Three dangerous myths that persist
Paying workers more is bad for business;
The more chief executives are paid, the better they will perform.
Currently we are governed by people who say they still believe in them.
Trickle-down theory has been doing the rounds since the 18th Century.
In 1794 the Presbyterian Minister and renowned intellectual William Bruce wrote a column in the Belfast News Letter which expressed it well.
His argument was that poor people were irrelevant to political life as their best interests lay in supporting property owners who, in turn, supported prosperity and commerce.
The working poor would then be employed more regularly and better paid since “in a free state the higher ranks of society, as they ( the rich) advance will bring forward the lower ones with them”
Therefore the prosperity of merchants and security of property was in the interest of all because wealth trickled down from those who had it to those who did not. Therefore poverty was a problem that would take care of itself.
At the time Bruce was articulating a widely-held stance and his views were not considered controversial.
Yet what he predicted did not happen. In the century that followed the wealth of the wealthy grew, whilst the disparity between them and the working poor widened.
Children were put to work, employers exploited the weaker position of those who worked for them and the squalor and misery of the working and living conditions of the new industrial working class was appalling.
Bruce may have been an intellectual of some standing but subsequent events served only to demonstrate his naivety. Most employers simply became more exploitative when unfettered, conditions for those who worked for them worsened, and it was the very injustice of that system which animated the 1848 Communist Manifesto authored by Karl Marx and Frederick Engels.
Trickle-down economics in its original guise was not just a failure it was spectacularly counter-productive.
In the 20th Century it still exists, indeed it has been described as the most enduring “zombie idea” in American politics where zombie idea is defined as one which has been unsuccessful yet is still discussed as a policy option.
In the 1980s the term was redefined. David Stockman Ronald Reagan’s former budget director explained: “It's kind of hard to sell 'trickle down,' so the supply-side formula was the only way to get a tax policy that was really 'trickle down.' Supply-side is 'trickle-down' theory.”
And that’s the term the current Conservative government uses for its version of the discredited theory.
The second great myth is that paying workers more is bad for business and, by extension, the economy as a whole.
This is contradicted by the experience of introducing a minimum wage in 1998. The aim of the minimum wage and the higher national living wage is to give employees a fair pay, and more disposable income to pump back into the economy.
Yet when it was introduced the business lobby and their friends in parliament were predicting disaster. It was widely believed that it would lead to job losses and make many businesses uncompetitive.
The evidence suggested otherwise. It points to fairer wages meaning better morale which translates into higher customer satisfaction and productivity and studies abound which back this up. It also encourages employees to stay – and replacing those who leave and then training them up is very expensive. Over time a higher wage bill is offset by higher retention rates.
And a 2015 report to the Low Pay Commission from the National Institute of Economic and Social Research concluded not only that the rate of business collapse did not increase but also found no evidence that “trends in profit margins differed substantially between lower and higher average labour cost businesses.” And remember at that period jobs in low-paying sectors rose at twice the rate of overall job growth.
That’s just one aspect. Low paid workers are generally compelled to spend all that they earn, so increasing their income increases their spend directly benefiting the economy.
Also paying workers less than they need to live on creates a shortfall which has to be made up by welfare payments, effectively meaning that employers are being subsidies by the taxpayer to pay staff less than they need to live on.
And an economy which is reliant on low paid workers will run out of new recruits when unemployment levels falls. That’s exactly what is happening in the UK right now.
In 2012 former Tory minister Andrea Leadsom – once a leadership contender - told the House of Commons: “I envisage there being absolutely no regulation whatsoever - no minimum wage, no maternity or paternity rights, no unfair dismissal rights, no pension rights - for the smallest companies that are trying to get off the ground, in order to give them a chance.”
Yet a glance at the evidence demonstrates that paying workers low wages is not just bad for the low paid, it’s ultimately bad for all of us.
The final myth – that the more we pay chief executives the better they will perform flies in the face of all evidence. Indeed a major US survey of 429 company performance between 2006 and 2015 found that shareholder returns of those companies whose total pay was below their sector median outperformed those companies where pay exceeded the sector median by as much as 39%.
CEO pay did not positively impact long-term stock performance. In fact, average shareholder returns were higher when a company’s CEO was in the bottom 20% than it was for companies whose executives were in the top 20% of earners!
The very highest paid CEOs had the worst performance by a significant margin.
Worse still CEO pay rates are based on the assumption that the only people who achieve success are a handful of individuals at the top of the organisation, rather than seeing performance as a collective endeavour.
Indeed the professional body for HR, the CIPD conducted research into the impact of high levels of pay for top executives. It found that 60 per cent of employees said high levels of executive remuneration had a direct demotivating effect.
It is remarkable in this context to see this myth persist. Currently high pay and low tax for top executives is a policy priority for the UK government. It is almost as if they did not notice the last recession which was caused by a collapse of the banks, which were and continue to be run by very well-paid people.
Given that all three myths are demonstrably false, why do they linger?
The answer is not hard to find. Paying people at the top more, depressing the wages of those below them and believing that this will benefit everyone is an argument that suits the financial interests of many in positions of power and influence to perpetuate.
Unless and until that is rejected it will continue to linger, blighting lives and destroying the hopes of so many.
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