Inequality and the price of food

Oxfam told the World Economic Forum in Davos that tax havens are largely to blame for the vast gap between rich and poor. But the problem runs deeper, says Colin Tudge. We have to think again from first principles.

It’s been known for a few years that just one per cent of the world’s population now own as much as the rest of us combined; and now, an Oxfam report written for the 2016 annual World Economic Forum in Davos tells us that 62 individual people — 53 men and nine women; scarcely enough to fill one tourist bus — own as much as the poorest 50%. The bottom 50% have lost a trillion dollars since 2010 while the wealth of “the 62” has increased by half a trillion.

One reason for this, says Oxfam, is tax havens. The super-rich have stashed an estimated $7.6tr in offshore accounts. If they paid tax on the income that this wealth generates, that would add an extra $190b to the world’s governments – which, at least in theory, they could spend on the wellbeing of humanity and the biosphere. About 30% of Africa’s wealth is held off-shore, or so it’s estimated — worth $14 billion a year in lost tax revenues. That’s enough, says Oxfam, “to save 4 million children’s lives a year and employ enough teachers to get every African child into school”. In 2013 David Cameron promised the WEF and hence the world that he would lead a global effort against aggressive tax avoidance in the UK and in poor countries. But, says Oxfam, “promised measures to increase transparency in British Overseas Territories and Crown Dependencies, such as the Cayman Islands and British Virgin Islands, have not yet been implemented”.

Absolutely equal shares for all as some moralists have advocated is surely not sensible or even just (some people need more than others, and for various reasons may be said to deserve more) but most people even at the WEF would agree that inequality on the present scale is seriously unfair. It is clearly damaging, too, since the extreme wealth of the few does far more harm than good to the rest of us, and to the biosphere at large, even if a few of the super-rich aspire to be philanthropists. The unfairness and the damage between them may reasonably be said to be seriously wicked. Yet this is a central fact of the world economy. No wonder the world is in a mess.

But are tax havens really central to the issue? They may or may not be legal (non-lawyers must fear to tread) but they are obviously unsocial and could reasonably be said, in practice if not in theory, to be corrupt.

Yet to blame tax havens for our present plight, or to blame corruption in general, is seriously to miss the point. It implies that the economy as a whole would be OK if it weren’t for tax havens or for corruption, perpetrated by a few bad hats. In truth the economy as a whole, the kind that David Cameron’s government wholeheartedly supports, and the Coalition before that, and the strangely conceived “New Labour” of Brown and Blair before that, inexorably creates inequality. The inequality of the present global economy is not an anomaly, caused by a few dubious people breaking the rules. It is systemic. If the present economy was working absolutely as intended, with everyone obeying the rules with squeaky cleanliness, it would still create gross inequality, not significantly different from what we have now.

One good reason for this was spelled out at a meeting on Holistic Economics, held at Schumacher College, Devon, in November 2007, by the German environmentalist Margrit Kennedy. The prime cause of ever-growing inequality, she said, is the debt economy, made worse by compound interest. We all of us in practice spend a significant proportion of our income paying interest on debts, which get steadily larger, exponentially, if we don’t pay them off immediately.  This is true even if we don’t feel that we personally are in debt. For even if we ourselves have no HP and have paid off our mortgages, other people have not: and when we buy stuff from a trader, or get our hair cut or our car fixed, a fair slice of the bill goes to pay off the traders’ debts – the interest that they are paying on their mortgages and hired machinery.

Of course, there must be lenders as well as borrowers. We are all perforce borrowers – or at least are paying other people’s interest on what they have borrowed. But anyone who has invested their money in someone else’s enterprise is also a lender, and they receive at least some of the money that other people are paying to service their own debts. In the end, then, the loans must balance out the debts and if we all lent as much as we borrowed and received interest at the same rate as we pay it out then presumably the lending and borrowing would not lead to inequality.

In practice, though, things don’t work like that. In any one society some people are net lenders, receiving more money in interest than they must pay out, to service their own or other people’s debts. Some are in a neutral position, receiving roughly the same as they pay out. Some are net debtors, paying out more than they get back.

In real societies, the net debtors far outweigh the net lenders. Germany has an economy fairly typical of western countries, though healthier than most, and there, according to Margrit, about 80% of the people, the ordinary kind who make their living by working, pay out about twice as much in interest each year as they receive from their various investments. About 10 per cent of the people are in balance; they are receiving roughly as much in interest from their various investments as they are paying out in interest on their own and other people’s debts. The remaining 10 per cent are net beneficiaries – receiving all the interest paid out by the 80 per cent who are the net payers.

So it is that money floats inexorably from the bottom to the top. In Germany in 2004 about one billion euros every day found their way from the 80 per cent who work for a living to the 10 per cent who sit at the top of the financial tree. The equivalent rate of transfer in Britain seems likely to be even higher since most people here have a mortgage and mortgages on average account for half our disposable income.

In short, the present economy seems expressly designed to make the rich richer and the poor poorer.  If it is not expressly designed so to do, this is at least an unintended consequence of huge proportion; and if this was not easily foreseeable, it is at least obvious in retrospect, since global inequality has been growing steadily and rapidly both between countries and within countries since the neoliberal global economy and its various intricacies became the norm circa 1980.

On the face of things, it seems that the ill-effects of the debt economy could be mitigated if the banks, the principal lenders, were owned by society as a whole or by communities. Then, the money that now has fallen into the hands of the few and created the super-rich elite would be owned by us all and – in theory at least — could be used for the general good. It is not obvious why there seems to be so little enthusiasm in high places, or indeed in society at large, for national or local banks. Presumably it’s because the few who have reached super-rich status tend also to control the lines of communication and influence public information and opinion to a significant degree.

The inequality, and the systematic flow of wealth from poor to rich, affects everyone at all levels – and farmers as always are in the firing line. They are prime victims of the modern economy, fiercely though some of them strive to defend it. For farmers are constantly encouraged to stay afloat by taking out more and more heroic loans – an aspect of the “bold” farming that was a prime theme of this year’s Oxford Farming Conference (not to be confused with the Oxford Real Farming Conference).

Less obviously, but crucially, the huge inequalities in income affect the price of food. Governments strive piously to keep down the price of food, ostensibly for the benefit of us all. In practice in recent years they have contrived to do this primarily by attacking the farm labour force, though this in practice accounts for only a small proportion of the total food bill. Unemployment is the result, of course – and unemployment is the royal road to deprivation. Governments like ours also support industrialization to achieve economies of scale – which seriously compromises the biosphere (though intellectuals can be found to argue that it does not), and ultimately threatens us all. In truth, food could be made cheaper than it is, without gross injustice and without damaging the Earth, but only by a radical re-think of farming methods and the economy and moral attitudes that lie behind present practice, and re-thinking is not what governments do. Certain it is, though, that within the present economy and Zeitgeist, food prices cannot be brought down any further except by perpetrating serious injustice and by wrecking the fabric of the world. Ad hoc fiddling of the kind undertaken by the CAP and discussed every year at length by government and the NFU at the Oxford Farming Conference and sometimes at the WEF, just will not do.

Specifically, if some people earn 100 or a 1000 times more than others, and if government intervention is considered taboo (we mustn’t interfere with the “free market” or increase public spending!) it is impossible to fix a sensible price for food. Food for the very rich is now too cheap for them to notice although in Britain, still among the world’s richest countries, we’re told, a million must resort to food banks, sometimes for good stuff (local groups do their heroic best) but typically for packets of own-brand biscuits and past-sell-by tins of Spam.

Governments like ours, of all parties, have presided over all this, and they fetch up at Davos once a year at huge expense to wring their hands (I gave a talk there once, in fact several, and the wringing was audible at 100 paces) and do everything except get to the heart of the matter. In this as in all things they – but more importantly we — have to think again from first principles.

Colin Tudge’s latest book, Six Steps Back to the Land, is now available from Green Books at £16.99.

Margrit Kennedy (1939–2013) was primarily an architect and environmentalist but she also made very significant contributions to economic thinking. In 2011 she initiated the movement, Occupy Money. Her books include: Occupy Money: Creating an Economy Where Everybody Wins; and  Building Community Schools: An Analysis of Experiences.

Colin Tudge, January 24 2016

One Response to “Inequality and the Price of Food”

John Harris says:

One of the first principles for many is the whole issue of what money is and who controls its supply. For some, one of the root maladies are central banks and the currency arrangements of the world. The first century or so of the USA’s history was a recurring political battle over who should issue the currency and about what money actually is. For some people the question is even the whole issue of fractional reserve banking, and for some even the whole issue of usury and a review of Calvin’s Letter of Advice on Usury and what he actually said.

For many, the whole issue of central banks is almost like the secret history of the world. Central banks have been around since the Bank of England’s establishment in 1694, not the very first but the model which was spread around the world.

Huge banking wealth had amassed in Europe from a lucrative trade in funding the petty wars of Europe, often funding both sides in these wars. It was widely believed in early America that international capital was out to steal the American revolution right from the start. The rebellion itself had begun over currency issuance.

The money we use is certainly a different species to the cheap metal coins of the Roman Republic, or the artefact of law that Aristotle described it as, or King Henry I’s tally sticks, legal tender for 726 years, or the American Colonial Scrip. Benjamin Franklin, the first American, reckoned that money was a simple thing, the authority printed just enough of it to facilitate trade and industry, and then money was no problem, and the public had no debts to anyone.

The US Constitutional Convention flunked the question of defining who should issue money, despite Franklin’s arguments about how well Colonial Scrip had worked.
A central bank was established almost immediately.
A tug-of-war over the issuance of money between state and private banking raged across subsequent decades, involving the kind of presidents that get carved into mountainsides; Jefferson, railing against the power of banks; Lincoln, and his legendary greenbacks during the Civil War. Between their eras, President Jackson had fought and won what was termed the Bank War, and became the only US president to ever pay off the national debt.

After Lincoln, greenbacks started to be withdrawn (though surviving until Reagan) and money mysteriously shrank in a fast expanding economy, there was in places a dire need for currency. Discoveries of abundant silver brought relief. Then later in the century a governmental act known as the Crime of ’73 outlawed the silver dollar, the dollar of our daddies as it was romantically termed.

Later grew the momentum of the Free Silver Movement. For a while the argument intensified about what money is. The Gold Bugs, believed that gold was the only natural money, the Silverites included the abundant silver, and the Greenbackers, believing in government-issued paper money backed by the credit of the nation. Frank Baum’s The Wonderful Wizard of Oz is a story about these times in America, the yellow brick road being gold and the Emerald City representing greenbacks, and Dorothy has silver slippers in the book.

Henry George, in Social Problems, sets out what isn’t and what is the business of government, is very clear that it is absolutely the business of the government to issue currency. Henry George spent his last years supporting William Jennings Bryan, the Lion of Free Silver. In Bryan’s famous and later plagiarised Crown of Gold, Cross of Thorns speech when he won the Democratic Candidature in 1896, he says:

We say, in our platform, that we believe that the right to coin money and issue money is a function of government. We believe it. We believe it is a part of sovereignty. Those who are opposed to this proposition tell us the issue of paper money is a function of the bank, and that the government ought to go out of the banking business. I stand with Jefferson rather than with them, and tell them, as he did, that the issue of money is a function of the government, and that the banks should go out of the governing business.

The tug-of-war of a century finally ended in 1913, the Federal Reserve Act was passed and, at the fourth attempt, the US central bank was established and has flourished ever since. This followed quickly on 1912’s 39th amendment in 1912, giving the Federal Government the right to issue income tax directly on all American citizens (Britain having had first introduced income tax as long ago as 1798) preparing the class that would pay the national debt.

The Federal Reserve spent the Roaring 20s fuelling the party with an expanding money supply before suddenly pulling the plug, causing the Wall Street Crash but, more significantly, sharply reducing the money supply by a third over the next four years. Global depression then set in.

Roosevelt, FDR, coming into the ruins of this, instigated major pieces of legislation known collectively as the New Deal. Roosevelt’s government also confiscated all the gold in America and locked it up in Fort Knox. At this time, great study was being made of the causes of the recession and the Chicago Plan was produced and circulated to policy makers. Its key proposal actually was the abolition of fractional reserve banking and the institution of full reserve banking.

That proposal wasn’t, though, considered for Roosevelt’s Banking Acts, which reined in banking activities until the late 70s. Best known is the part of the Banking Act known as Glass-Steagall, which separated investment banking from commercial banking. All such regulation, including on the reserves banks need to hold, burned in a neoliberal bonfire.

It feels inevitable with hindsight, but it was generally a shock when it all crashed in 2008. Fred Harrison had warned the incoming New Labour government about it a decade earlier. Meltdown, catastrophe. Could governments have just let the banks sink? It wasn’t mentioned as an option. Pension funds are legally bound to buy stock rated as AAA by the international ratings agencies. There certainly seem to be people who knew full well that a lot of the stock was ‘junk,’ some even bought it deliberately and insured themselves on it.

International ratings agencies seemed to suffer very little opprobrium at the time, and their judgements are still absolute, and they can terrorise governments about their credit ratings when they get into financial difficulties partly resulting from the agencies’ false ratings in the first place. And these rating agencies are financed by investment banks. It’s a funny old world.

Debts don’t equal out because the house always wins and compound interest is the most powerful force in the universe, as Einstein didn’t say but somebody did. The coins in our pockets are issued direct from the treasury, but the notes and credits are created by our banking system and come with a hidden tax.

Banking really is the ultimate business model; money can be created out of nothing and loaned at interest, and this is how they’ve come to own the world, which according to a recent study by the Swiss Federal Institute, they’re well on the way to. It’s hard to grasp the mystery of how the very currency is debt, which I must admit, I really don’t; but just some thoughts anyway.

In 2011, in one of the recent budgetary crises, the idea was floating around Obama’s administration of Trillion Dollar Coins. The Treasury would – as constitutionally they may – directly issue platinum coins to fund public spending. They’d have been quite a collector’s item.

The idea went away very quickly. This could be done, created money issued directly into the economy, and the hyperinflation this would create controlled by gradually increasing the reserve banks need to hold, until full reserve banking, and monetary stability, is achieved. From that point, an elected body separate from government, issues enough currency for society’s needs, no more, no less, and no one has any interest to pay to anyone. Just an idea we’ve seen bouncing around.

Re: National Banks, just to mention a couple:

The Bank of North Dakota was set up around 1918 by the Non-Partisan League administration, a party from the Prairie Populist movement. This is a state which has enduring laws dating back to this time forbidding banks and corporations from owning land in North Dakota. This is the only state bank in the US, where it’s naturally referred to as a socialist bank. It’s thriving, working for North Dakota. Iceland are examining the way things work in North Dakota, Icelanders having refused to accept the debts from their banking collapse and had been threatened by Britain with counter-terrorism measures.

In Canada, in 1938, inspired by Gerry McGeer’s narrative of President Lincoln and his greenbacks, took the privately founded Bank of Canada into public ownership, and the private banks were given ten years to remove their currency from circulation. This situation persisted until the 1970s, during which Canada had public debt-free currency, and after which their public debt quickly grew.

John Harris (16/02/2016)