The widening wealth gap and why demagogues like Donald Trump are on the rise (again)

This week Donald Trump has been sworn in as the 45th US president and it was a truly historical event. Never before has a US president been so unpopular even before taking office. Usually, the week preceding inauguration and the first days in office are the honeymoon period for any new president during which they enjoy high popularity ratings. Not so for Donald Trump. Due to his divisive and openly hostile campaign, he could feel the stiff breeze of opposition right from the very minute he took office. Not only was the popular turnout at the inaugural ceremony very low, but millions of people took to the streets to protest against the new president even before he had enacted a single policy. And like any good demagogue worth his salt, what did Trump do when this rather inconvenient truth stared him in the face, he of course denied it calling all media outlets “dishonest”.

Trump inauguration
Top: comparing public turnout at the Trump inauguration (left) with Obama (right). Bottom: protesters against Trump on inauguration day.

While many people are still rubbing their eyes in disbelief about how a simpleton egomaniac without any political agenda other than “make America great again” could rise to power, his success, if seen in context, is not really such a surprise after all.

The decline of the liberal democratic order and parallels to Weimar Germany

All over Europe a trend is emerging where we no longer have one large democratic party (conservative or liberal) forming the government while the other leads the opposition. Instead, we have countries were the big democratic parties have to join forces to form some grand coalition in order to prevent anti-democratic and openly racist parties from government participation (e.g., in Germany), while in other countries the anti-democrats have already taken over (e.g., Poland, Hungary, Turkey) or are predicted do so after the next elections (e.g., the Netherlands, France). The UK’s Observer newspaper now calls Angela Merkel of Germany the “last woman standing” to defend the west’s liberal democratic order.

This decline in the liberal democratic order is truly alarming as it shows many parallels to what happened during the late Weimar period in Germany (1930-33). Back then, the established democratic parties also largely ignored extremist forces such as the National Socialists of Adolf Hitler, deriding them as primitive and unelectable, all the while ignoring their ever increasing share in the popular vote and only just preventing their participation in a pre-1933 government by forming some kind of last-stand coalition of the remaining democratic forces left in parliament. As we all know this attitude proved fatal and people eventually got so fed up with the democratic parties and their inability/unwillingness to address the mass unemployment and poverty that people in 1930s Germany were ready to try something different and vote for some radicals simply because they claimed to possess all the answers and were promising to make Germany great again (sound familiar?!) after the defeat in WW-I and ensuing reparation payments that crippled the country’s economy. The rest is history.

Results from the elections to the German Reichstag in November 1932. Non-democratic forces had obtained a majority, resulting in political deadlock and new elections being called 4 months later in which the NSDAP gained nearly 44% of the vote (up from a mere 2.6% in 1926).

Already in 2010 it was Noam Chomsky who also recognised this historical parallel:

“[The current situation in the US] is very similar to late Weimar Germany. The parallels are striking. There was also tremendous disillusionment with the parliamentary system. The most striking fact about Weimar was […] that the traditional parties, the Conservative and Liberal parties, were hated and disappeared. It left a vacuum which the Nazis very cleverly and intelligently managed to take over. “ – Noam Chomsky, 2010

More specifically for the US he stated that:

“If somebody comes along who is charismatic and honest [the US] is in real trouble because of the frustration, disillusionment, the justified anger and the absence of any coherent response. What are people supposed to think if someone says ‘I have got an answer, we have an enemy’? There [in Nazi Germany] it was the Jews. Here it will be the illegal immigrants and the blacks. We will be told that white males are a persecuted minority. We will be told we have to defend ourselves and the honor of the nation. Military force will be exalted. […] I don’t think all this is very far away. If the polls are accurate it is not the Republicans but the right-wing Republicans, the crazed Republicans, who will sweep the next election. “ – Noam Chomsky, 2010

While Chomsky was pretty much spot on, he got 2 points wrong: Trump is openly dishonest and he did not sweep the “next election” but the one after that.

The fact that people voted for Trump despite his lies, his misogyny, and his proud displays of ignorance about important topics such as climate change, shows how frustrated people really were. One could argue that it was really the Democrats who won this election for Trump by long ago abandoning their core electorate and nominating the least popular candidate from among their ranks as Trump’s opponent.

The morning after

Trump as the result of globalisation

Irrespective of who was in power since the 1980s, policies were increasingly garnered towards banks and big business, globalisation and an untamed and unregulated capitalist system where the state simply functions as an enabler of big business rather than a regulator. People who worked hard, played by the rules, believed in god, guns and country, became the losers of this new world order.

Bringers of a new world order: Thatcher, Reagan, Blair and Schröder.

Nevertheless, we should not forget who initiated this new world order: the conservative and business-friendly governments of the 1980s in the US and the UK (Reagan, Bush, Thatcher) – against the protests of the political left. Back then, anti-globalisation protesters were given the same credence as scientists warning about climate change: none!

However, by the time the 1990s had arrived, even governments formed by political parties that traditionally advocated workers’ rights continued along this neo-liberal path (e.g., Bill Clinton in the US or Tony Blair in the UK), and countries that by then still had a rather social (i.e., moderate) form of capitalism began to dismantle it (Gerhard Schröder – Germany) thereby increasing the pressure on others to follow suit (France, the Scandinavian countries, etc.). It seemed as though the left had resigned and accepted the status quo and globalisation as inevitable and unalterable. Arguably, this resignation is the single biggest error committed by the political left in recent years: 20-30 years ago they could only warn people about the negative impacts of globalisation; today they could simply say “told you so” and put the issue back on the political agenda. Instead, they enabled the far right (both in Europe and the US) to appropriate this traditionally left issue. Trump’s anti-globalisation statements were one of the main pillars of his election campaign and one of the principal reasons for his success.

The rise in inequality

Globalisation was once advocated as the best possible tool to promote global equality. While it did indeed lead to the creation of small middle classes in developing countries such as China, Indonesia, India, and even Russia, the majority of the population in these countries still lives in relative poverty, while a small elite has become extremely rich. An annual global wealth study published in 2013 by the financial services group Credit Suisse says a mere 110 Russian citizens controlled 35% of the total household wealth across the vast country1. In addition, globalisation led to an increase in inequality in the developed countries as the qualified middle classes from the manufacturing sectors found themselves out of work. Instead of raising the standards (environmental, worker protection, salaries, etc.) in the developing world, the developed world lowered its own standards in an ever-accelerating downward spiral toward the lowest common denominator, always for the sake of competitiveness. As a result, we have full-time workers whose salaries no longer suffice to lead a dignified life, we have a situation where two thirds of wildlife has become extinct or is on the brink of extinction – sacrificed on the altar of competitiveness – and cities reaching levels of pollution that we only thought possible in apocalyptic science fiction movies.

Pollution levels in China have reached apocalyptic levels.

Inequality is as old as humanity and throughout history there have always been cycles of increasing and decreasing levels of inequality and exploitation where those in power tested the amount of inequality that those without power were prepared to accept without turning to violent revolt. In today’s societies, where we have but one single economic model and unprecedented levels of distraction by a never-ending stream of mind-numbing trivia, where those that have the least to say are given the most platforms to do so, it appears that these levels of tolerance towards inequality are about to be re-adjusted once again.

A look at the share in the total income by the top 1% in different countries shows that while societies tended to become more equal up until the mid to late 1980s, inequality is on the rise again worldwide since the fall of the only competing system: communism.

Share of total income for the top 1% after Roine and Waldenström (2015).

Particularly for the US, the share of total income by the top 1% has reached again the same levels as in 1925 (17.6%) after it had been down to 7.8% in 1970.

If we look at wealth rather than income, the level of inequality is even more extreme.

Share of total wealth for top 1% after Roine and Waldenström (2015).

While we are still far from the feudal levels of 1910 United Kingdom where the top 1% controlled almost 70% of all wealth, the most unequal countries in the survey were the US and Switzerland where the top 1% control about 35% of all national wealth (globally, the top 1% control over 50% of all wealth2). If we take a more detailed look at how wealth is distributed across US society, we find that the top 20% own almost 90% of the total wealth while the bottom 80% have just over 10%, with many probably highly in debt.

US wealth inequality

Given these numbers, it becomes increasingly difficult to speak of a middle class as the middle 33% appear to be only marginally better off than the bottom 33%. Here is a good explainer video:

If you combine this with news on how the 8 richest people control more wealth than the poorest 50% of all humanity or the “call to action” by outgoing US vice-president Biden because the top 1% are not carrying their weight, then it is not only a little too late but also not surprising that the trust in government, media and business is in sharp decline. In a time where 50% of UK’s 16-year olds give “Fame” as their primary career choice, one cannot help but be fearful of a future where this new generation reaches voting age. In that sense, Trump has really caught on to the Zeitgeist by reducing everything to the 160 character attention span that most people can just about muster these days.


How to tackle inequality and increasing levels of poverty in developed societies

Over the past few years, discussions have sprung up about a minimum basic salary for everyone, irrespective of whether one is working, with trials already under way in some countries. In most European societies, such state aid is means-based and the amounts given depend on the individual’s circumstances (income, number of children, special needs, etc.). However, means-testing involves a rather large bureaucratic effort as each application for state aid needs to be evaluated by some government employee. Economists therefore argued that the reduction in the bureaucratic ependiture by eliminating means-testing would largely pay for the cost of introducing this basic salary for everyone. In addition, a basic salary could help accommodate the expected rise in unemployment due to increased automation. The White House, in a report to Congress, has put the probability at 83% that a worker making less than $20 an hour in 2010 will eventually lose their job to a machine.

Probability of computerization by occupation after Frey and Osborne (2013).

On the downside, the introduction of a basic salary may lead to a further reduction and dismantling of workers rights in Europe as companies could argue, for instance, that due to the existence of a basic salary, employees should no longer be protected from dismissal or in need of an adequate salary, thus paving the way for the US-style hire-and-fire business practice.

In my view, this approach addresses the wrong end of the problem: instead of discussing a minimum basic salary for everyone which would only introduce even more people to an income level barely above the poverty line, we should be debating the introduction of a maximum salary. I would argue that there is enough money to go around to pay for schools, hospitals, etc. but the main problem is that this money is concentrated in fewer and fewer hands. For the example of the US, 35% of all wealth (i.e., 35% of about US$ 90 trillion3) are in the hands of the top 1%. If we would tax those individuals with a very modest wealth tax of 2%, this would generate tax revenues of about US$ 630 billion per year, enough to provide every student with a free education, pay for public health care, renew the failing infrastructure and perhaps even have some spare change to actually reduce the sovereign debt. The dent this would make on the pockets of the top 1% would be negligible. If we applied the 2% wealth tax to the top 5% who own about 63% of all wealth, tax revenue would be about US$ 1.1 trillion. Combine this with a financial transaction tax of just 0.02% on all futures and credit default swaps which would yield an additional US$ 150 billion in the US alone4, and most of today’s problems could be solved almost overnight!

Many of today’s average workers find it increasingly difficult to lead a dignified life with their income from full-time employment and governments are often being forced to resort to salary top-ups, thereby effectively subsidising and encouraging large corporations who no longer pay adequate salaries.

The new poor

At the same time, the income of a CEO in relation to the average worker has reached absurd levels. While a CEO in the 1950s would perhaps earn between 10 to 20 times as much as a normal worker in their company, today’s top earning CEO earns as much as nearly 2000 of his average employees combined:

while the average value for the CEO-to-standard-employee salary ratio lies somewhere around 350 in the US, a world record among developed countries:

Comparing the salary of an average CEO to the salary of an average employee for different countries. Actual = real value, Ideal = what people in that country said it should be. After Kiatpongsan and Norton (2014).

If we had a system where the CEO’s salary was limited to say 10 or 20 times the pay of an average worker (a value that is still higher than the “ideal” ratio of 7:1 found by Kiatpongsan and Norton (2014)), the CEO could only get a pay rise if the salary of the average worker was increased also. While CEOs may then no longer be able to afford their collection of Rolex watches or luxury cars and super yachts (but seriously who needed those in the first place), a CEO earning 20 times the average salary would still be able to live in a pretty nice house and drive a fancy car, especially since prices in the real estate market would no longer be able to reach the absurd levels we have seen of late. The fact that these excessive CEO salary payments are bad business has even been recognised by the Harvard Business Review which is not usually known for its left-leaning tendencies.

Although Donald Trump appears deeply despicable for his character and political agenda, I am curious to see whether something good will eventually come out of his promise to reverse some of the wrongs of globalisation. The introduction of tariffs to compensate for differences in the ecological and social standards between countries would seem like a good first step which – if implemented correctly – could be used by subsequent administrations as a stepping stone to continue along this route. Perhaps it would encourage developing countries to not use worker exploitation and a lack of social and environmental standards as their main competitive advantage to attract foreign investment but tariffs might force them to actually increase those standards. If Trump succeeds, it would be ironic indeed that it took a charlatan billionaire to bring about this change rather than a workers party from the political left. However, I somehow doubt that it will lead to a real reduction in inequality, given the illustrious members he appointed to his cabinet. Let’s see!

  1. Credit Suisse. Global Wealth Report 2013, p. 53.
  2. Credit Suisse. Global Wealth Report 2016, p. 19.
  3. Federal Reserve Bank of St Louis, Households and Nonprofit Organizations; Net Worth, Level, Q3 2016.
  4. Richard T. Page, “Foolish Revenge or Shrewd Regulation? Financial-Industry Tax Law Reforms Proposed in the Wake of the Financial Crisis?” 85 Tul. L. Rev. 191, 193–195, 205–14 (2010).

Author: admin

I am a scientist by training and currently call Spain my home.

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