Growth, inequality and Davos

Last week saw the latest figures for economic growth in the two fastest-growing of the top seven advanced economies (the so-called G7), the US and the UK. And both revealed that these economies, although growing slightly faster than in 2013, started to slow down in the last quarter of 2014.

US real GDP growth for the fourth quarter of 2014 came in lower than expected at just a 2.6% annualised rate compared to 5% in Q3. While consumers spent more, the biggest feature of the slowdown was the crawling pace of investment. Real non-residential fixed investment (that’s business and government investment combined) increased at just a 1.9% rate in Q4 down from an 8.9% rate in Q3. US real GDP increased 2.4% for the whole of 2014, only slightly above the rate of 2.2% in 2013.


UK GDP in Q4 2014 showed a slowdown in the pace of growth from a 0.7% quarterly rate in Q3 to 0.5% qoq in Q4. So the UK’s year-on-year real growth in Q4 was 2.7%, while growth came in at 2.6% for the whole year 2014, better than in 2013, but well short of the UK Chancellor’s boast of 3% for the year.

Indeed, compared to other G7 economies, the UK recovery has been slow. As the UK’s official stats office put it: “the level of GDP in the UK took until Q3 2013 to surpass its pre-downturn peak. The UK recovery took longer than some other countries in the G7. This is in part due to the nature of the downturn in the UK; GDP fell to a greater extent and as a result has taken longer to recover.”

UK recovery

Economic growth is currently virtually non-existent in the Eurozone and Japan and has slowed sharply in many large emerging economies like China, India, Brazil and Indonesia, while Russia has entered a deep recession, which according to some estimates will be deeper than in the Great Recession itself.

At best then, the world economy is grinding on at a slow crawl with the risk rising of a slip into a deflationary debt spiral and a new global recession. This week even Germany, the powerhouse of European capitalism slipped into deflation. The EU-harmonised inflation rate for Germany slumped from 0.1% in December to -0.5% in January, worse than expected. The year on year change is now down to -0.3%.

German deflation

It was fear of stagnation and the spectre of deflation that concentrated the minds of the great and not so good at Davos, Switzerland last week. This was the annual jamboree in the Swiss ski resort of the World Economic Forum when the top political and business leaders get together with the top mainstream economists to debate to key issues facing world capitalism and try to work out a strategy for sustaining the system.

And the prospect of secular stagnation and growing inequality of income and wealth globally that occupied the minds of business moguls, prime ministers and economists as they jetted in an out on private planes (a huge carbon imprint!) to take part in presentations, debates and behind the scenes discussions.

Once again, mainstream economist and former US treasury secretary, Larry Summers presented his argument that the world capitalist economy, or at least the major advance economies, were entering a period of ‘secular stagnation’, where economic growth would stay below the level necessary to ensure ‘full employment’ of the labour force and technological capacity (see my post,
According to Summers, this would force governments and central banks to keep trying to boost the economy by monetary easing (as the ECB is trying now – see my post,
or, as Summers prefers, by more government spending, particularly on infrastructure. But even that may not work.

For example, the latest projections for US long-term economic growth and government finances were released by the US Congress Budget Office (CBO) last week. The CBO reckons that by 2017, the US economy will finally be growing at its maximum potential growth rate based on the expected expansion of the labour force and productivity growth. The CBO expects 3% real growth this year and 2016 for the US and 2.5% in 2017. This means an average growth rate of 2.5% a year out to 2018, which is less than forecast by the CBO last time. But this rate of growth would eliminate the slack between potential growth and actual growth (at last, the gap between the two lines will disappear).

But here is the rub: after that, the CBO projects just 2.2% average real GDP growth for the years up to 2025. That is a full 1% point less than achieved in the 60 years before the Great Recession started.  As the Wall Street Journal put it, when analysing the latest US growth figure: “The fourth quarter report means that growth for all of 2014 clocked in at 2.4%, which is the best since 2.5% in 2010. It also means another year, an astonishing ninth in a row, in which the economy did not grow by 3%”. And the CBO forecast is well above the rate forecast by Thomas Piketty in his book of the year in 2014 of 1.5% a year or that of leading ‘secular stagnation’ theorist, David R Gordon (see my post, of under 1% a year.  It would seem that even the most optimistic of forecasters for the US economy expect a much lower growth rate for the US over the next generation, and that is assuming that there are no new economic slumps in the next ten years or more – but how likely is that?

So it means several things for the average American household. First, real household incomes will struggle to rise much at all. Just look at how earnings from work are doing for the average American at the moment.

US hourly earnings.jpg

Hourly earnings are crawling along at around 1.5% a year and this is before inflation and taxes. Real disposable income is thus stagnating or falling. If people can get extra hours they must work them and if they can get more than one job in the household, they must work them to make ends meet. And this is the long-term future.

By the way, the CBO found that that tax revenues would not be sufficient to sustain social security payouts after the end of this decade and the bill could only be met by either raising taxation rates, cutting yet further government spending (the opposite of what Larry Summers wants) or raising social security contributions. It would not take much extra payroll tax to get the funds: just about 80c per week extra each year over about 20 years. But even so, it just another burden on what Americans like to call the “middle-class” and what the rest of us more accurately call the “working-class”.

This situation for the ‘middle class’ concentrated the mind of Larry Summers before Davos. ( Apparently Larry Summers has been working with Ed Balls, the British Labour finance spokesman and former FT leader writer and adviser to British prime minister, Gordon Brown, on a new report by the Center for American Progress’ ‘Inclusive Prosperity Commission’ (

This dynamic duo argues that “the most challenging economic issue ahead of us” is the growing stagnation of incomes for the “middle classes of the world’s industrial countries”. Summers and Balls reckon that monetary easing is not doing the job in getting incomes for the majority up. Moreover, of the 11% increase in US real GDP in the last five years, most has been due to a bounce back from the trough of the Great Recession. Only 3% points can be attributed to an improvement in underlying capacity (technology, investment and better ‘human capital’). “Even after our recovery, the share of American men age 25 to 54 who are out of work exceeds that in Japan, France, Germany and Britain.”

Summers and Balls combine this argument about secular stagnation with rising inequality. “If the US had the same income distribution it had in 1979, the bottom 80% of the population would have $1 trillion — or $11,000 per family — more. The top 1% would have $1 trillion — or $750,000 — less.”  What do Summers and Balls offer as a solution: more progressive taxation and more regulation of the rich – much the same formula as Thomas Piketty in his book on inequality (see And they appealed to the ‘elites’ attending Davos to “recognize its importance and commit themselves to its achievement. That must be the focus of this year’s Davos.”

Unfortunately, the elites at Davos, far from agreeing that secular stagnation was problem and that rising inequality was the partly the cause, were out to claim that capitalism was actually eliminating poverty and that the world economy was on the up.

As one Davos commentator put it “the rich world middle class stagnation that is being complained about isn’t in fact a problem at all. It’s the result of the most successful economic policy anyone has ever implemented anywhere. And far from us having to do something about it we should carry on exactly as we are, following exactly that most successful economic policy ever, that of neoliberal globalisation.” Apparently, before neoliberal globalisation, billions in the world “were living in abject penury, dropping dead like flies when the rains failed and the crops vanished, dying like flies when the rains came and the epidemics raged.”  But globalisation, deregulation of trade and the movement of capital has transformed this by creating more wealth. “In terms of reducing global poverty this has been stunningly successful. We’ve just had the largest reduction in absolute poverty in the entire history of our species over these past few decades.”

This neoliberal apologia was backed up by using the work of the mainstream (but closet Marxist?) economist Branco Milanovic who has shown that global income inequality declined between 1988 and 2008. I have dealt with Milanovic’s analysis before (post, and in my Essays on Inequality – see below). The main reason that global poverty has declined on one horrifically strict measure (the number earning less than $1 a day) and inequality has dropped is because of China. China’s economic growth has been dramatic since the 1980s and has taken hundreds of millions out of poverty. So global inequality between the very poorest and the very richest has statistically fallen. But actually inequality of income and wealth within China or within the US has risen.

Nevertheless, everything is fine. More and more millions are being exploited as cheap labour across the world by Capital. But at least the incomes of these newly exploited urban masses in China, India etc have risen compared to staying as a peasant.

Justin Wolfers of the right-wing Peterson Institute for International Economics explained (on behalf of the elite billionaires flying into Davos), attacked the now famous Oxfam statistic (that the richest 80 people own as much wealth as the poorest half of the entire planet), “the world’s richest 80 people own (only) 0.7% of global wealth.” The inequality is because “3.5 billion people — most of them in the developing world — have virtually no wealth at all.” So that’s all right then.

And anyway, went the arguments of the elite at Davos, rising inequality of wealth and incomes in most economies is nothing to worry about. Interestingly, Winnie Byanyima, the executive director of Oxfam, was named a co-chair of the World Economic at Davos and so it was Oxfam’s data, which was based on the research of Credit Suisse in their annual global wealth report, produced by my friend Professor Tony Shorrocks (see my post,, that was attacked by the apologists of the elite.

At Davos, two economists, Salmon and Klein, argued that the Shorrocks data are misleading because “the wealth estimates all take debt into account.” And yet “going into debt is far more common in the US and Europe than in less developed places, where it’s more difficult to access credit.” In other words, Oxfam’s measure of wealth, which counts the most indebted person in the world as the poorest, includes a number of people who, by global standards, are “quite privileged.” But during Davos, Nick Galasso, an Oxfam researcher, responded to these critics, calculating that a new $2.6-trillion figure for wealth excluding those with debt still amounts to the wealth held by 147 richest people in the world (not 80, but still tiny) having as much as the bottom half. And it means that the share of global personal wealth held by the richest 1% in the world only falls from 48.1% to 47.9%. My colleague Tony Shorrocks also responded by calling the criticism from Klein and Salmon about debt to be a “silly argument… that’s a non-issue. It’s a diversion.”

So the data on inequality are still robust and were not demolished by the apologists for the rich at Davos. But the issue of whether rising inequality causes instability in capitalism or even secular stagnation, as many neo-Keynesians argue remains open. For example, Larry Elliot, the UK Guardian newspaper’s economics editor, prior to Davos, pushed the argument again that because wages have been held down and people have resorted to taking on more debt, the Great Recession and the subsequent stagnation are due to rising inequality. “Business leaders have a choice. Understand that less inequality equals stronger, less debt-dependent growth. Or watch as secular stagnation takes hold”.

Now I have dealt with these arguments on many occasions (see my post,
and my Essays on Inequality). But the business elite also waded in at Davos to attack this argument.

Top advertising global boss Sir Martin Sorrell responded to IMF chief Christine Lagarde’s comments that gap between rich and poor was damaging global prosperity “You have no proof that the reverse is true, that equality brings prosperity,” he said. In 2014 Sorrell, whose net worth is estimated at £200m, survived a shareholder revolt after investors balked at his £30m pay and bonuses package only a year after the company rewarded him with a near £18m remuneration deal. He survived both disputes to become Britain’s best paid company boss. He threw a champagne party earlier in the week in the tiny Swiss town attended by the UK chancellor, George Osborne, and Tony Blair (yes, they were there).

The Keynesian wing of mainstream economics is worried that world capitalism is sinking into secular stagnation and that rising inequality is making that inevitable. But the elite in Davos and their apologists are in denial. They claim that actually the world economy is picking up and that globalisation, rising debt and other outcomes of the neoliberal era have actually lowered global poverty and if governments interfere to reduce inequality and redistribute wealth they could destroy ‘prosperity’.

In my view, both sides of the mainstream are both right and wrong. Inequality is a disgrace and a direct result of capitalism and all class societies. And reducing inequality may well not damage economic growth. But capitalism is damaged if taxation squeezes profitability and if wages rise at the expense of profit, particularly when profitability remains at historic lows in major capitalist economies and growth in the productivity of labour and investment is so poor. But nobody at Davos, while highlighting stagnation and inequality, talked about profit and profitability. I shall return to the connection between profitability, growth and inequality with new estimates and research in a future post.

Essays on Inequality


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and UK

6 thoughts on “Growth, inequality and Davos

  1. It was the Philanthropic Roundtable at Davos 2014 where some of the elite had discussed capitalism which delivered both financial and social returns. Notably it was stated in that order.

    The host was understandably concerned about the deteriorating situation in Ukraine where blood had begun to flow.

    My former colleague had been on the ground trying to leverage investment for a ‘Marshall Plan’ strategy, Back in 1996, he’d warned Bill Clinton of the strategic risk of allowing wealth to accumulate in the hands of a minority:

  2. Even though growth in real GDP will not be as high a percentage as in the past 60 years, still it will grow. It’ll grow because the working class is ever more productive of wealth. However, because the capitalists want higher and higher rates of profit, they will continue to exert downward pressure on real wages.

    It’s in the class interests of workers to increased their share of the wealth they and they alone produce. It’s in the class interests of capitalists to keep the workers from realising their class interests. They will do this through sophisticated propaganda about how it is impossible to run successful businesses and pay higher taxes necessary to provide adequate revenue flows into public health, education, transport, welfare etc. They will also do this by moving the wealth/capital workers produce to areas of the world where the price of skilled labour power is cheaper.

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