Inequality: there’s no stopping it!

In the New York Review of Books this week, Paul Krugman wrote a piece on why austerity was taken up and why it has failed.  In passing he commented “It’s also worth noting that while economic policy since the financial crisis looks like a dismal failure by most measures, it hasn’t been so bad for the wealthy. Profits have recovered strongly even as unprecedented long-term unemployment persists; stock indices on both sides of the Atlantic have rebounded to pre-crisis highs even as median income languishes. It might be too much to say that those in the top 1 percent actually benefit from a continuing depression, but they certainly aren’t feeling much pain.”  (http://www.nybooks.com/articles/archives/2013/jun/06/how-case-austerity-has-crumbled/)

Indeed that is the case. In its latest update on inequality of income in the 33 mature capitalist economies, the OECD revealed that inequality has continued to rise since the Great Recession troughed.  Income inequality in the OECD countries – excluding the mitigating effect of the welfare state – increased more in the first three years of the financial crisis to the end of 2010 than in the previous 12!  Although overall “take home” inequality (i.e after tax and benefits) did not rise sharply between 2007 and 2010, the richest 10% of the population still did better than the poorest 10% over this period in 21 of the 33 countries analysed by the OECD.  The differences were most acute in those countries where household incomes dropped the most. In Spain and Italy, the income of the top 10% was fairly stable even after taxes, while the income of the bottom 10% fell about 14% and 6% respectively.  So government policies of austerity fell solely on the poor and not the rich.

Back in 2011, the OECD did a very comprehensive report on income inequality entitled ironically, Divided we stand. The report concluded that the gap between rich and poor had widened considerably over the three decades to 2008, when it reached an all-time high.  The OECD data were confirmed by the IMF in its paper last September (Income inequality and fiscal policy) that found inequality of income has also widened in the same period (see my post, https://thenextrecession.wordpress.com/2013/03/06/the-end-of-chavismo/).

The new OECD data now show that the global economic crisis of 2008 squeezed average household incomes in most countries and inequality increased in the following three years to 2011, despite taxes and transfer measures by governments.  Over these three years, real incomes in the OECD fell 2% on average per year, driven down by higher unemployment and falling real wages from work.  The fall was greatest in that Keynesian poster model, Iceland, where household ‘market income’ was down 12% per year between 2007 and 2010 (see my post, https://thenextrecession.wordpress.com/2013/04/28/icelands-electors-how-ungrateful/).  ‘Keynesian’ Iceland was followed by the ‘Austerian’ peripheral Eurozone households like Greece, Spain and Ireland, which took hits of 6-8% per year.  US household income fell slightly more than the OECD average of 2% a year.  Just a few countries had no fall at all: the households of Germany, Canada, Sweden and Poland.

This decline in household income was not shared out equally.  On the contrary, as measured by the gini coefficient (which is gauged at zero when everybody has the same income and 1 when one person has all the income, inequality rose across the OECD between 2007 and 2011 by 1.3% points to a new high.   Indeed, ‘market income’ inequality rose by more in those years than in the previous 12 years!

OECD gini

The biggest rise in inequality was experienced by Ireland, Spain, Japan, Greece and France and Iceland.  Again, US inequality increased more than the OECD average. The most unequal place in the OECD was Chile.   The gap between the rich and the poor has widened since 1980s but much more so in the UK and the US than the OECD average.  Indeed, the US gini coefficient is one of the highest in the OECD and the highest of the large capitalist economies. The UK’s is not far behind.

UK inequality

The UK and Italy are more unequal than the US before taxes and benefits, but after, the US is more unequal, showing the bias of tax and welfare is towards the richer in the US.

US redistribution

It’s the European ecom0mies that tend to have more equality as measured by the gini coefficient.  France and Germany’s gini is still below the OECD average although Germany’s rose sharply after the euro was founded.  But even in these economies the gini ratio is about .28, well short of equality.

French-German inequality

It is still the case that the top 10% of income earners receive ten times more income than the bottom 10% in the OECD – and that’s after tax and transfers.  That ratio is over 15 times in the US, only surpassed by Chile and Mexico at 27 times.  This inequality is also expressed in the levels of relative poverty in the OECD.  About 11% of the OECD population has less income than half their national median incomes.  That poverty measure is very high in the US, at 17% in 2010.  Poverty rates rose most in the Great Recession in the peripheral Eurozone countries, as you might expect.

As I outlined in my last post (https://thenextrecession.wordpress.com/2013/05/15/europe-deep-in-the-mire/), Britons have become poorer than their counterparts in a host of other rich economies, sliding from fifth to 12th on a global list of wealth based on disposable incomes.  While the spare cash available to households in most advanced economies grew at a similar pace between 2005 and 2011, disposable incomes in countries such as France and Australia rose at a faster rate than the UK, as price pressures weighed on the average Briton’s disposable income.  Households in Canada – Belgium, Sweden, Austria and Switzerland also became richer than those in the UK.  The average per head disposable income in the UK was $27,927 in 2011, compared with £26,050 in 2005. In the US, the figure has has risen from $34,373 to $39,658 over the same period.The pound lost a quarter of its value in 2008, which pushed up prices on imports at a far faster rate here than in other large industrialised economies.

As the rich have gotten richer, people across Europe have noticed and they do not like it. A strong majority (a median of 77%) of Europeans surveyed think that the current economic system generally favours the wealthy. This includes an overwhelming 95% of the Greeks, 89% of the Spanish and 86% of the Italians. Even seven-in-ten (72%) Germans, who have fared economically better than other European, think so.  The vast majority of all Europeans (85%) surveyed overwhelmingly agree that the gap between the rich and the poor has increased in the past five years.  And they are right.

I have argued before in previous posts that, contrary to the views of many leftist economists, rising inequality was not the cause of the Great Recession of 2008-9 or the ensuing Long Depression now being experienced in the mature capitalist economies of the OECD
(see my posts: https://thenextrecession.wordpress.com/2012/05/21/inequality-the-cause-of-crisis-and-depression/ and
https://thenextrecession.wordpress.com/2011/10/21/1-versus-99/).

But it is clear that the rich are not suffering from this depression, as Paul Krugman says.  The immediate crisis of the banking collapse was resolved by bailing out the bankers with workers’ taxes and welfare payments. And the economic ‘recovery’ is being made on the backs of workers’ jobs and real incomes, while the stock markets boom and profits soar at the expense of employment.

The graph below that US corporate profit per employee has risen dramatically since the trough of the Great Recession (it’s the red line going down – an inverse left-hand scale) so that total corporate profits have reached new heights.  Cutting labour costs rather than boosting growth through investment or expanding sales has been the cause of profits boom since 2009.

Corp profits to employees

It’s socialism for the rich and capitalism for the poor.

7 Responses to “Inequality: there’s no stopping it!”

  1. GrahamB Says:

    “Cutting labour costs rather than boosting growth through investment or expanding sales has been the cause of profits boom since 2009.”

    Spot on for the OECD. Many will say it’s obvious – but then ignore it in any discussion of profitability, perhaps due to focusing on the long-term rather than post-crisis, which is already four years old and not ephemeral.

    For capitalism, increasing the rate of exploitation through cutting real wages is a perfectly legitimate method if they can get away with it, as they are doing. Real wages in the UK are today back at the level of 2003. The hoarding and relatively low level of business investment (and hence growth) is not due to a lack of profitable opportunities, rather that it is easier and cheaper to cut costs instead.

    It has been successful in maintaining profit rates, the issue is how long can it continue.

  2. Jose Tapia Says:

    Almost everyone (except Kliman perhaps) agrees that inequality has increased in the US and most OECD countries in recent decades. Theory confirmed by two or three centuries of history tell us that the market economy tend to generate a polarization of society with increasing accumulation of capital in a side and an increasing proportion of the population becoming wage-workers in the other (increasingly numerous) side, so that increasing inequality is to be expected. A different question is whether income inequality tends to increase faster in periods of business prosperity or faster in periods of recession: in economic jargon, is income inequality procyclical or countercyclical? For Keynesians, the later is the case. A prosperous economy solves the economic issues and bring us closer to perfection (with 4-hr working day etc.) However, data show that during periods of recession both the mass of wages and the mass of profits fall, but the mass of wages decreases relatively less than the mass of profits. In this sense income inequality between social classes would be procyclical (in the disposable income graph you show, the graph for the US has a clear dip between 2007 and 2008, that is, at the start of the Great Recession). However, the smaller mass of wages is distributed in the recession among a working population with a greater share of unemployed, so that the distribution of income among workers becomes more unequal. On the other hand, between owners of capital, income from profits in the recession is reduced in general, but for some of them is reduced dramatically, even to zero (firms go bankrupt), while others manage to keep profits from falling by cutting costs (by layoffs, reductions in production, etc.). So that, among capital owners, income inequality probably also tends to increase during recessions. The combination of these effects probably makes that in terms of measures such as the Gini coefficient or similar, income inequality may be countercyclical. I am not sure though if empirical data support this. At any rate, when talking about the top p% or the bottom q% it would be convenient to remember there are other categories to refer when discussing the distribution of income.

  3. Mike Ballard Says:

    With 10% of the world’s population owning 71% of the wealth produced by 90% of the population, you’ve got a wage system which needs to be abolished by the 90% and their establishment of common ownership of the collective product of labour with production of goods and services for use and distribution based on need. In other words, commodity production, using labour power, at its going rate/price on the market, has to be sublated i.e., “where,In place of the old bourgeois society, with its classes and class antagonisms, we shall have an association, in which the free development of each is the condition for the free development of all.”

  4. paul Says:

    maybe socialism for the rich is capitalism

  5. sartesian Says:

    If I recall correctly, Kliman acknowledges that the measures of family income, household income, etc. show a growing inequality. He disagrees with the argument that capitalism has restored its rate of profit through reduction in the overall wage (wage +benefit) levels of workers.

    There’s a difference, and actually several differences.

    • GrahamB Says:

      IIRC Kliman says that the share of national income received by US workers has actually risen. That the rate of surplus value has fallen.

      I guess it can be reconciled with growing inequality, though not in a straightforward way. Or they are simply contradictory conclusions.

    • matthewrusso9 Says:

      Correct, as about to note the same. Kliman (The Failure of Capitalist Production) is not making an argument about the direction of inequality, but of the total wage. And even a rise in the total wage share is not incomparable with rising inequality, as there is plenty of room for rising inequality within all of wage labor, while (since Kliman’s stats are limited to the U.S.), capital can appropriate surplus value from overseas sources to add to accumulation.

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