Middle America is a construction worker who, during the recession of the 1990s, waived most benefits to keep his job in a local construction company. Mrs. Middle America is neither a Doris Day look-alike nor is she a housewife. More likely, she is overweight and overworked. Employed as a nurse at a nearby hospital, in her spare time she assists neighbours without medical insurance. The occasional tax free extra cash is crucial to make ends meet. In 2006, the couple’s household income was $46,326, $2,000 lower than in 2001, the year the last recession ended.[i]They have $3,800 in the bank, $8,000 of credit card debt[ii], no stocks or bonds and reside in a $160,000 house with $90,000 still left on the mortgage. Husband and wife shop at Wall-Mart, eat at MacDonald and regularly buy lottery tickets in the hope to win their way out of the middle class. That is Middle America’s overwhelming dream.
In fifty year, less than the lifetime of one generation, the American dream has turned into a nightmare. Debt and income inequality are at the root of such transformation. Let’s look at income inequality.
A seminal work produced by Ian Dew-Becker and Robert Gordon, two US economists, shows that from 1997 to 2001 the bulk of the US growth has enriched superstars actors, athletes, media moguls, so called celebrities as wells as corporate CEOs, among which former members of Enron board of directors. The US economy is growing, but the new wealth is not distributed evenly. From the mid 1990s, the top 1% of the US population has earned 24% of new wealth while the bottom 50% had to split less than 13%. Income inequality is fast growing also in Europe, the widest gap between rich and poor can be found in the United Kingdom. Tony Blair, UK prime minister, once said that reducing the salaries of soccer star David Beckham was not a priority, yet in the light of these new statistics Blair should reconsider such statement.
A growing percentage of tickets purchased to watch football matches or movies now goes to fund salaries of superstars, ranging from a few to tens of million dollars. Thus less money is available for other people involved in the business, from those who cut the grass of football fields to managers of cinemas, yet these are the people who put together the show. Robert Gordon estimates that real median earnings per hour have hardly increased at all in the US – not merely under George W. Bush administration but over the period 1966-2001. That means that a middle-income earner would have to work more hours today than five, 10 or even 25 years ago to obtain basic modern necessities. Inequality seems to have broken the link between productivity and real earnings, this explains why the monetary divide between a cameramen and a movie star has widened exponentially. The most serious consequence of such phenomenon is the impoverishment of the middle class. Between 1966 and 2001, in the United States real median earnings, better known as the salaries of the middle class, those sandwiched between the rich and the poor, have risen only by 11%. Yet over the same period the earnings of the top 10% of the population, the wealthiest people, have increased by 58%. The super-rich, a tiny 1% of the population enjoyed a 121% increase in their income. Finally, the income of the extraordinary rich, the 0.01% of the population, which includes movie stars such as Tom Cruise and Wall Street moguls such as Soros, rose 617%.
What is shocking is that this massive flow of cash is originated by the gravitation of the salaries of rich individuals and not by returns on investment, i.e. what is making their wealth soar are not sudden jumps in share prices held in their portfolio but rising fees perceived for their work. Another negative consequence of income inequality is the concentration of wealth in the hands of a shrinking segment of society. In 1966 the top 1% of the US population perceived 24% of non-wage income, which includes return on investment such as share prices and dividends; in 2001 this percentage jumped to 34%. Productive capital, therefore, is not any longer been diluted among the population, mostly because the middle class is too poor to buy shares.
Across the world, the fastest growing accumulation of wealth is taking place among corporate bosses and investment bankers. Top corporate executives account for more than half of the incomes in the elite 0.01% of the US income distribution. The ratio of the pay of US chief executive officers to average wages rose from 27 in 1973 to 300 in 2000, i.e. the gap between middle ranking management and board of directors is widening. In 2004, the directors of the FTSE 100, the index of top companies quoted at the London Stock Exchange, enjoyed a median salary shy of 3 million dollars a year. In a good year, partners of top hedge funds can take home billions of dollars.
A paper published by the National Bureau of Economic Research in the US warns that income inequality in the US is returning to where it was almost a century ago, during the so called ‘gilded age’, when the divide between rich and poor peaked. A new class of super rich, who do not mix with common people, is slowing taking control of the world’s economy. History warns that extreme income inequality can be disastrous. Professor Tony Atkinson, a leading expert on income distribution, showed that in the 1980s inequality in the United Kingdom worsened far more than in other European countries. Eventually this trend was halted by the recession of the 1990s, by far the most serious slow down in economic growth experienced by a European country in the post World War II era.
The ‘Gilded Age’ of the roaring 20s ended with the crash of 1929 and the great depression. A decade of wild unemployment unveiled the perils of keeping the wealth of nations in the hands of few people. Luckily, the British economist John Maynard Keynes came to the rescue. He suggested among massive government intervention in the labour market, the introduction of new policies to trigger a steep decline in income inequality and to distribute share ownership among the population. Today we may not be so lucky.”
> Loretta Napoleoni
[i] Centre on budget and policy priorities, Poverty remains higher, and median income for non-elderly is lower than when recession hit bottom
[ii] Gerald J. Swansin, America the Broke, Doubleday, New York, 2004 p 15