A WEEK IN ECONOMICS (20/11/13 – 25/11/13) THE HUNGER GAMES

, Business

Week-in-Economics

David Roth, President of Switzerland’s Young Socialists is not a happy man. On November 24th, a referendum he proposed on capping the pay of bosses 12: 1 was defeated, with 65.3% of the Swiss voting against it. The business committee were happy, validated that the people understood the need to inhibit government control over the freedom of accruing high salaries in order to remain competitive.

In effect, the result meant that executives could continue to earn however much even if that meant 200 times the salary of the lowest paid worker (as is the case with ABB, Novartis and Credit Suisse). The government were happy. They had been arguing that tax revenue would reduce, and companies will shift their business elsewhere. The country would no longer be competitive. For policy makers, it appears that for a country to grow, it has to be competitive.

What does that mean? Lower prices and good quality goods? Perhaps. But talk to a man on the street in more or less any country around the world today (China might be the exception), and the majority would say that prices are increasing while wages are not. Worrying statistics have emerged from the UK. 18.8% of the population are reporting serious financial issues. In some places, including major cities such as Manchester and Liverpool, over 40% are struggling with debt. This increased debt is not because they are borrowing in order to deploy funds into a money making venture as banks; rather because these people need to meet the basic needs. With low salaries, life has become a struggle. In their minds, a better standard of living has not occurred by the country being competitive.

Any government and policy maker is under the impression that a country that can offer a regulatory and financial system which incentivises home-grown entrepreneurs or attract multinationals will bring in income and revenue that will then seep down to benefit the people. It creates a multiplier effect in which you have a company generating income that passes to employees who then buy goods and services which benefit that company therefore creating a sound economy. Hence, tax havens, such as Ireland where major multinationals are creating branches in order to pay little tax, are used, and these havens hopes that the entry of a major multinational (through positive externalities) will benefit their country. It makes them competitive.

The Swiss think that capping salaries will scare away companies making them less competitive. Most countries feel the same, and worry too much wage regulation is a really bad thing. Hence, there has been such a balancing act following the financial crisis with the US and UK being stern on bank bonuses, but not entirely willing to take firm steps with bank higher management. Bonuses are thought to encourage competitive tendencies

Banks on the other hand continue to compete; multinationals continue to compete, yet we are not seeing competition having a positive effect on society because of the recessionary climate. Policy makers believe that it is only a matter of time before the situation changes, and entrepreneurs and multinational companies will compete which lower prices, and increased type and quality of goods. They think that this is what competition produces.

But competition also has the effect where, when basic costs are paid, the majority of the revenue can be distributed in a way the company sees fit.  Too much of that revenue goes to the top guy leaving the bottom guy somewhat bewildered yet bounded to the company because he needs to earn in order to survive. When he then goes to buy goods from another company in which the largest percentage of the price, once again, goes to the top guy, it leaves the bottom guys of that company (of which there are many ) with little income; you create a situation in which the bottom rung has little money to spend, and this situation perpetuates. Price levels remain low according to competition – perhaps these prices are the lowest they can possibly be (oil prices excluded). But the average person has less income to spend as most of it is going to higher management.

As children we were read fables and stories about the evil of greed. Today, we do not talk about greed unless the greedy person has committed an illegal act. No, today greed is institutionalised. It is considered a right for individuals to earn far more than what would be an appropriate salary. Unfortunately, if the individual at the bottom has so little income that he is just about making ends meet, then the implications for society are far more worrisome than a loss of competition caused by reduced fat cat salary. It begs another question: do the people at the top really care about the people at the bottom? Probably not but then isn’t survival of the fittest the end goal of competition?

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