Crisis and Inequality. Mattias Vermeiren
the Netherlands and Denmark) and clarify why the accumulation of household debt in these countries did not culminate in a fully fledged housing crisis like those in the United States and the United Kingdom.
Two distinctive growth models ensued from these changes in macroeconomic policy, industrial relations, corporate governance and financial policy: debt-led growth models in the LMEs and Mediterranean MMEs and export-led growth models in the CMEs, all of which have been shaped by distinctive patterns of income inequality. Chapter 7 reviews recent analytical approaches to CPE that focus on the relative importance of different components of aggregate demand and dynamic relations among these demand drivers of growth, thereby paying due attention to the instability of these growth models and their diversity within distinct groups of varieties of capitalism. We will sketch out the main political-economic pillars of these growth models and explain how the mutually interdependent relationship between debt-led and export-led growth gave rise to unsustainable macroeconomic imbalances that were an important source of the global financial crisis of 2007–8 and Eurozone debt crisis of 2010–15. Furthermore, we examine the varying capacity of the industrialized countries to avoid the burden of macroeconomic adjustment after the crisis, highlighting the importance of monetary sovereignty – that is, the capacity to issue debt in a currency controlled by the national central bank. The Eurozone countries have surrendered this capacity by issuing debt in a currency that is controlled by the European Central Bank (ECB), which was more reluctant than the Federal Reserve and the Bank of England to engage in large-scale asset purchase programmes known as quantitative easing (QE; see chapter 7). In the United States and the United Kingdom QE reflected an attempt to minimize the macroeconomic adjustment costs of the crisis by restoring the key pillars of finance-led growth. The ECB’s reluctance to pursue QE offered the northern CMEs a mechanism to deflect the burden of macroeconomic adjustment onto the southern MMEs, which were forced to pursue very painful austerity measures.
The asymmetrical adjustment to the global and regional macroeconomic imbalances after the crisis resulted in persistently weak and fragile economic growth, leading to a revival of the hypothesis that advanced capitalist countries face a period of secular stagnation. In chapter 8 we will discuss the risk of secular stagnation and other key challenges these countries will be confronted with in the near future: the rise in radical right-wing populism, global warming and the economic fallout of the coronavirus crisis. In doing so, the final chapter assesses the prospects for the emergence of a more egalitarian and more sustainable form of democratic capitalism, arguing that a fundamental revision of the neoliberal macroeconomic policy framework should be central to addressing these challenges.
Notes
1 1 Streeck 2014.
2 2 Alvaredo et al. 2018.
3 3 All abbreviations used in the text of this book are given with their full versions when they first appear, and are listed on pp. xi–xii.
4 4 Foa and Mounk 2016: 7.
5 5 Foa and Mounk 2016: 7.
6 6 Berman 2019; Broz et al. 2019; Hopkin and Blyth 2019; Rodrik 2017.
7 7 Petry 2016; Wade 2009.
8 8 Friedman 1953: 15.
9 9 Prescott 2016: 2.
10 10 Bernanke 2018: 251.
11 11 Mankiw 2013: 30–1.
12 12 Hacker and Pierson 2011.
13 13 See Harvey 2006 for an introduction to neoliberalism and Slobodian 2018 for an intellectual history.
14 14 Manduca 2019.
1Rising Inequality in Advanced Capitalism
In this chapter we will provide a brief overview of some issues related to rising inequality in advanced capitalist countries. First, how is it measured? There are many ways that inequality can be measured, but we will restrict ourselves to those measures that are most frequently used in contemporary debates on inequality: (1) measures of personal income distribution like the Gini index and the shares of different groups in national income; (2) measures of functional income distribution like the labour and capital share in national income; (3) measures of wealth distribution. By all measures, economic inequality has risen sharply in many advanced capitalist economies. Nevertheless, significant cross-national differences can be observed in terms of both the level of inequality and the evolution of inequality since the 1980s: patterns of inequality have been shaped by national varieties of capitalism, with the Anglo-Saxon LMEs displaying higher inequality and growth of inequality than North and West European CMEs.
Second, how can rising inequality be explained? Cross-national divergences in patterns of inequality suggest that the neoclassical interpretation remains inadequate. Neoclassical economists have emphasized exogenous market forces like skill-biased technological change (SBTC) and globalization to explain the rise in inequality. Since advanced capitalist economies have more or less equally been exposed to these market forces, they fail to clarify why the trajectory of inequality has been so markedly different in the Anglo-Saxon countries and the other advanced countries. So while technological change and globalization may act as powerful forces for income inequality, continued cross-national diversity suggests that other factors influence both the magnitude and the rate of change in inequality and top income shares. From a political economy perspective, the effects of technological change and globalization on the distribution of income and wealth in the advanced economies have been shaped and mediated by a variety of government policies and economic institutions that will be examined in subsequent chapters.
Finally, why does rising inequality matter? A growing body of research in social sciences and political economy suggests that excessive inequality can have different kinds of undesirable social and political effects. While it is important to be aware of these effects, the main focus of this book will be on another adverse consequence of rising inequality: financial instability. There is a growing consensus that the rise in income and wealth inequality was one of the deeper, structural causes of the global financial crisis of 2007–9. In this chapter we briefly discuss the main mechanisms behind this connection and sketch out why heterodox political economy is more adequate to understand the causes and consequences of rising inequality than neoclassical economics.
Measures of economic inequality
Personal income distribution
For many decades, both the IMF and the OECD have collected data on the evolution of income inequality, which they usually measure by the Gini index, developed by the Italian statistician and sociologist Corrado Gini (1884–1965). Essentially, the Gini index measures the extent to which the actual distribution of disposable household income deviates from the situation in which every household has the same income, ranging from zero (indicating ‘perfect equality’) to one (meaning ‘complete inequality’). In order to understand the origin of the Gini index, we need to have a look at the Lorenz curve – shown in figure 1.1. The Lorenz curve depicts the cumulative percentage of households (from poor to rich) on the horizontal x-axis and the cumulative income share of these households on the vertical y-axis. For instance, the poorest 20 per cent of households earn 5 per cent of total income in our example. The Gini index is then calculated by the ratio of the area between the line of perfect equality (the 45-degree diagonal line) and the observed Lorenz curve to the area between the line of perfect equality (line ab in the graph) and the line of perfect inequality (line acb). The higher the index, the more unequal the distribution is.