Runaway Inequality’s Stranglehold on our Future

It’s the hidden issue that “will undermine everything we care about” and will take a generation to fix. Runaway inequality looks set to eclipse our future, and it's going to take serious work to change its course

Spend any time in a major city and you’ll see it right before your eyes. Luxury shops are opening left right and centre, yet poverty is never far away.

Inequality is rampant; we live in an era where it rises every year. Oxfam America drew attention to this issue at the beginning of 2015 with a report entitled ‘Wealth: Having it All and Wanting More’, where it warned that in 2016 the richest 1% would own more than half of all global wealth for the first time.

If it continues to rise – and there’s nothing to suggest that it won’t – the gap will result in an ever-starker contrast between the lives of the wealthiest and the rest of society.

“The problem will not fix itself, it will get worse, and it will undermine everything that we care about,” warns Les Leopold, executive director and president of the Labor Institute in New York, who has written a book on the subject, entitled Runaway Inequality: An Activist’s Guide to Economic Justice.

But while we know that inequality exists, our perception of its severity is way off the mark. And even if we do become aware of how serious it’s become, dismantling the structures that perpetuate it will be the work of a generation.

Between perception and reality

The American consciousness about inequality is frozen in a previous era

Inequality has always existed, and there is an argument to say it’s an inherent part of human society. However, the level of inequality is now far beyond what we perceive it to be, and that’s a big problem.

“The American consciousness about inequality is frozen in a previous era,” says Leopold, citing the US results of an international poll about the perceived gap between entry level workers’ and CEOs’ pay as an example.

In the poll, people from all walks of life and political affiliation were asked to state what they thought the average gap was between the lowest and highest earners at a typical company.

“By and large, no matter what their age or background or political affiliation was, it sort of came out to about 40:1 – for every one dollar to the entry-level worker, 40 to the CEO,” says Leopold. “That’s kind of what it was in 1970.”

The reality, according to The Labor Institute’s data about the top 100 CEOs, is 829:1, making the inequality gap around 20 times larger that people perceived it to be. In 2016 the Institute believes it will be worse still, projecting 859:1.

Yet when asked in the poll what the ratio should be, participants consistently said it should be even lower that the imagined rate of 40:1.

“Strong Republicans in this survey think it ought to be 12:1, strong Democrats say 5:1, the average is about 8:1,” adds Leopold.

So how have we not noticed that the reality is so very far from our perceptions? The answer, according to Leopold, is that we’ve fragmented the impacts of inequality into several issues, dealing with each separately without tackling the underlying cause.

“In the States in particular, you’ve got people that are working on labour issues; and environmental issues; and racial justice issues; and housing issues and education issues, and they become quite specialised; they view their issues as often unique, separate from the other issues,” he says.

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Image courtesy of Glynnis Jones / Shutterstock.com. Feature image courtesy of lev radin / Shutterstock.com.

The separation of these issues, which Leopold refers to as “silos”, means that we never look at the reality of runaway inequality head-on, and so struggle to find meaningful ways to tackle it.

Instead, we look to people in other silos, seeing them as the enemy when they have marginally better situations than our own.

“They’re being pitted against each other and fighting for a decreasing pie, a smaller pie, and with no understanding of the source of that,” Leopold says.

But if that’s going to change, we must first recognise how our reality has come to be.

The rise of runaway inequality

The roots of runaway inequality are, like many things, to be found in the late 70s and early 80s, when Thatcher and Reagan’s neoliberal approaches to economics were transforming the modern world.

Reagan called it the “better business climate”, and it was supposed to reinvigorate the economy, providing wealth and security for all who participated.

“The model that says the economy will grow and prosper if we cut taxes on the wealthy, cut regulations, get the government out of the economy, privatise, get rid of state-owned facilities and cut back on social welfare, so that people are more hungry to work and stop coddling labour,” explains Leopold. “If you do all those things you’ll get a profit boom, an investment boom. That was the theory.”

As a result, the financial industries in a number of countries saw massive deregulation, and were given unprecedented freedom in the manner in which they did business.

“They let a genie out of the bottle. Wall Street became very aggressive,” says Leopold, who attributes this very aggressiveness to the start of runaway inequality.

“Once Wall Street got even a little bit deregulated they began hedge funds and private equity companies that bought up company after company or took large stakes in those companies,” says Leopold.

“They changed the way the companies operated; they became what I would call wealth strip mining operations. The way the CEO was paid changed dramatically in the early 1980s so that today only 5% of the top 500 corporations pay their CEOs with salaries and bonuses. The rest are all stock grants and stock options, so that made stock price the centre of the universe.”

But that wasn’t all. A second change also occurred, which had a major impact on the way companies do business. In 1982 a law was changed in the US that made it for the first time possible for companies to buy back large amounts of their own stock.

While a seemingly dry event, this prompted a significant change in the way corporations do business, which has remained to this day.

“Buying back your own stocks, i.e. manipulating the price of your own stock, became the primary goal of corporate America,” he says.

“By 2006 75% of all corporate profits were used to buy back their own shares, so that creates huge wealth. If you take any number of shares and reduce the number, you’re reducing the ownership and therefore – all things being equal – the value of the remaining shares go up.

Where financialisation is rife, runaway inequality is sure to follow

“That gives a bump in share prices, which allows the big hedge funds and private equity companies to pump and dump – to get in and out – because they become privy, and you get this huge increase in the CEOs’ pay and Wall Street remuneration.”

The result is a situation where a company’s profits are going directly to a very small number of people, but are made primarily through financial techniques, rather than through a conventional product.

The automation sideshow

In the current climate, automation is regularly blamed for stagnating wages and vanishing jobs, but Leopold argues that this is just a sideshow. In reality, he says, the true issue is financialisation: the increasing reliance on the finance sector to fuel economic growth. Where financialisation is rife, runaway inequality is sure to follow.

“The International Labour Organisation did a study on wage stagnation and they compared 70 developed nations in their survey,” he says. “They went through the usual suspects: globalisation, automation, government cutbacks, and it turned out that automation, new technology only counted for about 10% of the wage stagnation. 45% – the largest factor – was something called financialisation.

“The countries that had the most financialisation – the largest capital markets and the most people wrapped up in financial affairs – had the most wage stagnation, had the most runaway inequality. So I think automation is actually a relatively small factor in all this. It’s almost a misdirection play; it’s a fake-out.”

Separation anxiety

American exceptionalism is kind of a joke now

At this point you may be wondering why all of this matters. Sure, some people are getting richer and richer, but if I can continue to live my life, why does it matter?

Well in reality, it does matter, because the widening wage gap is having a serious impact on vital societal infrastructure.

“There’s no money to pay for anything,” says Leopold, referring to the US’ public sector. “My god, we just don’t have it.

“In the United States, our infrastructure is rated at D+, a failing grade, because we just don’t have the money. Why is that? Well, the interest on all that corporate debt is deductible, so tax revenues from corporations have been going down steadily since this better business climate model kicked in and the corporate rating and the financial strip mining took place.”

Simply put, the financial changes of the 80s have changed the way business is done. Companies take on debt against assets far more, meaning that corporate money that used to be profit is now being fed back into the system as interest payments. And you don’t have to pay tax on interest payments, which means the government coffers are getting smaller by the year.

But that’s just companies. The behaviours of mega-rich individuals also have an impact on the rest of us.

“When people become super, super rich they have the means to shelter their money all over the world. Not only can corporations move their profits everywhere, but the wealthy move their income out of the country,” he explains. “We estimate roughly $150bn in tax revenues are lost every year in the United States just from those manoeuvres.”

Add the physical separation between the rich and poor, and you have a scenario where the US is rapidly becoming two countries.

“In the United States, the most well-off live in another world. Their life expectancy is at the Japanese-European level. But our average life expectancy in the United States is low, and it’s actually stagnated,” he adds.

“If you are a wealthy super-rich American, you don’t send your kid to the same schools as the rest of us, you don’t live in the same communities, you don’t even use our airports, you have your private plane, your private airports. The world is a completely different oyster for you.

“Therefore the social intermingling that existed when there was more of an interaction between the wealthy sand everybody else is disappearing: You don’t care about the crumbling infrastructure because you don’t use it.”

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Image courtesy of miker / Shutterstock.com.

The end result of this is particularly serious in the US due to the country’s long-standing scepticism of socialism.

“America’s falling very far behind quickly in general compared to European countries in terms of many, many indicators from early childhood education, health, environment, wellbeing, the happiness index – all those things. We’re just tumbling down the scales. American exceptionalism is kind of a joke now,” says Leopold.

And that’s at present. With life-altering technologies on the horizon, such as the ability to end ageing, there could easily come a time where the rich have access to technologies and medicine that the poor can only dream of.

A police state?

With little social support for its poorest citizens, and a growing lack of jobs thanks to runaway inequality, the US’ financialisation has also has an impact on its prison population.

“The prison population in the United States was steady from 1920, until about 1980,” says Leopold. “I mean absolutely steady, even during the turbulent 1960s, and all the cry in the 70s about law and order, the prison population in the 70s did not go up.

“Then it skyrocketed; the United States has the most prisoners in the world. It has the highest percentage of prisoners in the world. You could say that the United States is the largest police state in the world now.”

Leopold attributes this change to the increase in joblessness that financialisation has caused. Industries dropped considerably as a result of the neoliberal model, wreaking havoc on cities such as Detroit and Baltimore.

“So what happens with the downtrodden population? What happens with the people way at the bottom at the economic ladder?” he asks.

“Well prison became the poverty programme. America’s poverty programme, the war on poverty basically became a prison programme. And people were siphoned up into the prison population.”

It would be reasonable to assume that this approach would lead to increasing levels of civil unrest, but Leopold isn’t so sure.

So what happens with the downtrodden population? What happens with the people way at the bottom at the economic ladder?

“It’s very hard to win a strike now. It’s too easy for a company to bring in replacement workers and basically break the union” he says.

“The chart of mass strikes is the inverse of the runaway inequality charts: up to 1980 there were 300 or 400 a year and then boom, it falls off a cliff – it drops off immediately to four or five a year. It’s very hard to win large strikes. So will there be more spontaneous civil unrest? I don’t know.”

Action needed

Runaway inequality does not paint a good picture for the vast majority of us who aren’t multimillionaires. So what can be done? According to Leopold, first people need to appreciate that not only is the issue there, but that it will not go away by itself.

“The problem will not cure itself. There is no pendulum, there is no automatic mechanism in the economy that is going to swing back to make inequality less severe, you know, that unemployment will drop, and wages will rise and somehow it will all equal out. It’s not happening!”

“Nothing short of a major new mass movement can do anything about it. It’s not going to change with one election here and one election there. It can’t change through spontaneous combustion like Occupy Wall Street, which was fantastic for six months, but didn’t build a lasting structure that can formulate a movement,” he says.

“We need an organised, long-term mass movement, populist movement that addresses this problem head-on, and it develops an agenda, and it builds a following behind it and then pushes the political system at the same time.”

But this is going to take a very, very long time.

“It took a generation to undo all the social democratic controls that grew out of the New Deal in America and wither away the social safety net and all the things that kept runaway inequality in check. It’s going to take a generation to tame it again.”

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Nevertheless, Leopold, who has been working in this area for 40 years, believes that the current mood is promising.

“There are things happening that make me think that a real movement can be built and there  are unions and community organisations that are about to embark on a massive educational campaign in the United States which could again be a contributing factor to building a new movement.”

In particular, he see’s Bernie Sanders’ current presidential campaign as a very positive sign.

“If you would have told me that Bernie Sanders had a chance of catching on, doing as well as he’s doing I would have laughed, I would have said no way. A social democrat? Anyone who uses the word socialist in America is doomed,” he says.

“Nevertheless, he’s authentically making the case about runaway inequality every day, and he’s gained some adherence. But he’d be the first one to say ‘even if I were elected, the movement has to be built and has to be continued’.”

For now, this is about education: Leopold recommends that people interested in becoming involved read up on the situation and, if possible, get involved in the Sanders campaign. From there, he encourages people to educate others, in order for the issue to become a mass movement.

“The third phase will be when larger organisations form and start recruiting people,” he says. “We’re not there yet, but we’re getting closer.”

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