Inequality and Economic Crises

By John Buell

The news from Europe continues to be bleak, but paradoxically discouraging numbers may have beneficial consequences.  Great Britain is now in the midst of an official double dip recession. One silver lining in this cloud lies in at least occasional departures from the conventional script even in the mainstream media.

Some now have the temerity to suggest that government austerity, pursued with a vengeance by Britain’s Tories, may well not be the answer to continuing economic woes. Cuts in government spending may depress GDP and even worsen the fiscal positions of debtor states. The increase in public debt, experienced throughout much of the world, may be seen as a consequence of the economic crisis rather than its cause. Perhaps the best way to attack deficits is to create the jobs that can provide the tax revenues to pay down long- term debt and restore fiscal order.

At this point any turn in the political discourse may be more significant than slight up or down ticks in the employment numbers. I am heartened to see some attention given to proposals like Paul Krugman’s to create a million new jobs by restoring cuts to local governments, especially for laid off teachers.

Yet the discourse even among many liberals still omits many key issues. How did our economy reach the point that it depends on government spending for life support? And just who is going to pay the long- term costs of government borrowing?

Inequality is the central concept in addressing both questions. The 40-year stagnation in working class wages even as worker productivity and corporate profits increased steadily created a severely unbalanced economy. This imbalance left both a need and an opportunity. In order to hold onto their part of the American dream, middle and working class families had to borrow. The rich for their part enjoyed incomes far in excess of anything they could spend. These surpluses of course went into investments, but hardly the sort that builds an economy’s overall strength. In order to diversify their assets, they turned to finance by funding loans to the workers on whom their profits were based and by creating complex derivatives based on these loans and on various forms of corporate consolidation.

The deeper question this crisis evokes is why the long term stagnation in worker wages even as corporate CEO’s salaries escalated. As Joseph Stiglitz points out, “If someone earns huge incomes as a result of a brilliant contribution that leads to huge increases in incomes of the rest of society, it might seem fair that he receive a fraction, perhaps a substantial fraction, of what he has contributed. Indeed, the dominant paradigm in economics attempted to justify societal inequalities by saying (I should say, assuming) that they were related to differences in “marginal” productivities: those who, at the margin, contributed more to society got more.

Now, in the aftermath of the crisis, it seemed grossly unfair that the bankers walked off with outsized bonuses while those who suffered from the crisis brought on by those bankers’ reckless and predatory lending went without a job.

It seemed grossly unfair that government bailed out the banks but seemed reluctant to even extend unemployment insurance for those who through no fault of their own could not get employment or to provide anything but token help to the millions who were losing their homes. Bankers reaped large rewards even though their contribution to society — and even to their firms — had been negative. In other sectors, CEOs who ran their firms into the ground, causing losses for shareholders and workers alike, were rewarded with gargantuan bonuses.”

How is it that destructive bankers and CEOs survive and even prosper? This is not the magic of the market. The seventies stagflation crisis undermined the post World War II economic consensus — flawed and limited in many ways as it was — between labor and management. What followed from the late seventies on was systematic attacks on unions, on laws protecting workers health and safety, on minimum wage standards.

As a consequence corporate executives no longer faced effective countervailing power, to borrow John Kenneth Galbraith’s insight. Political discourse came to suggest that the sole imperative of the modern corporation is to maximize shareholder value Stockholders, the line went, are the ones who take the risk and should reap the reward. Yet workers invest their health, their educational endeavors in their jobs. And the community’s health, safety, and economic stability depend on corporate success.

If the economy does begin to move toward full employment — a concept that itself deserves much more attention— the time will come to reduce the debt. But will the burden fall on those who have benefited from numerous bailouts and special subsidies or those who have struggled to hang on through the crisis? And will we take a closer look at the corporate structures that played so pivotal a role in cause?

John Buell lives in Southwest Harbor, Maine, and writes regularly on labor and environmental issues. Email jbuell@acadia.net.

From The Progressive Populist, June 15, 2012