A businessman pauses to check his phone outside the Bank of England. Photograph: Bloomberg
Show Hide image

The Age of Entitlement

The new super-rich have no allegiance, obligation or connection to wider society. They live in a mirror-lined bubble – and a legally entitled one. Can anything beyond another crash change things?

Nobody loved Bowater House in Knightsbridge. The demolition of this late-1950s, modernist mess in 2006 was greeted with general relief. Yet it did have one virtue. Through its core was cut a wide opening for a roadway that gave us all a view of Hyde Park and of a sinewy, thrilling Epstein sculpture of a family group, urged on by the god Pan and racing on to the green sward.

There is no such large opening in One Hyde Park, the building that replaced Bowater House. Instead, Pan has been relegated to the end of a much smaller public road that has been intimidatingly designed to look private. The great people’s invitation into the park has been lost. The public realm has not been abandoned altogether, however. At ground level there are shops, punctuated by some very limited planting. So, if the people care to struggle across the hellish confluence of roads that forms the heart of Knightsbridge, they can peer through the windows to see Abu Dhabi Islamic Bank, Rolex watches or McLaren cars. Things they cannot have.

One Hyde Park was developed by the Candy brothers and the Qataris and was designed by Rogers Stirk Harbour & Partners, the current incarnation of the once-idealistic Richard Rogers practice. The 86 flats start at £20m; a penthouse sold in 2010 for £140m. The building is an aesthetic, planning and social catastrophe. An inaccessible, menacing fortress looming over Knightsbridge, it symbolises the dark wealth of the entitled elite who have claimed the boroughs of Westminster and Kensington and Chelsea as their own. But it is just one big sign of a ruthless landgrab among many little ones.

Staff at the Kensington High Street branch of Carluccio’s – a pleasant, neighbourhood place – dread being sent over to South Ken. That’s banksterland. Mothers disrupt service with their giant baby buggies, the children are rude and even the toddlers snap their fingers at the waiters. Then there are the shops. In Knightsbridge’s “golden triangle” of streets and around Brompton Cross are all the “flagship stores” of the highest of high-end retailers. I used to like going there to watch and marvel at the very rich and to see the beauty that money could buy. Once in a while, feeling a bit flush, I might buy something. Not any longer.

Recently, in an idle moment, I wandered in - to the Ralph Lauren shop at Brompton Cross. I noticed a pair of shoes, quite nice, about £300, I reckoned, allowing for the location and the general flagshipness of the place. The shoes were £750, a price that bore no possible relation to either the cost of manufacture or the quality of the design. These people, I realised, don’t care about only fairly affluent me or my class any more. They’d rather I left, because they can sell all their stuff at any price, in effect, to the bonus boys and girls.

“Almost by definition, these things aren’t for you,” John Lanchester tells me on the phone. He is the author of Capital, the 2012 novel that defined the moral climate that led to the last financial crash. “The whole thing about luxury goods is that they’re an inter - national language. The prices don’t track the middle-class, aspirational market; they’re for the super-rich, who don’t really care what things cost. In fact, they want them to cost more, because the price signifies only that most people can’t afford them.” (Lanchester captured entitlement in the character of Arabella in Capital, a woman so ignorant, vain and greedy, she did not even understand the possibility of being unable to afford something. Now I see and hear Arabellas all around me when lunching in central London.)

Perhaps it was ever thus: the rich have always been different. But that’s not true. Some - thing big, something moral, has changed. Driving through Knightsbridge (occasionally one must) I noticed a huge, absurd, orange and, in London, practically undriveable Lamborghini illegally parked. Once, I would have been amused, but now I feel angry because I know – we all know – it was probably bought with stolen money.

“Shocking” is too soft a word to describe the crimes of the financial sector. They are almost thrilling in their creative abundance – laundering money for drugs cartels; defrauding old people, small businesses, investors and shareholders; rigging markets; sugarcoating dud loans to look like good ones; loading the world economy with ever greater levels of risk and throwing millions of people out of work. And so on. All the time, they were enriching nobody but themselves. The banks and their buddies have been on a crime spree that would have glazed over the eyes of Al Capone.

Yet here they still are, with their undriveable orange cars, their buggies, their dark fort - resses and their rancid sense of entitlement because, in short, they don’t get it. Apparently the bonus boys see “casino banking” as a flattering term rather than the insult intended. Furthermore, the use of vast sums taxpayers’ money to save the banks is seen as no more than their God-given right.

“I live near Wall Street,” the economist Jeffrey Sachs said at an event. “The sense of entitlement is beyond quantification. They could not figure out why anyone might be mad at them for having nearly destroyed the world economy, taken home $30bn a year of bonuses, gotten bailed out to the tune of another trillion dollars and then lobbied for no regulation afterwards . . . I don’t think they were kidding anyone except themselves. I think they don’t get it.”

But we get it and we don’t like the rich any more because they all seem tainted. Lanchester points out that real business people – those who do useful things – are as angry as we are, accusing the bankers of wrecking and discrediting capitalism. (I sympathise. I have always regarded myself as a conservative and still do, but these shenanigans have tainted even that gentle world. Like most true conservatives I know, I regard the failure forcibly to end these abuses as a disgrace and a grave threat to the social peace we crave.)

Certainly people’s attitudes to companies in general has changed. Energy suppliers, telcos, retailers are all treated with a grim, resigned mistrust. To be allowed to participate in the society of entitlement, you have to agree to be ripped off. In spite of this, globally, politicians have decided to ignore the insights and sense of justice of their electorates and shown no desire to restructure a failed and still dangerous system, not even to imprison the most egregious wrongdoers. So the Age of Entitlement endures. What does this mean for society as a whole?

First, it is necessary to understand the origins of this psychology of entitlement. Economically, it can be said to be neoliberalism, the cult of free markets and deregulation that swept the world from the 1970s onwards. In neoliberal thought, expressed most trenchantly by Milton Friedman, the job of a company was to obey the law and reward its shareholders; it was not obliged to take on the wider ethical and moral concerns of society. In the 1980s, this became “greed is good”, certainly not what Friedman meant. I witnessed the cult’s apotheosis at the World Economic Forum in Davos in the early 1990s – I sat in on a meeting at which sharky young businessmen more or less said they would trample on their grandmothers for the sake of the bottom line. Viciousness had been validated. That is the enduring view in the financial sector.

“There is no incentive in the financial world,” a very prominent insider told me, “to be moral.” The point is that society rewards company directors with the enormous blessing of limited liability and, in return, should expect them to behave not just technically within the law but responsibly as persons. Failing – or refusing – to understand this underpins the sense of entitlement. Because much of what they did was not tech - nically illegal, the bankers feel that they did nothing wrong. Yet, in our own lives, we know perfectly well that some of the worst things we can do are not illegal. The financiers’ defence is made even more hopeless by the banks having been anything but good neoliberal institutions. Far from believing in free markets, they acted like a cartel and did everything in their power to rig the markets in which they operated.

Coupled with this was a generational change, identified by Jean Twenge and W Keith Campbell in their book The Narcissism Epidemic: Living in the Age of Entitlement. From the late 1970s onwards, they detected a rise in narcissism among the young. Unlike the generation of the 1960s and early 1970s, these young people did not identify their goals as social or political but solely as personal. “There was a big shift in the 1980s away from the 1960s and 1970s,” Twenge told me, “. . . making a lot of money was no longer suspect. In the 1960s and 1970s it was not cool, but that flipped around.”

So, in the 1990s, a socially and politically quietist, narcissistic and self-seeking generation was well prepared to take advantage of the progressive deregulation of the financial system, primarily orchestrated by the then chairman of the Federal Reserve, Alan Greenspan, a card-carrying believer in the doctrines of the hyper-libertarian fruitcake Ayn Rand. After 1997, the British Labour Party drank disgracefully deeply of this toxic, superstitious cocktail. Peter Mandelson declared that he was “intensely relaxed” about people getting “filthy” rich. In the midst of what turned out to be one of the most lethal (and preventable) bubbles in financial history, this was one complacency too far.

Both psychologically and theoretically, therefore, the Age of Entitlement was firmly established by the mid-1990s; indeed, so firmly established was it that it was imper - vious even to the overwhelming evidence of its fragile foundations. The collapse of the hedge fund Long-Term Capital Management in 1998 nearly brought the US economy to its knees – even though it had Myron Scholes and Robert Merton, creators of the critical equations on which financial neoliberalism was based, on its board. The neolibs sailed on regardless.

And still they sail on. Throughout the crisis, the beneficiaries of the criminality and rigged markets into which neoliberalism had descended continued to enrich themselves. In 2012 the 100 richest people across the world grew $241bn richer, taking their total net wealth to $1.9trn. The poor and the middle classes, naturally, got poorer. Levels of inequality of a kind that threaten the social fabric – especially in the US and the UK – are one of the most alarming legacies of the Age of Entitlement. The crisis is not over; in fact, it may hardly have begun.

Part of the problem is the way the wealthy entitled have managed to make their world so easily selfsustaining. They are certainly good at outsmarting our elected leaders. “George Osborne and his friends go down to the City with some idea,” one hugely rich but very politically aware financier told me, “and the bankers blind them with science – saying, ‘Well, you could try that, but we wouldn’t be responsible for the consequences’ – so, nothing happens.”

The new entitled live in a mirror-lined bubble. Also a legally protected one. I was told of a hedge-fund boss so vile that investors withdrew their money but did not sue, because other hedge funds would then refuse to do business with them. On top of that, they are protected in Britain by libel laws and a tax system that, as John Lanchester points out, not only shields our own entitled from scrutiny but also encourages equally entitled foreigners to come here.

“You might as well say, ‘Bond villains, come and live here,’ ” he says. “Our libel laws don’t help. There are a lot of zillionaires about whom we are going to read the truth uncensored only when they are dead. It’s an astonishing situation, when we have such a proliferation of incredibly rich criminals.”

If that is the tragedy, the comedy is almost as alarming. Even the Financial Times last month was stunned to discover that bankers have been invited into schools to teach our children about money. The Royal Bank of Scotland, our most thoroughly disgraced financial institution, was, of course, represented. I can think of many people I could ask for advice about money. None of them is a banker.

Or there is the way the incontinent vanity of the newly entitled spills over into insults directed at their closest political allies. Towards the end of last year, Kevin Maguire reported in the New Statesman that members of the Bullingdon – the clownish club for the cream of Oxford society (the rich and thick) of which Cameron, Osborne and Boris Johnson were once members – had taken to burning £50 notes in front of beggars.

Most comical, but also most sad, are the attempts by the entitled to fit in with and compromise with the ordinary lives of others. In a remarkable piece for the Sunday Times Style magazine published in December, Kate Spicer interviewed members of the entitled generation that will reap the rewards of the wave of criminality that engulfed our financial system.

Goldman Sachs, Spicer reported, runs a course for partners on “how not to f*** up your kids” which encourages them to take the bewildered brats to the supermarket occasionally. (A friend of mine whom Goldman Sachs attempted to recruit in the 1990s was struck by the way, late at night, there were cars waiting to take the employees home, so that they need never see any street life.)

Unfortunately, the lesson “be nice, be normal” often fails to sink it. Spicer wrote of how Nell, the twentysomething daughter of the strikingly unpleasant former boss of Barclays Bob Diamond, defended her dad on Twitter by suggesting that Osborne and Ed Miliband should “go ahead and #hmd” – “hold my dick”.

Spicer also quoted Alexa, aged 17, who thought it “quite funny – people have no understanding, interest or involvement in something and then suddenly get all het up about it. I went on a drama course. I was one of very few private-school kids. This guy said, ‘Your dad f***** up the country,’ but he had a complete lack of understanding of the situation.”

Sorry, Alexa, but that guy was spot on.

The kids are worried about discrimination. Bankers’ brats now account for between 30 and 50 per cent of the intake of private schools, but they run into trouble when they have to talk to egalitarian-minded university interviewers and tell them that Mummy and Daddy paid for their gap-year adventures.

What is striking, reading Spicer’s interviews and copious other evidence, is that the narcissism Jean Twenge identified as having blossomed in the 1980s is still rampant. The children of the bankers do think they are better than the rest of us and that making money is what matters most.

“You commonly hear from companies now,” Twenge says, “that this generation really have new social goals, helping people and so on. Unfortunately, that is not backed up by the evidence from what the young people actually say. There is no resurgence in the idea that we really want companies to be responsible.”

One final feature of the Age of Entitlement must be mentioned. It is the viciously reductionist mindset behind what now happens in finance. In part, this derives from machines. Computers are like alcohol to Homer Simpson: the cause of and solution to all of life’s problems. Computers made the bubble possible and the 2007 crash (and the next one) inevitable. They created high-speed, mechanised trading and enabled the application of mathematics to the markets – bad maths, as it happened, given that the primary equations were derived from physics that dees not apply to human affairs.

But more important is the reductionism that was implicit in neoliberalism as it became in the hands of the entitled. Money, in this view, is the measure of all things. An angry and very serious financial player told me how he had spent 20 years helping build a company; then the private-equity people moved in and told him he wouldn’t get a penny because he had put no money in. “They were saying all you need to make money is money – you can forget about the decades of work that went in before they even joined the party. They were arrogant beyond belief.”

This reductionism is perhaps the most dangerous assumption of the Age of Entitlement. Money, as Bob Dylan sagely observed, doesn’t talk, it swears, and for this swearing to be effective it must be embodied in an ethical, moral, political and social realm that cannot, in and of itself, be reduced to money. That realm is being eroded rapidly, not only by the entitled, but also by the craven worship of cash that now suffuses the culture. It is this that is successfully disseminating the depraved idea that merely to be rich is to be entitled. To sample the idea, go to the Rich Kids of Instagram tumblr, a website of images of the young wealthy swigging from magnums of champagne and posing next to private jets. The site’s tagline is, “They have more money than you and this is what they do.”

Taxation cannot change this, as the French are learning. The next crash might and several hundred – or several thousand – bankers in prison would help, as would the demolition of One Hyde Park to give us all a view of the green sward. What would definitely change the climate of entitlement would be a dismantling of its psychological basis, the mindset that has created a super-rich class with no allegiance, obligation or connection to wider society. The ears of the entitled need to be unstopped so that we can whisper to them, ever so gently, “If you’re rich be grateful and, here’s another great idea, earn it.”

This article first appeared in the 04 February 2013 issue of the New Statesman, The Intervention Trap

MILES COLE
Show Hide image

The new Brexit economics

George Osborne’s austerity plan – now abandoned by the Tories – was the most costly macroeconomic policy mistake since the 1930s.

George Osborne is no longer chancellor, sacked by the post-Brexit Prime Minister, Theresa May. Philip Hammond, the new Chancellor, has yet to announce detailed plans but he has indicated that the real economy rather than the deficit is his priority. The senior Conservatives Sajid Javid and Stephen Crabb have advocated substantial increases in public-sector infrastructure investment, noting how cheap it is for the government to borrow. The argument that Osborne and the Conservatives had been making since 2010 – that the priority for macroeconomic policy had to be to reduce the government’s budget deficit – seems to have been brushed aside.

Is there a good economic reason why Brexit in particular should require abandoning austerity economics? I would argue that the Tory obsession with the budget deficit has had very little to do with economics for the past four or five years. Instead, it has been a political ruse with two intentions: to help win elections and to reduce the size of the state. That Britain’s macroeconomic policy was dictated by politics rather than economics was a precursor for the Brexit vote. However, austerity had already begun to reach its political sell-by date, and Brexit marks its end.

To understand why austerity today is opposed by nearly all economists, and to grasp the partial nature of any Conservative rethink, it is important to know why it began and how it evolved. By 2010 the biggest recession since the Second World War had led to rapid increases in government budget deficits around the world. It is inevitable that deficits (the difference between government spending and tax receipts) increase in a recession, because taxes fall as incomes fall, but government spending rises further because benefit payments increase with rising unemployment. We experienced record deficits in 2010 simply because the recession was unusually severe.

In 2009 governments had raised spending and cut taxes in an effort to moderate the recession. This was done because the macroeconomic stabilisation tool of choice, nominal short-term interest rates, had become impotent once these rates hit their lower bound near zero. Keynes described the same situation in the 1930s as a liquidity trap, but most economists today use a more straightforward description: the problem of the zero lower bound (ZLB). Cutting rates below this lower bound might not stimulate demand because people could avoid them by holding cash. The textbook response to the problem is to use fiscal policy to stimulate the economy, which involves raising spending and cutting taxes. Most studies suggest that the recession would have been even worse without this expansionary fiscal policy in 2009.

Fiscal stimulus changed to fiscal contraction, more popularly known as austerity, in most of the major economies in 2010, but the reasons for this change varied from country to country. George Osborne used three different arguments to justify substantial spending cuts and tax increases before and after the coalition government was formed. The first was that unconventional monetary policy (quantitative easing, or QE) could replace the role of lower interest rates in stimulating the economy. As QE was completely untested, this was wishful thinking: the Bank of England was bound to act cautiously, because it had no idea what impact QE would have. The second was that a fiscal policy contraction would in fact expand the economy because it would inspire consumer and business confidence. This idea, disputed by most economists at the time, has now lost all credibility.

***

The third reason for trying to cut the deficit was that the financial markets would not buy government debt without it. At first, this rationale seemed to be confirmed by events as the eurozone crisis developed, and so it became the main justification for the policy. However, by 2012 it was becoming clear to many economists that the debt crisis in Ireland, Portugal and Spain was peculiar to the eurozone, and in particular to the failure of the European Central Bank (ECB) to act as a lender of last resort, buying government debt when the market failed to.

In September 2012 the ECB changed its policy and the eurozone crisis beyond Greece came to an end. This was the main reason why renewed problems in Greece last year did not lead to any contagion in the markets. Yet it is not something that the ECB will admit, because it places responsibility for the crisis at its door.

By 2012 two other things had also become clear to economists. First, governments outside the eurozone were having no problems selling their debt, as interest rates on this reached record lows. There was an obvious reason why this should be so: with central banks buying large quantities of government debt as a result of QE, there was absolutely no chance that governments would default. Nor have I ever seen any evidence that there was any likelihood of a UK debt funding crisis in 2010, beyond the irrelevant warnings of those “close to the markets”. Second, the austerity policy had done considerable harm. In macroeconomic terms the recovery from recession had been derailed. With the help of analysis from the Office for Budget Responsibility, I calculated that the GDP lost as a result of austerity implied an average cost for each UK household of at least £4,000.

Following these events, the number of academic economists who supported austerity became very small (they had always been a minority). How much of the UK deficit was cyclical or structural was irrelevant: at the ZLB, fiscal policy should stimulate, and the deficit should be dealt with once the recession was over.

Yet you would not know this from the public debate. Osborne continued to insist that deficit reduction be a priority, and his belief seemed to have become hard-wired into nearly all media discussion. So perverse was this for standard macroeconomics that I christened it “mediamacro”: the reduction of macroeconomics to the logic of household finance. Even parts of the Labour Party seemed to be succumbing to a mediamacro view, until the fiscal credibility rule introduced in March by the shadow chancellor, John McDonnell. (This included an explicit knockout from the deficit target if interest rates hit the ZLB, allowing fiscal policy to focus on recovering from recession.)

It is obvious why a focus on the deficit was politically attractive for Osborne. After 2010 the coalition government adopted the mantra that the deficit had been caused by the previous Labour government’s profligacy, even though it was almost entirely a consequence of the recession. The Tories were “clearing up the mess Labour left”, and so austerity could be blamed on their predecessors. Labour foolishly decided not to challenge this myth, and so it became what could be termed a “politicised truth”. It allowed the media to say that Osborne was more competent at running the economy than his predecessors. Much of the public, hearing only mediamacro, agreed.

An obsession with cutting the deficit was attractive to the Tories, as it helped them to appear competent. It also enabled them to achieve their ideological goal of shrinking the state. I have described this elsewhere as “deficit deceit”: using manufactured fear about the deficit to achieve otherwise unpopular reductions in public spending.

The UK recovery from the 2008/2009 recession was the weakest on record. Although employment showed strong growth from 2013, this may have owed much to an unprecedented decline in real wages and stagnant productivity growth. By the main metrics by which economists judge the success of an economy, the period of the coalition government looked very poor. Many economists tried to point this out during the 2015 election but they were largely ignored. When a survey of macroeconomists showed that most thought austerity had been harmful, the broadcast media found letters from business leaders supporting the Conservative position more newsworthy.

***

In my view, mediamacro and its focus on the deficit played an important role in winning the Conservatives the 2015 general election. I believe Osborne thought so, too, and so he ­decided to try to repeat his success. Although the level of government debt was close to being stabilised, he decided to embark on a further period of fiscal consolidation so that he could achieve a budget surplus.

Osborne’s austerity plans after 2015 were different from what happened in 2010 for a number of reasons. First, while 2010 austerity also occurred in the US and the eurozone, 2015 austerity was largely a UK affair. Second, by 2015 the Bank of England had decided that interest rates could go lower than their current level if need be. We are therefore no longer at the ZLB and, in theory, the impact of fiscal consolidation on demand could be offset by reducing interest rates, as long as no adverse shocks hit the economy. The argument against fiscal consolidation was rather that it increased the vulnerability of the economy if a negative shock occurred. As we have seen, Brexit is just this kind of shock.

In this respect, abandoning Osborne’s surplus target makes sense. However, there were many other strong arguments against going for surplus. The strongest of these was the case for additional public-sector investment at a time when interest rates were extremely low. Osborne loved appearing in the media wearing a hard hat and talked the talk on investment, but in reality his fiscal plans involved a steadily decreasing share of public investment in GDP. Labour’s fiscal rules, like those of the coalition government, have targeted the deficit excluding public investment, precisely so that investment could increase when the circumstances were right. In 2015 the circumstances were as right as they can be. The Organisation for Economic Co-operation and Development, the International Monetary Fund and pretty well every economist agreed.

Brexit only reinforces this argument. Yet Brexit will also almost certainly worsen the deficit. This is why the recent acceptance by the Tories that public-sector investment should rise is significant. They may have ­decided that they have got all they could hope to achieve from deficit deceit, and that now is the time to focus on the real needs of the economy, given the short- and medium-term drag on growth caused by Brexit.

It is also worth noting that although the Conservatives have, in effect, disowned Osborne’s 2015 austerity, they still insist their 2010 policy was correct. This partial change of heart is little comfort to those of us who have been arguing against austerity for the past six years. In 2015 the Conservatives persuaded voters that electing Ed Miliband as prime minister and Ed Balls as chancellor was taking a big risk with the economy. What it would have meant, in fact, is that we would already be getting the public investment the Conservatives are now calling for, and we would have avoided both the uncertainty before the EU referendum and Brexit itself.

Many economists before the 2015 election said the same thing, but they made no impact on mediamacro. The number of economists who supported Osborne’s new fiscal charter was vanishingly small but it seemed to matter not one bit. This suggests that if a leading political party wants to ignore mainstream economics and academic economists in favour of simplistic ideas, it can get away with doing so.

As I wrote in March, the failure of debate made me very concerned about the outcome of the EU referendum. Economists were as united as they ever are that Brexit would involve significant economic costs, and the scale of these costs is probably greater than the average loss due to austerity, simply because they are repeated year after year. Yet our warnings were easily deflected with the slogan “Project Fear”, borrowed from the SNP’s nickname for the No campaign in the 2014 Scottish referendum.

It remains unclear whether economists’ warnings were ignored because they were never heard fully or because they were not trusted, but in either case economics as a profession needs to think seriously about what it can do to make itself more relevant. We do not want economics in the UK to change from being called the dismal science to becoming the “I told you so” science.

Some things will not change following the Brexit vote. Mediamacro will go on obsessing about the deficit, and the Conservatives will go on wanting to cut many parts of government expenditure so that they can cut taxes. But the signs are that deficit deceit, creating an imperative that budget deficits must be cut as a pretext for reducing the size of the state, has come to an end in the UK. It will go down in history as probably the most costly macroeconomic policy mistake since the 1930s, causing a great deal of misery to many people’s lives.

Simon Wren-Lewis is a professor of economic policy at the Blavatnik School of Government, University of Oxford. He blogs at: mainlymacro.blogspot.com

 Simon Wren-Lewis is is Professor of Economic Policy in the Blavatnik School of Government at Oxford University, and a fellow of Merton College. He blogs at mainlymacro.

This article first appeared in the 21 July 2016 issue of the New Statesman, The English Revolt