Davos is an interesting barometer of the conventional wisdom of the day among the global elite. Each year is a new year with a new menu and a short memory. Such is the world at the top. This year included widespread optimism, complex discussions of blockchains and artificial intelligence, enthusiasm for Macron and despise for Trump, alongside some unease for things too good to be true and lip service to the growing debate about inequality. Reasonable, but not earth-shaking.
The year of 2017 has been good for business and finance. Steady global growth and historically high share performance have blessed the Davos-goers with thick incomes. Their concern must be what to do with this bonanza now that shares are expensive. There is that nagging feeling that what goes up must come down, some day. Politically, the year has also been reasonably reassuring. The powerful anti-establishment trend has been broken by elections in France and the Netherlands and Trump has achieved less than what was feared while the Brexit camp has been fracturing.
The combination of good economic conditions and widespread political threats, including major war threats, explains the mood in Davos: times are good but that may not last. The real question is what the elites plan to do about it. We have seen a lot of hand wringing about inequality, probably correctly seen as a driver of populism. A study by Oxfam was published as Davos was starting and even featured on its website. It indicates that the top 1% have captured 82% of world incomes in 2017. Those walking the hallways of the World Economic Forum mostly belong to the top 0.1% who own some 15% world wealth according to the World Inequality Report. Yet, as far as one can tell, they did not have much to suggest about reversing that trend, as if there is nothing that they can do.
Delicate balance between reducing inequality and stifling growth
The standard answer to rising inequality is more progressive taxation. Yet, the entrepreneurs argue that too much progressivity will deter their efforts, ultimately hurting growth and employment. While one may wonder whether they need that much money to work hard enough, it remains that aggressive progressivity is bound to elicit tax avoidance strategies in a never ending race between lawyers and the authorities, where the latter always lag behind the former. At the other end, the authors of the World Inequality Report argue that the trend toward wealth concentration is partly due to the dismantlement of state-owned corporations, implicitly calling for a reversal of this worldwide trend. This view – which is reminiscent of Marx’s call for collective ownership of the means of production – ignores the widespread evidence that state-owned corporations have invariably underperformed everywhere, and those that remain still do.
It may well be that governments do not have that many tools, or that any tool suffers from negative side effects. Yet they are not powerless. Public policies explain why inequality is much lower in Europe than in the United States. Finding the right balance between reducing inequality and stifling growth is extremely difficult but this is also a choice that deserves the kind of debate that Davos is proud to generate but is strangely shy on this topic. The Nordic countries, for instance, have forged a consensus.
More importantly, perhaps, the corporations themselves can do a lot. A well-known feature of the last two decades is that top earners have continuously earned more, often much more, while the middle class has seen its incomes stagnate. The usual explanation for middle class income stagnation is the emergence of fierce competition from Asia and Latin America where labor costs are a fraction of those in the developed countries. This is true but quite disingenuous. According to the Conference Board, in 2002 manufacturing hourly labor costs in China were 2.2% of those in the US. By 2013, the proportion had increased to 11.3%. The difference is so huge that it is hard to believe that a proportion of, say 15%, would have ruined the ability of the US to compete with China. At the other end of the spectrum, the top 0.1% could have voluntarily cut their earnings, which run in the millions of dollars per month, without seeing their standards of living deteriorate in any way. There is a limit to how much one can consume but, apparently, no limit to the wealth that some want to accumulate.
Mending the system and the social contract
The incredible wealth gains of the wealthiest people are the outcome of explicit decisions made within corporations. A grassroot movement is trying to force corporate boards to reveal and justify the earnings of top managers, but it is facing fierce resistance. If the Davos crowd really worries about mounting populism, cutting stratospheric payments is an easy, symbolic gesture. They should not resist moves that are in their best long-term interest, before anti-elite politicians reach power. They should also see to it that all employees share in the prosperity of the corporations that they run. Political competition was reasonably smooth when living standards were rising for everyone and the norm was that children would do better than parents. Absent this optimistic outlook, people turn to populists who promise to restore that golden age without the slightest operational idea of how they would do it.
The financial industry has a special responsibility. The global financial crisis of 2008 was the consequence of excessive risk-taking in many market segments. Since then, a new regulatory approach has been adopted. The new regulations can certainly be improved but the aim should not be to return to the pre-2008 world. To be sure, financial regulation eats into profits but it also aims at making financial market less crisis prone. The crisis had ushered the new era of mistrust toward elites by undermining trust into their management. The financial industry would be well advised to refrain from rolling back regulation as it is currently trying to do in the US.
In his message to the participants, Klaus Schwab said: «If the system is broken and the social contract is failing, business leaders, in Davos and around the world, must play a leading role in repairing them.» Sadly, we have not seen that happening, not yet at least.