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Updated: August 5, 2010 00:43 IST

What the £35,000 cocktail taught us

Aditya Chakrabortty
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A homeless man walks past a furniture store that is going out of business in Los Angeles in June, 2009.
Photo: AFP A homeless man walks past a furniture store that is going out of business in Los Angeles in June, 2009.

In the winter of 2007, the British celebrated what would be their last boomtime Christmas for quite a few years to come. High streets swarmed with shoppers who didn't yet have to worry about losing their jobs. Bankers received their final bonuses before the banking system fell in. And I discovered that a London nightclub had begun selling the most expensive cocktail in the world, at £35,000 a glass. That would buy you a shot of cognac, half a bottle of Cristal, a diamond ring and two security guards, presumably to offer protection from the other punters.

Writing this up at the time, I rang an MP who decently worked himself into a quotable outrage (“You might as well set fire to your money in front of those less well-off”); and a social commentator for the requisite sneering (“the buyers are barely literate, one step up from a potato”). A few months later Lehman Brothers collapsed and we all had bigger things to worry about.

Still, that cocktail, which cost more than three-quarters of the workforce earns in a year, remains a potent sign of how unequal boomtime Britain had become. And when people pinpoint just why the widening gap between the rich and the poor is wrong, they usually fall back on the sort of criticisms made by that politician and pundit — that it wastes resources or is immoral. Or they might quote from The Spirit Level, last year's brilliant study by public health specialists Richard Wilkinson and Kate Pickett, which demonstrated how social evils — from crime to suicides — get worse when the well-off leave the rest of the pack too far behind. The pair has come under fire from the Right in the last few weeks, but their argument has held up well.

No, the big problem with these points is that the Right-winger's riposte to them is simple: So what? Liberal bedwetters might not like inequality, he or she can say, but that is the price you pay for a thriving economy. America may be the most unfair of all the big economies — but it is also the richest.

Except that a big gap between the haves and the have-mores does not necessarily denote capitalist success at all; indeed, it can just as well indicate imminent economic failure. That is the argument convincingly made by Raghuram Rajan in his new account of this crisis, Fault Lines. Mr. Rajan is not interested in the eye-catching but ultimately trivial problems such as bankers' bonuses. Instead, he analyses the major problems in the world economy — the ones which could cause another massive meltdown.

When it comes to crises, this former IMF chief economist knows what he is talking about. Nowadays, analysts who claim they spotted this bust coming far outnumber musicians who swear blind they saw the Sex Pistols play Manchester's Free Trade Hall in 1976. But Mr. Rajan really did, bravely telling America's bubble-blower-in-chief Alan Greenspan just that at a 2005 conference.

Forced to borrow

So when Mr. Rajan names as the first of his fractures the gap between America's rich and the rest, it's worth paying attention. The reasoning is simple: since middle-American families saw barely any increase in their wages over the last decade, they were forced to borrow dangerous amounts to buy houses, to keep up living standards — or simply to keep from falling behind.

As he points out, Presidents Bill Clinton and George Bush allowed this lethal explosion in credit as it was “the path of least resistance”. Clamping down on all those dodgy home and car loans and credit cards would have been tantamount to sticking two fingers up at their own voters.

How bad was America's wealth gap? By Mr. Rajan's calculations, from every dollar of growth in income between 1976 and 2007, 58 cents went to the top one per cent of households. The other 99 per cent of American families had to scrap over the 42 cents of loose change. The result was a country as unequal as it had been just before the Wall Street crash of 1929 — and with much the same results.

Lessons from history

That an economy so lopsided would eventually topple over should have been obvious to anyone who knew a bit about history. After all, as John Kenneth Galbraith pointed out in his classic analysis of the Great Crash: “The rich cannot buy great quantities of bread. If they are to dispose of what they receive, it must be on luxuries or by way of investments ...” In modern times, that meant funnelling money into the housing market, or funds run by fraudster Bernie Madoff. Or £35,000 cocktails. Because, as America's mini-me economy, Britain's wealth gap was almost as bad. As British analyst Stewart Lansley points out, most workers in the U.K. have seen a huge squeeze on their wages, even while they have continued to be highly productive.

But that did not apply to the top 10 per cent; a banker or a corporate executive would have seen his or her earnings rise 100 per cent over the last three decades, even while those at the bottom would have been only 27 per cent better off. The results we all know: mortgages as big as the Himalayas and a world-class bout of borrowing.

Modern, unbuttoned Conservatives say that they are just as concerned about inequality as any lefty. Perhaps. But, the message from Mr. Rajan and a growing number of other economists is that this is not just a kind of luxury angst one affects to appease voters. No, sorting out the wealth gap is essential if we are not to repeat the financial crisis. — © Guardian Newspapers Limited, 2010

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