Income and wealth inequality: An underlying cause of the crash

(In a question posted on my blog, Bill Bell asked me to explain why I believe that one of the basic causes of the economic crash of 2008 was the widening income and wealth gap between the rich and the rest of the population. Drawn from excerpts from my book Beyond the Bubble, here is my answer to that crucial question.)

The last thirty years have been the golden age of inequality. While that inequality was the incubator for multitudes of new billionaires, it was, as well, a principal cause of the Crash. In large part, the meltdown of the financial sector flowed from the labour market model that was the very heart of neo-liberalism. The financial meltdown flowed directly from the reckless decisions of financial managers to mine the economy for enhanced profits through the promotion of various kinds of debt and the promotion of variety of financial products whose common aim was to heighten the leverage of investors.

In sharp contrast to the period from 1950 to 1970, when the real incomes of the families of wage and salary earning Canadians, adjusted for inflation, doubled during the last several decades, real incomes in North America have remained essentially flat for most wage and salary earners.

In the period 1980 to 2006, what happened to the incomes of younger U.S. full-time, full-year wage and salary earners aged twenty-five to thirty-four is telling. Here is what happened to the incomes of younger full-time, full year wage and salary earners in the United States, aged 25-34 over the period 1980 to 2006. This cohort is extraordinarily important because it is made up of people already solidly in the work force for whom the pattern has been set and whose life journeys will be crucial in coming decades. In constant 2006 dollars, the median annual income of this crucial cohort in 1980 was $36,700; in 2006, it was $35,000. For men in the cohort, here are the median wage and salary figures for 1980 and 2006: $43,700 and $37,000 respectively; for women: $29,400 and $31,800; for whites of both genders: $38,200 and $37,400; for blacks of both genders: $29,400 and $30,000; for Hispanics of both genders: $33,000 and $28,000.

The median incomes for working-age U.S. households over the period from 2001 to 2007 -- the years in the lead-up to the crash -- are also revealing. Household incomes are crucially important to economic well-being, including as they do the incomes of single-income households and the larger number of households that have more than one earner. In constant 2007 dollars, the median income of working-age U.S. households was $58,721 in 2001; in 2007, it was $56,545.

In Canada, the median wages and salaries of Canadian workers, adjusted for inflation have not grown for the past three decades. A study published by the Canadian Centre for Policy Alternatives resolves the different ways Statistics Canada has categorized the data to show that average real wages for Canadian workers, have not increased since the end of the 1970s. In constant 2005 dollars, the average weekly wage was just under $800 in the early 1980s, where it remained in 2005, with those working overtime earning more than those who did not. While there were minor fluctuations over the decades, what is remarkable is how little things changed. Rising levels of productivity in the economy were not passed on to the average worker in the form of higher wages. The study concluded: "Astoundingly...real wages have been stagnant for 30 years running."

In recent years the relative income gap in the United States between the rich and the rest is wider than at any time since 1928 (the eve of the Great Depression.) In 2005, while the total reported income in the United States grew by nearly 9 per cent, the average incomes for those in the bottom 90 per cent of income earners actually declined slightly, by $172 or 0.6 per cent. The top 300,000 income earners took home a total remuneration that was nearly equivalent to the combined incomes of the bottom 150 million Americans. The privileged 300,000, per person, received 440 times as much as the average person in the bottom 150 million -- the gap between the two cohorts having nearly doubled since 1980. In 2005, the top ten per cent of American income earners took home 48.5 per cent of all reported income, compared with roughly 33 per cent in the late 1970s. The all time peak for the top ten per cent was 49.3 per cent in 1928. The top one per cent took home 21.8 per cent of reported income, more than double their share of income in 1980. In 1928, the top one per cent peaked in its share of income at 23.9 per cent. In 2005, the top tenth of one per cent reported an average income of $5.6 million, and the top hundredth of one per cent an average income of $25.7 million. The word "reported" used in this paragraph is very important. The U.S. Internal Revenue Service (IRS) has reported that it is able to accurately tax 99 per cent of income from wages, but that it is only able to tax about 70 per cent of business and investment income, most of which goes to upper income earners. What this means is that the IRS doesn't really know how much business and investment income is being earned in the United States. The consequence is that the real income gap is greater than reported in the figures above.

During an epoch when the top one per cent of income earners were squeezing ever more out of the economy for themselves, employers and governments, with the full support of neo-liberal economists and social scientists, were implementing a labour market model that marginalized an ever larger proportion of the work force. Particularly in the Anglo-American world and in countries that adopted the Anglo-American model, the dominant idea was to establish an ever more "flexible" labour market. The word "flexible", chosen to seem modern and progressive, meant that the labour force would be segmented so that while its inner core would be made up of wage and salary earners with full time employment, benefits, and a degree of job security, around this core there would be an ever greater secondary labour force, made up of part-time or contractual employees, whose rate of pay was lower, a work-force with few benefits, without pensions, and with little or no job security. Over the past quarter century the rise of this secondary or precarious labour force has transformed the economies of the advanced countries.

For the most part, the precarious labour force has been made up of women, immigrants, people of colour, migrants to cities from rural areas and small towns, and those with limited education. The workers in the precarious labour force cost employers, whether they are in the private or public sectors, much less than do their employees in the inner or permanent labour force. Savings accrue in a number of ways. The hourly or weekly rates of pay of precarious workers are lower. Reduced benefits and the absence of pensions result in enormous savings. Of great importance, the members of the precarious work force can be hired or laid off at the pleasure of the employer, or to use the in-word, in the most flexible possible way. As the demand for goods and services rises in particular sectors, people can be hired, without long-term commitments being made to them, so that when demand declines, these people can be shown the door with little difficulty.

The rise of the precarious or secondary labour force also puts immense pressure on the permanent labour force, by threatening it with a less costly alternative. The permanent labour force is highly expensive for employers. Wages and salaries are much higher than in the precarious zone, benefits are substantial and costly and so are pensions. In addition, depending on labour laws in particular jurisdictions, as well as union contracts, dismissing an employee can be an expensive affair, often involving costly severance payouts. Highly significant, the permanent labour force is much more often unionized than is the precarious force.

Unions manage to increase the wage and salaries and the benefits as well as the job security of their members. All of these effects of trade unionism are thought to be undesirable by the proponents of a flexible labour market. Business school students are taught that trade unionism is old-fashioned. While it once played a useful role in winning higher wages and better working conditions for employees in the days of the rough and ready capitalism of the past, capitalism has been modernized and humanized and no longer needs unions, the story goes. Instead, students learn, unions are barriers that stand in the way of efficiency, increased productivity and the smooth evolution of the market economy toward ever more highly sought goods and services.

Neo-liberal economists contend that too much job security holds an economy back. Job security can block a company's move into cutting-edge sectors of the future, tempting the enterprise to remain in mature sectors that may already be in decline. Over the long-term such a company is bound to lose out to more innovative companies that do not have to operate according these rules. In addition, job security, these analysts contend, forces enterprises to keep mediocre and aging employees on their payrolls, when they would do better if they could rid themselves of such workers and hire younger, better educated, more highly motivated people.

There is no doubt, as well, that competition and negative feelings between those in the permanent labour force and those in the marginalized work force act to the benefit of both private and public sector employers. Part time workers who are not unionized and who have little job security are often resentful of workers with full-time jobs who have substantial job security and the protection of union contracts. In neo-liberal societies, the media regularly depicts the elected officials of trade unions as "union bosses", suggesting that their members work for the union rather than the reverse. In the public service, which is now relatively highly unionized, especially in Canada, employees are routinely described as lazy and inefficient, highly resistant to change and devoted to short-work weeks and long holidays. One consequence of neo-liberal assaults against unions is that many of those who work in the precarious sector resent full-time, unionized workers. When unionized workers go on strike, it is not difficult for the media to find lower paid part-time workers to complain that fat-cat union members should have to contend with the insecurities that are the lot in life of the majority. Employers have always benefited from resentments between different segments of the work force. Today's division of the work force into the inner segment and the precarious segment suits them to a tee.

Important as well in dividing workers into competitive sub groups that bear resentments against one another, is the highly diverse character of today's labour force. Race, ethnicity and gender are crucial lines of demarcation in the contemporary labour force. Resentments among workers on the basis of race, ethnicity and religion is no new thing.

The history of struggles within the working class is not pretty story to gladden the hearts of trade union militants. Resistance to immigrant workers who threaten to compete with and reduce the remuneration of the existing working force is a recurring part of the history of working people. Resentment among workers against the Chinese labourers who played a central role in constructing the railways in both Canada and the United States resulted in numerous brawls, beatings and lynchings and in popular support for laws restricting Chinese immigration to Canada and the United States.

The impact of the neo-liberal social model is one of the chief causes of the crash of 2008. This is because the suppression of wage and salary increases -- the heart of the neo-liberal model -- both in the advanced countries and throughout the world, has had the inexorable effect of limiting the size of the market for goods and services and consequently for increased profits. This is the old capitalist conundrum. While individual capitalists benefit from keeping the wages and salaries they pay as low as possible, collectively they benefit from making wages and salaries as high as possible. Keeping its own wage bill low obviously directly enhances a company's profits. There is simply more left over for the shareholders or owners. Paradoxically, a company is aided if its competitors have high wage bills for the simple reason that this means there will be more money in the pockets of consumers to purchase the goods and services of firms in general, including those determined to keep their own wage bills as low as possible.

This is an insoluble dilemma. Individual firms, concerned exclusively with their own results, are not prepared to raise wage and salaries as a way to serve the general interest, including the interest of other private firms. Indeed, they only raise the wages and salaries they pay in response to effective pressure from unions or from the existence of labour shortages to raise them. They also raise wages if forced to do so as a consequence of minimum wage legislation or as a consequence of full-employment state policies that succeed in keeping the pool of surplus labour as small as possible. During the Keynesian age of the post-war decades, wages and salaries did rise for a variety of reasons. Under pressure from electorates with keen memories of the privations of the Great Depression and the war, as well as of the effectiveness of wartime economic planning, governments made job creation and full employment top priorities.

Under conditions in which the pool of surplus labour was minimal, unions undertook highly effective drives to organize the unorganized. During the post-war decades, the trade union movements reached the peak of their economic and societal influence in Western Europe, Canada and the United States. In a period often described as a golden age, wage and salary earners achieved greater influence than ever before in the history of capitalism. Real wages rose, social programs were expanded, educational opportunities were widened. For the first time in history, the majority of wage and salary earners in the advanced countries were no longer poor.

During the period of the "great social compromise", while corporations remained at the helm in directing the economy and reaping the benefits, workers had to be taken in consideration as never before. Of critical importance to the stability of these arrangements, this was also an era of national capitalism within the framework of the American centred Bretton Woods economic system. In this period of fixed exchange rates, as opposed to the system of floating exchange rates, with which we live, the U.S. dollar was the reserve currency of the world, exchangeable for gold at a rate of $35 an ounce, and exchangeable as well for other currencies. Despite rising trade and investment abroad on the part of multinational corporations, this was also an age of national capitalism, with the state in each advanced country playing a seminal role in steering the system. It was the age of the so-called "mixed economy", a term that acknowledged the predominant role of the private sector but also the power of the state and its responsibility to steer the economy to achieve broad objectives, the most important being full employment.

Following the intermediate decade of the 1970s, whose economic storms and shocks led to the collapse of the Keynesian consensus, rising government deficits and debts, slower economic growth, and the existence of high inflation alongside high unemployment, the transition was rapid to the new age of globalization, de-regulation and neo-liberalism. The leading political stars of this new age of the right were Margaret Thatcher, elected to lead a Conservative government in Britain in 1979, and Ronald Reagan, who was elected President of the United States the following year.

Neo-liberalism dismantled the regulatory systems that had been in place during the post war decades. In the Anglo-American world, and in other nations as well, the doors were thrown open to the free movement of capital internationally. National governments lost their ability to control capital flows. Gigantic new corporate investments outside the developed countries tore away at the balance of power that existed between capital and labour. Able to access much cheaper labour on an enormous scale, corporations threw workers and their unions onto the defensive.

From the early 1980s to the present, corporations have been running away from labour in the advanced countries. .....In the United States and Canada, the income of the average worker, adjusted for inflation, has hardly grown over the past quarter century. In the United States, only 12 per cent employees were unionized in 2006; in Canada, the proportion is much higher at 31.4 per cent in 2007, but it too has been declining.....

How then has the neo-liberal model played a key role in triggering the crash?

The widening divide between a tiny minority at the top, especially in the Anglo-American world, and the rest of the population has limited the growth of the market for goods and services. When those at the top keep too much for themselves and hold wages and salaries down, they set themselves up for an economic crisis. The same was true in the 1920s on the eve of the Crash of 1929. This time, the financial capitalists who were at the centre of the meltdown spent the first decade of this new century trying to stave off the crisis -- in the aftermath of the bursting of the dot.com bubble -- with a whole series of new initiatives, in sub-prime mortgages, in the promotion of personal debt, and in the sale of a long list of financial products under the headings of securitization, credit default swaps and other derivatives.

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