SANE Views

Vol.4 No.17, 14 December 2004

Closing the Rich-Poor Gap is a Necessity not an Option

Margaret Legum

‘I boil water, and hope the children fall asleep before they know there is no food in the water.’ Suppertime in the Transkei home of a grandmother, whose pension supports a small tribe. When grandma dies God help those children – and their ‘scrounging’ relatives if they continue to collect that life-saving pension for a month or two. Meanwhile a R15 million house changes hands in Constantia or Sandton with the assistance of tax lawyers skilled at minimizing tax.

That is one demonstration of the concentration of wealth in our economic dispensation. For some of us it is enough reason to seek by all means to end such a system of injustice and suffering. For the more hardheaded more justification is needed. After all there is poverty all over the world – ‘the poor’, indeed, ‘are always with us’ – and we must just find a way to help people who for some reason can’t make it.

That hard-headed justification can be found in the fact that the world economy lurches from one threat of depression to another precisely because people at the bottom are too
poor to buy and people at the top cannot spent the money they are accumulating. The stuff that brings goods and services together with people who need them is money. That money is not working as it should in enabling people who need things to buy from people who make them. So everyone suffers - apart from the people who sit on millions.

There is an ‘over-supply’ of virtually all industrial, commercial and agricultural output throughout the world. There are few, other than niche or monopoly, products that could not sell an average of 30% more, without significant investment, if the market were there. But the market is not there. Not because there is no need or desire for the product, but because the mass of the population in all countries is losing purchasing power.

The middle-class as well as the working class is eating into assets rather than accumulating them. A parody on the 23rd Psalm, currently doing the rounds, ends with the words: ‘and my jobless child shall dwell in my basement forever’. The ‘working poor’ is a phrase that characterizes the lower end of the formal job market in all industrial economies, notably the US. When there is a ‘consumer boom’ in these circumstances it is fueled by debt – not, as implied, by joyous spending of rising incomes. That debt burden threatens recession everywhere.

Up until the 1980s, people in jobs normally expected to increase their stake in the economy annually; and they did so because the increase in the money supply roughly matched the growth in output. Today, much of the money supply is being in effect hoarded – in the sense that it is not used to buy the products of sellers. People who earn annual salaries and bonuses in seven or eight figures cannot consume it by buying in the real economy. So they starve the economy of purchasing power.

Instead, they put it, via the asset management industry, into one of two places. They buy and sell among themselves stocks and shares and currencies, earning an income from dividends or from speculative deals. That creates an unstable situation for the rest of us, who would like to invest our pensions in something that keeps its value over time and avoids bubbles. Secondly, they buy property. Thanks to the fact that they are all doing this, the prices of these assets continue to rise, which is nice for them. It is not so nice for the rest of us who want to buy homes to live in.

Those of us who like to find villains and angles will be disappointed to find that none of this happens because of personal attributes like greed. True, one sometimes wonders whether any beneficiaries of those galactic salaries ever blush or demur when told the package. But greed and callousness are not the causes but among the toxic consequences of a system in which you either sink or rise to the top like a bubble. You can opt out to live simply and so on, but mostly you need some capital and much confidence to risk it. The fact is that the system, and not individuals, sucks the substance from the poorer end to the richer.

What can we do about it? We can examine every act of policy for its effect on the distribution of income. Every time we subsidize something that will further enrich the wealthy we should reject it in favour of one that puts money into the hands of poor people and poor areas. That objective immediately implies a list of policy priorities. Subsidies for renewable energy research and employment, rather than for fossil fuels. Progressive taxation. Above all, the most obvious solution. A Basic Income Grant.