Wage stagnation and the financial crisis

There was a very interesting and well-written article that I read a little while ago about wage stagnation, rising profits and the financial crisis. I can’t seem to find it again, so if any else knows the one, maybe they could point it out to me. It was about the US, rather than the UK. The basic narrative was that the increasing influence of neo-liberalism and the reduction in union power (and collective bargaining) meant that corporations were (from the 1980s onwards) keeping more of their profits than they had in the past. So, basically profits were increasing as a fraction of GDP while wages were dropping as a fraction of GDP.

So business owners, shareholders and investors now have more capital than they’ve had in the past. Of course they want to do something with this capital which, presumably, they will invest in the financial sector. Their consumers (who are also their employees), however, have less disposable income than they’ve had in the past. So what happens? Well, the financial industry sees all these people who could use more credit and who might like to buy houses. Sub-prime mortgages come into existence and credit becomes easier. People buy their houses and spend their credit on the very products made by the companies who’s profits are rising as a fraction of GDP. These people are, however, also the employees of these companies and their wages are dropping as a fraction of GDP.

So, at this stage corporations are winning on multiple levels. They’re keeping more of their profits than they have in the past (by not increasing wages at the same rate). They’re continuing to sell their products because of the easy credit that this extra capital allows, so they’re able to maintain their revenue streams and continue to extract their profits. Since this credit is essentially their money in the first place, they’re also earning interest on the money being lent to their own employees.

However, there’s a fundamental problem. If people’s wages aren’t rising while their debts are, there’s every likelihood that many won’t be able to repay their debts. Hence the credit crunch arrives when this starts to happen and the financial sector finally realises that the risk associated with the sub-prime mortgages and easy credit is much greater than they had initially realised.

Now, I appreciate that this applies to the US, but I recently saw an article on the Liberal Conspiracy website about wages and profits in the UK. It discusses essentially the same trend, which is illustrated in the figure below which I’ve taken from the article on their site. It’s certainly my view that we should be aiming to reverse this trend if we want to reduce the problems we currently have in our economy and possibly also in our society.

Graph showing the variation in wages and profits (net and gross) since 1960.

Graph showing the variation in wages and profits (net and gross) since 1960 (credit : Duncan Weldon, Liberal Conspiracy).


Global wealth inequality

I wanted to post this short video about global wealth inequality. I haven’t checked if what is said in the video is correct, but I have no reason to suspect that it isn’t. Some remarkable statistics. In the world, the top 1% have 43% of all the wealth and the top 20% have 94% of all the wealth. I won’t describe anymore, but it’s well worth a watch. My personal opinion, though, is that we have to be careful of confusing wealth inequality with income inequality. I’m not suggesting that wealth inequality isn’t a problem, but I think we have the ability – on reasonably short timescales – to address income inequality more easily than wealth inequality (although this may only be true locally). Reducing income inequality should, however, act – over time – to reduce wealth inequality anyway.

Income inequality in the USA – A Bill Moyers Essay

Since today is Margaret Thatcher’s funeral, it seem appropriate to post this video, by Bill Moyers, about income inequality. Bill Moyers is an American TV host and commentator and this is what he is calling an essay on The United States of Inequality. I appreciate that this is about the US, but much of what is said – in my opinion – applies equally to the UK. It focuses primarily on Silicon Valley where there is apparently a huge – and growing – income divide. What I found interesting is that they included a number of senior business executives who seemed well aware of this issue and were more than willing to acknowledge that this is a big and growing problem. If business executives acknowledge the problem and accept that it is growing, it seems to me that this implies that we can’t rely on businesses to solve it alone. Their obligation is to their shareholders and investors, and maybe to their customers. They obviously have to treat their employees in a manner that is consistent with good labour practice, but they’re not obliged to pay them more than they need to and they’re not obliged to create jobs if they can get what they want more cheaply (and efficiently?) elsewhere. We need, in my opinion, labour policies that aim to address unemployment and income inequality as well as take into account best value for investors and shareholders. I accept that it is not easy, but I would hope that many would agree that the future stability of the UK economy may well depend on how we address the issue of rising income (and wealth) inequality.

Thatcher is dead!

With a blog name like To the left of centre, you might imagine that I would write some gloating post about the death of Margaret Thatcher, but I can’t quite bring myself to do so. I’ve only written about her once before, when I commented on the large increase in income inequality that occurred during her time as prime minister.

Something that has struck me, while listening to the various people commenting on her life, is that very few (if any) seem to say anything really nice about her. Many thought she was “strong”, “decisive”, “inspirational”, “determined”, “a great polician” but noone seems to have said “nice”, “cheerful”, “friendly”, “generous”, “compassionate”. Listening to radio 4 on the way home last night, someone – when asked if she could have done some things differently – suggested she could have bullied her staff and colleagues less. Someone tried to say something positive by commenting on how she would sometimes change her mind. He went on to say that you could arrive one morning to discover that her views had changed and that she now agreed with what you had said the previous day. She wouldn’t acknowledge that it had been your idea; but it still felt good to have contributed! Sounds like a remarkably unpleasant person. It’s possible that this was the only way that a woman could ever have become prime minister at that time, but that doesn’t suddenly excuse her behaviour. It just just doesn’t reflect well on our society, which is probably no better today to be honest.

All I seem to be able to take from the coverage of Thatcher’s death is that she seems to have been quite an unpleasant person who divided a nation. Still, some think she was one of our best prime ministers. If my characterisation has some merit, I find it hard to understand how this can be true.

The Economic Crisis and Inequality

Excellent video of an interview with a Stephanie Sequino, a Professor of Economics at the University of Vermont. What Stephanie Sequino is suggesting is that one of the factors (maybe the primary factor) that contributed to the economic crisis was the rising income inequality. Maybe one reason that I like the video is that it is similar to an argument that I made in a post (We are the 99%) a couple of years ago. I recommend watching the video, but the basic argument is that rising inequality since the 1970s lead to increases in company profits (money that – in an ideal world – should have gone to the employees in the form of higher salaries). Some of this would have been used to pay off debt or invest in the financial sector. The rising inequality, however, impacted on the consumer base for these companies. The excess capital in the financial sector was, however, targeted at people who, in the past, would have been regarded as credit risks and were the very people who’s salaries were stagnating. In a sense, rather than this money going to these people in the form of salary increases, it went to them in the form of loans. They still spent this money, but they had to pay it back with interest. Companies therefore won twice because they sold their products and the money used to buy these products was their capital which they then recovered with interest. They should really have lost this money when the financial crisis hit but, of course, the banks were bailed out and so their investors did not lose as much as they should have had we followed a true free-market policy. I think it is a very sensible argument and applies to the UK as well as the US. The real concern I have is that nothing that is being done today appears to be attempting to address income inequality. If anything it is doing the reverse and I can’t see how our economies can recover until we address this issue.

April Fool’s Day

Not really a day for joking. Today is the day that a large number of the coalition government’s new policies come into effect. This includes the introduction of the “bedroom tax”, changes to NHS commissioning that many think is one of the final steps in the privatisation of healthcare in England, the scrapping of the 50p tax rate for those earning over £150000, and changes to legal aid, to name some.

I don’t really know what to say about this. I think the “bedroom tax” is terrible, I think the reduction in the top-rate of tax is exactly the wrong thing to do at the moment, and I genuinely worry about the future of healthcare provision in the UK. The mantra that is continually used is that we can’t afford to maintain our current spending levels and we have to wean people off a dependence on benefits. Make no mistake, I would be quite happy if everyone was employed, contributing to the economy and getting paid a salary that allowed them to afford to live decently; and I’m quite happy with there being an income distribution with some being paid more than others. I just think the problems are much more complicated than suggested by the rhetoric used by the current government.

One of problems – in my opinion – is that income inequality has increased in the last 30 – 40 years. The top earners are taking a bigger fraction of the income than they were in the 1970s. It seems to me that if income inequality increases, welfare/social security spending will have to increase to help the increasing number of people on low incomes or who become unemployed. It’s my view that if we want to reduce welfare spending, we should act to reduce income inequality. I’ve written about this before, but since I think income inequality and welfare spending are related I thought I would link to this video (link at bottom of post) of Steve Machin, from University College London, discussing income inequality. It’s quite short and doesn’t really say all that much, but is quite interesting. It’s clear that inequality has increased since the 1970s and that this might be related to changes in technology that mean there is a demand for very qualified people and for those who do very basic tasks (that can’t easily be replaced by technology), but those in the middle doing skilled but repetitive tasks can often be replaced. He suggests that income inequality doesn’t have to continually increase and that good labour policies could help, but doesn’t really suggest what these might be. Worth a watch anyway.

Wealth inequality

Very interesting video about wealth inequality in the US. It would be interesting to see the same for the UK. Probably wouldn’t be very different. Something that was very interesting was that although people recognised that wealth distribution was quite unequal, they didn’t appreciate quite how unequal it was. The actual distribution was also very far from what most would have regarded as reasonable.

Maybe what the video didn’t do quite as well was discuss the link between income inequality and wealth inequality and also how the wealth distribution has changed over time (especially in the last 30 years). It is discussed, but it would have been nice to see how it has changed. Wealth and income are different and one has to be a little careful when considering wealth distributions since, in a day-to-day sense, the income distribution is what tells us how much money people have to spend. One could imagine a society with a very unequal wealth distribution but with a much more equal income distribution. What seems to have happened in the last 30 years is that the income distribution has become more and more unequal (the top 1% in the US have gone from taking 9% of all the income to taking 24% of all the income – similar changes have taken place in the UK). The change in the income distribution has allowed the top earners to accumulate more and more wealth and is what has driven the change in the wealth distribution. Anyway, have a look at the video yourself and see what you think.