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