Davos 2014: There's only one way to close the wealth gap

As the financial crisis recedes, it leaves in its wake a terrible legacy of entrenched unemployment and squeezed median incomes. The rich are getting richer, and the rest are getting poorer.

I’m in Davos this week, where more than 2,500 chief executives, government ministers and NGOs are assembled for the annual meeting of the World Economic Forum. After years of permafreeze, a thaw seems finally to have taken hold. Among business leaders, there is an unmistakable air of optimism. The gloom is lifting, particularly in America and in Britain, where this week’s strong jobs data provide further evidence of a fast-recovering economy.

Even so, nobody is kidding themselves. Growth is back, but remains heavily dependent on artificial stimulus, and there is still a key missing ingredient – business investment. Chief executives are holding back, and with good reason. Few are yet convinced about the sustainability of today’s recovery.

For more than 20 years now, Western economies have had the following wind of steadily falling interest rates to help drive them forward, support consumption and underpin asset prices. But these winds have created unprecedented financial instability and today, rates can be manipulated no lower. We’ve run out of road.

There is no big new idea, innovation or development, as there has been in the past, to galvanise Western business into a fresh wave of job- and income-boosting investment. In the Nineties, it was the fall of the Berlin Wall, and the end of the Cold War. Later, it was turbocharged globalisation, the internet and the wider tech revolution. Yet today, these things seem only to be part of the problem, steadily eroding jobs and incomes, and further entrenching perceived bastions of privilege and entitlement.

Many of the old assumptions seem to have been turned on their heads. That growth leads automatically to rising incomes and employment can no longer be taken for granted.

Widening income inequalities may also be contributing to the problem of deficient domestic demand, since high earners tend disproportionately to save, or otherwise plough their money into assets, rather than consume.

By putting a rocket under asset prices, unconventional monetary policy has made the wealth divide worse still, denying growing numbers access to the housing market and confounding many of the other expectations of older generations.

The bottom line is that market economies are failing to deliver in the way that is demanded of them. Even now, with the financial crisis apparently behind us, there is little sign of a turnaround. Here in Davos, the issue has taken centre stage. Some will find this laughable, given the constituency. Cynicism is more than justified. Yet it is self-interest, as much as moral indignation, that drives the renewed search for solutions. Elites rule only by consent, and to win it, they need to deliver.

There are two ways this can go. Either Western economies can do the sort of thing Mr Miliband proposes, and turn the clock back 40 years to the failed solutions of the past – price and wage regulation in tandem with ever more intrusive forms of government intervention. We can, like Europe, turn our backs on globalisation, we can tie finance up in knots, and with stagnant incomes eating into government revenues, we can attempt to tax wealth, capital, property and profits a whole lot more.

But this is not the way the rest of the world is heading. Any economy that chooses such a path condemns itself to decline and eventual irrelevance. The alternative is to embrace the future, give low-earning households the life chances they deserve by investing properly in education and training, and to deregulate in a manner that gives bottom-up innovation and individualism a chance, quashes vested interests, and provides the private sector with the incentives it needs to do the job. Defining choices lie ahead.

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