The rising gap between the rich and poor

Before the First World War Britain was divided into upper and lower classes, with the lower classes depending on the landed aristocracy for jobs. There was not a middle-class as we know it today.

The First World War was devastating, with the loss of life being put at eighteen million men. After the war the government passed a bill to allow the vote for women, because they did not want continued violence from the suffragettes, and in recognition of the part that women had played in the war.

At this time there was also rising support for the communist party and trade unions, but Britain was then plunged into War again. After the war, even though Winston Churchill was a great wartime Prime Minister, his Conservative Party was defeated and the Labour party swept to power on a platform of social reform. It was then that the National Health Service and other welfare benefits were introduced in Britain.

In the USA, ‘The New Deal’ had been introduced after the Great Depression, and the economy then grew by leaps and bounds in the post war boom. In the period from 1940 to 1980 both Britain and America had policies that were a mixture of socialism and capitalism. While they believed in capitalism and a free market, they also believed in protecting the poor, and in redistribution of wealth to pay for social programs.

This was captured in Keynesian economic policy, articulated by John Maynard Keynes, which advocated a capitalist policy, but with government intervention in periods of recession to stimulate demand, and taxation policies for social protection of the poor at the expense of the rich. The rationale for increased taxation on the rich was that their wealth was built on the benefits they had received from the State.

These included a good education, availability of research, and the rule of law, all of which made it possible to innovate or build businesses, which had a duty to repay society.

During this period of Keynesian economics, taxes were levied on the very wealthy up to the level of 70%. Obviously they were not too keen on this level of taxation and they developed support for another economic theory that espoused a free market policy, with lower taxes, and less government interference.

This was the economic theory of Milton Freedman, which stated that the markets would take care of everything, and we should have as little government intervention as possible. The major proponents of this economic policy in the 70s were the Prime Minister of Britain, Margaret Thatcher, and the President of the USA, Ronald Regan.

Both of them reduced taxes on the very rich from 70% to 45%, and since that time taxation levels on the super-rich have been reduced even further – to the point where the very rich are taxed at lower rates than their workers. This has resulted in a vast redistribution of wealth over the last half-century. In 1950 the top one percent of Americans controlled 10% of national income, whereas today the top 1% of the world’s richest people control over 50% of the world’s wealth.

The Friedman doctrine has been driven by the people who benefit most from these policies: the super-rich. They have advanced their agenda through their support of think tanks, certain universities and political parties. And gradually Milton Friedman’s free market economics have been taken as the accepted capitalist position. The theory is that, as the rich are allowed to keep a higher proportion of their income, they will use it to build industry and create more jobs in a trickle down effect.

But that is not what happened. The financial collapse of 2008 was caused by deregulation of the banks and increased flows of cheap money into Wall Street looking for a home. This resulted in all the best brains being drawn into the financial markets to dream up complex methods of packaging derivatives and credit default swaps designed to bring returns on this pool of cash. The ‘products’ were also designed to make the managers of hedge funds and Wall Street traders incredibly rich – without creating any more jobs or building the economy.

Some of these hedge fund managers walked away with billions of dollars at the end of the crash, leaving ordinary people penniless, while banks that were ‘too big to fail’ were shored up by the taxpayer. Since that time some economists have realized that the market is not the self-correcting force that will ensure equity and fairness for all, but the low taxation regimes have persisted.

The net result is that while the rich become richer, wages for the ordinary workers have stagnated for decades. This free market policy, which encourages extreme greed and excess, will not correct itself, and there can only be a solution when governments implement equitable tax regimes.

But how can they do this when they are themselves controlled by the super-rich, and now in America they have gone one step further and a member of the super rich, Donald Trump, has become the government. But what makes me marvel is that it is the people whose wages have stagnated for decades who are his ardent supporters.