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.

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.

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.

Society and taxation

Thought I would post this cartoon about taxation. It’s aimed at the USA, but applies also to the UK. It’s a bit simplistic (as you might imagine for a cartoon) but I can’t really fault the logic. Either we want to live in a society with certain services and standards, or we don’t care. If we want to live in a society with these services and standards, then we need to pay for them and it’s hard to see how to do this without the richest paying more than the poorest. If we don’t care, then we can carry on as we are. There are clearly complications. How much do you support those who are unemployed? What should be provided publicly and what should be provided privately? However, if the highest earners continue to take an increasing fraction of the income (and hence accumulate an increasing fraction of the wealth), it’s hard to see how we can maintain the type of society in which I would certainly like to live.

The Living Wage

There has been quite a lot of discussion about encouraging employers to pay at least a living wage, rather than the minimum wage. The minimum wage is legally set to be £6.19 an hour, for those over 21. The living wage is an informal benchmark and is regarded as the minimum that someone needs to have a decent life. Currently it is set at £8.55 in London and £7.45 in the rest of UK. I accept that a living wage is not well defined, but it seems reasonable that a living wage might be somewhat higher than some legally mandated minimum.

There was someone on Radio 4 this morning talking about this. He pointed out that if everyone was paid at least a living wage, it would reduce the government’s benefits bill by £6 billion. This illustrates the point, that many make, that benefits sometimes act to allow employers to pay lower salaries than might be regarded as reasonable. On the other hand, it would apparently cost employers £12 billion if they were to pay everyone a living wage. Given that a living wage is about £1.25 an hour higher than the minimum, and someone in a full-time job works about 1750 hours a year, this suggest that the equivalent of 5 million people are in full-time jobs that pay less than a living wage. The commentator made a perfectly valid point that this money would have to come from somewhere and that employers were unlikely to increase the lowest salaries if this would harm their profits or if it might have a negative impact on employment. I completely accept that investors are unlikely to invest if they don’t get a decent return on their investments. It is, however, still somewhat amazing that people are comfortable with the view that it is better to leave 5 million or more people on less than a living wage just so as to protect company profits.

I, however, have a very easy to solution to the problem. We need to find £12 billion so that all employees can earn at least a living wage. Since about 1980, the top 1% of earners have increased their share of the income from about 8% to about 15%. The top 10% have increased their share from about 25% to about 31%. In today’s money this means that the top 1% have increased their share of the income from £64 billion to £120 billion, while the top 10% have increased their share from £200 billion to £248 billion. You could find the necessary £12 billion by reducing the income of the top 1% by 10% or by reducing the income of the top 10% by 5%. They would still have a higher fraction of the income than they did in 1980 and everyone could earn what is regarded as a living wage.

There are some other factors to consider. A recent report by a non-partisan Congressional committee has shown that reducing the top rate of tax does not improve economic growth. It primarily seems to allow a smaller fraction of society to accumulate an increasing fraction of the wealth (as might seem obvious if you gave it any thought). One could consequently assume that the increase in the wealth/income of the top 1% and 10%, in the UK, is not because they’ve done a great job of growing the UK economy. It’s really because they’ve done a great job of convincing the government to reduce how much tax they should pay. In fact, the current financial crisis might suggest the influence of the such people on government policy has done more harm than good. A book by Kate Pickett and Richard Wilkinson, called the Spirit Level, has also shown – quite convincingly – that countries with more unequal income distributions have more societal problems (health, crime, etc). It seems to me that by reducing the income of the top 1% and 10% to a level similar to – but higher than – that in 1980, we could pay everyone in the country a living wage, could reduce income inequality (which would have a positive effect on our society), could reduce government spending (something regarded as crucial by many), and we could do all of this without negatively affecting company profits. It really seems like a win-win to me. I wonder why someone else hasn’t thought of this sooner?