So, by now, you have all probably read, or at least heard of, Joseph Stiglitz’s column in the New York Times as to how inequalities are stalling economic recovery:
“With inequality at its highest level since before the Depression, a robust recovery will be difficult in the short term, and the American dream — a good life in exchange for hard work — is slowly dying.”
In case you have forgotten how true this is, just remember this:
Stiglitz offers four main reasons for why inequalities are a threat to recovery:
“There are four major reasons inequality is squelching our recovery. The most immediate is that our middle class is too weak to support the consumer spending that has historically driven our economic growth. While the top 1 percent of income earners took home 93 percent of the growth in incomes in 2010, the households in the middle — who are most likely to spend their incomes rather than save them and who are, in a sense, the true job creators — have lower household incomes, adjusted for inflation, than they did in 1996. The growth in the decade before the crisis was unsustainable — it was reliant on the bottom 80 percent consuming about 110 percent of their income.
Second, the hollowing out of the middle class since the 1970s, a phenomenon interrupted only briefly in the 1990s, means that they are unable to invest in their future, by educating themselves and their children and by starting or improving businesses.
Third, the weakness of the middle class is holding back tax receipts, especially because those at the top are so adroit in avoiding taxes and in getting Washington to give them tax breaks. The recent modest agreement to restore Clinton-level marginal income-tax rates for individuals making more than $400,000 and households making more than $450,000 did nothing to change this. Returns from Wall Street speculation are taxed at a far lower rate than other forms of income. Low tax receipts mean that the government cannot make the vital investments in infrastructure, education, research and health that are crucial for restoring long-term economic strength.
Fourth, inequality is associated with more frequent and more severe boom-and-bust cycles that make our economy more volatile and vulnerable. Though inequality did not directly cause the crisis, it is no coincidence that the 1920s — the last time inequality of income and wealth in the United States was so high — ended with the Great Crash and the Depression. The International Monetary Fund has noted the systematic relationship between economic instability and economic inequality, but American leaders haven’t absorbed the lesson.”
And yes, lower mobility:
“Our skyrocketing inequality — so contrary to our meritocratic ideal of America as a place where anyone with hard work and talent can “make it” — means that those who are born to parents of limited means are likely never to live up to their potential. Children in other rich countries like Canada, France, Germany and Sweden have a better chance of doing better than their parents did than American kids have. More than a fifth of our children live in poverty — the second worst of all the advanced economies, putting us behind countries like Bulgaria, Latvia and Greece.”
And I especially like how Stiglitz points out the obvious: what is happening is the product not of impersonal market forces, but of very real, human and ideological decisions:
“There are all kinds of excuses for inequality. Some say it’s beyond our control, pointing to market forces like globalization, trade liberalization, the technological revolution, the “rise of the rest.” Others assert that doing anything about it would make us all worse off, by stifling our already sputtering economic engine. These are self-serving, ignorant falsehoods.
Market forces don’t exist in a vacuum — we shape them. Other countries, like fast-growing Brazil, have shaped them in ways that have lowered inequality while creating more opportunity and higher growth. Countries far poorer than ours have decided that all young people should have access to food, education and health care so they can fulfill their aspirations.
Our legal framework and the way we enforce it has provided more scope here for abuses by the financial sector; for perverse compensation for chief executives; for monopolies’ ability to take unjust advantage of their concentrated power.
Yes, the market values some skills more highly than others, and those who have those skills will do well. Yes, globalization and technological advances have led to the loss of good manufacturing jobs, which are not likely ever to come back. Global manufacturing employment is shrinking, simply because of enormous increases in productivity, and America is likely to get a shrinking share of the shrinking number of new jobs. If we do succeed in “saving” these jobs, it may be only by converting higher-paid jobs to lower-paid ones — hardly a long-term strategy.
Globalization, and the unbalanced way it has been pursued, has shifted bargaining power away from workers: firms can threaten to move elsewhere, especially when tax laws treat such overseas investments so favorably. This in turn has weakened unions, and though unions have sometimes been a source of rigidity, the countries that responded most effectively to the global financial crisis, like Germany and Sweden, have strong unions and strong systems of social protection.”
[I love how these rationalization mirror those about guns I debunked in an earlier post.]
Are things going to get better? According to three analysts that I like, the answer seems to be a resounding “NO!” because nothing has changed since the Depression of 2008.
“How they must bleed for us. In 2012, the world’s 100 richest people became $241 billion richer. They are now worth $1.9 trillion: just a little less than the entire output of the United Kingdom.
This is not the result of chance. The rise in the fortunes of the super-rich is the direct result of policies. Here are a few: the reduction of tax rates and tax enforcement; governments’ refusal to recoup a decent share of revenues from minerals and land; the privatisation of public assets and the creation of a toll-booth economy; wage liberalisation and the destruction of collective bargaining.
The policies that made the global monarchs so rich are the policies squeezing everyone else. This is not what the theory predicted. Friedrich Hayek, Milton Friedman and their disciples – in a thousand business schools, the IMF, the World Bank, the OECD and just about every modern government – have argued that the less governments tax the rich, defend workers and redistribute wealth, the more prosperous everyone will be. Any attempt to reduce inequality would damage the efficiency of the market, impeding the rising tide that lifts all boats. The apostles have conducted a 30-year global experiment, and the results are now in. Total failure.
The neoliberals also insisted that unrestrained inequality in incomes and flexible wages would reduce unemployment. But throughout the rich world both inequality and unemployment have soared. The recent jump in unemployment in most developed countries – worse than in any previous recession of the past three decades – was preceded by the lowest level of wages as a share of GDP since the second world war. Bang goes the theory. It failed for the same obvious reason: low wages suppress demand, which suppresses employment.
As wages stagnated, people supplemented their income with debt. Rising debt fed the deregulated banks, with consequences of which we are all aware. The greater inequality becomes, the UN report finds, the less stable the economy and the lower its rates of growth. The policies with which neoliberal governments seek to reduce their deficits and stimulate their economies are counter-productive.
Staring dumbfounded at the lessons unlearned in Britain, Europe and the US, it strikes me that the entire structure of neoliberal thought is a fraud. The demands of the ultra-rich have been dressed up as sophisticated economic theory and applied regardless of the outcome. The complete failure of this world-scale experiment is no impediment to its repetition. This has nothing to do with economics. It has everything to do with power.”
“In any case, for most of the business leaders attending Davos, the economic malaise is an abstraction. Profits as a share of GDP in almost all western countries are at record highs, along with executive pay. Meanwhile, real wages for the majority are stagnating, if not falling, justified by our economic leaders in Davos as the proper if sad consequence of “structural adjustment”. Goldman Sachs, for example, shamed from deferring its bonus payments into the next financial year so that its staff could enjoy the lower tax rate, has just enjoyed a bumper year. Davos men and women are prospering. No structural adjustment for them.
There will doubtless be the usual appeals for more free trade, more scientific research and more investment in skills as the expensively clad executives move from seminar and sonorous keynote speech to reception and back to the dinner table. But what there will not be at Davos is a willingness to countenance a sea change in the way capitalism is organised. It can do what it will and that is to continue to confer fortunes on those at the top, with little risk, while directing pain on to others.
The paradox is that the chief reason capitalism is in crisis is that without such challenges it has undermined its own dynamism and capacity for innovation. Instead, it merely offers enormous and unjustified self-enrichment for those at the top.
Nor does the malign impact of inequality stop there. I was stunned to read in a recent IMF working paper, with the hardly catchy title Income Inequality and Current Account Imbalances, that the whole – yes the whole – of the deterioration of the British current account deficit between the early 1970s and 2007 could be explained by the rise in British inequality. It is a similar, if less acute, story across the rest of the industrialised or, rather, deindustrialising west.
What the IMF team shows is that as the share of national income devoted to profits and top pay rises to its current levels, so a noxious economic dynamic is created. By definition, there is less of the pie available to the mass of wage earners, whose real wages become squeezed. To sustain their living standards, they borrow, which has been easier than ever over the past 40 years as banks take advantage of financial deregulation. Overall demand thus carries on growing, but at the price of sucking in imports and ever higher personal debt levels for ordinary wage earners.
Finally, the music stops, as it has now, as both debt and import levels become unsustainable. The state of play in Britain – crazy levels of private sector debt and a record trade deficit – can thus be explained by the rise of inequality. And one of the chief causes of that, the IMF believes, is the decline in trade union bargaining power!
I would argue there is a further twist to the story. Inequality driven by weaker unions and labour market deregulation hits investment and innovation. Executive teams do not need to invest and innovate dynamically to earn rich personal rewards. They just need to be in post, squeezing the workforces’ real wages to lift profits, now the fast and easy route to apparent better performance, and thus to increase their own remuneration. And even if they do invest and innovate, the capacity to scale up production fast is hit because there are ever fewer consumers with rising real wages to buy the new products. Inequality is a recipe for stagnation. If Davos wants “resilient dynamism”, the delegates should be discussing how to reduce profits as a share of GDP to more normal levels, while boosting the real incomes of the mass of their workforces. Be sure this will not be on the agenda. For what it implies – better wage bargaining, new arrangements to share profits across the whole workforce, smarter labour market regulation and executive pay keyed to long-term innovation rather than annual profits growth – is the antithesis of all that Davos and the international consensus believe.”
What is to be done?
“Davos is intellectually bankrupt. But the ideology it champions won’t fall just by itself. Capitalism’s dead end requires intellectual challengers, social movements and trade union leaders prepared to dare to reimagine their role. We need ferment and protest in civil society. Social democratic parties will move, but only when they can sense a change of popular mood. This is everyone’s problem – and the responsibility of us all to act as we can.”
Last but not least, Aditya Chakrabortty:
“I have an idea for a particularly mediocre film. The plot runs thus: a bunch of rich white men gather in an Alpine hamlet. There’s a schlubby bald Chicagoan, a Parisian banker in a suit lush enough to eat, and the obligatory Belarusian with a PhD in physics and a dentist keen on gold crowns. It’s an odd set-up, but apparently innocuous. With this much cash flying about, busted film stars and semi-retired pop singers swoop in. Journalists write amusing sketches about the post-prandial piano-man who plays Billy Joel for tipsy millionaires.
But away from the gluhwein and the gabfest, the real action is slowly revealed. The businessmen summon prime ministers and presidents to secret meetings in tiny rooms, where they order the lives of the billions consigned to the plains below – and so make themselves even richer. The title for this not-so-thriller? Well, I rather fancy Plutocrats’ Paradise.
Perhaps you think my scenario is too crass to be credible, yet a far cruder version is about to unfold: it’s called Davos.”
Read the whole rather snarky piece.
That’s the macro and ideological side of things. Then, there is the reality of what increased inequalities mean to people in the trenches (that is, the non-Cloud-Minders… I know I have used that reference before but I like it so much). First, this:
“The average Manhattan apartment, at $3,973 a month, costs almost $2,800 more than the average rental nationwide. The average sale price of a home in Manhattan last year was $1.46 million, according to a recent Douglas Elliman report, while the average sale price for a new home in the United States was just under $230,000. The middle class makes up a smaller proportion of the population in New York than elsewhere in the nation. New Yorkers also live in a notably unequal place. Household incomes in Manhattan are about as evenly distributed as they are in Bolivia or Sierra Leone — the wealthiest fifth of Manhattanites make 40 times more than the lowest fifth, according to 2010 census data.”
But class divisions and their markers are visible in every markets:
“In the 1970s, the receipt of a Fisher Price farm set on Christmas Day would have conferred nothing terribly distinctive about class, having come from a department store and having appeared just as probably under the tree of a white-shoe lawyer as it would have under the tree of a brick layer. But toys, like lettuces or chocolate, have long since become another manifestation of difference. (And this is even before we arrive at an absurdity like the $1,499.99 Etch-a-Sketch encased in Swarovski crystals, currently at F. A. O. Schwarz, something that would appear to have been created as an engagement offering for an 8-year-old Trump to give a 6 ½-year-old Kardashian.)
What finds its way off the shelves of the chains is not what disappears from stores like Boomerang in TriBeCa, or Mary Arnold, the 81-year-old toy store on the Upper East Side. At those stores, the best-selling product of recent years has been something called Magna-Tiles, geometrically shaped magnetic tiles that allow children to imaginatively build virtually anything but what, in my experience, often turns out looking like the Crystal Cathedral in Southern California. Last Christmas, a flood near the factory where the tiles are made in Asia caused a shortage and a rise in price, with boxes of tiles, which usually retail for roughly $1 a tile, going for hundreds of dollars on eBay. By Dec. 12 last year, Ezra Ishayik, the owner of Mary Arnold, told me, he’d sold $20,000 worth of tiles and had run out.
Magna-Tiles are not sold at Toys “R” Us. Uninterested in sharing company with licensed products rendered in offensive colors, manufacturers like these resist the taint of the mass market, selling instead in museum gift shops and small, aesthetically palatable shops that draw from a narrow slice of our demographics. At the same time, as Sean McGowan, a toy industry analyst at the investment bank Needham & Company explained it, the market for educational toys is never quite as big as we would like it to be. While a company like Toys “R” Us carries educational toys, over time its commitment to promoting them has eroded, he said.
In many parts of the city, though, beyond Manhattan and the various precincts of brownstone Brooklyn, something like Toys “R” Us is really all that exists. As I learned when I phoned recently, Castle Hill Toys and Games in the Bronx, for instance, doesn’t consider itself much of a toy store at all anymore, having transitioned into a focus on bikes and bike repairs when Toys “R” Us came to be common in the borough.
In the way that we have considered food deserts — those parts of the city in which stores seem to stock primarily the food groups Doritos and Pepsi — we might begin to think, in essence, about toy deserts and the implications of a commercial system in which the least-privileged children are choked off from the recreations most explicitly geared toward creativity and achievement.”