Revive Eighties Capitalism

Can't you feel the change in the air? The Occupy Wall Street movement has attracted support around the world and many believe they have a genuine gripe. High-fliers in the finance world helped create a crisis that poor people are now paying for. Is there any way out? Yes. We just need to go back to the 1980s.
I don't mean we have to wear tight stonewashed jeans, perm our hair and head down to the disco to dance to Frankie Goes to Hollywood. We just need to return to the mixed economy that saw the need for wage differentials to be controlled and growth to be related to value of things.

In 1981, the top marginal tax rate in the US was 70 percent, today it's half that. With Reaganomics and Thatcherism the argument was that if the rich got rich, the wealth would be passed down to all. Well, guess what: it hasn't worked.

The argument certainly applied at the time of the industrial revolution. The rich built factories, employed people and added value. The same can't be said for finance speculators, some of the richest people around today, who create no public good, gamble with other people's money and distort the value of things.
As a result of less reregulation and less tax, the West has seen a widening rich-poor gap. That applies in Australia almost as much as it does in the US, but it attracts very little coverage.

In 1994-5 the highest quintile of wage-earners in Australia accounted for 37.8 percent of all income. Last year that had risen to 40.2 percent --- their relative income had risen 6 percent. That doesn't seem a lot, but if we apply the argument that wealth filters down to all sectors of the community you'd expect the high wage-earners' proportion of total income to hold steady.

It's not just the finance industry fuelling this income gap, of course. There are greedy corporate types across all industries. Alan Joyce's $5.5 million salary package is equivalent to the income of almost 300 average households in the bottom quintile. His pay is high, but not extraordinary --- according to the Australian Council of Super Investors the average pay for CEOs in our top 100 companies is $2 million.

The fix is easy because we've been there before. Politicians need to stop promising tax cuts and start pushing them up. In the sixties in the US the top tax bracket was as high as 91 percent, today it's 35 percent.

We also need to stop speculative investments that don't create any material value, they just make traders rich. Many, including economist Ross Buckley, argue that there needs to be a tax on transactions, to slow the speculative element of the finance markets. Economist Steve Keen suggested an interesting alternative on BTalk --- to tie investment to the purchase of assets for a company that facilitate growth, there should be a limited life attributed to shares that change hands. That way investors stick with a company and have a long-term interest in its success.

Whatever the way forward, there needs to be more consideration given to how we control capitalism. That won't happen in a hurry, of course. Politicians like to promise tax cuts and free market principles. The media likes to follow the big end of town. And at least half the people reading this --- if they've got this far --- will call me a raving socialist, or even a commie.

So how big does the divide have to be, how much suffering has to be felt, how much civil unrest must there be, before we all reach agreement that there needs to be a fundamental shift in how the economic divide is managed?

Data sources:

• ABS Household Income and Income Distribution, Australia, 2009-10
• U.S. Federal Individual Income Tax Rates History, 1913-2011
• CEO Pay in the Top 100 Companies: 2010

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