by Michael Roberts
Aug. 13 2014
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
http://thenextrecession.wordpress.com/2014/04/15/thomas-piketty-and-the-search-for-r/ ;
http://thenextrecession.wordpress.com/2014/05/19/david-harvey-piketty-and-the-central-contradiction-of-capitalism/ and
http://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.”
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,
http://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 http://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
(http://thenextrecession.wordpress.com/2012/05/21/inequality-the-cause-of-crisis-and-depression/ and
http://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.
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. (http://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.
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
If you have opinions about the subject matter of posts on this blog please share them. Do you have a story about how the system affects you at work school or home, or just in general? This is a place to share it.
Wednesday, August 13, 2014
Economics: Inequality – the mainstream worry
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