The Inequality Machine – The Tyranny of the One Percent

Some revelations come as little surprise. It’s not really news that some politicians love money and like to spend time with those who have lots of it. Or that they sometimes behave like a caste that is above the law. Or that the tax system favours the affluent, and that the free circulation of capital enables them to stash their cash in tax havens.

The disclosure of individual transgressions should lead to scrutiny of the system that created them. But in recent decades, the world has been changing at such a pace that it has outstripped our analytical capacity. With each new event — the fall of the Berlin Wall, the emergence of the Brics (Brazil, Russia, India, China, South Africa), technological advances, financial crises, Arab revolutions, European decline — experts have fallen over themselves to announce the end of history or the birth of a new world order.

Beyond these premature birth and death notices, three main, more or less universal, tendencies have emerged which warrant initial exploration: the marked rise in social inequality, the disintegration of political democracy and the decline of national sovereignty. Every new scandal is like a pustule on a sickly body: it allows us to see each element of this trio re-emerge separately and operate together. The overall situation could be summed up thus: governments allow their political systems to drift towards oligarchy because they are so dependent on the mediation of an affluent minority (who invest, speculate, hire, fire and lend). If governments balk at this abandonment of the popular mandate, international pressure from concerted financial interest ensures they topple.

“All human beings are born free and equal in dignity and rights. They are endowed with reason and conscience and should act towards one another in a spirit of brotherhood.” As we all know only too well, the first article of the Declaration of Human Rights has never been strictly observed. Differences between people’s lots have always been due to other things than the common good: where you have the good (or bad) fortune to be born, your parents’ status, your access to education and healthcare and so on. But the belief that social mobility could overcome inequalities of birth sometimes alleviated the burden of these differences. For Alexis de Toqueville, such a hope, more common in the US than Europe, helped Americans tolerate greater disparities in income than were found elsewhere. A junior accountant from Cleveland or a young Californian without a degree could dream that his talent and dedication would take him to the position of a John Rockefeller or a Steve Jobs.

“Inequality per se has never been a big problem in American political culture, which emphasises equality of opportunity rather than of outcomes,” says Francis Fukuyama. “But the system remains legitimate only as long as people believe that by working hard and doing their best, they and their children have a fair shot at getting ahead, and that the wealthy got there playing by the rules” (1). All over the world this age-old faith, whose effect can be calming or anaesthetising, is evaporating. President François Hollande, asked six months before his election how the “moral recovery” he was calling for might be achieved, spoke of the “French dream. It’s linked to the republican narrative which has enabled us to progress in spite of wars, crises and divisions. Until recently, we have had the conviction that our children would have a better life than us.” But, he added, “this belief has gone” (2).

Fear of Losing Status

The myth of social mobility is being replaced by the fear of losing status. A manual worker no longer has much chance of becoming a boss, journalist, banker, academic or politician. France’s elite tertiary education institutions, thegrandes écoles, are even less accessible to working-class students than when Pierre Bourdieu published Les Héritiers (The Inheritors: French Students and their Relation to Culture) in 1964. The same is true of elite universities worldwide, where fees have rocketed. A young woman in Manila, unable to keep paying her fees, recently committed suicide. And two years ago an American student explained: “I have about $75,000 in student loans. I will default soon. My co-signer, my father, will be forced to take my loans. He will default as well. I’ve ruined my family because I tried to rise above my class” (3). He had wanted to live the American dream, to go from rags to riches. Now his family are heading in the opposite direction.

When the winner takes all (4), income inequalities can be indicative of a social pathology. Thirty years ago the Walton family, who own the giant Walmart corporation, had a fortune 61,992 times greater than the median US income. Today it’s 1,157,827 times greater. The Waltons have amassed as much money as America’s 48,800,000 poorest families. Last year the Bank of Italy said “the ten wealthiest individuals have as much money as the poorest three million Italians” (5).

And now China, India, Russia and the Gulf states are catching up in the billionaire stakes. When it comes to the concentration of wealth and exploitation of workers, the West has nothing to teach them; indeed they can give the West some lessons in brutal neoliberalism. In 2003 Indian billionaires owned 1.8% of the nation’s wealth; five years later they held 22% of the wealth of a nation of over a billion people (6). That must give one pause. India’s wealthiest man, Mukesh Ambani, may ponder this from his glittering 27-storey home looking down on Mumbai, where half the inhabitants still live in slums.

Even the IMF is getting concerned: after long proclaiming that “income disparities” drive imitation, efficiency and dynamism, it noted that 93% of the growth gains achieved in the US in the first year of the economic upturn profited only America’s richest 1%. That was too much even for the IMF. Leaving aside moral considerations, how can you assure the development of a country if its growth increasingly profits a tiny group who don’t buy much as they already have everything? And who consequently either save or speculate with their money, further fuelling an already parasitic financial economy. Two years ago an IMF study conceded that favouring growth and reducing inequality were “two sides of the same coin” (7). Economists are moreover noticing that industrial sectors which depend on middle-class consumption are beginning to struggle in a world in which global demand — when not throttled by austerity policies — prefers either luxury goods or bargain products.

According to advocates of globalisation, widening social inequalities result above all from particularly rapid technological development, which penalises society’s least educated, mobile, flexible and agile citizens. And they have a ready answer: education and training for those who lag behind. Last February, The Economist,summed up this legitimist fairy tale in which politics and corruption play no role: “The top 1% have seen their incomes soar because of the premium that a globalised high-tech economy places on brainy people. An aristocracy that gambled its money away on ‘wine, women and song’ has been replaced by a business-school-educated elite whose members marry one another and spend their money wisely on Mandarin lessons and Economist subscriptions for their children” (8).

So apparently the wisdom of attentive parents training their offspring to read the (only) periodical worthy of their time explains soaring wealth… There are competing hypotheses, however. For example, wealth, which is taxed less than work, is able to plough some of the financial benefits it accrues from favourable measures back into the task of consolidating its political support: accommodating tax regimes; the rescue of large banks which held small savers to ransom; entire populations who are put under pressure so that creditors are repaid; public debt, which the rich view as another investment opportunity (and means of exerting pressure). Wealth’s complicity with politics ensures it will continue to be less heavily taxed than work. In 2009 six of the US’s 400 highest earners paid no tax at all; 27 paid under 10%; none paid over 35%.

In short, the rich use their fortunes to increase their influence, and their influence to increase their fortunes. This is how Fukuyama sums it up: “Over time, elites are able to protect their positions by gaming the political system, moving their money offshore to avoid taxation and transmitting these advantages to their children through favoured access to elitist institutions.”

The inequality machine is reshaping the whole planet: a globalised economy in which the winner takes all; national unions going to the dogs; the lightest taxation for the highest income. The 63,000 people — 18,000 in Asia, 17,000 in the US and 14,000 in Europe — who have a fortune of over $100m collectively own $39,900bn. Making the rich pay may no longer be simply symbolic.

The economic policies which have so favoured a minority have nonetheless rarely transgressed the democratic forms of the government of the majority. There’s an apparent paradox here. One of the most famous judges in the history of the US Supreme Court, Louis Brandeis, put it like this: “We must make our choice. We may have democracy, or we may have wealth concentrated in the hands of a few, but we can’t have both.” True democracy is not solely about respecting its formal features (pluralist ballot, the voting booth and ballot box). It means more than resigned participation in an election which won’t change anything: it means passion, an educated electorate, a political culture, the right to demand accountability and get rid of politicians who betray their mandate. In a famous report published by the Trilateral Commission, the conservative thinker Samuel Huntington expressed the concern that “the effective operation of a democratic political system usually requires some measure of apathy and non-involvement on the part of some individuals and groups” (9). It’s no coincidence that he said this in 1975, at a time of political ferment, collective optimism, international solidarity and social utopias. Mission accomplished…

The Trilateral Commission has just celebrated its 40th anniversary by enlarging the circle of its guests to include former European Socialist ministers (Peter Mandelson, Elisabeth Guigou, David Miliband) and Chinese and Indian guests. It has no cause to be ashamed of its progress. In 2011 two of its members, Mario Monti and Lucas Papademos, both former bankers, were propelled by a troika of non-elected institutions — the IMF, European Commission and European Central Bank (ECB) — to the head of the Italian and Greek governments. Yet voters whose “measure of apathy” is insufficient still balk. So when Monti tried to convert the troika’s suffrage into universal suffrage, he suffered a disastrous defeat. French philosopher Luc Ferry has expressed his disappointment: “What saddens me, because I am a democrat at heart, is the consistency with which the people in times of crisis choose without fail if not the worst, then at least those who most skilfully and completely conceal the truth from them” (10).

EU denial of the electorate

The simplest defence against this sort of disappointment is to pay no heed to the electorate’s verdict. The European Union, which gives lessons in democracy to the whole planet, has made this denial one of its specialities. This is no accident since, for 30 years, the ultraliberals who call the shots ideologically in the US and Europe have been drawing inspiration from economist James Buchanan’s public choice theory.

This intellectual school — which is fundamentally distrustful of democracy, “the tyranny of the majority” — postulates that political leaders are inclined to sacrifice the general interest (indistinguishable from the initiatives of business leaders) in favour of satisfying their clienteles and guaranteeing their own re-election. The sovereignty of such irresponsible people must consequently be strictly curtailed. That is the role of coercive mechanisms that currently provide the inspiration for the European project (the independence of central banks, the 3% budget deficit ceiling, the stability pact), and in the US the automatic amputation of public credit (budget sequestration).

It’s hard to imagine that neoliberals have anything left to fear from politicians, given how well the latter’s economic and social reforms match the demands of the business world and financial markets. At the highest level of the state, this convergence of interests is additionally reinforced by the over-representation of the upper tier of the middle class and the ease with which they move between public and private sectors. When, in a country such as China, where average annual income is little more than $2,500, the parliament contains 83 billionaires, it’s clear that China’s rich don’t lack a sympathetic ear at the highest level. On this point at least, the American model has met its match, even if — lacking elections — Beijing doesn’t yet distribute choice ambassadorial posts to the most generous donors in presidential campaigns as Washington does.

Collusion — and conflicts of interest — between politicians and billionaires now operate across borders. When he was president, Nicolas Sarkozy reserved special favours for the Qataris (including a tax exemption on their highest-value property purchases). Qatar is now prepared to back him in starting a private equity fund. “The fact that he is a former president doesn’t mean he should become a Trappist monk,” said former interior minister Claude Guéant in his defence (11). Nor does a vow of chastity apply in the cases of other former leaders: Tony Blair advises J P Morgan, Belgian Jean-Luc Dehaene is on the Dexia payroll and Italy’s Giuliano Amato works for Deutsche Bank. Is it possible to defend the public good while simultaneously avoiding displeasing feudal foreign regimes or financial institutions which may become one’s future employers? When, in a growing number of countries, such a self-interested calculation involves both main parties, they become, as far as the people are concerned, what novelist Upton Sinclair called “the two wings of the same bird of prey”.

Demos sought to gauge the effects of the close relationship between government officials and the economic oligarchy. Two months ago it published a report detailing “how the dominance of politics by the affluent and business undermines economic mobility in America” (12). Their conclusion: in matters of social and economic policy and labour law, the wealthiest citizens share priorities which are largely different from those of the majority of their fellow citizens. But of course the rich have unusual means by which to bring their aspirations to fruition.

Opinions diverge

So, while 78% of Americans reckon that the minimum wage should be indexed to the cost of living and be high enough to prevent recipients falling below the poverty line, only 40% of the highest-rate tax payers share this view. They are also less favourably disposed towards unions and laws that encourage union activity. The vast majority of people meanwhile would like to see wealth taxed at the same rate as labour and accord foremost priority to overcoming unemployment (33%), not deficit reduction (15%).

Which group prevailed? The minimum wage has lost 30% of its value since 1968; there has been no law to facilitate setting up a union in a workplace, despite Obama’s campaign promise; work is still taxed twice as heavily as wealth (39.6% versus 20%). Finally, Congress and the White House are vying with each other over budget cuts in a country in which the proportion of the population who are actively employed is close to a historic low.

How better to convey the huge footprint the rich leave on the state and the political system? They vote more often, finance electoral campaigns more than others and — in particular — exert constant pressure on politicians. The widening inequalities in the US owe a great deal to the very low level of taxation on wealth, a state of affairs in part sustained through the permanent lobbying of Congress, though 71% of its cost to all US taxpayers only benefits America’s wealthiest 1%.

The refusal to create an active employment policy is another manifestation of the same class choice, transmitted through the same oligarchical system. In January 2013, the unemployment rate among (mainly middle-class) Americans with at least a first degree was just 3.7%. By contrast, it stood at 12% for those without a degree, who are much poorer — and whose views count for less in Washington than the views of the business community. Or the views of Sheldon and Miriam Adelson, the billionaire Republican couple who gave more to last year’s elections than the total population of 12 US states. “Under most circumstances,” the Demos study concluded, “the preferences of the vast majority of Americans appear to have essentially no impact on which policies the government does or doesn’t adopt.”

“Do you want me to resign? If so, tell me!” Cypriot president Nicos Anastasiades apparently said to IMF director Christine Lagarde when she requested the immediate closure one of the biggest banks on the island, a large provider of jobs and revenue (13). French minister Benoît Hamon also seemed to concede that his government’s sovereignty (or influence) was limited, since “under pressure from the German right, austerity measures are being imposed which all over Europe are translating into rising unemployment” (14).

Left or right, same ingredients

In their implementation of measures which consolidate the censitary power of wealth and profit, governments have always known how to use the pressure of non-resident “voters” whose power is deemed irresistible: the troika, the credit-rating agencies and the financial markets. Once the formality of national elections is out of the way, Brussels, the ECB and the IMF send their road map to the new leaders so that particular campaign promises can be ditched immediately. Even The Wall Street Journal could not conceal its bafflement last February: “The French, Spanish, Irish, Dutch, Portuguese, Greeks, Slovenians, Slovakians and Cypriots have to varying degrees voted against the currency bloc’s economic model since the crisis began three years ago. Yet economic policies have changed little in response to one electoral defeat after another. The left has replaced the right; the right has ousted the left. Even the centre right trounced Communists (in Cyprus) — but the economic policies have largely remained the same: governments will continue to cut spending and raise taxes. The problem facing newly elected governments is that they operate within the institutions of the Eurozone. National governments must follow macroeconomic directives set by the European Commission. All of which means that, after the sound and fury of an election, national governments have little room for manoeuvre on economic policy” (15). “You get the impression,” Benoît Hamon admitted sadly, “that a leftwing policy or a rightwing one just administers different quantities of the same ingredients” (16).

When a senior official from the European Commission attended a meeting between his colleagues and the head of the French Treasury, he reported:  “It was stunning: they [the Eurocrats] behaved like schoolmasters telling a poor student what to do. I was very impressed that the director of the Treasury kept his cool” (17). This scene brings to mind the fate of Ethiopia and Indonesia at the time when their leaders were reduced to the role of administering punishments which the IMF had decided to impose on their countries (18). Now Europe is getting a taste of the same medicine: in January 2012, the Commission in Brussels instructed the Greek government to cut nearly €2bn from its public expenditure within five days or face a fine.

No sanction threatens the president of Azerbaijan, the former Mongolian finance minister, Georgia’s prime minister, the wife of Russia’s deputy prime minister or the son of the former Colombian president. Yet all of them have tucked away some of their wealth — ill-gotten or simply stolen — in tax havens such as the British Virgin Islands, where there are 20 times more companies registered than inhabitants. Or the Cayman Islands, which has as many hedge funds as the US. Not forgetting in Europe, Switzerland, Austria and Luxembourg, thanks to which the continent is a volatile mix of harsh austerity policies and tax evasion industries.

Growing pressure

Not everyone is unhappy about permeable borders. Bernard Arnault, who owns a luxury-goods multinational and is the tenth richest person on earth, has even expressed delight at democratic governments’ loss of influence: “Businesses, especially international ones, have ever greater resources and in Europe they have acquired the ability to compete with states… Politicians’ real impact on the economic life of a country is more and more limited. Fortunately” (19).

By contrast, the pressure states are under is growing, exerted simultaneously by creditor countries, the ECB, the IMF, credit ratings agencies and financial markets. Jean-Pierre Jouyet, current president of the Banque Publique d’Investissement (Public Investment Bank), conceded two years ago that in Italy the markets “exerted pressure on the democratic mechanism. It’s the third government to fall at their initiative through excessive debt. The spike in interest rates on Italian debt was the markets’ way of casting their vote. Ultimately, citizens will revolt against this de facto dictatorship.”

But de facto dictatorship can count on the mainstream media to come up with diverting subjects to delay, and then misdirect, collective revolt, and to personalise and thereby depoliticise the most shocking scandals. Illuminating the real workings of what happens, the mechanisms through which wealth and power have been captured by a minority who control both markets and states, requires a constant effort to educate the public. It would remind people that any government ceases to be legitimate when it allows social inequalities to grow, ratifies the crumbling of political democracy, and accepts the subordination of national sovereignty.

Every day, there are signs of the people’s rejection of illegitimate governments — at the ballot box, in the streets, in the workplace. Yet despite the severity of the crisis, they are groping for alternative proposals, half believing they do not exist, or else would come at too high a price. Thus the growing frustration and despair. Fresh ways out are urgently required.

SERGE HALIMI is director of Le Monde Diplomatique. He has written several books, including one  on the French press, Les nouveaux chiens de garde and another on the French left in the 20th century – Quand la gauche essayait – both are fine works.  He can be reached at Serge.Halimi@monde-diplomatique.fr

Translated by George Miller.

(1) Francis Fukuyama, The Origins of Political Order: From Prehuman Times to the French Revolution, Farrar, Straus and Giroux, New York, 2011.

(2) La Vie, Paris, 15 December 2011.

(3) Tim Mak, “Unpaid student loans top $1 trillion”,Politico, 19 October 2011.

(4) Robert Frank and Philip Cook, The Winner-Take-All-Society, Free Press, New York, 1995.

(5) Guillaume Delacroix, “L’Italie de Monti, laboratoire des ‘mesures Attali’” (Monti’s Italy: the laboratory for ‘Attali measures’), Les Echos, Paris, 6-7 April 2012.

(6) “India’s billionaires club”, Financial Times,London, 17 November 2012.

(7) “Income inequality may take toll on growth”, New York Times, 16 October 2012.

(8) “Repairing the rungs on the ladder”, The Economist, London, 9 February 2013.

(9) Samuel Huntington, The Crisis of Democracy,New York University Press, New York, 1975.

(10) Luc Ferry, Le Figaro, Paris, 7 March 2013.

(11) Anne-Sylvaine Chassany and Camilla Hall, “Nicolas Sarkozy’s road from the Elysée to private equity”, Financial Times, London, 28 March 2013.

(12) David Callahan and J. Mijin Cha, “Stacked deck: How the dominance of politics by the affluent business undermines economic mobility in America”, Demos; the data which follows is taken from this study.

(13) “Le FMI et Berlin imposent leur loi à Chypre” (The IMF lays down the law in Cyprus), Le Monde,26 March 2013.

(14) RMC, 10 April 2013.

(15) Matthew Dalton, “Europe’s institutions pose counterweight to voters’ wishes”, The Wall Street Journal, 28 February 2013.

(16) RTL, 8 April 2013.

(17) “A Bruxelles, la grande déprime des eurocrates” (In Brussels, the great Eurocrat depression), Libération, Paris, 7 February 2013.

(18) See Joseph Stiglitz, “La preuve par l’Ethiopie”,Le Monde diplomatique, April 2002.

(19) Bernard Arnault, La Passion créative: Entretiens avec Yves Messarovitch, Plon, Paris, 2000.