Essays on Inequality in modern economies 2

8/11/2019 Essays on Inequality in modern economies 2

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ESSAYS

ON

INEQUALITY

IN

MODERN

ECONOMIES

by

Michael Roberts


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Contents

Inequality in Britain

Inequality of opportunity

1% versus 99%

Inequality, poverty and riots

Inequality: the cause of crisis and depression?

Inequality theres no stopping it!Defending the indefensible

The story of inequality

Global wealth inequality

Workers of the world cannot unite

Davos and the Chinese princelings

Is inequality the cause of crises?

Inequality and Britains oligarchs

How much inequality?

Unpicking Piketty

Inequality: the mainstream worry

The Waltons, John Cochrane and the road to serfdom


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Inequality in Britain

It is truly shocking. The just published report of UKs National Equality Panel, called Ananatomy of Economic Inequality in the UK, could not be more devastating as an indictment ofthe inequalities bred by the capitalist system. The report shows what Marxists already know:that the capitalist system of production enables a very small minority to live in luxury,

privilege and enjoyment, while the majoritys chances of a good quality of life are stunted,restricted and destroyed.

But the report is also an indictment of the failure of the New Labour government that hasbeen in office since 1997 to change this in any significant way. According to the report,inequalities of income, wealth and opportunity rose sharply during the Thatcher years of1979-90. But as of now, these inequalities are as bad as they were when Labour came tooffice in 1997.

Moreover, inequalities between rich and poor and the middling in Britain are greater than inmost other leading capitalist economies and are even worse than they were at the end ofsecond world war in 1945. As the report explains, these inequalities under capitalism makesure that it is impossible for those down the pyramid of income and wealth to betterthemselves and take advantage of so-called equality of opportunity.

In my book, The Great Recession, I took up the bogus arguments of the current Chairman ofthe US Federal Reserve, Ben Bernanke, who argued that you did not need equality of incomeor wealth to make a better society for all. You just needed equality of opportunity throughgood education etc.

The UKs Equality Panel Report annihilates that argument with the facts and thefigures. Without decent wages and enough wealth, hardly anybody will fulfil their potential,

because they wont get a good education, have good health, or obtain better jobs. Andwithout good education and a good job, you wont earn a good income or accumulate wealth

its a vicious circle. Indeed, as the Labour minister responsible for equality had to admit:class was much more important than gender or ethnic origin in affecting life chances.

Let me just list some of the conclusions of the report (and there are many more). The top 10%of earners have four times as much income than the bottom 10%. The top 10% of wealthholders (property, investments and cash) have 100 times the wealth of the bottom 10%. Ofthe top seven capitalist economies, only the US has a higher measure of inequality of income

These inequalities ensure that children from poorer backgrounds do not achieve as much aseducational success, get poorer paid and more difficult jobs, live in worse housing and growup to be poor again.

This cycle of luxury living on the one hand and deprivation on the other, with many in themiddle struggling to make things work, has been unchanged for generations (or centuries)under capitalism. And New Labour after 13 years in office has done nothing to change that.

28 January 2010


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Inequality of opportunity

In my book, The Great Recession, I refer to one of the major features of capitalism theinequality of income and wealth. Its not just that capitalism suffers from slumps ineconomic activity at regular intervals that destroy jobs and peoples livelihoods and wasteinvestment and production. Even in the good times of boom, capitalism generatesinequality in the incomes earned by people during capitalist production and in the wealthowned and controlled through the means of production under capitalism.

This inequality is exhibited between rich and poor countries and within countries. In mybook, I cite several devastating studies that reveal the extent of these inequalities bothglobally and within the richer countries like the US and the UK (see chapters 16 and 21),where the data are most freely available. And see the posts in this blog (Inequality in

Britain, 28 January and Unfair society, unhealthy lives, 11 February)

The gist of it, by the way, is that the differentials of wealth and income are very large andhave hardly altered (except for the worse) since the days of Karl Marx sitting in the BritishMuseum in the 1850s. Democracy, economic growth, better health and more schooling undercapitalism in the last 150 years have not altered the huge relative advantage that the rich havein life (both in its length and its quality) over the middle and poor sections of society.

In my book, there is one chapter (21) that deals with a speech by Ben Bernanke, the currenthead of the US Federal Reserve, in which he recognises that there are inequalities of wealthand income in the US. He explains that this is basically down to education; with equality ofeducational opportunities for all, inequalities of outcome in income; health, life expectancyetc can be reduced, Bernanke says.

Well, here is yet another piece of research that throws a heavy bucket of cold water overBernankes espousal of the American dream of equal opportunity. The OECD has publisheda report called Going for Growth, in which OECD researchers look at whether opportunitiesfor a better and prosperous life improve over generations in other words, on average, willyou do better than your parents and will your children do better than you? Can we move upor down the social ladder with ease under capitalism?

What does the OECD find? First, that a young persons educational attainment, futureearnings and life expectancy depend more than anything else on whether that youngster wasborn into a rich or poor family. The ability to improve on your parents status and wealth if

they are poor is very low in France, Italy, the UK or the US (its slightly better in the Nordiccountries, Australia and Canada).

The OECD finds that the more your parents earn or own, the better the children will do. Thismatters much more than the school that kids go to or the job opportunities there are in theirarea indeed, childrens chances of going to a good school or college or their future earningsdepend most on their parents status. This situation has persisted over generationsunchanged. Capitalism generates inequality and different outcomes for peoples lives on thebasis of wealth and income and still overwhelms the effects of improved and progressiveeducation and better health.

7 April 2010.


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1% versus 99%

We are the 99% is the slogan of the Anti-Wall Street campaign in the US. This refers to

the sheer inequality of income and wealth which exists in America. According to the latest

figures, the top 1% of income holders in the US receive over 20% of all income and ownnearly 35% of all Americas wealth.

According to the latest estimates of Arthur Kennickell at the US Federal Reserve (Ponds and

Streams: wealth and income in the US 1989 to 2007), in 2007, the top 1% of wealth holders

had net worth (thats total wealth net of any debt) of nearly $22trn, or 33.8% of all net wealth

in America ($65trn). He also estimated that the top 1% of income earners had 21.4% of all

income received in 2006or $2trn each year out of $9trn in total. If we add in the next 4%

of wealth holders, then the top 5% have over 60% of all wealth and 37% of all income.

It is increasingly fashionable to argue that inequality is the cause of the crisis in capitalismright now (for just one example among many, see Nouriel Roubinis The instability of

inequality.. This is odd. The cause of recessions and instability in capitalism in the 1970s

was not assigned to inequality of income or wealth. Indeed, many mainstream and heterodox

economists argued the opposite, namely that it was caused by wages rising to squeeze profits

in overall national incomesee chapter 20 in my book, The Great Recession. But now,

many Marxist economists argue that this current crisis is a product of wages being too low

and profits too high. This leads to low wage earners being force to borrow more and thus

eventually causing a credit crisis. So it seems that the underlying cause of capitalist crisis can

vary. The trouble with this eclectic approach is that it becomes unclear what the cause of

capitalist crisis isis it wages squeezing profits as in the 1970s or is it low wages leading to

a collapse of demand in the noughties?

Inequality of wealth and income may not be the cause of capitalist crises, but it is certainly a

product of capitalism. Capitalism, or the private profit society, is increasingly inefficient in

delivering our needs and increasingly unstable. But it has always been unjust and

unequal. Actually, inequality of incomes and wealth in a society is a feature of all class

societies, whether it is slavery, Asian absolutism, priestly castes, feudalism or capitalism. By

definition, inequality accompanies a class society. After all, why would anybody want to be

a member of the ruling elite if they did not enjoy the fruits, namely extreme wealth and

income as well as power and status. Indeed, even priestly castes, supposedly engaged in

waiting for the rewards of the after life and telling their flock that they must also wait, were

not slow in coming forward to benefit from the material life? Just take a look at the Vatican

and other Christian churches, the mosques of the Middle East, the synagogues and going

further back to the priestly rulers of Ancient Egypt, of the Aztecs and Incas of south

America. Class society means that the ruling class controls the surplus generated by the

labour time of the non-rulers, in whatever form. That means inequality is a consequence in

all class societies and is not a specific feature of capitalism that could explain its continual

boom and slumps.


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How unequal in wealth and income is the world (not just in the US) right now? Well,

Branco Milanovic at the World Bank has studied global inequality over the years carefully in

a series of books and papers. His measure of inequality is not a measure between nations but

between individuals, even though inequality is decided more by which country you live in

than by inequality within a country. Global elites (the top 10%) take 57% of all the incomecreated in the world and this ratio has hardly moved in 100 years. As Milanovic explains,

this flies in the face of the predictions of mainstream economics that argues inequality should

decline as economies get richer.

Simon Kuznets developed what is called the Kuznets curve in the mid-1950s. This tracked

the idea that in pre-industrial societies where everybody is poor, inequality is low. When

industrialisation takes place, as in the UK in early 19th century and in the rest of major

capitalist economies later in that century, then inequality grows between the urban and rural

populations. Then, as an economy matures, the urban-rural gap narrows and the welfare state

kicks in and inequality falls. So the Kuznets curve of inequality is an upside down U. Theother mainstream theory is that, as global trade expands, the demand for low-skill labour in

poor countries rises and so their incomes rise relatively to those in mature

economies. Inequality should decline.

Well, the evidence refutes both those theories. Global inequality of incomei.e. between

world citizensis high and has stayed high. The Gini coefficient (which measures the ratio

of income or wealth held by cohorts of individuals) has remained very high globally, near

70. It has risen in the US and the UK over the last 30 years and it has also jumped in

China. So the richest 1% of the worlds population now receive nearly 15% of all the

worlds income, while the poorest 20% receive only just over 1%!

Since the 1980s, inequality in incomes has grown in nearly all the major capitalist economies,

but particularly in the so-called Anglo-Saxon, deregulated free market economies like the

US and the UK (the top 1% had about 10% in the early 1980s and now have nearer 20%). In

Continental Europe, inequality has been staticthe top 1% had about 10% in the 1980s and

now have much the same ratio. In the US, average real incomes grew at a 1.3% rate between

1993 and 2008, but if you exclude the top 1%, the rate of increase was only 0.75% a

year. The incomes of the top 1% achieved a 3.9% a year rise, taking 58% of all the increase

in real incomes between 1993 and 2008. Indeed, in the great US booms of 1993-2000 and

2001-2007, the top 1% achieved annual growth in their incomes of over 10%, while the

bottom 99% achieved only 1.3-2.7% a year.

The most comprehensive and up-to-date analysis of inequality in the capitalist world has been

published jointly by the most eminent researchers in the field recentlyAnthony Atkinson,

Thomas Piketty and Emmanuel Saez. In their recent piece in the Journal of Economic

Literature, Top incomes in the long run of history, they looked at top income shares for more

than 20 countries. They concluded that top income shares have increased substantially in

the last 30 years. The top incomes share fell somewhat in the early part of the 20th century,

mainly during two world wars and the Great Depression. Inequality declines in wars andrecessions because profits collapse more than wages. Also, as wealth in industry and in


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stocks and shares fall, the income from them falls for the richest and thats a bigger part of

their income than for rest of us. In the last 30 years, the authors find that in all of the

Western English-speaking countries and in China and India, the share of income going to the

top 1% and 5% rose, with the US leading the way. While southern Europe and the Nordic

states also saw a rise in inequality, the change was small and from a lower level. In mainlandEurope (France, Germany and the Netherlands), there was no increase at all. Atkinson also

looked at the global rich, defined as those with more than 20 times the mean world

income. In the early 1990s, they constituted just 0.14% of the world population or 7m

people, with more than 2m in the US. These very rich earners had doubled in size in the US

between 1970 and 1992.

The top 10% of income earners in the US, with incomes over $110,00 a year, now receive

half of all the income each year. The top 1% with incomes over $400,000 a year received

nearly 25% of all income in 2007. This 1% constitutes 1.5m earners out of 150m earners in

America. One of the stats that the authors reveal is that, in the Great Recession, the bottom99% of income earners in the US suffered a 7% fall in their incomes, the largest drop since

the Great Depression. The other discovery is that it is the top 1% and even more, the top

0.1% of earners, who gained the most, compared with the top 5%. The inequalities are rising

within the rich to create a super-rich elite. Whereas the top 1% took 9% of incomes in 1978

and the top 5% took the next 12% , to make 21% in all; by 2008, the top 1% took 21% while

the top 5% took another 15% (making 36% in all). So the top 1% have reaped the biggest

gains in the last 30 years. Also the top 0.1% took only 1% of incomes in 1978 but now take

6%!

The main reason for this higher concentration is the massive rises in the incomes going to thevery top chief executives in the banks and big corporations. Its the same story in the

UK. The UKs High Pay Commission found that bosses salaries rose by 63% since 2002,

but total pay packages for top company executives had gone up by 700% since 2002. In

contrast, pay levels for the average worker in Britain rose only 27% before inflation and

taxes.

These extremes of inequality and the particularly fast rise in that inequality in the last 30

years is now beginning to worry the strategists of capital in an environment of depression in

the mature capitalist economies. It is not that they think inequality causes crises (although

some are beginning to argue that), it is because they fear a social backlash from the 99%

towards the 1%. And how right that fear now appears to be, given the global campaign

developing against the super-rich.

As one City economist , Jeremy Grantham put it: My worst fears about the potential loss of

confidence in our leaders, institutions, and capitalism itself are being realized. We have been

digging this hole for a long time. We really must be serious in our attempts to resuscitate the

fortunes of the average worker. Wouldnt it be better for us to decide deliberately and by

ourselves that income distribution which creates the best balance of social justice and

incentive to work? How about going back to the levels of income equality that existed underthe Presidency of that notable Pinko, Dwight Eisenhower? And dont think for a second that


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Inequality, poverty and riots

I have argued before that the cause of capitalist crises (slumps and recessions) does not liewith rising inequality in the advanced capitalist economies over the last 30 years or more. Butit is certainly one of the more grotesque features of modern capitalism. A new report fromthe OECD called, rather startingly, Divided we standon inequality in 18 leading capitalisteconomies, finds that in the three decades prior to the recent economic downturn, wage gapswidened and household income inequality increased in a large majority of OECD countries.

As the report concluded, this put the final burial rites on the mainstream economics ideaprevalent in the 1990s that if the rich got richer, their income and wealth would trickledown the income scale so that a rising tide lifted all the boats. That idea was best summedup by that leading ideologist of the New Labour government in the UK, Lord Mandelson,who said we are intensely relaxed about people getting filthy rich, as long they pay theirtaxes. Well paying their taxes, which they didnt in many cases, made not a blind bit of

difference, such was the largesse the filthy rich earned and such was the reduction in theeffective tax burden for the rich over the last 30 years.

The OECD report finds that, in all the major capitalist economies, the rich getting richer justmeant that they got further away from the rest of us and it did not matter if you lived in a so-called free market Anglo Saxon country, such as the US and the UK, or supposedly in moreegalitarian countries such as Denmark, Sweden and Germany. The pay gap between rich andpoor just widened: from five to one in the 1980s to six to one today. In so-called BRICs (Brazil, Russia, India and China), the ratio is an alarming 50 to one.

It is not just that the top 10% of the income distribution that has moved away from the bottom

10%. The top 1%, and even the top 0.1%, has accelerated away from everybodyelse. Income inequality has risen faster in Britain than in any other rich nation since the mid-1970s. The annual average income in the UK of the top 10% in 2008 was just under 55,000,about 12 times higher than that of the bottom 10%, who had an average income of 4,700.The share of the top 1% of income earners increased from 7.1% in 1970 to 14.3% in2005. The very top of British society the 0.1% of highest earners accounted for aremarkable 5% of total pre-tax income, a level of wealth hoarding not seen since the 1920s.

Some economists have argued, and that includes the OECD report, that inequality has risenbecause of technological change as low-paid manufacturing jobs were moved to developingcountries and craft and non-craft jobs were replaced by machines while computers do the

work of filing clerks. Other arguments are that it is due to the lack of education skills. Butthe evidence reveals that the real reason is the power of capital. The growth of an elite infinance capital has been the result of the expansion of that sector in modern capitalism. Andthis financial services elite have concentrated wealth into the hands of a tiny minority.

It brings into focus the truly grotesque set of figures revealed by the UKs High PayCommission. The commission found that chief executives of large companies are often paid70, 80 or over 100 times the salary of their average worker, when three decades ago the ratiousually stood at 13 to 1. According to the UKs Financial Services Authority, 1800 bankers inthe City still earn more than 1m a year after the banking collapse. So income rewards are notrelated to performance, but to the power of capital. The UKs Institute of Fiscal Studiesfound that bankers bonuses had played a large part in creating this divide. If you look at


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who is racing away, then half the top 1% of high earners work in financial services, said theIFS researcher. Mark Stewart, a professor of economics at Warwick University, has shownthat almost all the increase in inequality has come from financial services in the past 12years.

This rise in inequality worries the OECD. The social contract is unravelling, said AngelGurra, OECD secretary-general. The OECD warned of sweeping consequences for richsocieties and pointed to the rash of occupations and protests, especially by young people,around the world. Youths who see no future for themselves feel increasinglydisenfranchised. They have now been joined by protesters who believe they are bearing thebrunt of a crisis for which they have no responsibility, while people on higher incomesappeared to be spared, the OECD said.

To rebalance society for the 99%, the report calls for a series of measures focusing on jobcreation, increased redistributive effects and freely accessible and high-quality public

services in education, health and family care. Thats a rather sick joke when the British

government plans is cutting public sector jobs by 710,000 and hiking university fees. Thereport urged governments not to cut social investments. And yet that is exactly what theeconomists of OECD are proposing that governments in the major capitalist economies do inorder to get public sector deficits and debt under controlcut public spending and services.

The level of youth unemployment is now at record highs in most capitalist economies. Thatmeans millions of disaffected youth with no future and ready to lash out at the system. Lastsummers riots in the UK demonstrated that (see my post Criminality pure and simple, 8August 2011). So a comprehensive report on the UK riots is opportune.

In a detailed survey of the riots, the London School of Economics found that four out of fiveparticipants in summer unrest think there will be a repeat, with most believing poverty to be afactor. Of the 270 questioned in the Reading the Riots study, 81% said they believed thedisturbances that spread across England in August would happen again.Two-thirdspredicted there would be more riots before the end of 2014. Despite more than 4,000 riot-related arrests, and harsher than average sentences in the courts, many of those interviewedsaid they did not regret their actions. The research found they were predominantly from thecountrys most deprived areas, with many complaining of falling living standards andworsening employment prospects.

Those questioned as part of the study were pessimistic about the future, with 29% disagreeing

with the statement life is full of opportunities compared with 13% among the populationat large. Eighty-five percent said poverty was an important or very important factor incausing the riots. An independent panel set up prime minister David Cameron alsoconcluded that poverty was an important factor. It found that more than half of those whohad appeared in court proceedings relating to the riots had come from the most deprived 20%of areas in Britain. Many said they were angry about perceived social and economicinjustice, complaining about lack of jobs, benefits cuts and the closure of youthservices. Overall, the rioters questioned had lower levels of educational attainment, with athird of adults educated to GCSE level and one-fifth having no educational qualifications atall.Government data reveals that two-fifths of the young people who have appeared in courtin connection with the riots were receiving free school meals a key indicator of

deprivation. Two-thirds have been identified as having special education needs aproportion three times higher than for the population as whole. For many of those not in


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education, unemployment was the norm among the rioters who were interviewed. Theyrepeatedly complained about their struggle to find workwith some even saying they soughtout and looted shops that had rejected their job applications. Fifty-nine percent of the riotersinterviewed in the study who were of working age and not in education were unemployed.

Rising inequality and joblessness, increasing social unrest and riots. Thats moderncapitalism in 2011.

6 December 2011


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Inequality: the cause of crisis and depression?

The inequality issue has risen its head again. Paul Krugman took it up big time again in hisNew York Times column: Did the rise of the 1 percent (or, better yet, the 0.01 percent)cause the Lesser Depression were now living through? It probably contributed. But the more

important point is that inequality is a major reason the economy is still so depressed andunemployment so high. For we have responded to crisis with a mix of paralysis and confusion

both of which have a lot to do with the distorting effects of great wealth on oursociety..There would have been a broad bipartisan consensus in favor of strong action, and

there would also have been wide agreement about what kind of action was needed. But thatwas then. Today, Washington is marked by a combination of bitter partisanship andintellectual confusion and both are, I would argue, largely the result of extreme incomeinequality.

Krugman sees the role of inequality in policy action i.e. rich people dont want to change

anything. But there is a much bigger body of left economists including Marxists who reckoninequality is not just unfair, it is the main economic cause of the crisis. There is a long line ofacademic papers supporting this view. I cannot go through all of them in this post. Indeed, Idont know where to start and to stop, with so many books and papers coming out explainingthat the rising inequality of income and wealth in the major capitalist economies has createdinstability and depression. But let me outline some the key arguments presented.

Take James Galbraiths new book calledInequality and Instability. In this book, by the sonof the famous New Deal Keynesian economist, JK Galbraith, it is argued that As WallStreet rose to dominate the U.S. economy, income and pay inequalities in America came todance to the tune of the credit cycle. Galbraith argues that the rise of the finance sector was

the driveshaft that linked inequality to economic instability.

And the ex-chief economist of the World Bank, Nobel prize winner and now scourge ofmainstream economics, Joseph Stiglitz, takes the same position. Why might wideninginequality lead to a banking crisis? Stiglitzs theory is that growing inequality in mostcountries of the world has meant that money has gone from those who would spend it to thosewho are so well off that, try as they might, they cant spend it all. This flood of liquiditythen contributed to the reckless leverage and risk-taking that underlay this crisis, heasserts. In a related view, called the Stiglitz hypothesis, Sir Anthony Atkinson and SalvatoreMorelli propose that in the face of stagnating real incomes, households in the lower part ofthe distribution borrowed to maintain a rising standard of living, and this borrowing later

proved unsustainable, leading to default and pressure on over-extended financialinstitutions. And in previous posts, I have noted that the great guru of crisis economics,Nouriel Roubini, raised growing inequality as the key cause of capitalist crisis (see my post,1% versus 99%, 21 October, 2011) in particular, see Roubinis, The instability ofinequality.

Michael Dumhoff and Romain Ranciere from the IMF argue that long periods of unequalincomes spur borrowing from the rich, increasing the risk of major economiccrises According to Dumhoff and Ranciere, something happens to lead to incomestagnation for middle and low-income workers, while high-income households acquire morecapital assets. This increases the savings of wealthy households relative to lower-incomehouseholds. In order to keep their living standards from declining, the middle class borrowsmore. Financial innovations, including new types of securitization, increase the liquidity and


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lower the cost of loanable funds available to the borrowers. So the bottom groups greaterreliance on debt and the top groups increase in wealth generated a higher demand for

financial intermediation and the financial sector thus grows rapidly as do the debt-to-incomeratios of the middle class relative to the wealthy. The combination of rising middle class debtand stagnant middle class incomes increases instability in financial markets, and the system

eventually crashes.

Its true that US aggregate debt-to-income across all income groups grew consistently withthe income share of the top 5% both before the Great Depression and Great Recession. Thisincrease was a considerably sharper in recent years for the bottom 95% than the top 5%.

But is this growing inequality and rising debt the cause of slumps? A paper by MichaelBordo and Christopher Meissner from the Bank of International Settlements analysed the dataand concluded that inequality does not seem to be the reason for a crisis. Credit booms

mostly lead to financial crises, but inequality does not necessarily lead to credit booms. Ourpaper looks for empirical evidence for the recent Kumhof/Rancire hypothesis attributing the


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US subprime mortgage crisis to rising inequality, redistributive government housing policyand a credit boom. Using data from a panel of 14 countries for over 120 years, we findstrong evidence linking credit booms to banking crises, but no evidence that rising incomeconcentration was a significant determinant of credit booms. Narrative evidence on theUS experience in the 1920s, and that of other countries, casts further doubt on the role of

rising inequality.

Edward Glaesar also points to research on the US economy that home prices in various partsof the US did not always increase where there was the most income inequality. That calls intoquestion the claim that income inequality was inflating the housing bubble. He concludes:Professors Atkinson and Morellis international data also suggest little regular connection

between inequality and crises. Looking at 25 countries over a century, they find ten caseswhere crises were preceded by rising inequality and seven where crises were preceded bydeclining inequality. Moreover, inequality was higher in two of the six cases where a crisisis identified, which is exactly the same proportion as among the 15 cases where no crisis isidentified.

Now dont get me wrong. I am not saying that there has not been rising inequality of incomeand wealth in most major capitalist economies during the so-called neoliberal era from the1980s. Indeed, in various posts (Karl Marx was right (partly),16 August 2011; Inequality,

poverty and riots, 6 December 2011), I have highlighted the growing body of research thatreveals this grotesque feature of modern capitalism.

Now let me add the very latest research to that. In a working paper from the OECD, KajaBonesmo Frederiksen (Income inequality in the European Union, OECD Working paper 952,16 April 2012), found that inequality had risen quite substantially since the mid 1980s andthat the large gain accruing to the top 10% of earners was the main driver of thisinequality. The reason that the top 10% did better was down to a decline in progressivetaxation, rising capital gains from property and share ownership, so-called performancerelated pay, weaker trade unions and globalisationindeed all the elements of the neo-liberalera.

I did some analysis of the OECD paper and found that the ratio of the share of real disposableincome growth going to top 10% over growth in income going to the bottom 10% averaged2.6 times for the European Union, 9.1 times for the UK and a staggering 21.9 times for theUS. That means the top 10% of income earners in the US got 22 times more growth inincome that the bottom 10% between the mid-1980s and 2008. Only in France and Greece

was income growth for the bottom 10% faster than for the top 10%. The most neo-liberalcapitalist economies saw the most unequal expansion in incomes. While the bottom 10% ofincome earners in Europe managed just 0.87% annual increase in real disposable incomefrom the mid-1980s to 2008, the top 10% got 2.23% a year. And the top 10% of Britishincome earners did best in the whole of the OECD, experiencing 4.2% average annual growthin real disposable income, while the bottom 10% got only 0.5% annual increase a year overthe last 3o years.

But it is one thing to recognise that inequality has rocketed in the last 30 years and quiteanother to claim that this explains the credit crunch and the Great Recession. What is wrongtheoretically with this argument is that it assumes, as the Keynesians do, that the fundamental

weakness of capitalism lies on the demand side of the economy. Since many people hadinsufficient income to consume they borrowed money to maintain their living


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Inequality of wealth and income: the rich alongside a mass of poverty. This has always beena feature of class societies, including capitalism. As Marx said, all history is really the historyof class struggle. What that means is the struggle to control the surplus created in anysociety. But inequality is not the cause of crises. Booms and slumps took place beforeinequality rose to current extremes. They can take place even when there is relative equality:

indeed the drive for equality of income now would eat into profit shares and could exacerbatethe crisis. And more equality will not stop slumps.

21 May 2012


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Inequality: theres no stopping it!

In the New York Review of Books this week, Paul Krugman wrote a piece on why austeritywas taken up and why it has failed. In passing he commented Its also worth noting thatwhile economic policy since the financial crisis looks like a dismal failure by most measures,it hasnt been so bad for the wealthy. Profits have recovered strongly even as unprecedented

long-term unemployment persists; stock indices on both sides of the Atlantic have reboundedto pre-crisis highs even as median income languishes. It might be too much to say that thosein the top 1 percent actually benefit from a continuing depression, but they certainly arent

feeling much pain.

Indeed that is the case. In its latest update on inequality of income in the 33 mature capitalisteconomies, the OECD revealed that inequality has continued to rise since the GreatRecession troughed. Income inequality in the OECD countries excluding the mitigatingeffect of the welfare stateincreased more in the first three years of the financial crisis to the

end of 2010 than in the previous 12! Although overall take home inequality (i.e after taxand benefits) did not rise sharply between 2007 and 2010, the richest 10% of the populationstill did better than the poorest 10% over this period in 21 of the 33 countries analysed by theOECD. The differences were most acute in those countries where household incomesdropped the most. In Spain and Italy, the income of the top 10% was fairly stable even aftertaxes, while the income of the bottom 10% fell about 14% and 6% respectively. Sogovernment policies of austerity fell solely on the poor and not the rich.

Back in 2011, the OECD did a very comprehensive report on income inequality entitledironically, Divided we stand. The report concluded that the gap between rich and poor hadwidened considerably over the three decades to 2008, when it reached an all-time high. The

OECD data were confirmed by the IMF in its paper last September (Income inequality andfiscal policy) that found inequality of income has also widened in the same period.

The new OECD data now show that the global economic crisis of 2008 squeezed averagehousehold incomes in most countries and inequality increased in the following three years to2011, despite taxes and transfer measures by governments. Over these three years, realincomes in the OECD fell 2% on average per year, driven down by higher unemployment andfalling real wages from work. The fall was greatest in that Keynesian poster model, Iceland,where household market income was down 12% per year between 2007 and 2010 .Keynesian Iceland was followed by the Austerian peripheral Eurozone households likeGreece, Spain and Ireland, which took hits of 6-8% per year. US household income fell

slightly more than the OECD average of 2% a year. Just a few countries had no fall at all: thehouseholds of Germany, Canada, Sweden and Poland.

This decline in household income was not shared out equally. On the contrary, as measuredby the gini coefficient (which is gauged at zero when everybody has the same income and 1when one person has all the income, inequality rose across the OECD between 2007 and2011 by 1.3% points to a new high. Indeed, market income inequality rose by more inthose years than in the previous 12 years!


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The biggest rise in inequality was experienced by Ireland, Spain, Japan, Greece and Franceand Iceland. Again, US inequality increased more than the OECD average. The mostunequal place in the OECD was Chile. The gap between the rich and the poor has widenedsince 1980s but much more so in the UK and the US than the OECD average. Indeed, the USgini coefficient is one of the highest in the OECD and the highest of the large capitalisteconomies. The UKs is not far behind.

The UK and Italy are more unequal than the US before taxes and benefits, but after, the US ismore unequal, showing the bias of tax and welfare is towards the richer in the US.


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Its the European ecom0mies that tend to have more equality as measured by the ginicoefficient. France and Germanys gini is still below the OECD average although Germanysrose sharply after the euro was founded. But even in these economies the gini ratio is about.28, well short of equality.

It is still the case that the top 10% of income earners receive ten times more income than thebottom 10% in the OECD and thats after tax and transfers. That ratio is over 15 times inthe US, only surpassed by Chile and Mexico at 27 times. This inequality is also expressed inthe levels of relative poverty in the OECD. About 11% of the OECD population has lessincome than half their national median incomes. That poverty measure is very high in theUS, at 17% in 2010. Poverty rates rose most in the Great Recession in the peripheralEurozone countries, as you might expect.

Britons have become poorer than their counterparts in a host of other rich economies, sliding

from fifth to 12th on a global list of wealth based on disposable incomes. While the sparecash available to households in most advanced economies grew at a similar pace between


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2005 and 2011, disposable incomes in countries such as France and Australia rose at a fasterrate than the UK, as price pressures weighed on the average Britons disposableincome. Households in Canada Belgium, Sweden, Austria and Switzerland also becamericher than those in the UK. The average per head disposable income in the UK was $27,927in 2011, compared with 26,050 in 2005. In the US, the figure has has risen from $34,373 to

$39,658 over the same period.The pound lost a quarter of its value in 2008, which pushed upprices on imports at a far faster rate here than in other large industrialised economies.

As the rich have gotten richer, people across Europe have noticed and they do not like it. Astrong majority (a median of 77%) of Europeans surveyed think that the current economicsystem generally favours the wealthy. This includes an overwhelming 95% of the Greeks,89% of the Spanish and 86% of the Italians. Even seven-in-ten (72%) Germans, who havefared economically better than other European, think so. The vast majority of all Europeans(85%) surveyed overwhelmingly agree that the gap between the rich and the poor hasincreased in the past five years. And they are right.

I have argued before in previous posts that, contrary to the views of many leftist economists,rising inequality was not the cause of the Great Recession of 2008-9 or the ensuing LongDepression now being experienced in the mature capitalist economies of the OECD.

But it is clear that the rich are not suffering from this depression, as Paul Krugman says. Theimmediate crisis of the banking collapse was resolved by bailing out the bankers withworkers taxes and welfare payments. And the economic recovery is being made on the

backs of workers jobs and real incomes, while the stock markets boom and profits soar at theexpense of employment.

The graph below that US corporate profit per employee has risen dramatically since thetrough of the Great Recession (its the red line going down an inverse left-hand scale) sothat total corporate profits have reached new heights. Cutting labour costs rather thanboosting growth through investment or expanding sales has been the cause of profits boomsince 2009.

Its socialism for the rich and capitalism for the poor.

17 May 2013


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Defending the indefensible

Greg Mankiw is professor and chairman of the prestigious economics department of Harvard

University. He is also author of the most widely used textbook on economics by university

undergraduates. So he could not be more mainstream. Mankiw has a blog and justpublished a new paper entitled,Defending the 1%.

Mankiw is trying to be provocative and clever in this paper by arguing that there are

perfectly good economic and even moral reasons for the top 1% of income earners in the US

to have their huge share of total income. In 2010, the top 1% had 17.4% of all income earned

in the US, by any measure a very extreme level of income inequality. As has been

documented in many studies, that share of income going to the 1% has risen sharply from just

(!) 7.7% in 1973. Mankiw seeks to justify (defend) this more than doubling of the income of

the 1% against the cries and protests of the Occupy movement. He feigns to show sympathy

with their principles but his paper aims from beginning to end to refute all the arguments ofthe left that this inequality is morally wrong or inefficient by using the principles of

mainstream economics and a healthy dose of political philosophy.

His first defence is the one most used, namely that the reason the top 1% have had a rising

share of income in the last 40 years has been the growing gap between the skills and

education of workers. Skill-biased technical change has increased the demand for skilled

labour and so incomes for the skilled have risen faster than the unskilled. Mankiw quotes the

usual study of his fellow Harvard economists, Claudia Goldin and Larry Katz who have

described this as a race between education and technology. But there are plenty of other

studies that argue something different has been going on. In a working paper from the

OECD, Kaja Bonesmo Frederiksen (Income inequality in the European Union, OECD

Working paper 952, 16 April 2012), found that the reason that the top 10% did better was

down to several factors: a decline in progressive taxation, rising capital gains from property

and share ownership, so-called performance related pay, weaker trade unions and

globalisationindeed all the elements of the neo-liberal eraand not better technology

skills.

The differences between the pay of the skilled and unskilled is not much different in the US

compared to the UK or Europe. And yet, as the OECD working paper shows, the ratio of the

share of real disposable income growth going to top 10% over growth in income going to the

bottom 10% averaged 2.6 times for the European Union, 9.1 times for the UK and a

staggering 21.9 times for the US. That means the top 10% of income earners in the US got

22 times more growth in income that the bottom 10% between the mid-1980s and 2008,

while in France and Greece income growth for the bottom 10% was faster than for the top

10%! So the most neo-liberal capitalist economies saw the most unequal expansion in

incomes.

Mankiw wants to dismiss the arguments of Joseph Stiglitz (The price of inequality, 2012)

who argues that the top 1% have scooped the lions share of incomes because of rent-seeking, namely the ability to appropriate incomes produced through protectionism,


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differences with inheritance. Genes may be passed on, but there is no reason why incomes or

wealth should be passed on from parent to child. The top 1% of income earners can

perpetuate their income status for their children, but not because of their genes but because of

their influence. Take the current scandal that internships in lucrative companies can be

arranged by rich parents working in them or knowing the contacts, while equally cleverpoorer kids dont get a look in.

Okay, Mankiw says, let us assume that there are serious inequalities of income that are

unfair. What can be done about it? Apparently little. Mankiw correctly points out that the

US income tax system is already progressive. In other words, the more income you earn,

the more you pay as a percentage in income tax. The poorest fifth pay just 1% of their

income in federal taxes, the middle fifth pay 11% and top 20% pay 23%, while the top 1%

pay 29% of their income in tax. So federal taxes are progressive. So whats the problem,

says Mankiw.

But federal taxes are not the only taxes that people. People also pay sales taxes, VAT,

insurance taxes, capital gains tax and payroll taxes. And these are not progressive at

all. Then there are the subsidies, allowances and exemptions from tax usually paid to the

better off. There is every reason to conclude that the whole taxation system could be way

more progressive and so bring about greater equality of incomes.

But Mankiw appears to reject the case for government applying any redistributive policies at

all. After all, he says, if you are born with two kidneys and somebody else has two failing

ones, government should not be able to enforce the removal of one of your kidneys to give it

to the other person. Mankiw equates the forcible removal of a persons kidneys with thedemocratic decision of a government to make top earners pay more to help lower earners and

to spend on public goods!

Mankiw prefers what he calls a just deserts perspective namely that a person should get

an income congruent with his contribution to society. On this perspective, there should not

be higher taxation of those earning more because they are only receiving their just deserts,

an income that matches their marginal productivity. Mankiw thus presents us with the

neoclassical concept of marginal productivitya concept hugely discredited as bearing no

resemblance to the reality of capitalism (see Fred Moseleys critique of Mankiw and marginal

productivity.

Mankiw discusses only the inequality of income in the US. But global inequality is even

greater and clearly not the result of just technology and skill differences, but instead the

product of trade and capital flows dominated and controlled by rich capitalist economies over

weaker ones.

And Mankiw only talks of inequality of income. But under capitalism, private (not common)

ownership of financial assets, real estate and the means of global production is key. So

inequality in these social assets is much more important and even greater than with

incomes. The power of capital dominates and exploits labour and thus enables the 1% toreap the benefits of the value created by the 99%. Mankiw has nothing to say about this.


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Marx never advocated equality, if we mean by that completely equal incomes or personal

wealth for each person or household unit in a society. But neither was the Marxist

perspective one of just deserts. Instead, it was from each according to his/her abilities; to

each according to his/her needs. People (Steve Jobs) may have different or unequal

abilities, but a commonwealth would provide for all according to their needs.

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The story of inequality

The 15th conference of the Association of Heterodox Economists took place last week. Thekeynote theme of this gathering of economists who are not of the mainstream wasinequality. The worlds greatest economic expert on inequality of wealth and income is TonyAtkinson, or should I say, Sir Anthony Atkinson. Atkinson is senior research fellow atNuffield College, Oxford and a distinguished econometrician.

Atkinsons address was entitled Where is inequality headed?. Inequality is back on theeconomic agenda after being ignored for decades by mainstream economics. But officialspokespeople and mainstream economists everywhere are now looking at the subject, afterthe financial crash and the revelation that the top 1% (bankers and top corporate executives)have been stacking up their earnings while the 99% have been stuck with unmoving realincomes for years.

Atkinson was careful to define inequality for his purposes: namely inequality of incomewithin a country, not inequality of wealth or income between countries. I have referred to thegroundbreaking work of Branko Milanovic from the World Bank who has shown that thebiggest inequalities of income and wealth are engendered by the gaps between the rich andpoorer countries rather than inequalities between rich and poor within a country. ButAtkinson concentrates on inequalities within countries. Atkinson reckons that the bestmeasure of inequality of income is between households, not individuals, and after tax andbenefits have been distributed. This household disposable income includes not just earningsfrom work but also capital income (rent and interest and dividends).

On this measure, Atkinson has an interesting story to tell about the changes in inequality of

incomes in the advanced capitalist economies. Using the gini coefficient, which measuresaverage inequality across the spectrum of households, Atkinson finds that in the OECDeconomies there has been a rise of about 3% pts in the coefficient from about 28 to 31 sincethe 1980s, or a rise of about 10%. This confirms the evidence of the OECD that I hadpreviously referred to.

Adding to that OECD study, Atkinson pointed out that between 1911 and 1950, inequality ofincome actually declined slightly, reaching its most equal point (still pretty unequal) in theyears immediately after WW2. But from the 1980s it rose sharply. Interestingly, the largest


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rise in inequality in the UK was in the 1980s during the Thatcher years, when the gini ratiorose a staggering 10% points, briefly exceeding the US by the early 1990s. The other shockerwas the rise in inequality in social democratic Sweden, which now no longer has a moreequal society, at least as measured by disposable household income. In contrast, inequality ofincome in France fell a little during the same period.

The latest data from the UKs ONS confirm this story of rising i nequality during the 1980sand then a levelling off in the 1990s onwards

Atkinson then asked the question: why? What were the causes of the rise in householdinequality of income in the advanced capitalist economies after the 1980s? The usual reasongiven by mainstream economics is that new technology and globalisation led to a rise in thedemand for skilled workers over unskilled and so drove up their earnings relatively. This isthe argument presented by Greg Mankiw recently in his defence of the top 1% of earners.

Atkinson dismissed this neoclassical apologia. The biggest rises in inequality took placebefore globalisation and the dot.com revolution got underway in the 1990s. Atkinson pinneddown the causes to two. The first was the sharp fall in direct income tax for the top earnersunder neoliberal government policies from the 1980s onwards and the sharp rise in capitalincome (i.e. income generated from the ownership of capital rather than from the sale oflabour power). The rising profit share in capitalist sector production that most OECDeconomies have generated since the 1980s was translated into higher dividends, interest and

rent for the top 1-5% who generally own the means of production. In 2011, capital incomeconstituted 60% of the top 10% earners income compared to just 32% in the 1980s.

Higher returns from capital have been coupled with lower taxes on capital and on the incomeearned by the top earners. The total effective tax rate is the total amount paid by householdsin both direct and indirect taxes as a percentage of their gross income. In the UK, theeffective tax rate grew during the 1960s and 1970s from 28.4% in 1961 to a peak of 39.4% in1983. But from then on, under Thatcher, Major and New Labour, the trend has beendownward, reaching a low of 32.8% in 2009/10, before increasing slightly over the last twoyears to 34.6%.


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.

As a result, even though the rich pay more in tax than the poor because they earn more, thebottom 20% of households now pay more in tax as a percentage of income (36.6%) than thetop 20% in the UK (35.5%)!

The other key issue on inequality is whether it is the main reason for the last globalcrisis. Many leftist and some mainstream economists reckon that restricted incomes for thelower income groups caused the Great Recession because consumption and effectivedemand weakened and because households resorted to taking on more debt to compensate

for the lack of growth in the incomes from work. I have argued before in previous posts thatrising inequality was not the cause of the Great Recession of 2008-9 or the ensuing LongDepression now being experienced in the mature capitalist economies of the OECD. But thisargument persists and many papers at this years AHE conference pressed on with thisargument with some evidence.

But the evidence for this thesis remains questionable. A paper by Michael Bordoand Christopher Meissner from the Bank of International Settlements has analysed the dataand concluded that inequality does not seem to be the reason for a crisis. Credit boomsmostly lead to financial crises, but inequality does not necessarily lead to credit booms. Our

paper looks for empirical evidence for the recent Kumhof/Rancire hypothesis attributing theUS subprime mortgage crisis to rising inequality, redistributive government housing policyand a credit boom. Using data from a panel of 14 countries for over 120 years, we findstrong evidence linking credit booms to banking crises, but no evidence that rising incomeconcentration was a significant determinant of credit booms. Narrative evidence on theUS experience in the 1920s, and that of other countries, casts further doubt on the role ofrising inequality.

Edward Glaesar also points to research on the US economy that home prices in various partsof the US did not always increase where there was the most income inequality. That calls intoquestion the claim that income inequality was inflating the housing bubble. And Glaesar

refers to Atkinson on this: Professors Atkinson and Morellis international data alsosuggest little regular connection between inequality and crises. Looking at 25 countries over


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a century, they find ten cases where crises were preceded by rising inequality and sevenwhere crises were preceded by declining inequality. Moreover, inequality was higher intwo of the six cases where a crisis is identified, which is exactly the same proportion asamong the 15 cases where no crisis is identified.

It is one thing to recognise that inequality has rocketed in the last 30 years and quite anotherto claim that this explains the credit crunch and the Great Recession. What is wrongtheoretically with this argument is that it assumes, as the Keynesians do, that the fundamentalweakness of capitalism lies on the demand side of the economy. Since many people hadinsufficient incomes to consume, they borrowed money to maintain their livingstandards. Radically different conclusions follow if the problem is located on the supply side(with the cause to be found in profitability). From this perspective, falling profitabilityexplains the sluggish character of the productive economy and is at the root of the crisis. Ifthe economy had been more profitable, there would have been less need for such a rapid orexcessive expansion of credit. From this perspective, the widening of inequality is more ofa symptom than a cause of economic weakness. The rich became richer with the emergence

of the asset bubble, but the underlying economy was far from healthy in the first place.

What is decisive for capitalism is surplus value (profit, interest and rent), not wage income orspending. Control of that surplus is key. The main feature of the last 100 years of capitalismhas not been growing inequality of income indeed, as Atkinson shows, inequality has notalways risen. The main feature has been a growing concentration and centralisation ofwealth, not income. And it has been in the wealth held in means of production and not justhousehold wealth.

A new study shows how far that has gone in the recent period. Three systems theorists at theSwiss Federal Institute of Technology in Zurich have taken a database listing 37 millioncompanies and investors worldwide and analysed all 43,060 transnational corporations andshare ownerships linking them (147 control). They have a built a model of who owns whatand what their revenues are, mapping out the whole edifice of economic power. Theydiscovered that a dominant core of 147 firms through interlocking stakes in others togethercontrol 40% of the wealth in the network. A total of 737 companies control 80% of itall. This is the inequality that matters for the functioning of capitalism the concentratedpower of capital.

14 July 2013


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Global wealth inequality: top 1% own 41%; top 10% own

86%; bottom half own just 1%

Despite the financial crisis of 2008 and the difficulties in the Eurozone, global wealth has

more than doubled since 2000, reaching over 150 trillion, according to the latest globalwealth report from Credit Suisse.

Economic growth in developing countries and rising populations have played a significantpart in the figures. Aggregate total wealth rocketed past the pre-crisis peak in 2010 and hasbeen climbing higher ever since. Average wealth per adult has reached 32,167 after a rise of4.9 per cent during the year to mid-2013.

Change in household wealth by region 2012-2013:

Region Total Wealth 2013 (USD billion) Percentage Change 2012-13

Africa 2,711 1.2

Asia-Pacific (including China and India) 73,879 -3.7

Europe 76,254 7.7

Latin America 9,139 3.6

North America 78,898 11.9

World 240,881 4.9

The countries experiencing the largest wealth gains of over 620bn included the US, Japan,China, Germany and France. The UK came sixth in total wealth gains with over 125bn.

A large part of the gains made in the US were due to rising house prices and a strengtheningequity market driving up the Dow Jones. The US increased the global wealth stock by 5.05trillion, a 54 per cent increase since the downturn of 2008.

Switzerland remains the richest nation in the world, on average, with wealth rising to319,805 per adult. Australia, Norway and Luxembourg all saw an increase in wealth peradult and retained their respective second, third and fourth places from 2012.

In terms of global distribution, once debts have been subtracted, 2493 in assets will place anadult in the top half of the worlds wealthiest citizens. Wealth of 46,000 is required for anadult to reach the top 10 per cent of global wealth holders, while personal wealth of469,422 places an adult in the top one per cent.

The report forecasts that wealth will rise by close to 40 per cent in the next five years with

emerging markets to increase their share of global wealth to 23 per cent by 2018. China is


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expected to see household wealth dramatically, growing by 10.1 per cent over the next fiveyears.

Just 8.4% of all the 5bn adults in the world own 83.4% of all household wealth (thats

property and financial assets, like stocks, shares and cash in the bank). About 393 million

people have net worth (thats wealth after all debt is accounted for) of over $100,000, thats

10% own 86% of all household wealth! But $100,000 may not seem that much, if you own a

house in any G7 country without any mortgage. So many millions in the UK or the US are in

the top 10% of global wealth holders. This shows just how little two-thirds of adults in the

world haveunder $10,000 of net wealth each and billions have nothing at all.

This is not annual income but just wealth in other words, 3.2bn adults own virtually nothing

at all. At the other end of the spectrum, just 32m people own $98trn in wealth or 41% of all

household wealth or more than $1m each. And just 98,700 people with ultra-high net worth

have more than $50 million each and of these 33,900 are worth over $100 million each. Halfof these super-rich live in the US.

All this is in a new global wealth report published Credit Suisse Bank and authored by

Professors Anthony Shorrocks and Jim Davies. The professors find that global wealth has

reached a new all-time high of $241 trillion, up 4.9% since last year, with the US accounting


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for most of the rise. Average wealth hit a new peak of $51,600 per adult but the distribution

of that wealth is wildly unequal.

There is nothing new in this report in one sense because Tony Shorrocks previously authored

a UN report back in 2010 that found virtually the same wealth inequality and Branko

Milanovic also found similar figures in various World Bank studies. But what is also

interesting is that Professor Shorrocks finds that there is little or no social mobility between

rich and poor over generations87% of people stay rich or poor, hardly moving up or down

the wealth pyramid.

This inequality is mirrored within each country. In the UK, aggregate total wealth (including

private pension wealth but excluding state pension wealth) of all private households in Great

Britain was 10.3 trillion. And the wealthiest 10 per cent of households were 4.4 times

wealthier than the bottom 50 per cent of households combined. The wealthiest 20 per cent of

households owned 62 per cent of total aggregate household wealth.

Moreover, according to the Credit Suisse report, the American dream or the British idea of

rags to riches is a myth. Two-thirds of American adults are in the same wealth decile as

their parents were. Even globally, while some individuals do alternate wildly between rags

and riches, many stay for their whole lifetime in the same wealth neighborhood for people of

their age. Dividing the population into wealth quintiles, about half the population remains in

the same quintile after ten years and we estimate that at least a third would be in the same

quintile after thirty years.

Global wealth is projected to rise by nearly 40% over the next five years, reaching $334

trillion by 2018. Emerging markets will be responsible for 29% of the growth, although they

account for just 21% of current wealth, while China will account for nearly 50% of the

increase in emerging economies wealth. Wealth will primarily be driven by growth in the

middle segment, but the number of millionaires will also grow markedly over the next five

years.

All class societies have generated extremes of inequality in wealth and income. That is thepoint of a rich elite (whether feudal landlords, Asiatic warlords, Incan and Egyptian religiouscastes, Roman slave owners etc) usurping control of the surplus produced by labour. But pastclass societies considered that normal and god-given. Capitalism on the other hand talksabout free markets, equal exchange and equality of opportunity. But the reality is nodifferent from previous class societies.

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Workers of the world cannot uniteconclusive evidence

In a recent post I relayed the results of a study of the global inequality of wealth (thats

property and financial assets) recently produced by the top experts in the field, Tony

Shorrocks and Jim Davies. The study revealed that the top 1% of wealth holders in the worldhad 41% of the wealth and the top 10% had 86%. Remember this is wealth across the whole

world and so reflects not just inequality of wealth within a country but also inequality

between countries. Indeed, most of the top 10% live in the top seven (G7) advanced

capitalist economies.

Now, in a new paper, Branco Milanovic of the World Bank has updated his definitive study

of the inequality of incomes (not wealth) globally. I have referred to Milanovics work

before (see my book, The Great Recession pp 255-6). Way back in 2005, Milanovic carefully

documented in his book, Worlds Apart (updated in 2007) that the global inequality of income

(and wealth), was 20:80 (i.e. that 80% of worlds then 6.6bn population could be classed aspoor) and the situation was getting worse, not better, even if you take into account the

booming so-called BRICs (Brazil, Russia India and China).

The usual measure of inequality is the gini coefficient. This measure of inequality takes its

name from the Italian statistician and economist Corrado Gini. The gini index ranges from 0

when everybody has the same incometo 1, or 100 (expressed as a percentage or an

index), when one person gets the entire income of a city (province, nation, world)whatever

is the relevant population over which we calculate inequality. Milanovic uses national

household surveys from dozens of countries over time as raw data to work out his gini

indexes for each country and the world.

Milanovic concludes:Take the whole income of the world and divide it into two halves: the

richest 8% will take one-half and the other 92% of the population will take another half. So,

it is a 92-8 world. In the US, the numbers are 78 and 22. Or using Germany, the numbers

are 71 and 29. So its 92-9 world noweven more unequal than he measured

before. Milanovic notes that global inequality is much greater than inequality within any

individual country. The global gini is around 70, substantially greater than inequality in

Brazil, the highest for a country. And it is almost twice as great as inequality in the United

States.

Milankovic finds that the 60m or so people who constitute the worlds top 1% of income

earners have seen their incomes rise by 60% since 1988. About half of these are the richest

12% of Americans. The rest of the top 1% is made up by the top 3-6% of Britons, Japanese,

French and German, and the top 1% of several other countries, including Russia, Brazil and

South Africa. These people include the world capitalist classthe owners and controllers of

the capitalist system and the strategists and policy makers of imperialism.

But Milanovic finds that those who have gained income even more in the last 20 years are the

ones in the global middle. These people are not capitalists. These are mainly people in

India and China, formerly peasants or rural workers have migrated to the cities to work in the


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sweat shops and factories of globalisation: their real incomes have jumped from a very low

base, even if their conditions and rights have not.

The biggest losers are the very poorest (mainly in African rural farmers) who have gained

nothing in 20 years. The other losers appear to be some of the better off globally. But this

is in a global context, remember. These better off are in fact mainly working class people in

the former Communist countries of Eastern Europe whose living standards were slashed

with the return of capitalism in the 1990s and the broad working class in the advanced

capitalist economies whose real wages have stagnated in the past 20 years.

Milanovic shows that, since the Industrial Revolution that accompanied the rise to dominance

of the capitalist mode of production globally, inequality in world income has risen. There

was a period of more than a century of steady increase in global inequality, followed by

perhaps fifty years (between the end of the Second World War and the turn of the 21st

century) when global inequality remained on a high plateau, changing very little. However,

Milanovic is struck by a decline in his measure of global inequality since 2002, which maybe historically important. But he explains this by the catching-up of poor and large

countries (China and India), overcoming upward pressures in inequality within countries. But

does this mean that global inequality will decline from now on? Dont bet on it for long, if

growth in the likes of China and India should slow.

Using a Theil coefficient of global inequality in two baseline years: 1870 and 2000,

Milanovic shows that overall global inequality today is greater than in 1870 (the bar on the

right for the year 2000 is higher).

Level and composition of global inequality in the 19th century and around year 2000(measured by the Theil index)


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More on global wealth inequality, Davos and the Chinese

princelings

Much has been made of the headline from the recent Oxfam report on global wealth

inequality that revealed that the richest 85 people in the world are worth more than thepoorest 3.5 billion.

The Oxfam data are actually taken from Credit Suisses 2013 global wealth report. But againthis report comes from the earlier study by UN economists Tony Shorrocks (a former

university colleague of mine) and Jim Davies using the UN wealth database. I reported onthis study back in October.

Its funny that it takes a report by Oxfam, the anti-poverty charity, to cause a stir about datathat have been available for months. Ezra Klein has pointed out some of the key facts in theCredit Suisse/UN study taken up by Oxfam. Klein notes that Switzerland leads in averagewealth, with each adult worth, on average, $513,000. Australia is in second place, at$403,000. The US is in the $250,000-300,000 range. But when you consider median wealth(the level that most people in a country are on), then Australia leads with $220,000, followedby Luxembourg, Belgium, France, Italy, the UK, and Japan. The US is way back on thismeasure, with a median wealth of just $45,000, so that most Americans are worth less thanmost Italians, Belgians and Japanese.

The reason for the difference between the mean average wealth level and the median averageis the extent of inequality in the ownership of assets in a country. And as the UN globalstudy showed, after accounting for debts, assets of more than $4,000 put a person in thewealthiest half of world citizens. Assets of more than $75,000 put them in the top 10 percent.Assets of more than $753,000 put them in the top 1%.

All this talk of inequality of wealth and growing inequalities of income before and after theGreat Recession is getting the great and good and the masters of the universe worried. At

their annual gathering in the luxury ski resort of Davos, starting with the heads of the IMFand the OECD and going through leading bankers and CEOs of global multinational


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companies, there is always a mention of the dangers of extreme inequality in the world. AndPresident Obama apparently plans to make inequality the theme of his annual address toCongress. Our rulers are concerned that these inequalities could lead to political and socialupheaval.

And there is continual talk about offshore evasion of tax and the hoarding of secret bankaccounts by the super-rich, yet again revealed in the leaked reports about the Chinese

princelings among others. More than a dozen family members of Chinas top political andmilitary leaders are making use of offshore companies based in the British Virgin Islands,leaked financial documents reveal. The brother-in-law of Chinas current president, XiJinping, as well as the son and son-in-law of former premier Wen Jiabao are among thepolitical relations making use of the offshore havens.

This is the latest revelation from Offshore Secrets, a two-year reporting effort led by theInternational Consortium of Investigative Journalists (ICIJ), which obtained more than 200gigabytes of leaked financial data from two companies in the British Virgin Islands, and

shared the information with the Guardian and other international news outlets. Thedocuments also disclose the central role of major Western banks and accountancy firms,including PricewaterhouseCoopers, Credit Suisse (yes, them again!) and UBS in the offshoreworld, acting as middlemen in the establishing of companies. Between $1tn and $4tn inuntraced assets have left China since 2000, according to estimates.

But nothing will be done and not just in autocratic, one-party state China. The OECD, forexample, has virtually dropped its original aim of coming up with an international agreementon dealing with these hidden assets and accounts. See Richard Murphys brilliant blog forthis.

When just a few hundred people have more wealth (and with it) more political power thaneverybody else combined, you cannot expect our current politicians to do anything.

23 January 2014


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Is inequality the cause of capitalist crises?

Is inequality the cause of crises (slumps) under capitalism? Well, the majority of the leftseems to think so.

It remains the dominant view not only of left economists of the Keynesian or post-Keynesianvariety (too many to mention), but also of Marxists like Richard Wolf or Costas Lapavitsasand even some mainstream Nobel prize winners like Joseph Stiglitz (in his book The price ofinequality) or the current head of the Indian central bank, Raghuram Rajan (as in his book,Faultlines). And there have been a host of books arguing that inequality is the cause of allour problemsThe Spirit Level by Kate Pickett and Richard Wilkinson being one thats verypopular. The varied views on this issue were summed up in a compendium, Incomeinequality as a cause of the Great Recession.

But what has really excited the inequality proponents is a new paper by the some IMFeconomists who purport to show that the sharp rise in inequality of income and wealth inmost mature capitalist economies since the 1980s is not only a bad moral thing, its badeconomics too. The IMF paper, authored by Jonathan Ostry, deputy head of the IMFsresearch department, and the economists Andrew Berg and Charalambos Tsangarides, foundnot only that inequality is bad for economic growth but that redistribution of wealth doeslittle to harm it. Thus it refutes the trickle-down theory on growth and inequalitypropounded by neoclassical apologists for capitalism that a free market would speed upeconomic growth and thus everybody would gain. As the rich prospered, their gains wouldtrickle down to the less rich through more jobs, more spending by the rich etc. The IMFpaper concluded: It would be a mistake to focus on growth and let inequality take care ofitself, not only because inequality may be ethically undesirable but also because the resulting

growth may be low and unsustainable,

This is not a new conclusion because the two eminent economists on inequality in capitalisteconomies, Emmanuel Saez and Thomas Piketty explained: countries that [have] madelarge cuts in top tax rates, such as the United Kingdom or the United States, have not grown

significantly faster than countries that did not, such as Germany or Denmark we have seen

decades of increasing income concentration that have brought about mediocre growth sincethe 1970s.


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Leftist Democrat, Robert Reich wrote a book, Aftershock, which also lays the blame forcrises at the door of inequality. He blogs regularly against capitalist excesses and Republicanapologia for capitalism adopted the same conclusion as The Spirit Level authors: The richdo better with a smaller share of a rapidly-growing economy than they do with a large shareof an economy thats barely growing at allHigher taxes on the wealthy to finance public

investments improve future productivity All of us gain from these investments, including thewealthy. Broadly-shared prosperity isnt just compatible with a healthy economy that benefitseveryone its essential to it. That isnt crazy left-wing talk. Its common sense. And it isshared by the great majority of people.

And behind this conclusion is a theoretical analysis that the Great Recession was ultimatelythe result of rising inequality in the US and elsewhere. The argument goes that the greatfinancial crisis was caused by debt mostly in the private sector. As wages were held downin the US, households were forced to borrow more to get mortgages to buy homes or loans tobuy cars and maintain their standard of living. They were encouraged to do so by recklesslending from banks even to sub-prime borrowers. And as we know, eventually the sheer

weight of this debt could not be supported by rising home prices or by the chicken legs ofaverage incomes and the whole house of cards eventually came tumbling down.

The credit crunch, the banking collapse and the Great Recession had nothing to do with theclassic Marxist explanation of the downward pressure on profitability. It was down to therapacious speculative lending of the too-big-to-fail banks the explanation that MarxistCostas Lapavitsas has expounded in his new book (Profiting without producing) see my

post and Tony Norfields devastating review of Lapavitsas book.

The argument that inequality causes capitalist crises has been developed more theoreticallyby leading post-Keynesian economist Engelbert Stockhammer from Kingston University, UKin a new paper in the Cambridge Journal of Economics entitledRising inequality as a causeof the present crisis.

For those who dont know, post-Keynesian economists are those who reckon that Keynesdeveloped a really radical analysis of capitalism. They rely on the work of Michel Kalecki, aMarxist economist who developed a Keynesaan-style analysis that ignored Marxs law ofvalue and profitability. The post Keynesians look for the cause of crises under capitalism in alack of demand arising from a squeeze on wages and a lack of investment.

Stockhammer argues that the economic imbalances that caused the present crisis should be

thought of as the outcome of the interaction of the effects of financial deregulation with themacroeconomic effects of rising inequality. In this sense, rising inequality should be regardedas a root cause of the present crisis. Rising inequality creates a downwards pressure onaggregate demand since poorer income groups have high marginal propensities to consume.Higher inequality has led to higher household debt as working-class families have tried tokeep up with social consumption norms despite stagnating or falling real wages, while risinginequality has increased the propensity to speculate as richer households tend to hold riskierfinancial assets than other groups.

For Stockhammer, capitalist economies are either wage-led or profit-led. A wage-leddemand regime is one where an increase in the wage share leads to higher aggregate demand,

which will occur if the positive consumption effect is larger than the negative investmenteffect. A profit-led demand regime is one where an increase the wage share has a negative


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effect on aggregate demand. The post-Keynesians reckon that capitalist economies are wage-led. So when there is a decline in the wage share as there has been since the 1980s, it reducesaggregate demand in a capitalist economy and thus eventually causes a slump. The bankingsector increases the risk of this with its speculative activities

The problem I have with this post-Keynesian hypothesis is manifold. First, surely, no one isclaiming the simultaneous international slump of 1974-5 was due to a lack of wages or risingdebt or banking speculation? Or that the deep global slump of 1980-2 can be laid at the doorof low wages or household debt? Every Marxist economist reckons that the cause of thoseslumps can be found in the dramatic decline in the profitability of capital from the heights ofthe mid-1960s; and even mainstream economists look for explanations in rising oil prices ortechnological slowdown. Nobody reckons the cause was low wages or rising inequality.

I suppose Stockhammer would say that in the 1970s, capitalist economies were profit -ledbut now they are wage-led; so each crisis has a different cause. As the title of his papersays inequality as the cause of the present crisis. But how did a profit-led capitalist

economy become a wage-led one? Yes, wages were held down and profits rose. Butwhy? Surely the answer lies is the attempts of the strategists of capital to raise the rate ofexploitation as a counteracting factor to the fall in profitability the classic Marxistexplanation. Rising inequality is really the product of the successful attempt to raiseprofitability during the 1980s and 1990s by raising the rate of surplus value throughunemployment, demolishing labour rights, shackling the trade unions, privatising state assets,freeing up product markets, deregulating industry, reducing corporate tax etc in otherwords, the neo-liberal agenda. As Maria Ivanova has pointed out, rising inequality was reallya side effect of financialisation.

Indeed, the empirical evidence for a causal connection between inequality and crises remainsquestionable. Michael Bordo and Christopher Meissner from the Bank of InternationalSettlements analysed the data and concluded that inequality does not seem to be the reasonfor a crisis. Credit booms mostly lead to financial crises, but inequality does not necessarilylead to credit booms. Our paper looks for empirical evidence for the recentKumhof/Rancire hypothesis attributing the US subprime mortgage crisis to rising inequality,redistributive government housing policy and a credit boom. Using data from a panel of 14countries for over 120 years, we find strong evidence linking credit booms to banking crises,but no evidence that rising income concentration was a significant determinant of creditbooms. Narrative evidence on the US experience in the 1920s, and that of other countries,casts further doubt on the role of rising inequality.

Edward Glaesar also points to research on the US economy that home prices in various partsof the US did not always increase where there was the most income inequality. That calls intoquestion the claim that income inequality was inflating the housing bubble. And Glaesarrefers to Atkinson on this:Professors Atkinson and Morellis international data also suggestlittle regular connection between inequality and crises. Looking at 25 countries over acentury, they find ten cases where crises were preceded by rising inequality and seven wherecrises were preceded by declining inequality. Inequality was higher in two of the six caseswhere a crisis is identified, which is exactly the same proportion as among the 15 cases whereno crisis is identified.

As I have mentioned above, French economist Thomas Piketty is one of the leading expertson the rise in inequality of income and wealth in the major economies. His magisterial new


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book, Capital in the 21st century, describes the huge rise in the share of income and wealthheld by the top 1%.

But actually, Pikettys explanation for this does not fit in with the post -Keynesian inequalitytheory. Piketty shows that the main reason for the huge increase in the incomes and wealth of

the top 1% is not higher incomes from wages or work as such, but huge increases in capitalincome, namely rising dividends from shares, capital gains from buying and selling shares,

Documents

Essays on Inequality in modern economies 2