I am now back on Terra Firma and have been greeted with beautiful Spring weather. Among the headlines I read when I returned to my office today were those predicting that the Greek economy will have shrunk by 25 per cent by 2013 and the Troika are demanding more cuts. What I learned from being in the lands of austerity over the last few weeks is that there is no coherent plan to salvage economic growth. Rather, the same economic policies that caused the crisis remain dominant. In saying that, I discount the trends in monetary policy including quantitative easing, which are crisis-specific, because they really don’t make much difference. What is apparent is that one of the pillars of social stability is now under threat. I refer to the deteriorating position of the middle class in the advanced nations. The latest data from the US supports the view that the inequality in income distributions continues to worsen. There is a hollowing out of the middle class continuing at a pace. This rising inequality demonstrates we haven’t learned much and are continuing to repeat the errors in policy that created the crisis and is preventing nations from leaving it behind.
By now the world is aware of how appalling the US Republican candidate after the Mother Jones magazine managed to get hold of a video of a talk Romney gave to some very wealthy Americans in May 2012.
The candidate categorically lied during that speech when he said that Obama supporters “are people who pay no income tax. 47% of Americans pay no income taxes.”
A study by the Tax Policy Center published July 27, 2011 – Why Some Tax Units Pay No Income Tax – puts to rest those claims.
But what I found interesting with this leaked speech was his strategic claim that while 47 per cent of Americans were spongers on government there was some middle ground that was contestable. He said “What I have to do is convince the 5% to 10% in the center that are independents, that are thoughtful, that look at voting one way or the other depending upon in some cases emotion.”
The swinging voter phenomenon is not confined to the US. The Tories are in power in the UK because of this cohort and the syndrome is well-known in Australia.
But what is now emerging from the data on income and wealth distributions is that the middle class have been hollowed out during the neo-liberal years and this trend accelerated during the crisis and in its aftermath.
Last November, the High Pay Commission in the UK published its final report – Cheques with Balances: Why tackling high pay is in the national interest – which found that:
As Britain enters times of unparalleled austerity, one tiny section of society has been insulated from the downturn. That is the top 0.1% of earners, with company directors in particular continuing to enjoy a huge annual uplift in rewards.
The Report found that:
– In 1979 the top 0.1% took home 1.3% of the national income; by 2007 this had grown to 6.5%.
– In 1979 the top 1% took home 5.93% of the national income; by 2007 this had grown to 14.5%.
– In 1979 the top 10% took home 28.4% of the national income; by 2007 this had grown to 40%.
This “dramatic shift in income distribution” has been part of the wider story where the real wage prospects of workers have been undermined by labour market deregulation, persistently high unemployment, rising underemployment (due to the casualisation of many positions) and a host of anti-union regulations.
Real wages growth in many nations has clearly lagged behind productivity growth with more of the national income being distributed to capital.
From a macroeconomic perspective this meant that real wages growth was insufficient to drive consumption growth and to prevent a realisation crisis, a new source of consumption funding had to be found.
The rise of the financial sector and the concomitant financial engineering, courtesy of the deregulation and lax financial supervision and oversight, spawned the massive credit binge which exploded as the financial crisis emerged.
The High Pay Commission found that:
Previously unpublished figures show that pay at the top has spiralled alarmingly to stratospheric levels in some of our biggest companies. In BP, in 2011 the lead executive earned 63 times the amount of the average employee. In 1979 the multiple was 16.5. In Barclays, top pay is now 75 times that of the average worker. In 1979 it was 14.5. Over that period, the lead executive’s pay in Barclays has risen by 4,899.4% – from £87,323 to a staggering £4,365,636.
The excessive pay at the top of the income distribution identified by the High Pay Commission in the UK was made possible by the massive redistribution of national income that was deliberately engineered by governments pursuing neo-liberal deregulation. The same trends are seen in many advanced nations.
The current policy debate has not considered these trends. But it is clear that rising inequality undermines the capacity of nations to grow in sustainable ways.
Even the IMF (April 8, 2011) – Inequality and Unsustainable Growth: Two Sides of the Same Coin? – concluded that:
… longer growth spells are robustly associated with more equality in the income distribution.
A prerequisite for resolving the unsustainable imbalances that led to the financial crisis will be to dramatically redistribute income back to workers – so that real wages growth closely tracks productivity growth and workers in sectors with little union representation are able to similarly participate in national productivity gains.
The other point about the rising inequality under the neo-liberal policy is not only attacking the poorest members of society but has seemingly been eroding the middle class – the cohort, which arguably has been instrumental in maintaining social stability via its willingness to trade consumption-rewards for political docility.
Around this time last year, the Atlantic Magazine (September 20, 2011) published the following article – The Global Hollowing Out of the Middle Class (No, It’s Not Just the U.S.) – which summarised the September 2011 release of the IMF World Economic Outlook.
The article noted that:
Some consider the erosion of the middle class an American phenomenon driven by greedy capitalists at the top or an especially impotent education system at the bottom. This thing is global … In the 14 years before the Great Recession, there was already a great recession for the the middle-paying swath of workers in the U.S., Europe, and Japan. Advanced economies saw “a shift away from middle-income jobs” to jobs in industries with lower productivity …
The issue of income inequality was also taken up in this article in the New Statesman (September 14, 2012) – Explaining rising income inequality – which noted that:
The ongoing crisis of the major Western capitalist economies has citizens on both sides of the Atlantic asking why the incomes of the business elite keeps rising even as companies cut jobs, banks foreclose homes, and the threat of penury faces many families who thought they were solidly middle class.
This is one of the puzzles of the crisis. The crisis was caused by managers in financial institutions acting in corrupt and incompetent ways after being given too much leash by governments, who were seduced by the ideology that self-regulating markets optimise wealth. The crisis should have disabused us all of that lie.
But then how can the same cohort of managers continue to reap ridiculous rewards at the expense of other workers? The New Statesman says “these overpaid corporate executives are getting these huge bonanzas for not doing their jobs.”
That has been the ultimate con. Students get taught a lot in business schools about risk and return. High executive salaries are meant to reward those who can deliver high returns to companies but risk losing their jobs in the case of poor performance.
The problem is, as the New Statesman points out, is that it is not just the shareholders and the managers that take all the risk. Workers bear the risk of enterprise as much as anyone given that they lose their jobs if the company performs badly.
Further, the New Statesman argues that “the growing concentration of income at the top in the United Kingdom is both unfair to workers and taxpayers, and damaging to the growth and competitiveness of the economy”.
Has the crisis changed anything? Answer: the inequality is getting worse.
Analysis by the Pew Research Center – (August 22, 2012) – The Lost Decade of the Middle Class – shows that in 2011 dollar terms, the “middle-tier” median household income in 2000 was $US72,956. This had fallen to $US69,487 by 2010. This is a measure of the “middle class” annual median income.
The Report concludes that “America’s middle class … has endured a lost decade for economic well-being. Since 2000, the middle class has shrunk in size, fallen backward in income and wealth, and shed some—but by no means all—of its characteristic faith in the future”. Presumably, some of these are Romney’s swinging voters.
On Wednesday, September 12, 2012, the US Census Bureau published its Income, Poverty, and Health Insurance Coverage in the United States: 2011 – which shows that in the aftermath of the crisis, the fortunes of the American middle class continue to deteriorate.
The US Census Bureau data showed that:
Real median household income in the United States in 2011 was $50,054, a 1.5 percent decline from the 2010 median and the second consecutive annual drop … [and] … In 2011, real median household income was 8.1 percent lower than in 2007, the year before the most recent recession, and was 8.9 percent lower than the median household income peak that occurred in 1999.
The US Census Bureau also found that “Based on the Gini index, income inequality increased by 1.6 percent between 2010 and 2011”.
The following graph is taken from the latest US Census Bureau data and shows the quintile shares of families in total income (and the top 5 percent) in 1980 and 2010.
This is roughly the neo-liberal years and it is clear that there has been a squeeze on the bottom 4 quintiles in terms of shares in income.
No doubt this data will provide some very rich narratives as it is analysed in more detail. The obvious message is that the same forces that have led to increased inequality in income and wealth distributions also led to the crisis.
The same policies that governments are now pushing are also undermining the recovery and causing the income inequality to worsen.
Until the citizens rebel against that trend, there will be no sustainable growth path defined.
Relatively short blog today – tired from travel and a million other things to do.
That is enough for today!
(c) Copyright 2012 Bill Mitchell. All Rights Reserved.