One-Percenters And The System's Collapse
Branko Milanovic, lead research economist at the World Bank, argues in The Crisis of Maldistribution that the real driver behind the collapse of the international economic systems is the over-accumulation of wealth in the few which arose as part of the vast inequality in income between the very wealthy and everyone else over the last two or three decades prior to the financial collapse. The super-rich, having no place to invest their money began "throwing money at anyone who would take it" without understanding the risks.
The current financial crisis is generally blamed on feckless bankers, financial deregulation, crony capitalism, and the like. While all of these elements may be true, this purely financial explanation of the crisis overlooks its fundamental reasons. They lie in the real sector, and more exactly in the distribution of income across individuals and social classes. Deregulation, by helping irresponsible behavior, just exacerbated the crisis; it did not create it.
The numbers Milanovic cites -- all before the collapse -- are staggering.
To go to the origins of the crisis, one needs to go to rising income inequality within practically all countries in the world over the last 25 years.
- In the United States, the top 1% of the population doubled its share in national income from around 8 percent in the mid-1970s to almost 16 percent in the early 2000s. (Piketty and Saez, 2006). That replicated the situation that existed just prior to the crash of 1929, when the top 1% share reached its previous high watermark.
- In the UK, the top 1% receives 10% of total income, a share greater than at any point since World War II (Atkinson, 2003, Figure 3).
- In China, inequality, measured by the Gini coefficient (the most common measure of inequality), almost doubled between 1980 and 2005. The top 1% of the population is estimated to garner around 9% of national income.
- Even more egregious were developments in Russia, where the combined total wealth of thirty-three Russian billionaires listed on the Forbes list in 2006 was $180 billion as against total country’s GDP of about $1,000 billion that same year (Guriev and Rachinsky, 2008).
Milanovic then points to a couple of the most egregious anecdotes.
Just before his downfall, the richest oligarch, Michael Khodorovsky had an estimated income equal to average Russia-wide incomes of 250,000 people. (The same number for Bill Gates and the United States in 2005 was 75,000.) Think of it. With his income alone, that is without touching a penny of his wealth, Khodorovsky could create (if need be) an army of quarter million people. No wonder the Kremlin took notice, and Khodorovsky ended up in jail. . . .
Similarly, in Mexico, Carlos Slim’s wealth, prior to the crisis, was estimated at more than $53 billion. Assume a conservative return of 7% on his assets, and that gives an annual income of $3.7 billion with which, given Mexican GDP per capita in the same year, Slim could command even more labor than Khodorovsky: 440,000 people. These are only a few examples. But they were replicated, albeit on a smaller scale, in practically all countries of the world.
Interesting theory. Read on for more...