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Does capitalism trickle down?

The exponents of stakeholding bang on about how laissez-faire capitalism fails the poor- the rich get richer, so they tell us, and the poor either get poorer or no better off. Hence we need to raise redistributive taxes to correct not just the rising inequality capitalism generates but also the absolute decline of poor people's living standards. Against all this capitalists have argued that their system produces `trickle down': the rich get richer, yes, but this makes the poor richer too- maybe not at as fast a rate, but why should they care about the greater inequality when they are part of a winning team? They are better off in the team.

It is an old argument, rediscovered by every generation. But the late twentieth century has given it some fresh twists. We have seen staggeringly high rates of taxation as the welfare state was ratcheted up by post-war socialism and we have seen counter-revolutions-Thatcher and Reagan led the way, the ex-Soviet bloc crumbled and followed, and many others are now joining in, in Latin America most of all. The stakeholder argument is an attempt today to regroup the fleeing socialists of yesteryear.

What are the facts? Anglo-Saxon capitalism, which is considerably less infected with stakeholderism than the continental variety, is generally doing rather well: producing growth in jobs as well as national income and because taxes are being held down that means growth in personal living standards too. Britain is a conspicuous example. The economy is now slowing under the steady drip-drip of high real interest rates and the implied strong pound but it is now in its sixth year of expansion, almost as long-lived as the fabulous US expansion of the 90s. What is more it is spreading out to the parts that previous expansions have failed to reach. Unemployment has fallen to 4.9% on the standard measure (the count of unemployed benefit claimants)- roughly back to where it was in the late 70s before the massive rise in efficiency and the resulting employment shake-out of the Thatcher era. Employment is now rising rapidly- about 2% a year- in services: this is where our flexible labour market excels in providing opportunities for all sorts, skilled and unskilled. Single mothers. teenagers, and that increasingly endangered species, double-jobless householders, are all getting jobs.

Ah, say the stakeholderists, but what about trickle down? Are not the poor in many ways worse off, with crumbling public services and their wages undermined by technology and competition from the East?

We most of us go around with our eyes open and have noticed that there seems to be more or less universal access to the trappings of modern life: the TV, video and car. We just do not believe the gloomy figures about rather slowly rising living standards among the poorest- say the `bottom quintile' household (that is the household at the top of the lowest fifth of the income distribution). According to the Office of National Statistics this household was only 17% better off in 1995 than in 1979- 1% a year. But using expenditure surveys the Department of Social Security found that this household was actually spending 28% more than in 1979- a rise of 1.6% a year, the same as the average rise in per capita national income over the period.

Does it pay the poor to be part of the flexible free market UK economy rather than say part of the continental stakeholder economy? Well, turn to some remarkable statistics produced by the OECD on net-of-tax wages across different countries but in the same currency. We all know that UK wage costs to employers are low: for example an ordinary British worker costs about 60% of his German opposite number. So we naturally assume that the said British worker is less well-off. Not so, finds the OECD: it turns out that the same worker is by now actually better off after tax than his German oppo-by some 6% in 1996. What is more this is true for the worker on two thirds of average wages as well. The significance of these figures, drawn to my attention by Oxford's Walter Eltis and Gabriel Stein of Lombard Street Research, is indeed that UK workers of all types are on a winning team. It has paid them to put up with all that dreadful Anglo-Saxon inequality, to swallow their envy: trickle down has been alive and well.

Our stakeholder has one shot left in his locker: those better net incomes are partly bought by Britain's much lower taxes (38% of our national income against 46% in Germany). But is not the cost crumbling public services? Your German worker has a better public pension, better roads, health, education, public transport, and so on. Factor this in and he is really winning.

Not so: the OECD comparison is at `purchasing power parity' (PPP) exchange rates: that means rates that equate the cost of living including all those public services. Hence the figures estimate true relative living standards after allowing for the cost of the whole range of goods and services the worker buys. Against Germany the OECD PPP exchange rate for the pound turns out to be- 3 DM! And one can see why the extra German tax take buys little. We know that efficiency in the British public (and privatised) sector has risen sharply over the last twenty years whereas the German public sector has changed little. Furthermore a great deal of German taxation goes to subsidising coal, steel, and other lame ducks, not to speak of the EC's budget; opera, too- the Berlin state subsidy to opera is the size of the UK's entire Arts Council budget. As for that wonderful state pension, forget it: current taxes are way too small to pay for it.

When one puts this picture for workers together with the much better prospects for the workless, the case for free market Britain appears overwhelming. And to think we wasted 30 years after the war in an impoverishing socialist experiment. Let us not allow those stakeholderists to have another go at our hard-earned prosperity!

Patrick Minford is professor of economics at Cardiff Business School and visiting professor at Liverpool University.
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