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The main outcome of the post-1980 neoliberal experiment has been an economy that is both much more unequal and much more fragile. Stewart Lansley FRSA argues that unless we tackle inequality the slump will continue.

At the depth of the downturn in October 2009, St Paul’s Cathedral hosted a spirited and timely debate on the subject of the role of the growing divide in market-led economies. Sharing a platform with Nicholas Sagovsky, canon theologian at Westminster Abbey and Vince Cable, then Lib-Dem deputy leader, Brian Griffiths, the Vice-Chair of Goldman Sachs and a former adviser to Mrs Thatcher, defended higher inequality ‘as the way to achieve greater prosperity for all'.

For the last 30 years, the gains from growth in a number of rich countries have gone increasingly to big business and a small corporate and financial elite. Between 1980 and 2007, average real wages in the UK rose by half the rate of economic growth, a process of decoupling that accelerated from the late 1990s. In the US, living standards for four-fifths of the workforce have been little better than stagnant over the last three decades. In Germany, real wages started flat-lining from the millennium.

It is these trends that have fuelled today’s towering personal fortunes, and left nearly everyone else with a declining share of the economic cake. While recent years have seen several hotly debated critiques of this deepening gulf, these have concentrated on issues of social injustice. But an equally critical issue is that of the impact of deepening inequality on the way economies function.

The architects of the post-1980 experiment in market capitalism – Margaret Thatcher, Ronald Reagan and their advisers – argued that the post-war march towards more equal societies had killed incentives and stifled enterprise. Higher rewards and the accumulation of large fortunes might bring a bigger divide, they claimed, but would encourage business and wealth creation, raise growth rates with everyone gaining.

So are Lord Griffiths and the pro-inequality school right? The evidence says no. The wealth gap has soared but without the promised pay-off of wider economic progress. On all measures of economic performance bar inflation, the post-1980 era of rising inequality has a much poorer record on growth, unemployment and stability than the egalitarian post-war decades.

Productivity growth averaged 1.9% a year from 1980 to 2008 compared with an annual average rise of 3% during the post-war era of regulated capitalism. The average level of unemployment since 1980 is close to five times that of the two post-war decades. This is despite a steady fall in the share of national output accruing to wage-earners, from around 60% at the end of the 1970s to 53% by 2008; a trend that was meant to bring record job creation. Most important, financial crises have become much more frequent and more damaging culminating in the increasingly intractable crisis of the last four years.

But what does this tell us about cause and effect? Can the current global crisis be attributed, at least in part, to the growing wealth divide? No, according to the report of the bipartisan US Financial Crisis Inquiry Commission, which blamed pretty well everybody and everything for the 2008 crash but failed to mention ‘inequality’ once in its mammoth 662 page report.

Yet there are powerful reasons to believe that the growing divide – one which took the US and the UK back to levels of inequality last seen during the turbulence of the 1930s – played not just a central role in the build-up to 2008, but is now a key cause of the failure of recovery.

First, highly unequal societies have a natural propensity to deflation. In the UK and the US, for example, the prolonged wage squeezes of the last 30 years have sucked demand out of the economy, creating consumer societies without the capacity to consume. Both countries would have plunged into recession much earlier without a great surge in levels of personal debt to unsustainable levels.

Secondly, excessive concentrations of income and wealth also lead to ‘bubble economies’. From the early 1990s, the surge in inequality created a giant mountain of global footloose capital: a mix of corporate surpluses and burgeoning personal wealth. Levels of bank credit grew much more quickly than the needs of the economy, while the surplus funds held by the global rich more than doubled in the decade to 2008 to $39 trillion, a sum more than three times the output of the American economy. It was this tidal wave of hot money caroming around the world in search of the quickest returns that created the bubbles – in housing, property and business – that eventually brought the global economy to its knees.

Despite the evidence of its impact, the great wealth divide has continued to grow. While seven out of 10 UK employees have experienced either a pay freeze or a pay cut in 2011, executive pay and city bonuses are continuing to rise. The number of global billionaires has continued to swell through the crisis.

It is this rising income divide that lies behind the faltering of recovery. Falling real wages are stifling demand across the world’s richest economies. The globe’s billionaires and largest corporations are sitting on near-record volumes of cash, while the productive economy is being starved of funds. Unless these great concentrations of wealth and income are broken up, we are heading for an era of near-permanent slump.

Stewart Lansley is the author of The Cost of Inequality: Three Decades of the Super-Rich and the Economy, Gibson Square.


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