Ever since the financial crash “the 1%” and “the 99%” have become part of our language. At a time of global recession, people became acutely aware that the richest 1% were not suffering in the same way and in fact becoming richer.
There are numerous news articles and graphs I could share with you. This last made the headlines just a month ago when the latest data showed that the richest 1% received 82% of the wealth generated in 2017, while the poorest 50% saw no increase at all. You can instantly find graphs on line showing the proportion of wealth owned by each 10% of the population, and the shocking surge of wealth to the richest in the last 40 years.
But I’m going to focus on just one thing – here is a graph that gets to the heart of what is going on in terms of the functioning of the economy.
This graph shows the marked and continued fall in wages as a share of GDP in the United States over the last 50 years. Global data isn’t available, but America is the largest economy in the world and the dollar is the international currency. You will find the same picture in every other G20 country, though not always with such a steep decline.
Imagine your parents and grandparents sitting comfortably on the left hand side of the graph, earning enough to be comfortably off and building up a secure defined benefits pension. Your children are squashed in under the line on the right hand side of the graph, raised in an era of financial strife and with a worrying, uncertain future ahead of them.
If you read the previous section of the blog, you will know that GDP measures the value of everything produced in a country. It is calculated by measuring the value of all final consumption and investment goods sold, and also the value of changes in inventory. That expenditure then becomes income for someone else, so the total GDP expenditure will always equal the income generated by that expenditure (explained here). And all income comprises either wages or profits.
So what this graph is telling you is that, year-on-year, a significantly higher proportions of income is flowing to profits rather than wages. This is a global phenomenon – the workers of the world are getting a continually reducing share of the pie.
And this is what is driving the rise of the 1% – this is why incomes for half the world remain static but continue to climb for the richest 1%. We are often told that low wages will drive economic growth and enable more people to be employed. The next section of the blog will explain in detail why this proposition is wrong – but for now I just want to point out that this graph is showing us that low wages simply enables more profit to flow to the owners of businesses.
It would be easy to misrepresent this as a divide between “workers” and “capitalists”, implying that these profits all go to the richest in society. But pension funds are significant investors in stock markets, and pension funds benefit from the distribution of profits. If you have a pension fund, technically you are part-owner of many companies!
What we need to do is look under the bonnet at where this profit is going, and in the previous section of the blog there was also a post explaining in detail that profit can be distributed or undistributed. Distributed profits are paid to shareholders as dividends, and undistributed profits are retained by businesses. They are therefore sometimes referred to as “retained earnings” and constitute business saving.
The sharp shift in wealth from wages to profits has led to a huge increase in the retained earnings of businesses – in other words, a massive rise in business saving.
Next week we will look at the data on this – it is hard to convey how shocking it is. It is literally “seismic” – in next week’s graph you will see the mountainous peak caused by the concentration of wealth into a very small number of corporate hands. And to understand what is going on in our global economy you need to understand the economic effects of this concentration. What are they doing with all this money?