July 24, 2021

How to create poverty

poverty and rising income gap
Poverty and the income gap are rising

Poverty is increasing in the UK and in other developed countries. How is this possible while the economy is growing, while the generated wealth is growing, and while employment levels are very high? The short answer is that the richer get richer and the poorer get poorer, the wealth and income gaps keep increasing, the cost of living increases faster than income of the poorest, and the middle class is shrinking.

But this answer is not satisfactory. It ignores the underlying mechanisms of how poverty is created.

How to create poverty: extracting money from the economy

The British economy was the fastest growing developed economy until recently, and shows the highest levels of employment for more than 40 years.

Nonetheless, many citizens live from hand to mouth. Their disposable income is barely sufficient to make ends meet and they are not able to save anything. The positive effect of spending all, if one may say so, is that this money is reinjected directly and without delay into the economy to pay for goods and services, and to keep others in work.

Others are able to save part of their income. Savings, when reinvested, complete the circulation of money and contribute to economic growth.

When extracting money, however, from the economy, through tax avoidance or tax evasion towards offshore accounts, the money is not only taken from the economy, the country and its citizens causing immediate prejudice but the prejudice is increasing and accumulating year after year. This money will only return to the economy when the return on investment is significant and recurrent. Citizens will bear this cost immediately as well as in the future through increased cost of living.

How to create poverty: privatisation

There is a general trend to privatise public utilities. The primary objective is to improve efficiency and reduce cost. Public utilities that have been fully or partially privatised or are under consideration for privatisation include water, railways, energy companies, health service, and roads.

Private investors however expect to achieve a substantial return of investment, in the order of 6% to 20% every year. It is not a given that a privately owned business can derive efficiency gains to such an extent. Often cost reductions are achieved by reducing employment standards and pay.

Privatisations are no sure-fire success as this compares with governments who can raise money in the financial markets most cheaply to re-lend to state-owned enterprises.

When a privatised service is more expensive or of a lower quality, the consumer and citizen has to bear the consequences of higher cost, year after year. This feels like a tax or an interest payment, and increases the cost of living.

How to create poverty: stifle competition

The biggest downside of privatising public utilities is that they often result in no or limited competition. This makes a mockery of the most crucial aspect of capitalism namely the competitive market. Reduced competition means low efficiency and high margins.

Public utilities like railways, water companies, energy companies, and the health service are often natural monopolies. The infrastructure required to produce and deliver a product such as electricity or water is very expensive to build and maintain.

In reality, privatising utilities often results in a single or few players, i.e. in a monopoly or oligopoly.

The consequences are reduced investment and product development, and inflated prices. The oligopoly maximises profits and maintains abnormal profits for a long time, and often increases prices above inflation. This means for the consumer an ever increasing cost of living.