The Vicious Circle of Inequality, Debt, Crisis, and Austerity

We are in a time of austerity. Public services are being cut, social benefits are being capped, and real wages are shrinking. In the last 5 years, the UK has gone through a big wage squeeze: real wages have declined by 5.5% since 2010, on par with countries such as Greece and Portugal. All these measures have fairly clear regressive distributional effects: low-wage earners (those that are more likely to receive benefits or use public services) are being much more deeply affected than the rich, who can buy these services in the market. We are told that this is just a necessary adjustment of the labour market, and that increasing inequalities and the decline of real wages at the bottom are better than an increase in unemployment.

But what if the increase in inequality and the decline of real wages at the bottom end were not only an effect but actually a cause of the crisis in the first place? What if inequality, debt, crisis and austerity were part of a vicious circle which unfolds over decades and that is simply repeating itself? If one pieces together a number of arguments that are out there, there is a grand narrative that emerges.

1. Labour was disciplined in the 1970s. After three decades of increasing real wages in line with productivity, full employment and increases in national wealth going to labour (the Golden Age, 1945-197), unemployment increased, and Keynesianism was discredited. The “excessive” power of labour unions was commonly blamed as a major cause of the crisis, and appropriate measures to discipline labour were taken. Anti-union legislation was passed in the US (Reagan) and the UK (Thatcher), but non-accommodating monetary policies prioritizing low inflation over full employment were implemented everywhere. That was the 1970s-1980s version of current austerity, only with longer sideburns.

2. Inequalities increased, Real Wages Stagnated. Since the early 1970s, productivity continued to increase, but real wages have stagnated (The Great Moderation). Accordingly, income inequalities have increased almost everywhere, and the share of income going to labour decreased again, while profit margins for capital increased. The income share of those at the top has soared, while those at the bottom remained in the slump.

3. Debt Increased to Compensate for the Stagnation of Real Wages. There are two things that have happened to compensate for the decline of real wages from the 1970s onwards. First, there has been a massive entry of women in the workforce. Of course this has to do with cultural change, but one can also understand this as a response by households to maintain or increase household income in the face of stagnating male wages. Second, and most importantly, there has been a massive increase in private debt. Who is going to buy all the cars, houses, videogames, fridges Ipods and iPhones that are produced in ever greater numbers if real wages stagnate? Supply-side economics tells us that supply generates its own demand, but it doesn’t seem to work by itself. The solution is: you give everybody credit cards. Colin Crouch calls this privatised Keynesianism: instead of supporting consumer demand via public spending, you provide easy credit to everyone, even to poor people. “Subprime”, as in “subprime mortgages”, is another word for “poor”.  In a context of austerity where you cannot expand public spending to boost demand, an alternative is to deregulate the financial sector so that citizen-voters can still buy houses via lower credit requirements, and without direct state involvement. Everybody’s happy until…

4. …The financial system bloats and explodes. Because the whole financial system works through complex chains where risks and insurance are sold, resold, and opaquely packaged in complex products, the connection between loans, interests and actual risks is severed. When people to whom loans shouldn’t have been granted in the first place cannot pay their debts anymore, the whole pyramid collapses.

5. The Government steps in to bail out the banks, because they are “too big to fail”. What was private debt becomes all of a sudden public debt.

6. Governments face a fiscal crisis. The big hole in their national accounts due to the money they had to inject in the financial sector aggravates the problem you have in times of crisis: declining revenues because of lower growth and higher expenditures because of higher unemployment.

7. Back to square one. Governments carry out austerity to reduce debt, and they do so mainly by hitting the poor. Public services are cut, benefits are capped, wages shrink again, and labour is disciplined. Go back 6 paragraphs and start again.

A fairly similar story is provided by Pasquale Tridico here, and you can watch an excellent video by David Harvey here or another one by Mark Blyth here.