by Michael Roberts
As the World Bank and the IMF meet for their semi-annual meeting
this weekend, in a speech, World Bank Group President Jim Yong Kim
underlined the importance of “addressing inequality” in the
world. Kim told students and faculty at Howard University that a recent
Oxfam International report had found the world’s richest 85 people have
as much combined wealth as the poorest 3.6 billion. And this compared to
around a billion people who still live on $2 a day, have no
electricity, drinking water, or even latrines.
The evidence of growing inequality of wealth and income globally is
now overwhelming. In a new report, the OECD finds that global income
inequality is now back at 1820 levels (http://www.oecd.org/newsroom/how-was-life-shows-long-term-progress-in-key-areas-of-well-being.htm).
OECD researchers studied income levels in 25 different countries,
charted them back in time to 1820 and then collated them as if the world
were a single country. “The enormous increase of income inequality
on a global scale is one of the most significant -– and worrying -–
features of the development of the world economy in the past 200 years,”
concluded the OECD in its 269-page report. Interestingly, the OECD
noted that global inequality rose once globalisation took root after the
1980s.
And within the US alone, the latest triennial Survey of Consumer Finances (SCF) from the Federal Reserve (http://www.federalreserve.gov/pubs/bulletin/2014/pdf/scf14.pdf),
reveals how the rich have got richer compared to the rest of us, even
after the Great Recession. In the Great Recession, net wealth for the
average American household fell 39%, but just 16% for the top 400
American families (as measured by Forbes magazine), while net wealth
actually rose for the Walton family (who are part of the 85 Oxfam
people), the owners of the cut-price, anti-labour American retailer,
WalMart (up 45%!). Recession was good for the Waltons.
It was the collapse of home prices that hit the average American
household the most, while the fall in stock priced affected the richest
400 more. In the ‘recovery’ since 2010, the average household has
experienced a further fall in wealth (-2%), but the top 400 have gained
an extra 45%, while the Waltons have added another 50%! Typical US
family wealth in 2013 was $81,200 — which is about the same as it was in
1992 at $80,200 (in real terms). The cumulative wealth of the Forbes
400 was about $2.1 trillion, or roughly the same as that held by the
entire bottom 60% of American families. The combined worth of the Walton
Six was $145 billion in 2013, which equalled the total wealth of the
bottom 43%!
The Fed and OECD studies confirm a myriad of others, including the most comprehensive by Anthony Atkinson (see my post, http://thenextrecession.wordpress.com/2013/07/14/the-story-of-inequality/)
and, of course, the best-selling book on the rising inequality of
wealth in the major economies by French economist Thomas Piketty,
“Capital in the Twenty-First Century” (see my posts, http://thenextrecession.wordpress.com/2014/04/15/thomas-piketty-and-the-search-for-r/).
FT columnist Martin Wolf in his latest book (The shifts and the shocks) also launches the idea that inequality is the main problem of capitalism. “It is increasingly recognised that, beyond a certain point, inequality will be a source of significant economic ills.”
Wolf cites the Federal Reserve study above on inequality of income
where the top 3% income earners got 30.5% of total incomes in 2013. The
next 7% received just 16.8% and this left barely over half of total
incomes to the remaining 90%. The upper 3% was also the only group to
have enjoyed a rising share in incomes since the early 1990s. So
inequality keeps rising.
Wolf also cites the Morgan Stanley study which lists among causes of
the rise in inequality: the growing proportion of poorly paid and
insecure low-paid jobs; the rising wage premium for educated people; and
the fact that tax and spending policies are less redistributive than
they used to be a few decades ago. According to the OECD, the US ranked
highest among the high-income countries in the share of relatively
low-paying jobs. Moreover, the bottom quintile of the income
distribution received only 36% of federal transfer payments in 2010,
down from 54% in 1979. The poorest are getting a smaller share of
available welfare benefits.
Wolf then trots out the argument still dominant among leftist and
Keynesian economists that rising inequality is not only unjust but that
it is the principal cause of crises and stagnation under capitalism. The
argument goes: “up to the time of the crisis, many of those who
were not enjoying rising real incomes borrowed instead. Rising house
prices made this possible. By late 2007, debt peaked at 135 per cent of
disposable incomes. Then came the crash. Left with huge debts and unable
to borrow more, people on low incomes have been forced to spend less.
Withdrawal of mortgage equity, financed by borrowing, has collapsed. The
result has been an exceptionally weak recovery of consumption.”
The argument that the Great Recession and the weak recovery were due
to a collapse in consumption just does not hold up – see my post, http://thenextrecession.wordpress.com/2014/03/11/is-inequality-the-cause-of-capitalist-crises/.) But Wolf’s propositions are now the conventional wisdom of the left or liberal wing of mainstream economics.
I have argued before that there are two reasons for this. First, the
powers that be (IMF, OECD, World Bank etc) are genuinely worried that
growing inequality could lead to a political and social backlash by the
poor against the rich that could threaten the capitalist system itself.
Second, claiming that growing inequality is the real cause of slumps in
capitalist production is a comforting theory because it suggests that,
with a judicious policy of redistribution of wealth and incomes, crises
could be eliminated without the need to replace the capitalist mode of
production. So nobody on the left (let alone the mainstream) pays any
attention to the causal explanation of crises provided by Marxist
economics.
Inequality may be seen as the issue by the liberal left and
Keynesians, but it is certainly not by the hardline neoclassical
mainstream. John Cochrane is a leading University of Chicago
neoclassical economist (http://johnhcochrane.blogspot.co.uk/).
He is a strong critic of all this liberal ‘fuss’ about inequality. At a
recent panel on inequality organised by the Hoover Institution in
memory of another neoclassical great, Gary Becker, Cochrane commented
that asking for the redistribution of wealth and income was pointless
because “we all know there isn’t enough money, especially to address real global poverty” and yet the ‘liberals’ keep insisting on trying to.
“I think it is a mistake to accept the premise that inequality, per se,
is a “problem” needing to be solved and to craft alternative solutions.
Inequality is a symptom of other problems.”
Cochrane starts with the argument that the top wealth owners, like
the Waltons or the Steve Jobs at Apple, have ‘earned’ their wealth. It’s
the same view expressed by Greg Mankiw, the doyen of economics
textbooks, in his (indefensible) defence of the top 1% (see my post, http://thenextrecession.wordpress.com/2013/06/19/defending-the-indefensible/).
You see, some people are more skilled than others or luckier than
others and so get better-off. It is nothing to do with ‘cronyism’, or
‘rent-seeking’ i.e. the ownership of capital. The answer to inequality
is thus more education for the unskilled, not more taxation of the rich.
But be careful, says Cochrane, state funded education would be a bad
idea as people will train up as art historians or such rather than in
skills useful for jobs in the capitalist economy and we cannot have
that. And education must be directed to those where it will work. At the
lower end, we just have single mothers, criminals, druggies and other
‘low lifes’ and no amount of education or redistribution of income in
benefits etc will change them. After all, “70% of male black high
school dropouts will end up in prison, hence essentially unemployable
and poor marriage prospects. Less than half are even looking for legal
work.” Thus Cochrane drags up the old argument that ‘incentives’
(money, status etc) really only works for those who are already rich to
make them do productive things, while ‘incentives’ like benefits or free
education and health etc are useless for the poor.
Anyway, Cochrane goes on “as rich people mostly give away or reinvest their wealth. It’s hard to see just how this is a problem”.
So that’s all right then. But it is also not true. There are many
studies that show poorer people give more to charities as a percentage
of their income that the richest. And most of the giving by the rich
‘philanthropists’ is for tax avoiding purposes and the kudos of
supporting ‘the arts’ or universities like Cochrane’s Chicago. The
Waltons are noted for their lack of philanthropy.
Cochrane then comes up with the well-versed argument that actually
global inequality has been declining, not rising. This proposition is
based on looking at inequality between nations not within nations, as
the OECD or Fed studies above do. Branco Mankovic, formerly of the World
Bank, has done the work and shown that the gap between an average
household in the emerging economies and those in the rich countries has
narrowed over the last few decades (see my post, http://thenextrecession.wordpress.com/2013/10/27/workers-of-the-world-cannot-unite-conclusive-evidence/).
But this is only for one reason: China. The huge growth in the Chinese
economy and the rise in living standards there explain nearly all of
this improvement – strip that out and it is the same old story – no
change. Cochrane has to admit that China is the reason but argues that
China succeeded by not taxing its rich people but by growing. Yes, fast
growth is the factor, but it is also the case China’s inequality ratios
have rocketed so that inequality of income there now matches the levels
in the US.
Nevertheless, Cochrane tells us that Bill Gates being a super-rich
billionaire is hardly a problem for the body politic of human
civilisation compared to murderous dictators who killed millions like
Mao Tse-Tung or Joseph Stalin. Poor people don’t worry about rich people
getting richer as long as their own living improves “just what problem does top 1% inequality really represent to them?”
Well, as the global financial crash has exposed, it is the greed of the
bankers, hedge fund speculators making their billions that eventually
caused the huge loss in wealth for the average American recorded by the
Fed above. So just letting the rich do what they want with our money is a
problem.
And as for the poor revolting against capitalism because of rising inequality, don’t worry,
“Maybe the poor should rise up and overthrow the rich, but they never
have. Inequality was pretty bad on Thomas Jefferson’s farm. But he
started a revolution, not his slaves.” Perhaps Cochrane ought to be
more cautious: the poor have not always docilely accepted the
extravagances of the rich. History is the history of class struggle as
just three examples show: the Peasants Revolt of 1381 in England; the
French revolution of the late 18th century and the Russian revolution of
the early 20th century. Indeed, if the Waltons and the super rich have
nothing to fear from the rest of us, why do they spend so much effort
stopping trade unions, using police and other forces to crush any
protests and intervening around the world against regimes and people who
appear to object to their rule? The rich appear more worried than
Cochrane.
Finally, we get the Hayek argument to defend inequality. Just after
1945, Friedrich Hayek, a right-wing market economist and main
protagonist in opposition to Keynesian views, argued that more
regulation and redistribution would put everybody on the ‘road to
serfdom under an all-powerful state, Orwellian-style. Cochrane says that
‘liberals’ that advocate higher taxes and regulation on the rich would
so the same.
The problem with this argument is that Hayek was wrong. Tax rates on
the top 1% reached 90% under Eisenhower in the 1950s but the economy
kept on growing fast by historic standards and dictatorship medieval
style did not appear. The golden age of the US economy was in the 1960s
when economic growth was 4%-plus a year, inequality declined (according
to Piketty) and living standards of the poor rose sharply. Growth was
much lower when corporate taxation and income tax for the rich was cut
in the 1980s onwards, inequality grew and living standards stagnated.
So let’s sum up. The ‘liberal’ Keynesian wing of mainstream economics
is pushing the argument that rising inequality of wealth and income is
the issue for capitalism and the globe. It is generating social
instability and is the main cause of crises under capitalism. The
neoclassical right-wing of mainstream economics dismisses this as
rubbish. Inequality is part of capitalism, sure, but is not a social or
economic problem and indeed any attempt to correct the market forces at
work that have created will make things worse by helping state-run
dictatorships to develop. It’s the road to serfdom.
In my view, both sides are right and wrong. Yes, inequality appears
to be getting worse as a result of the neoliberal counterrevolution and
it is not a product of better skilled or educated workers ‘earning’
more, but because those who own or control capital have been taking
more. But inequality is not the cause of crises but a consequence of
them as the latest evidence of the Fed shows. Yes, redistributing wealth
and income through heavier taxation etc may make things worse for
capitalism as Cochrane suggests, but only because it would lower
profitability at a time when it is near its historic post-war lows. It
would not if profitability was high and rising as it was in the 1950s
and 1960s.
The idea that inequality is a fact of life that cannot be changed is
just apologia for the rich. Serfdom would not follow from the ending of
the capitalist mode of production and the expropriation of the
super-rich and their capital. We are already serfs compared to the
Waltons. With ownership in common, we could plan for need not profit –
the best ‘incentive’ of all.
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.
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