Inequality – the mainstream worry

The argument that rising inequality in the US and the other major capitalist economies, as expressed in the work of Thomas Piketty and others (see my posts
https://thenextrecession.wordpress.com/2014/04/15/thomas-piketty-and-the-search-for-r/ ;
https://thenextrecession.wordpress.com/2014/05/19/david-harvey-piketty-and-the-central-contradiction-of-capitalism/
 and
https://thenextrecession.wordpress.com/2014/05/24/piketty-data-and-the-scientific-method/),
was the major cause of the global financial collapse and the Great Recession, continues to gain traction.  As Paul Krugman put it only last week: “there is solid evidence that high inequality is a drag on growth and redistribution can be good for the economy”.

Now even mainstream economics and financial institutions have taken up the idea.  In a new report, economists at Standard & Poor’s, the US credit agency, reckon that unequal distribution in incomes (they don’t refer to wealth as Piketty does) is making it harder for the nation to recover from the recession.(“How Increasing Inequality is Dampening U.S. Economic Growth, and Possible Ways to Change the Tide.”)

That the S&P, at the heart of Wall Street, should take up this theme, shows that the near-record levels of inequality of income in the major economies is becoming a serious worry for the strategists of capital.  They fear a social backlash and/or a breakdown of economic harmony unless this is reversed or at least ameliorated.  Indeed, Piketty’s main worry about his forecast of rising inequality in wealth was the social consequences.

But the argument of some on the left and now the S&P is that inequality is not just a threat to social harmony, but actually damages the capitalist economy and is the main cause of crises.  “Our review of the data, as well as a wealth of research on this matter, leads us to conclude that the current level of income inequality in the US is dampening GDP.” (S&P).  Beth Ann Bovino, the chief economist at S&P, commented: “What disturbs me about this recovery — which has been the weakest in 50 years — is how feeble it has been, and we’ve been asking what are the reasons behind it.” She added: “One of the reasons that could explain this pace of very slow growth is higher income inequality. And that also might also explain what happened that led up to the great recession.”

US distribution of income

Then she expounded the usual Keynesian argument that, because the rich tend to save more of what they earn rather than spend it, as more and more of the nation’s income goes to people at the top income brackets, there isn’t enough demand for goods and services to maintain strong growth and attempts to bridge that gap with debt feed a boom-bust cycle of crises.  It’s a similar argument to that used by Atif Mian and Amir Sufi’s in their recent “House of Debt,” (see my post,
https://thenextrecession.wordpress.com/2014/06/28/its-debt-stupid/).

As usual, the S&P economists have no real answer to this problem, except to call for more investment in education to improve the skills of the workforce and thus raise their income potential.  That lack of education and skills is the cause of inequality has been refuted on many occasions (see my post https://thenextrecession.wordpress.com/2010/04/07/inequality-of-opportunity/).  It is not the differences in income between the skilled and the unskilled, but the sharp rise in income from capital (dividends, rent and interest plus bonuses for top management) and above all huge capital gains (in the value of property and stocks) that is the cause.

The S&P report outlines all the failures of the US economy and expects its weak growth recovery to continue.  But it offers little in the way of solutions.  Reducing inequality would at the very least require huge increases in wealth and income taxes on the very rich, along with raising wages for the lowest paid.  None of this, of course, is advocated by our newly found Keynesian economists of the S&P.  “Any clear-headed consideration of these options must recognize that heavy taxation–solely to reduce wage inequality–could do more damage than good.” Also the solution of greater investment in education is a joke in most post-Great Recession economies, where state spending on education is being reduced to meet fiscal and debt targets.

But anyway, is rising inequality the main cause of the Great Recession and the subsequent weak growth since it ended?  I have argued against this thesis as the cause of capitalist crises in several posts
(https://thenextrecession.wordpress.com/2012/05/21/inequality-the-cause-of-crisis-and-depression/ and
https://thenextrecession.wordpress.com/2014/03/11/is-inequality-the-cause-of-capitalist-crises/).

The argument presented by Joseph Stiglitz, Paul Krugman, and now by the S&P, is that the US is a ‘consumer economy’, with 70% of spending by households.  So if the rich have most of the money, then spending will slow or fall and we get a crisis through a ‘lack of effective demand’.  Well, the actual evidence for a causal connection between rising inequality and consumer spending is very weak.  In the period leading up to the Great Recession, consumer spending raced along and so did rising inequality.

US consumer

In the Great Recession, consumer spending fell a little, but nothing compared to investment.  And in subsequent  ‘recovery’ period, consumer spending as a share of GDP has hardly altered.  This suggests that both consumer spending and GDP change according other factors and there is no causal link between the two directly.

Capitalist booms and slumps and ensuing financial crashes have taken place even when inequality was much lower than now.  As I said in a previous post, surely, no one is claiming the simultaneous international slump of 1974-5 was due to a lack of wages or rising debt or banking speculation?  Or that the deep global slump of 1980-2 can be laid at the door of low wages or household debt?  Every Marxist economist reckons that the cause of those slumps can be found in the dramatic decline in the profitability of capital from the heights of the mid-1960s; and even mainstream economists look for explanations in rising oil prices or technological slowdown.  Nobody reckons the cause of the 1970s and 1980s crises was low wages or rising inequality.

Inequality experts, Professors Atkinson and Morelli, found little regular connection between inequality and crises. Looking at 25 countries over a century, they find ten cases where crises were preceded by rising inequality and seven where crises were preceded by declining inequality. Inequality was higher in two of the six cases where a crisis is identified, which is exactly the same proportion as among the 15 cases where no crisis is identified. (https://thenextrecession.wordpress.com/2014/03/18/inequality-and-britains-oligarchs/)

Rising inequality is a product of the recent rising rate of exploitation in the process of capitalist production.  It does not cause crises of capitalism but is inherent to capitalist production as capitalists own the means of production and build up their wealth and income from profit while trying to keep wages to a minimum.

And yet inequality continues to rise not just in reality, in the economies of the major capitalist economies, but also in the thoughts of economists as the cause of crises.  I suspect this is because, if rising inequality were the cause of crises, it may be possible to avoid crises in future by a judicious set of tax and spending measures that do not threaten the basis of capitalism.   Up to now taxation has made very little difference to inequality as the S&P graph below shows.

 

after tax

This shows that the rich will not concede even the slightest loss of their gargantuan wealth and incomes without a fight.

But the likes of the S&P, the IMF, Thomas Piketty et al to want stick with changes in inequality in income and wealth (distribution) rather than the drive for profit and the accumulation of capital (the capitalist mode of production) as the cause of all our misery.  For them, there is nothing wrong with the capitalist mode of production, it’s just the unfair distribution of the value created that is the problem.

ADDENDUM

You can see my recent presentation on the nature of the current long depression made to the Marxism Festival in London in July here.  http://youtu.be/85FMJQeK6Kw

I am making a presentation to the Communist University summer school in London next week along similar lines. http://www.cpgb.org.uk/home/action/communist-university-2014

5 Responses to “Inequality – the mainstream worry”

  1. paulc156 Says:

    As you say regards the increases in income and wealth, it is the latter which is striking and it is far more striking when looking at the top decile rather than quintile and yet more so when looking at the top 1% or even 0.1% who really have eaten all the pies. Looking at your first chart which shows income after taxes there is practically no change in the Gini between 1986 and 2010, which does imply they [S&P et al] are looking in the wrong place.

  2. Don Sutherland Says:

    In Sydney last night I went to a “Sydney Ideas” Forum on Austerity. The chair of the forum and then the four panellists, each an international guest at a Sydney Uni symposium, all adopted a leftist critique of austerity and each provided important insights. The discussion included the issue of “debt” and associated government policy to deal with that. However, across all the speakers there was just one passing reference to wages and not one to profits. Somewhat surprised and disturbed by this, I asked from the floor, for any or all to say something about wages and profits. I pointed out that whenever I asked Workers about what was most important to their boss, most say “their profits”? Further, in such discussions it is clear that wage earning is vital to pay off and / or live with debt. Workers somehow seem to understand something that was completely lost in a discussion about austerity that wanted to canvas the “why” of it. The brief responses were friendly and acknowledged my point but in content were quite lame. What is going on here?

  3. Sean Burgett Says:

    Income distribution is a poor way to understand inequality. The lower bracket and higher bracket incomes more often than not are the same earners in different stages of their lives (Sowell, 2011). People tend to earn more as they get older. I would like to see studies of specific individuals over time. Also, inequality in its self is a very abstract and ambiguous term. Who is judging this inequality? Lastly, I would like to state that if all incomes were equal what incentives would remain?

  4. sao Says:

    As you know I am not so sure that the reduction of profitability is the main reason for the different crises.
    And as the first comment says in the table about gini it seems that it has not changed in the last 30 years; but it is not the case.
    I learned that Engels said that financial crisis is due to the anarchy in production. Is it true or false? Please can you elaborate on it?
    There seems to be lack of crisis in socialist periods like in the Stalin era and the Mao era. May it be due to strict planning?

  5. Henry Says:

    I think that only under capitalism, the money economy par excellence, does the idea of the incentive raise it’s very ugly head. So in the money economy, naturally human nature is judged by the desire to get hold of money!

    The argument against this is that the incentive outside the money economy wouldn’t be money but other values would come into play. The desire to contribute to the well being of everyone, this would be a value under a socialist society. It also shows the alienation that capitalism fails to abolish, the very natural human process of changing nature in order to satisfy our needs is turned into some unnatural chore, which we need incentives to make us do!

    All in all a pretty damning indictment of capitalism! A wage slave system indeed!

    Inequality is not some abstraction, some people really do live on a bowl of rice a day, are malnourished, while others have servants feeding them the finest foods, in plentiful supply. Some consume far more than others. Very concrete and not abstract.

    The Keynesian solution is production for productions sake. The thing is austerity can have a good side, it can make people think more about what it consumes and why.

    But we don’t have austerity, we have a war on the poor.

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