rising inequality as a root cause of the present crisis

7/27/2019 Rising Inequality as a Root Cause of the Present Crisis

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POL

ITICAL

ECON

OMY

RESEARCH

INSTIT

UTE

Rising Inequality as a Root Cause

of the Present Crisis

Engelbert Stockhammer

April 2012

WORKINGPAPER SERIESNumber 282

Gordon Hall

418 North Pleasant Street

Amherst, MA 01002

Phone: 413.545.6355

Fax: 413.577.0261

[email protected]

www.peri.umass.edu


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1

RisingInequalityasaRootCauseofthePresentCrisis

EngelbertStockhammer,KingstonUniversity

[email protected]

Abstract

Thepaperarguesthattheeconomicimbalancesthatcausedthepresentcrisisshouldbethoughtof

astheoutcomeoftheinteractionoftheeffectsoffinancialderegulationwiththemacroeconomic

effectsofrisinginequality.Inthissenserisinginequalityshouldberegardedasarootcauseofthe

presentcrisis.Weidentifyfourchannelsbywhichithascontributedtothecrisis.First,rising

inequalitycreatesadownwardpressureonaggregatedemandsinceitispoorerincomegroupsthat

havehighmarginalpropensitiestoconsume.Second,internationalfinancialderegulationhas

allowedcountriestorunlargercurrentaccountdeficitsandforlongertimeperiods.Thus,inreaction

topotentiallystagnantdemandtwogrowthmodelshaveemerged:adebtledmodelandanexport

ledmodel.

Third,

(in

the

debt

led

growth

models)

higher

inequality

has

led

to

higher

household

debt

asworkingclassfamilieshavetriedtokeepupwithsocialconsumptionnormsdespitestagnatingor

fallingrealwages.Fourth,risinginequalityhasincreasedthepropensitytospeculateasricher

householdstendholdriskierfinancialassetsthanothergroups.Theriseofhedgefundsandof

subprimederivativesinparticularhasbeenlinkedtoriseofthesuperrich.

Keywords:crisis,distribution,inequality,effectivedemand,growthregimes,postKeynesian

economics

JELcodes:E12,E25,E60

Acknowledgements.AnearlierversionofthispaperhasbeenpresentedattheworkshopGetting

OutoftheCrisis:theroleofdistribution,2eColloqueinternational,CEPN,Paris13,June2011.The

authorisgratefultotheparticipantsandtoPaulAuerbachforcomments.


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2

1.Introduction

Therecessionthatbeganin2008hasbeentheworsteconomiccrisissincethe1930s.Thediscussion

ofitscausesusuallyfocusesondefectsinthefinancialsystem:incentivesofbankmanagers;

financialinstrumentsthatlackedtransparency;anexaggeratedtrustintheabilityofsophisticated

statisticalmodelstoinsureagainstrisks;theshiftfromtheoriginateandholdtotheoriginateand

distributemoduleofbankingmadepossiblebymortgagebackedsecurities;increasinginternational

imbalances.Thelistcouldbecontinuedandtheliteratureonthisislongandgrowing.Whatitshares

incommonisthatithighlightsmalfunctionswithinthefinancialsector.Whiletherecanbenodoubt

thatfinancialfactorsarecriticalinthemakingofthecrisis,thepresentdebaterunsthedangerof

neglectingothersocioeconomicaspects.Theriseofinequalityhasbeenoneofthemostprofound

changesinmodernsocietiessincetheearly1980s.Severalauthorshaverecentlyhighlightedthat

inequalitymayhaveplayedarole,butoftenwithoutclarifyingthemechanisms.Thispaperwill

explorethe

role

that

rising

inequality

has

played

in

creating

the

preconditions

of

the

crisis.

Sincetheearly1980sanincreaseininequalityhasoccurredinallOECDcountries.Atfirstsight,this

seemstohavetakenondifferentformsindifferentcountries.IntheAngloSaxoncountrieswe

observeasharpincreaseinpersonalincomeinequality.Topincomeshaveexperiencedaspectacular

growth(PikettyundSaez2003,2007;OECD2008).Since1980thetopincomepercentilehas

increaseditsshareinnationalincomebymorethan10percentagepoints.IncontinentalEuropean

countriesweseeastrongdeclineinthefunctionaldistributionofincome.Since1980the(adjusted)

wagesharehasfallenbyaround10percentagepoint(ofnationalincome).Giventheextentof

redistributionthathastakenplace,onemightexpectthattherearemacroeconomiceffects.While

severalauthorshavenoticedthattheremightbealinkbetweenrisinginequalityandthecrisis

(Stiglitz2010,Wade2009,Rajan2010),thereisasofyetlittlesystematicanalysis.Thisarticlegivesa

conceptualframework,basedonpostKeynesiantheory,forthedifferentchannelsthroughwhich

risinginequalitymayhavecontributedtothecrisisand,secondly,presentssomepreliminary

evidencetosubstantiatethesechannels.

Ourhypothesisisthatthecrisisshouldbeunderstoodastheinteractionofthederegulationofthe

financialsector

(or

financialisation,

more

generally)

with

the

effect

of

rising

inequality.

In

anutshell

ourstoryisthefollowing:sincetheearly1980stheriseofNeoliberalismhasbroughtabout

importanteconomicandsocietalchanges,includingthederegulationoffinancialsectorandvarious

legislativemeasuresthathaveweakenedorganisedlabourandthewelfarestate.Froma

macroeconomicpointofviewtwogrowthmodelshaveemerged:adebtledgrowthmodelandan

exportledgrowthmodel.TheUSAandtheUKareprimeexamplesoftheformer,Germanyand


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3

Chinaforthelatter.Bothgrowthmodelscanberegardedasareactiontothelackofdomestic

demandduetorisinginequality.Potentiallystagnatingdomesticdemandiscompensatedfor,inthe

firstcase,bydebtfinancedconsumptionandresidentialinvestmentboomsand,inthesecondcase,

byexportdemand.Severalmacroeconomicimbalanceshaveemerged:growingtradeimbalances

acrosscountries;

rising

household

debt

levels,

namely

in

the

debt

led

economies;

arise

in

the

size

of

thefinancialsectorrelativetoothers;andariseofassetandpropertyprices.Theseimbalancesare

attherootofthecrisis.Theyhavebeenfacilitatedbyfinancialderegulation,butmostofthemare

intrinsicallylinkedtotheriseofinequality.

ThepapertakesaviewthatisinformedbyKaleckianmacroeconomicsandbyFrenchRegulation

Theory.Weidentifyfourchannelsthroughwhichrisinginequalityhascontributedtothecrisis.

Firstly,risinginequalitycreatesadownwardpressureonaggregatedemand,sinceitispoorer

incomegroupsthathavehighmarginalpropensitiestoconsume.Second,internationalfinancial

deregulationhas

allowed

countries

to

run

large

current

account

deficits

and

for

extended

time

periods.Thus,inreactiontopotentiallystagnantdomesticdemandtwogrowthmodelshave

emerged:adebtledmodelandanexportledmodel.Third,(inthedebtledgrowthmodels)higher

inequalityhasledtohigherhouseholddebtasworkingclassfamilieshavetriedtokeepupwith

socialconsumptionnormsdespitestagnatingorfallingrealwages.Fourth,risinginequalityhas

increasedthepropensitytospeculateasricherhouseholdstendholdriskierfinancialassetsthan

othergroups.Theriseofhedgefundsandofsubprimederivativesinparticularhasbeenlinkedto

riseofthesuperrich.

Thepaperwillclarifythesechannelsandpresentsome(preliminary)evidencetosubstantiatethese

channels.Ouranalysisleadstothefollowingresearchquestions:isthereevidenceforthe

emergenceofdebtledversusexportledgrowthmodels?Isthereevidencefortheeffectofchanges

inincomedistributiononconsumptiondemandandaggregatedemand?Istherealinkbetween

risinginequalityandrisingdebtlevels?Hasincreasedinequalitycontributedtoahigherpropensity

forspeculation?

Thepaperisstructuredasfollows.Section2givesanoverviewofthecrisisanditsdifferentphases.

Section3makes

some

comments

on

the

debate

on

the

origins

of

the

crisis.

Section

4documents

the

riseininequalityinthepastdecades.Section5discussesfourchannelsthroughwhichrising

inequalityhascontributedtothecrisisandpresentsevidenceforthesechannels.Section6

concludes.


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4

2.Thecrisis20072011

Inmid2006housepricesintheUSAstartedtodecline.Withhindsight,thatprobablymarksthe

beginningofthecrisis,buttheUSgrowthmodelhadgivenrisetoimbalancesalongseveral

dimensions.Rapidlyrisinghouseprices,andthemortgagelendingthatcamewithit,hadbeenthe

basisof

aboom

driven

by

credit

financed

consumption

and

construction

investment

in

the

USA.

The

boomcamewithlargecurrentaccountsurplusesand,duetofinancialinnovation,thefinancial

sectorincreaseditsassetsandliabilitiesonamassivescale.Thissectiongivesabriefoverviewofthe

unfoldingofthecrisisitself.

Thecrisisbrokeoutinspring2007inaseeminglyobscurenicheoftheUSfinancialsystem:the

subprimemarket,whichisthemarketforderivativesonlowqualitymortgagecredit;thustheinitial

nameofthecrisisasthesubprimecrisis.Thisisarathersmallsegmentoftheoverallmortgage

market,thoughitaccountedforasubstantialportionofthecreditgrowthintheyearsbeforethe

crisis.Assubprimecreditis,bydefinition,oflowquality,itwasthenaturalfieldforasecuritization

oftheseloansthatwassupposedtoreducerisk(e.g.IMF2006).Whatwasgoingonherewasthe

extremeformofwhathappenedonamuchbroaderscaleintheentiremortgageindustry.InAugust

2007thecrisisspiltoverintotheinterbankmarket,wherebankslendtoeachother,usuallyvery

shortterm.Theinterbankmarketisattheverycentreofthemodernfinancialsystem.Interestrates

rosetomorethanonepercentagepointabovethoseongovernmentbonds.Thisincreaseintherisk

premiumoflendingreflectedthatbanksdidnottrusteachother.Andrightlyso,asitturnedout.

Centralbanksreactedquicklyandpumpedbillions(ofdollarsandEuros)intothemarkettomaintain

liquidity.

However,whiletheinterbankmarketstabilized,thecrisisevolved.Inspring2008BearStearns,one

oftheleadinginvestmentbanks,wasbankruptandcouldonlybesoldwiththeFEDguaranteeing

some20bnUS$worthofassets.Afirst(small)fiscalstimuluspacketwasimplementedintheUSA.

AtthisstagetheimpactofthecrisisontherealeconomyoutsidetheUSAwaslimited.In

August/September2008thecrisisturnedintoafullscalefinancialcrisisanditdidsowithabang:

LehmanBrothers,oneofWallStreetsleadinginvestmentbanks,wentbankrupt.Theendofthe

world(or

at

least

of

big

finance)

as

we

knew

it

seemed

to

have

arrived.

Interest

rates

soared

(interestratespreadsrosetoseveralpercentagepoints)andliquidityfroze.

Againgovernmentsreacted.Theprinciplesofneoliberalfreemarketeconomicsweresuspendedfor

afewweeks.Centralbanksprovidedmoreliquidity,butthatprovedinsufficienttostabilizemarkets.

Governmentshadtointervenedirectly:intheU.S.,AIG,aninsurancefirmthathadinsuredhuge

volumesofcreditderivates,wastakenoverbythestate,aswereFannieMaeandFreddieMac,the


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5

twostatesponsoredmortgagerefinancinggiants.WithinafewweeksEuropeancountriesfollowed

suitwiththerecapitalizationoffinancialinstitutionsandmassiveguaranteesforinterbankcredits

becomingmainstreameconomicpolicy.Recapitalizationmeantthatgovernmentseffectively

nationalized(fullyorpartly)financialinstitutionsbutgovernmentsabstainedfrominterferingwith

themanagement

of

banks

despite

obvious

management

failures.

In

late

October

2008

an

EU

summit

issuedastatementthatnosystemicallyimportantfinancialinstitutionswouldbeallowedtofaila

capitalismwithoutbankruptcies(ofbigbanks)wasdeclared!

Byfall2008thefinancialcrisishadturnedintoafullblowneconomiccrisis.Worldtradecontracted

bymorethan20%andGDPinmostdevelopedcountriesshrankataspeednotseensincethe1930s

(inmostcountriesbyaround5%).Anditnotonlyhitthosecountriesthathadexperiencedproperty

bubbles,butalsocountrieslikeGermanyandJapanwherepropertypriceshadbeenpracticallyflat;

itspreadaswelltoemergingcountries.EasternEuropeancountrieswereparticularlybadhit,with

theBaltic

countries

suffering

GDP

declines

of

around

20%.

The

IMF

had

to

be

called

in

to

save

Hungary,PakistanandtheBalticstates.Butthemostconspicuoussymbolofthedownturnwas

certainlythefallofGM:oncetheworldslargestfirmandemployer,itnowhadtorescuedbytheUS

government.

Whilecompletemeltdownseemedimminentinfall2008,inthecourseofspring2009itbecame

clearthatthehistoricallyunprecedentedscaleofgovernmentinterventionhadprevented

outrightcollapse.Acascadeofbankbreakdownscouldonlybepreventedbyrescuepackagesthat

amountedto80%ofGDPintheUSAandtheUK(UNCTAD2009,Table1.8)andbytheFED

expandingitsbalancesheetbyatrillionUS$,mostlybyacquiringassetsthatitwouldnothave

touchedinnormaltimes.Riskpremiaremainedelevated,banksweremakingphenomenallosses,

unemploymentstartedrising,butnormalityofasortreturned.Thepressuretoreformthesystem

hadreceded.Earlierdeclarationsofafundamentalrestructuringofthefinancialsystem(e.g.theG20

meetingofNov.2008)hadbeenforgottenandthedebateonreformturnedintospecialistsdebate

abouttechnicalities,withallbutprivatebankersandcentralbankersbeingexcludedfromdecision

makingcircles.Thearroganceofthefinancialelite,however,isbestcapturedbythefactthat,in

spiteoftheobviousdisasterinfinance,bankersbonusesreturnedtoprecrisislevels.

Butthenormalitythatwasabouttorestoreitselfwasnotquitethenormalityexistingbeforethe

crisis.Afterall,thecrisiswasbynomeansover,thoughforthebankersitseemedso.Forlargeparts

ofthepopulation,ithadonlyjusthadbegun.Productionfellandunemploymentrose.IntheUSA

foreclosureswererising.Peoplelosttheirjobsandtheirhomes.Andtherewasanotherdevastating

effectofthecrisis:budgetdeficitswereincreasing,surpassing10%ofGDPinmanycases,withpublic


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6

debtincreasingaccordingly.Financialmarketsstartedtoworrywhethergovernmentswouldbeable

topaytheirdebts.Sointhecourseof2009thecrisisthustookitsnextturn:asovereigndebtcrisis.

ItsmostprominentvictimwastobeGreeceandwithittheEurosystem.Intermsofeconomicpolicy

therehasbeenashifttowardsausterity.

Inearly2010Greecefacedpunitiveinterestratesonits(public)debtissues.Greecehadfudged

publicdebtstatistics(withthehelpofleadingWallStreetbanks)andnowhaddifficultiesrefinancing

itsdebt.Indeed,whathadbeenexposedwasafundamentalflawintheconstructionoftheEuro

system.Withexchangeratesfrozen,thesoutherncountrieshad,despitemuchlowerinflationsince

adoptingtheEuro,slowlybutsteadilylostcompetitivenesstoGermanyanditseconomicsatellites.

Germanysnetexports(mostlytootherEurocountries)amountedtomorethan5%ofGDP,

achievedlargelybywagesuppressionand,consequently,lowinflationrates(Lapavitsasetal2010).

TheEuroareahadnoinstrumentstodealwiththeinternalimbalancesthatemerged,otherthan

trustingin

labour

market

flexibility

to

adjust

price

levels

in

the

nations

of

the

Euro

area

to

bring

aboutstability(Stockhammer2011).

WhileitwasrelativelysimpletoblametheGreekcrisisonirresponsiblefiscalpolicythestructural

problemsoftheEuroareawereillustratedbytheIrishcrisisshortlythereafter.Irelandhad

governmentsurplusesbeforethecrisis,butstillneededahugerescuepackage(85bn,morethan

halfofIrishGDP).AsinGreece,therescuepackagewasreallyonefortheEuropeanfinancialsector

ratherthanforstates.Irelandhadexperiencedanenormousrealestatebubblethatburstund

effectivelybankrupteditsbanks.Becauseofthebankbailouts,Irishdebtsoaredby40percentage

pointsofGDPfrom2007to2010.LiterallyalloftheobligationsofthebustIrishbankingsystemwere

guaranteed,whichledtoanangryarticlebyEichengreen(2010).

TheEurocrisisisstillgoingonatthetimeofwriting.Whiletheeconomicsituationisdesperatein

Greece,thebiggerdangerfortheEuroisposedbyItalianandSpanishdebtmarkets.Butthe

underlyingproblemisaEuropeanone:Europeancountrieshavegivenuponindependentmonetary

policy,buttherearenoeffectiveinstitutionsandfiscaltransfersinplacethatwouldstabilisethese

countriesintimesofcrisis.Ratherthecrisisisamplifiedbyprocyclicalausteritypoliciesthatare

increasinglyimposed

by

Brussels

(and

Berlin).

3.Thedebateoncausesofthecrisis

Manyinsightfulcontributionstothedebateonthecausesofthecrisisemphasizemicroeconomic

factors.Theycomeindifferentversions.First,therearecontributionsthathighlightincentivesfor


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7

bankmanagersthatencouragerisktaking(RoubiniandMihm2010)andtheextensiveuseof

statisticalmodelsthatwereaimedatdiversifyingriskandequatedriskswithpastvolatility(basedon

shorttimeseries)andunderestimatedthecorrelationofrisksintheeventofacrisis.These

argumentsdiscussproblemswithintheprivatesectorand,typically,assumerationalbehaviour.

Second,there

is

group

of

arguments

highlighting

wrong

incentives

created

by

government

institutions.AprimeexampleistheBasleIIaccord,whichisthoughttohavecreatedincentivesfor

privatebankstoshiftactivitiesoffbalancetominimizeadherencetocapitalrequirements.Rajan

(2009)arguesthatsuccessiveUSgovernmentshaveencouragedlendingtothepoorthroughstate

backedmortgagerefinancinginstitutions.Implicitlytheseargumentsassumerationalbehaviouron

partofprivateactors.Third,thereisagrowingbehaviouralfinanceliteraturethatsuggeststhat

people,evenfinancialinvestors,oftendontactrationallyandarepronetoirrationalexuberance

(AkerlofandShiller2009).

Asmodern

economics

is

dominated

by

amicroeconomic

approach

it

is

perhaps

not

surprising

that

themacroeconomicdimensionislessprominent.Twofactorsstandoutinthedebate.First,thereis

agrowinginterestindebtcycleanddebtdeflationmodels.Risingpropertyprices(intheUSA)area

keyelement,helpingtoengenderasubstantialriseinhouseholddebt.Forwhateverreason,the

privatesavingsratiohadbeenonadecliningtrendinthedecadesbeforethecrisisconsumption

wasinpartbeingfinancedbyrisingdebt.Risinghousepriceswerealsocentralforthe(residential)

investmentboomthatpartsoftheUSA,SpainandIrelandhadwitnessed.

Asecondmacroeconomicfactorthathasreceivedwidespreadattentionhasbeentherising

internationaltradeimbalancesandincreasesincapitalflows.TheUSAhadexperiencedmassive

capitalinflows(andtradedeficits)priortothecrisis.Thereisnoconsensusastowhethertrade

imbalancesorsavingsdecisionsdrovecapitalflowsorwhethercapitalflowshavebeendriving

assetpricesandmacroeconomicperformance,butthereisawidespreadperceptionthat

internationalimbalanceshadsomethingtodowiththecrisis.Thesavingsgluthypothesisof

Bernanke(2005)essentiallyblamedsouthEastAsiancentralbanksfortheimbalances(asifthe

inflowswereforcedupontheUSA).BorioandDisyatat(2011)arguethatcapitalflowsarenotdueto

savingsdecisions,buttoportfoliodecisionsandthattheyarepronetolargeswingsduetowhatthey

callanexcesselasticityofthefinancialsystem.Withoutmuchtheoreticalado,ReinhartandReinhart

(2008)haveshownthatepisodesofcapitalinflows(capitalflowbonanzas)typicallyleadto

speculativebubblesonfinancialmarketsandpropertymarketsand,ultimately,tofinancialcrises.

Figure1summarisesthemacroeconomicmechanismsofthecrisisthathavebeenhighlightedinthe

literaturegraphically.Changesinthefinancialsystem,duetothederegulation(orwrongregulation)


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8

allowedforabubbleonfinancialandpropertymarkets,whichinturnallowedforthemassive

increaseinhouseholddebt.Risinghouseholddebtlevelsfuelledconsumptionexpendituresand

residentialinvestmentandthusledtoeconomicgrowththatalsoresultedincurrentaccount

deficits.Theresultingcapitalinflows,inturn,helpedkeepinterestrateslowandfuelledthebubbles.

Figure1.Standardcrisisexplanation

Thereisdisagreementaboutthemicroeconomicdimensionforthesedevelopments.Theserange

fromneoclassicalapproachesthathighlightgovernment(regulationfailure),behaviouraleconomics,

whichhighlightsirrationalbehaviour,topostKeynesianapproachesthathighlight,inthetraditionof

HymanMinsky,theintrinsicandendogenousinstabilityofthefinancialsystem,whichhasbeen

amplified

by

financial

deregulation.

Some

commentators

have

emphasised

a

parallel

between

the

risinginequalityofthe1920sandthepresentcrisis(Livingston2009).Usuallythesearguments

remainrudimentary.ThediscussionthatfollowswillpresentapostKeynesianandregulationist

frameworkfortheinequalityargumentandsubstantiatesomethechannelsempirically.

4.Risinginequality

Incomedistributionhasexperienceddramaticchangesinthelastdecades.Andthereareremarkable

differencesacrosscountries.Since1980(adjusted)wageshareshavefallenbysometenpercentage

points

in

continental

European

countries,

and

even

more

in

Japan

(Figure

2).

The

decline

in

the

USA

andtheUKwasmoderateandisaroundfivepercentagepoints.TheAngloSaxoncountries,onthe

otherhand,experiencedamuchmoredramaticchangeinpersonalincomedistribution(Figure3).In

theUSAthetop1%oftheincomedistributionhasincreaseditsshareinnationalincomefrom8%

(1980)toabove21%(2005).DevelopmentsinotherEnglishspeakingcountriesaresimilar.In

continentalEuropeancountriesandJapanpersonalincomehasbecomemoreunequal,buttoa

muchmoremoderatedegree.Thedramaticriseinpersonalinequalityis,toasignificantextent,due

tosharplyrisingmanagementremuneration(inEnglishspeakingcountries).Thesearecountedas

labourcostsinthenationalaccountandthusformpartofthewageshare.Ifmanagementsalaries

werecountedasdistributedprofits,i.e.adjustingtheUSwageshareforthewagepaymentsoftop

incomepercentile,itlooksmuchmorelikeEuropeanwageshares.Overall,increasinginequalityhas

thusresultedinstagnatingincomesfortheworkingclasses(intheUSArealmedianwageshave

grownbyatotalof2.8%inthequartercenturyfrom1980to2005;OECD2008),whereasprofit


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10

Section4presentedevidenceforthedramaticchangesinincomedistributionthatoccurredinthe

past30years.Whatarethemacroeconomiceffectsofthisredistribution?Moreprecisely,whatare

itseffectsonaggregatedemand?First,otherthingsequal,onewouldexpectafallingwageshareto

haveanegativeeffectonconsumptiondemand:wageearners,andespeciallythepoor,willhavea

higherconsumption

propensity

than

recipients

of

profit

incomes.

Second,

afalling

wage

share,

i.e.

a

risingprofitshare,oughttohavepositiveeffectoninvestmentexpenditures(atleastforagiven

levelofdemand).Third,afallingwageshareinanyonecountyoughttohaveapositiveeffectonnet

exportsascompetitivenessincreases.Thislasteffect,however,isnotrelevantinourcontext,as

wageshareshavefalleninallcountries.Thetotalorneteffectofachangeinwageshareon

aggregatedemandistheoreticallyambiguousanddependsontherelativesizeofthepartialeffects.

BhaduriandMarglin(1990)proposedapostKaleckianmacromodelthatencompassesthesethree

effects.Itallowsforaggregatedemandtobeeitherwageledorprofitled.Awageleddemand

regime

is

one

where

an

increase

in

the

wage

share

leads

to

higher

aggregate

demand,

which

will

occuriftheconsumptioneffectinlargerthantheinvestmentandnetexporteffect.Aprofitled

demandregimeisone,whereanincreasethewagesharehasanegativeeffectonaggregate

demand.TheKaleckianhypothesisisthat(atleastasfarasthedomesticcomponentsare

concerned)demandiswageled.

ThismodelhasinspiredaseriesofempiricalstudiesincludingBowlesandBoyer(1995),

StockhammerandOnaran(2004),NaastepadandStorm(2006/07),HeinandVogel(2008),

StockhammerandStehrer(2011),OnaranandGalanis(2012).ForexampleStockhammeretal.

(2009)find

aconsumption

differential

of

around

0.4

for

the

Euro

area.

Thus

the

decline

in

the

wage

sharebyaroundtenpercentagepointswouldhaveledtoareductionofconsumptionbyfour

percentagepointsofGDP.

Theeffectsofchangesinpersonalincomedistributiononconsumptiondemandaremore

straightforward,asstandardconsumptiontheorypredictsthatthepoorwillhavehighermarginal

consumptionpropensitythantherich.Toillustrate,Stein(2009)reportsthat,forGermany,in2007

thetopquartilehadanaveragesavingrateof15.8%,thesecondquartileof9%,thethirdof8%and

thebottomquartile4.1%.Indeedsavingdifferentialsacrossincomegroupshaveincreased,withthe

differencebetweenthetopandthebottomquartileincreasingfrom5.5%in1995to11.7%.[OECD?]

Theincreaseinthesavingdifferentialis,accordingtoStein,duetoincreasinginequalityinthis

period.Brenke(2011)arguesthatrisinginequalityhasbeenanimportantcontributingfactorto

Germanysweakconsumptiondemand.


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11

Channel1arguesthatrisinginequalityhas,otherthingsequal,anegativeeffectonconsumption

expendituresandthusonaggregatedemand.Otherthings,however,werenotequalduring

neoliberalism.

Channel2:Thederegulationofinternationalcapitalflowshasrelaxedtheexternalbalanceconstraint

andallowedcountriestorunlargercurrentaccountdeficits.Thishasallowedforthedevelopmentof

twodistinctgrowthmodels:adebtledgrowthmodelthatcamewithaconsumptionboomand

currentaccountdeficits,andanexportledgrowthmodel.

Figure4plotsthestandarddeviationofcurrentaccountpositionsofOECDcountries.Thisisan

measureofinternationalimbalances.Thefigureillustratesthatinternationalimbalancesdidnot

occurrecently,butarepartofalongertermtrend:theliberalisationofcapitalflowsafterBretton

Woodsdid

not

lead

to

stable

exchange

rates,

but

rather

to

increasing

international

imbalances

becauseexchangeratesareincreasinglydeterminedbycapitalflowsratherthantradebalances.As

capitalflowshavefinancial,oftenspeculative,motivesandaretypicallyprocyclical,the

deregulationofinternationalcapitalflowshasloosenedexternaltradeconstraints.Ithasallowed

countriestorunlargercurrentaccountdeficitsforlongerperiods(comparedtotheBrettonWoods

period).ReinhartandReinhart(2008)showthatepisodesofstrongcapitalinflows(capitalflow

bonanzas)usuallycomewithspeculativebubblesonfinancialandpropertymarketsandtypically

endinrecessions.

Figure4[stddeviationcurrentaccount]

Financialglobalisationhasthusironicallyincreasedtheroomfordifferentdevelopmentsacross

countries.Currentaccountimbalancescanbemaintainedforlongeressentiallyaslongasmarkets

trustthesituation.Thisisthebackgroundtotheemergenceoftwodifferentgrowthmodels.

Theimbalancesattheeveofthecrisisarewellknown.In2007Germanyhadacurrentaccount

surplusof7.5%ofGDP;theUSAhadadeficitof5.07%(OECD.stats,accessedFeb2012).Figure4

suggestthattheseimbalancesarepartofalongtermtrend.Ourhypothesisisthattheseimbalances

aretheexpressionandresultsofdifferentgrowthmodelsthatdevelopedindifferentcountries.

Morespecifically,wearguethatcountriescanbeusefullygroupedindebtledgrowthmodelsand


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12

exportledgrowthmodels.1Importantly,weinterpretthesemodelsasareactiontothesame

underlyingproblem:stagnatingdomesticdemandduetorisinginequality.Table1classifiessome

importantcountries.Debtledandfinanceledgrowthmodelsexistincoreaswellasinperipheral

countries.Whileonaglobalscalethedebtledeconomieswereatthecore,withintheEuroarea,the

rolesare

reversed

and

the

export

led

economies

are

at

the

centre

and

debt

led

growth

took

place

in

theperiphery.

Table1

ThehistoricalpathsthatledthecountriestotheirpositionsinTable1arecomplexandwemakeno

claimofbeingabletoexplainthemhere.Financialinstitutionsaswellasindustrialrelationsand

industrialpolicy

play

arole.

The

USA

and

the

UK

have

long

been

leading

examples

of

market

based

financialsystemsandtheyledthewayinneoliberalfinancialderegulationofthe1970sand80s.In

particularintheUSAhomeownershiphasaspecialeconomicandideologicalconnotation.Forthe

countriesoftheEuropeanperipheryfinancialliberalisationwasverymuchanoutcomeofEuropean

integration,onewhichimposedtheliberalisationofcapitalflowsandprovidedtheframeworkfor

capitalinflows.Thereisalsoanaspectofhistoricalcontinuityonthesideoftheexportledmodel,

complementedbyanewdynamicduetochangingcircumstances.Germanyhaslonghadanexport

orientedgrowthstrategy.TheentireeraofEuropeanintegrationismarkedbyGermansurplusesand

subsequentrevaluations.

However,

German

demand

composition

only

tilts

decisively

towards

an

exportledgrowthmodelafterunificationandtheintroductionoftheEuro(Hornetal.2010).In

Japantheexportledgrowthmodelisarguablyareactiontoitsdebtledgrowthmodelgoinginto

reverseafter1992.IntheemergingeconomiesofSouthEastAsia,exportledgrowthisinparta

reactiontothehumiliatingexperienceofthecrisis1097/98,and,certainlyinthecaseofChina,the

resultofstrategyofundervaluationinordertoaccumulatereserves.

Giventhecontrastingcurrentaccountpositions,itishardlysurprisingthatcountrieshavedifferent

compositionsoffinaldemand.Figure5illustratesthestarkdifferenceinconsumptionsharesacross

1 No particular weight is given to names. What we label debt-led has been called

financialized, finance-led models. Our export-led model has also been called neo-

mercantilist. Hein and Mundt (2012) offer a more detailed analysis of debt-led and export-led

growth models. The conceptual distinction is found in Becker (2002).


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13

countries.Whereasdebtledeconomieshavetypicallyexperiencedasubstantialincreaseinthe

consumptionshare,exportledeconomieshaveexperiencedadeclineintheconsumptionshare.

Figure5

Increasesintheconsumptionsharehavetypicallybeenaccompaniedbyincreasesinhousehold

debt.Table2showstheinhouseholddebtinpercentofGDPaswellasitschangefrom2000to

2008.Wefocusonthechangeinhouseholddebtratherthanonitslevel,because,arguably

increasesindebt(ratherthanalevelofdebt)canfeedconsumptionexpenditures.Forthestability

ofthegrowthregime,ofcoursethechangeaswellasthelevelofdebtmaybeimportant.While

householddebtdeclinedinGermanyfrom2000to2008by11percentagepointsofGDP(andit

increasedin

Austria

by

amoderate

7%

points),

household

debt

rose

by

26

percentage

points

in

the

USAandby28percentagepointsintheUK.InperipheralEuropetheincreaseswereevensharper

(thoughlevelsinMediterraneanEuropewereusuallylow).InIrelanditroseby61,inSpainby33

percentagepoints.2

Table2[HHdebt]

Overall,our

crude

classification

in

debt

led

and

export

led

growth

models

seems

consistent

with

the

data:countrieswithcurrentaccountdeficitsarealsothosewithhigherincreasesinhouseholddebt.

TheUSAandtheUKontheonesideandGermanyandJapanontheotherareprimeexampleof

thesegrowthmodels.TheclassificationalsoishelpfulinunderstandingdevelopmentsinGreece,

Portugal,Ireland,andSpain.TheIrishcase,admittedly,issomewhatmorecomplicatedasIreland

had,atthesametimecurrentaccountdeficitsandnetexportsurpluses,thedifferencebeing

explainedbyrepatriatedprofits.TheIrishexternalpositiondeterioratedinthedecadepriortothe

crisis.Severalcountrieswould,however,notfitneatlyintoourdichotomy,forexamplethenew

memberstates

in

central

and

eastern

Europe,

but

also

the

Netherlands

and

Denmark,

which

seem

to

havehad,atthesametime,sharpincreasesinhouseholddebtandexportsurpluses.Notablythese

aresmallcountries.

2 We were unable to find comparable data for Japan. Girouard et al (2006, Figure 1) report

falling household debt levels from 1995 to 2004.


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14

Channel3.Risinginequalitycontributedtohouseholddebt(inthedebtledmodels).

Thedistributionofhouseholddebtisanunderresearchedtopic.Primarydataareoftennotreadily

availableand,

where

they

are,

they

usually

not

reported

in

aform

that

would

encourage

distributionalanalysis.FortheUSA,dataareavailableandwillbediscussedbelow.

Intheliteraturethereareoppositeviewsonthedistributionaldimensionofrisinghouseholddebtin

theUSA.OntheonehandBarbaandPivettiarguethatrisinghouseholdindebtednessshouldbe

seenprincipallyasaresponsetostagnantrealwagesandretrenchmentsinthewelfarestate,i.e.as

thecounterpartofenduringchangesinincomedistribution(BarbaandPivetti2009,114);rising

inequalityhasthuscontributedtohouseholddebtinthatthepoorweredrivenintodebtby

decliningwagesandsocialservices.Ontheotherhand,ithasbeenarguedthatrisinghousehold

debt,and

more

precisely

falling

saving

rates,

is

due

to

the

behaviour

of

the

rich.

Maki

and

Palumbo

claimthat alloftheconsumptionboomreallycanbeattributedtotherichestgroupsof

households(MakiundPalumbo(2001,22).Thisargumenthasbeencitedwidely,includingby

Marxistauthors(Brenner2003,Glyn2006).Whilerisinghouseholddebtisrelatedtorisinginequality

inthisstory,itisnotthepoorwhoareaccumulatingdebt,butitisthetopendofthedistribution.

ThestudybyMakiandPalumbowasoneofthefirstonthistopic.Theyanalysewealtheffectsinthe

consumptionbehaviourofUShouseholdsbasedondataoftheSurveyofConsumerFinances(SCF)

from1992to2000.TheSCFalsoformedthebasisforlaterstudiesthatyieldeddifferentresults.

Somecommentsareinplace.First,theirstudyfocusesonsavingratesratherthanondebtlevels.

Whileitistemptingtoassumethatthegroupsthatreducedtheirsavingratesarealsotheones

whosedebtlevelsincreased,thisneednotbethecase.Second,theirstudyfocusesonthe1990s,i.e.

theperiodintherunuptothedotcombubble.Inthisperiod,arguablygainsinwealthwere

concentratedinfinancialassetsthataremorehighlyconcentratedthanthegainsinhousingwealth

thattookplaceinthe2000s.Third,laterstudiesareunabletoreplicatethefindingsofMakiand

Palumbo.Bibow(2010)findsthatthedeclineinthesavingcanbeattributedtohomeowners.

WhileBarba

and

Pivetti

(2009)

do

not

present

empirical

analysis,

Wolff

(2010)

offers

extensive

analysisofprimarydata.Hearguesthattheincreaseinhouseholddebtisduemostlytothe

attemptsofmiddleclasshouseholdstomaintaintheirconsumptionpositioninthefaceoffallingor

stagnatingrealwages.Maintainingsocialstatuswasonlypossiblethroughincreasingdebt.

Kennickell(2009)givesanextensiveoverviewoftheresultsofvariouscohortsofSCFdatafrom1989

to2007.Wewillusethisstudytoillustratethedifferentpoints.Table3summarisestheshareof


16/32

15

debtheldbydifferentincomegroups.Kennickellgroupsthemintothebottom50%,the5090th

percentile,the9095th

percentile,the9599th

percentileandthetoppercentile.Lookingatthe

distributionofdebtovertime,theoverallimpressionisoneofstability.(AstheSCFisbasedona

smallsample,notallfluctuationsnecessarilyreflectchangesintheunderlyingpopulation.)The

bottom90%

of

the

distribution

had

74.9%

of

all

household

debt

in

1989

and

73.3%

in

2007.

Table3[debtbyincomegroup.]

Debthastobeservicedoutofcurrentincome.Andthedistributionofcurrentincomehadchanged

intherelevantperiod.Table4thussummarisesthedebttoincomeratiobyincomegroup.This

givesaverydifferentpicture.Thereisacleartrend:relativetoincome,debthasincreasedmore

sharplyinlowerincomegroups.Thedebttoincomeratioforthebottom50%increasedfrom61%

(1989)to137%(2007);forthenext40percentilesitincreasedfrom81%to148%;whilethedebtto

incomeratiosalsoincreasedforthetop10%oftheincomedistribution,thedynamicwasamuch

weakerone.

Table4[debttoincomebyincomegroup.]

Thuswhilethedistributionofdebthasremainedratherstable,debtrelativetoincomehasincreased

moreforlowerincomegroups.Inthissensethehypothesisthatlowerincomegroupshavebeen

drivenintodebtbyfallingwages(andsocialservices)isconsistentwiththedata.

Channel4.Risinginequalityhasincreasedthepropensitytospeculate.

Thereisawidespreadperceptionthatincreasinginequality,andinparticularthegrowthofsmall

groupof

superrich

individuals

has

contributed

to

the

total

propensity

to

speculate.

The

intuition

behindthisperceptionisthat,withincreasingincome,theconsumptionpossibilitiesgetexhausted

andspeculativeuseofwealthincreases.ForexampleHuffschmied(2002),arguesthatincreasing

inequalityhasresultedinexcessliquiditythathashadaninflationaryeffectonthepricesof

financialassets.Thetermexcessliquidityissomewhatconfusinginthiscontext,buttheintuitionis


17/32


18/32

17

investmentassets,whichincludeCDOsandotherderivatives(Lysandrou2011,Tab1).Lysandrou

concludes: Amajorpolicyimplicationthatfollowsfromtheaboveanalysisisthattheworlds

wealthhastobemoreequitablydistributedifglobalfinancialcrisesaretobeavoided(Lysandrou

2011,22).

6.Conclusion

Thispaperhasinvestigatedthequestionwhetherrisinginequalityhascontributedtotheimbalances

thateruptedinthepresentcrisis,inotherwords,whetherrisinginequalityisacauseofthecrisis.

Wehavediscussedfourchannelsthroughwhichinequalitymayhavecontributed.Thisisnottobe

understoodasanalternativetofinancialfactors,butasacomplementaryexplanationthathighlights

theinteractionoffinancialandsocialfactors.First,increasinginequalityleadspotentiallytoa

stagnationof

demand,

since

lower

income

groups

have

higher

consumption

propensity.

Second,

countriesdevelopedtwoalternativestrategiestodealwiththisshortfallofdemand.IntheEnglish

speakingcountries(andinMediterraneancountries),adebtledgrowthmodelemerged,incontrast

withtheexportledgrowthmodelincountriessuchasGermany,JapanorChina.Thesetwogrowth

modelsbecamefeasiblebecausefinancialliberalisationofinternationalcapitalflowsallowedfor

unprecedentedinternationalimbalances.Third,indebtledcountriesrisinginequality contributed

tothegrowthofdebtasthepoorhaveincreasedtheirdebtlevelsrelativetoincomefasterthanthe

rich.FortheUSAthiscanbeclearlyseenindebttoincomeratiosfordifferentincomegroups.

Financializationhas

meant

debt

growth

instead

of

wage

growth.

This

growth

model

that

is

not

sustainable.Fourth,increasinginequalityhasincreasedthepropensitytospeculate,i.e.ithasledto

ashifttomoreriskyfinancialassets.Oneparticularaspectofthesedevelopmentsisthatsubprime

derivatives,thesegmentwherethefinancialcrisisbrokeoutin2008,weredevelopedtocatertothe

demandsofhedgefundsthatmanagetheassetsofthesuperrich.Increasinginequalityhasthus

playedaroleintheoriginoftheimbalancesthateruptedinthecrisisaswellasinthedemandfor

theveryassetsinwhichthecrisisbrokeout.Ourconclusionthatincreasinginequality,ininteraction

withfinancialderegulation,shouldbeseenasrootcausesofthecrisis.Figure6summarisesour

argumentgraphically.

Figure6.Risinginequalityandthecausesofcrisis


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18

Thisargumenthasdirectimplicationsforeconomicpolicy.Abroadconsensusexiststhatfinancial

reformisnecessarytoavertsimilarcrisesinthefuture(eveniflittlehasyetchangedinthe

regulationoffinancialmarkets).Theanalysisherehighlightsthatincomedistributionwillhavetobe

acentralconsiderationinpoliciesdealingwithdomesticandinternationalmacroeconomic

stabilisation.The

avoidance

of

crises

similar

to

the

recent

one

and

the

generation

of

stable

growth

regimeswillinvolvesimultaneousconsiderationofincomeandwealthdistribution,financial

regulationandaggregatedemand.Itisthisfirstelementthedistributionofincomeandwealth

thathasnotconventionallybeenincorporatedinmacroeconomic analysis.Putmorebluntly,

creatingamoreequalsocietyisnotaneconomicluxurythatcanbetakencareofafterthereal

issues,suchasfinancialregulation,havebeensortedout.Rather,afarmoreequitabledistribution

ofincomeandwealththanpresentlyexistswouldbeanessentialaspectofastablegrowthregime:

wagegrowthisapreconditionofanincreaseinconsumptionthatdoesnotrelyonthegrowthof

debt.

And

financial

assets

are

less

likely

to

be

used

for

speculation

if

wealth

is

more

broadly

distributed.

Amoreequitabledistributionofincomeandwealthwillinvolvechangesintaxaswellasinwage

policy.Reformedtaxpolicieswillincludeincreasesinupperincometaxrates,risesinwealthtaxes

andtheclosureoftaxloopholesandoftaxhavens(Shaxson2011).Intheareaofwagepolicyfar

reachingchangesarenecessary.Presentpolicyprescriptionsaimatcuttingwagesinarecession.But

higherwagegrowthisanecessaryaspectofabalancedeconomy.Itcanonlybeachievedby

strengtheningoflabourunionandcollectivebargainingstructures.

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Becker, J. (2002): Akkumulation, Regulation Territorium. Zur kritischen Rekonstruktion der franzsischenRegulationstheorie. Marburg: Metropolis Verlag

Beigewum, Attac sterreich 2010.Mythen der Krise: Einsprche gegen falsche Lehren aus dem groen

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FiguresandTables

Figure1.Thestandardviewofthecrisis

Financial

deregulation

Debtled

growth

Currentaccount

deficits

capitalinflows

Bubbleson

financialand

realestate

markets

Rising

household

debt


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22

Figure2.Adjustedwageshareinmajoreconomies

Source:AMECO3

3 http://ec.europa.eu/economy_finance/db_indicators/ameco/index_en.htm

Adjusted wage share

60

62

64

66

68

70

72

74

76

78

80

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

USA

UK

Germany

France

Japan


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23

Figure3.Incomeshareofthetop1%oftheincomedistributioninUSA,UK,France,Swedenand

Japan

Note: There is a (minor) break in the UK series in 1990.

Source: Alvaredo, Facundo, Anthony B. Atkinson, Thomas Piketty and Emmanuel Saez, The World

Top Incomes Database, http://g-mond.parisschoolofeconomics.eu/topincomes[access

24/2/2012]

0

5

10

15

20

25

1886

1894

1902

1910

1918

1926

1934

1942

1950

1958

1966

1974

1982

1990

1998

2006

France

Japan

Sweden

UnitedKingdom

UnitedStates


25/32

24

Figure4.Standarddeviationofthecurrentaccountas%ofGDPacrossOECDcountries

Source:AMECO

Standard deviation of cur rent account as % of GDP across OECD countries

0

0.02

0.04

0.06

0.08

0.1

0.12

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006


26/32

25

Figure5.ConsumptionasashareoffinaldemandintheUSA,UK,Germany,FranceandJapan

Source:AMECO

Consumption to f inal demand ratio

0.3

0.35

0.4

0.45

0.5

0.55

0.6

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

Note. All countries except USA left scale; USA right scale

0.53

0.54

0.55

0.56

0.57

0.58

0.59

0.6

0.61

0.62

0.63

UK

Germany

France

Japan

USA


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26

Figure6.Risinginequalityandfinancialderegulationascausesofthecrisis

Risinginequality

Financial

deregulation

Debtled

growth

Currentaccount

deficits

capitalinflows

Currentaccount

surpluses

Capitaloutflows

Bubbleson

financialand

realestate

markets

Rising

household

debt

Twogrowth

models

Stagnantdomesticdemand

Exportled

growth


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27

Table1.Debtledandexportledgrowthmodelsincoreandperiphery

Growthmodel

Debtled Exportled

Core USA,UK Germany,Austria,Japan

Periphery Greece,Ireland,Portugal,Spain China


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28

Table2.Householddebt(in%ofGDP)

Householddebt(in%ofGDP)

2000 2008

Change2000

08

USA 70.21 96.35 26.13

United

Kingdom 75.16 107.43 32.27

Ireland 51.55 114.26 62.71

Greece 19.83 55.29 35.46

Spain 54.22 88.06 33.84

Portugal 74.96 102.34 27.38

Italy

35.29

53.61

18.32

Germany 73.41 61.70 11.71

Austria 47.13 55.04 7.91

Switzerland 74.76 77.70 2.94

Netherlands 86.98 119.81 32.83

Note:Ireland200108

Source: Eurostat,expectUSA(FlowsofFunds)


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29

Table3.Debtsharesbyincomegroup,USA19892007

Percentileofthedistributionoffamilynetworth

050

50

90

90

95

95

99

99

100

1989 23.4 51.5 9.9 9.8 5.4

1992 25.7 46.7 9.1 12.4 6.1

1995 30.4 45.9 8.6 9 6.1

1998 28.8 45.3 8.2 12.2 5.5

2001 26 48 8.6 11.5 5.9

2004 24.2 48.6 8.3 11.5 7.3

2007 26.7 46.6 7.7 13.7 5.3

Source:Kennickell(2009)


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30

Table4.Debttoincomebyincomegroups,USA19892007


050 5090 9095 9599 99100

1989

0.61

0.81 0.71 0.5 0.251992 0.72 0.88 0.8 0.77 0.57

1995 0.89 0.92 0.77 0.67 0.43

1998 1 0.97 0.92 0.81 0.4

2001 0.89 0.99 0.73 0.59 0.32

2004 1.14 1.36 1.1 0.91 0.6

2007 1.37 1.48 1.07 0.95 0.37

Source:Kennickell(2009)


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Table5.Distributionoffinancialassetsacrossincomegroups,USA2007


050 5090 9095 9599 99100

Holdingsof

checking,

savings,

money

market,andcallaccounts 6.5 33 11.4 26.2 22.9

Holdingsofcertificatesofdeposit 3.1 46.6 11.5 23.7 15.1

Directholdingsofpubliclytradedstocks 0.6 9 8 30.5 51.9

Mutualfundsotherthanmoneymarket

mutualfunds,andhedgefunds 0.4 11.6 10.3 30.9 46.7

Source:Kennickel(2009),TableA3a

rising inequality as a root cause of the present crisis

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