Rome, 13 April 2017 Pasquale Tridico University Roma Tre - tridico@uniroma3.it
The key arguments in this volume are that income inequality increased during this period because labour and welfare became seen as costs to be compressed rather than as a fundamental part of aggregate demand to be expanded. This period also witnessed the growth of "financial capitalism", characterised by the strong dependency of economies on the financial sector, by the globalisation and intensification of international trade and capital mobility, and by the "flexibilisation" of labour markets which contributed to the reduction of wage shares and therefore to the increase of inequality. However, the welfare state is not a drain on economic performance and competitiveness, or is it a barrier to economic efficiency
1970s: Ideological switch, political change and technical progress 1980s: capital expansion globalisation and financialisation change in capital-labour relations 1990s and 2000s: labour flexibility, weakening of labour market institutions and adverse social policies recovery of profits and soar of financial rents and compensations wage share reduction INEQUALITY moderation of aggregate demand scarce GDP dynamics secular stagnation
In OECD: the richest 10% OWNS 10X INCOME 10% POOR On the world the top 1% own 48% of global wealth (about US$120 trillion). The richest 85 people in the world the likes of Bill Gates, Warren Buffett, and Carlos Slim own about US$70 trillion, more wealth than the roughly 3.5 billion people who make up the poorest half of the world s population. In the United States, the top 10 % (1%) own about 70% (38%) of wealth in the economy. Income (rather than wealth) follows the same trend in proportion: the top 10% (1%) own about 47% (20%) of income in the economy (Source: OECD, OXFAM, Forbes, WB, WID..)
1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Average Gini coefficient - OECD countries 0,34 0,33 0,32 0,31 0,3 0,29 0,28 0,27 0,26 Wage share (adjusted) in G7 economies, from the end 1970s to 2016 (last 2 years projections) % 68 66 64 62 60 58 56 54 52 50
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Adjusted labour income share (%) Wage share (adjusted) in rich OECD countries 70 65 60 55 50 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Germany France Italy United Kingdom United States Japan Canada Australia 65 Wage share (Adjusted) in selected OECD countries 61 57 53 49 Greece Spain Portugal Ireland 45
Australia Austria Canada Czech Republic Denmark Finland France Germany Hungary Ireland Israel Italy Japan Netherlands New Zealand Norway Sweden United Kingdom United States OECD average 0,4 0,35 0,3 0,25 0,2 0,15 0,1 0,05 0 0,4 0,35 0,3 0,25 0,2 0,15 0,1 0,05 0 1985 2012
ineq.2.3.4.5 30 40 50 60 70 80 wage_share_adj
1. It favours the aggressive implementation of the principle downsize and distribute so that corporations managers have as the only objective to maximize and distribute dividends for the shareholders at the cost of squeezing production, cutting wages and downsizing. Moreover, assets are wasted in speculation strategies rather than in productive investments. 1. It favours an aggressive short-term strategy of corporations managers interested mainly to sell products and to the maximization of bonus and profits in the short terms at the expenses of the wage bill. Labour market institutions and in particular labour flexibility are functional to these strategies.
FINANCIAL-LED MODEL (institutional change: financial deregulation, labour market flexibility, welfare retrenchement, capital mobility, trade union weakening) Decline of productive investeements and increase of financial speculation increase of Financial compensation Indebteness Inequality Weakening and instability of aggregate demand Boom & Burst and financial instability GDP stagnation
6 GDP growth per capita 4 2 0-2 -4-6 OECD countries, Source: OECD
Capital mobility Financial deregulation No growth + income inequality Structural adjustement
1. Finance (financialisation) and Inequality Inequality is boosted by financial development, credit consumption and the financialisation of the economy which allow for an expansion of the debt, both public and private, the compression of the wage share through downsizing of workforce and distributing of profits among shareholders, flexible labour markets, and the reduction of welfare state which increases income vulnerability and reduce worker purchasing power. [Stockhammer (2013); Galbraith, (2012); Stiglitz, (2012)] 2. Inequality (credit availability) and Financial crisis Inequality may weaken aggregate demand and drag on the economy since higher income groups spend a smaller share of the income; moreover, income inequality boosts financial instability because it increases demand for credit and this may destabilize the aggregate demand, in particular during credit rationing time [Rajan, 2010; Cynamon and Fazzari (2013); Palley, 2012]
Wage compensation, which is shrinking, affects the labour capacity whose value is generally less than the value of the output produced. The excess of supply (which is also the surface of worker s exploitation) is compensated by creditconsumption. In this way the crisis is endemic to capitalism and to inequality Workers suffer twice from these crises (being exploited and paid less, and being encouraged to increase credit consumption) Capitalists gain twice (because they gain from the exploitation which however produces excess of supply, and obtain returns from financial products). Goda and Lysandrou (2014);
United States.35.4 Japan United Kingdom Australia Portugal Ireland Canada New Zealand Estonia Italy.3 France Germany Netherlands.25 Norway Austria Sweden Finland Belgium Denmark -2-1 0 1 2 3 Scores for the principal component of labour market institutions
.25.3.35.4 Gini Figure - Correlation scatter between inequality and EPL in 2013 United States United Kingdom Japan Ireland Australia Spain Greece Canada New Zealand Estonia Italy Korea Poland France Netherlands Germany Hungary Austria Sweden Slovak Belgium Republic Finland Czech Repub Denmark Norway Slovenia 0 1 2 3 EPL
Gini.4.3.35.25 Figure - Correlation scatter between financialisation and inequality in 2013 Israel United States Portugal Italy Greece Ireland Spain Japan United Kin Australia Estonia New Zealand Poland Korea France Canada Germany Netherlands Hungary Austria Slovak Republic Czech Republic Slovenia Sweden Belgium Finland Norway Denmark 0 50 100 150 Financialisation
Financialisation during neoliberalism 350 Market capitalization, OECD countries, % of GDP, 1988-2006-2009 300 250 200 150 100 50 0 1988 2006
Defined/described from different perspectives, not only financial: housing sector and connections with insurance mortgage perspectives CEO and the shareholders perspectives. houses asset to speculate corporation its interests in the expansion and in global markets; emerging countries (i.e. BRICS, MINT), considered countries of opportunities unexploited markets perspectives; Wall Street and other stock exchanges perspectives of view with their main interests in whatsoever investments, as far as bringing higher returns, higher profits, higher value shares; hedge funds perspectives where speculation more than investments are the main drivers of behaviours, and financial asset accumulation is the main objective in order to affect financial markets and government decisions; from the government and policy perspectives as far as financial markets are left as much as possible unregulated and free to move capitals
A paradox btw goods market and stock market. In the goods market, competition increase size of firms, innovation, productive investments, and market size. In the stock market instead, competition downsize of firms listed in the stock exchanges, reductions of costs, and distribution of more remunerative dividends. This paradox can be explained with the contraposition of principal and agent : the first acts in the goods market, owns the firms, and does everything in order to increase the size and to get higher profits. Agents in the stock market instead work in order to create rooms for higher dividends for shareholders and higher bonuses for themselves, so they have conflicting interests with the firms. Even in the case of Merger and Acquisition (M&A) in the stock exchange, where apparently the objective is to increase the size, in reality the objective is to increase synergy so that costs (mostly labour costs) can be reduced. In fact the sum of two corporations would not be one resulted in the M&A of the new corporation in terms of employees, labour costs, size, etc.
CEO salaries, in financial capitalism, depend on the increase of value shares, and on the short-term results performance in the stock exchange. In 1950, the average American chief executive was paid about 20x as much as the typical employee of his firm. Today, ratio is +500 to 1. In 2011, Apple s Tim Cook received $378 million (6,258X the wage of an average Apple employee ($60,000). A typical worker at Walmart earns less than $25,000 a year; Michael Duke, the retailer s former chief executive, was paid more than $23 million in 2012. This represents the return of a patrimonial society as Piketty (2014) stated: the patrimonial society today is the financial class.
Some emerging economies are managed like big corporations with customers rather than countries with citizens: Singapore, Thailand, and Malaysia. big EE such as BRICS or MINT are considered big assets to exploit through the intervention of fiscal structural adjustments (administered by IMF and WB) with the objective to implement neoliberal policies able to fit with the financial capitalism model such as: capital mobility, privatization, fiscal discipline, public deficit and debt reduction, labour market flexibility, etc.
Since 1980, and in particular since the Thatcher and Reagan administrations in the UK and the US, financial capitalism was shaped a set of neoliberal policies boosting financialisation and globalisation were implemented, such as deregulation of the financial sector, liberalization of trade, capital mobility, wage flexibility, privatization, structural adjustments, retrenchment of welfare states, the creation of a second pillar in the pension system i.e. the pension funds with the clear aim to collect easy savings.
Before 2007 generous monetary policies. This increased opportunity in the financial sector, speculation, value shares, asset prices, dividends financial bubble; boom in the housing sector and the emerging of the huge insurance business. After 2007 even more QE by the Fed, BoE, BoJ, and..ecb QE favoured speculations more than real investments and did not allow, for the Keynes effect financial and labour compensation gap increased even more, and income inequality worsened also after the crisis. in CF, investment behaviour is not driven by macroeconomic policies (such as the Keynes effect) but by discourses and stories able to convince speculators, hedge funds owner and managers, feeling and perverse animal spirits (Erturk et al., 2008).
The secular stagnation is intimately related to policies and features that shaped the financial-led model. Excess of S is a consequence of an excess of income going to the wealthiest part of the society, which has a lower propensity to consume (Kaldor, 1956, 1961). Second, the imbalance is a consequence of lower wages for workers and in turn of lower consumption and demand by them. Third, it is a consequence of a retrenchment tendency of public expenditure and welfare expenditure occurring among advanced economies in the last two decades and intensifying in the last years after the crisis, known as fiscal adjustments and austerity program (see also Hein 2015). Finally, from the investment side, the reduction of I has been driven by slower growth of labour force, and by the availability of cheap capital good which increases the value of saving. Hence, the solution to the secular stagnation can be found from one side in the fiscal policy and government deficit rather than in monetary policy and quantitative easing, which would absorb the excess of S. From another side, income distribution policies and wage increases would compensate the negative drag on the aggregate demand operated by excess of S. Finally, a program of public investment would increase the stock value of I.
Source: Michael Roberts, 2015
7,0 Net dividends (% of GDP), USA 6,0 5,0 4,0 3,0 2,0 1,0 0,0 Source: FREED database.
3,5 3 2,5 2 1,5 1 0,5 0-0,5 OECD-Total G7 6 5 Labour Productivity growth per hours (Y/Lh) OECD 1971-2014 4 3 2 1 0-1
Index (base year =1999) 118 115 Labour productivity index 112 109 Real wage index 106 103 100 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: ILO 2015, online database.
Reaction: shift in the political economy paradigm ideological change Tatcher and Reagan administrations 1970s-1980s Financialisation: finance, credit consumption, speculation and indebteness Decline of labour productivity in industrial and manufacturing sector (advanced economies) and profit fall Globalisation: Multinatonal companies, outsourcing, Capital mobility Policies, competiveness strategies, neoliberal discourses, institutional changes : 1990s-2000s Dividents and shareholder objectives "downsize and distribute" "corporate downsize" Compression of labour cost competitoveness strategies, international tax competition, export led strategies decline of trade union power Labour flexibility, wage stagnation and Wage share decline, Retrenchment of the role of the State in the Economy, Austerity programs
The globalisation of the economy increased the power of capital in relation to labour, and trade unions lost power, contributing to the deterioration of labour market institutions. During the process of financialisation and globalisation of economies, which identifies the shift towards what I called financial capitalism, labour markets were affected by radical changes too, involving above all an increase in labour flexibility.
35 30 Global trade intensification 25 20 15 10 5 World Imports of goods and services (% of GDP) World Exports of goods and services (% of GDP) 0
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 CAPITAL MOBILITY THREATEN Fdi in % of World GDP 4,5 4 3,5 3 2,5 2 1,5 1 0,5 0 FDI, net inflows (% of GDP)
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 45 35 Average Trade Union density (unionization rate) 25 34 OECD countries 15
Financialization + labour flexibility Neoliberalism => Inequality
2,5 2,3 2,1 Average level of EPL 1,9 1,7 OECD countries 1990-2013 1,5 1990 1995 2000 2005 2010
As I argued, a flexible labour market with compressed and low wages needs to be supplemented by credit consumption and developed financial tools to sustain consumption. Hence, a strong correlation between financialisation and labour flexibility was identified in our empirical analysis, suggesting complementarities between these two phenomena.
Compensation financial sector and other sectors (USA) Avg compensation financial sector Avg Compensation other sectors Source: Financial Crisis Inquiry Commission (2011)
Profit soar (rents and financial compensation) Wages stagnated Inequality increased Consumption kept up thanks to financialization private debt (financial innovation) public debt (bonds China-US) Stiglitz (2010); Brancaccio and Fontana (2011); Fitoussi and Saraceno (2010); Barba and Pivetti (2009); Tridico (2012)
Interactions and bubbles within the Finance-led Growth Model LABOR w/p Instable wages Precarious job FINANCE Financialization Demand for finance Price shares (financial) BUBBLE Finance for consumption Credits, loans, mortgages (credit) BUBBLE (Prices in the commodity market increase too) CONSUMPTION Movement of Portfolio Financial investments (speculative) BUBBLE Productive investments INVESTMENTS
EPL Figure - Correlation scatter between financialisation and labour flexibility (EPL) in 2013 0 1 2 3 Portugal Czech Republic Germany Netherlands Slovenia Sweden Italy Austria Norway Korea France Poland Denmark Greece Finland Spain Israel Belgium Australia Ireland Japan United King Canada United States 0 50 100 150 Financialisation
Figure 16 The Welfare States since 1960 (Public Social Expenditure, % of GDP) Expansion and retrenchment of Welfare State 1960-2007 20 15 10 Source: own elaboration on OECD data 5 1960 1965 1970 1975 1980 1985 1990 1993 1997 2002 2007
Finally, income distribution was worsened by the retrenchment of the welfare state (illustrated in my paper by the stagnation in public social spending) in advanced economies mostly with the justification that firms would be more competitive, and economies could attract more capitals the socalled efficiency thesis would suggest.
.25.3.35.4.45.5 Gini 2013 Figure Inequality (Gini) and Public Social Expenditure (% GDP) Chile Mexico Turkey Israel United States Japan United Kingdom Portugal Australia Greece Spain Italy Ireland Estonia Canada New Zealand Poland France Netherlands Germany Luxembourg Austria Sweden Finland Belgium Norway Denmark 10 15 20 25 30 Public social spending 2013
The model: Dep.var. is: inequality (Ineq) Indep. Var. are: financialisation (F), labour flexibility (EPL Employment Protection Legislation), trade union density (TU) public social spending (S). I use panel data for 34 OECD countries from 1990 to 2013, for a total of 816 observations.
Random-effects GLS regression Fixed-effect Regression Number of obs = 816; Number of groups = 34; anel = 1990-2013 Model I Model II (with Model III control var) Var Coeff (St. er. in Coeff (St. er. in brackets) brackets) Financialisation (F).0000502** (.000019).0000459** (.0000214).0000451** (.000021) EPL (LF) -.0040886** (.0021277) -.0051814** (.0024638) -.0061798** (.0025251) TU density (TU) -.0005735* (.0001389) -.0005768* (.0001975) -.0004044*** (.0002232) Social Spending (S) -.000829* (.0002327) -.0010213* (.0003015) -.0007598** (.000301) Unemployment.0000153 (.0002661) -.0000472 (.0002632) FDI in.0000543 (.0000604).0000384 (.000059) Import -.0001758 (.0001385) 2.92e-06 (.0001501) Econ. Growth.0001935 (.0002315).0001312 (.0002276) Tertiary Education lev -.0001815 (.0003467).0001228 (.000372) Time dummies (years YES YES YES 1990-2013) Constant.3530048 (.0124588) -.2291932 (.4890413).2456811 (.5126353) R-sq = 0.2437 R-sq = 0.3167 R-sq = 0.1447
.3 Liberal1990 Liberal2010 Mediterranean2010.3 GINI Mediterranean1990 Continental1990 Continental2010.25 Scandinavian2010 Scandinavian1990.2 20 25 30 35 40 SOCIAL_SPENDING
40 Financial Capitalism United States 35 Gini 2012 Australia Portugal United Kingdom Greece Spain Ireland Italy Canada New Zealand Welfare Capitalism 30 France Netherlands Germany 25 Luxembourg Norway Austria Sweden Finland Belgium Denmark 15 20 25 30 35 Public Social Spending 2012
Welfare Capitalism and Financial Capitalism
the increase in inequality, which has been very marked over the last two decades, is due to a radical change to the main features of the socioeconomic model of advanced economies. This change involves a shift towards financialisation, a pressure on labour through increased labour flexibility, the decline of trade unions power and the retrenchment of public social spending. Our sample was composed of data for 34 OECD countries during the period between 1990 and 2013. The econometric analysis produced very interesting results and the regression confirmed our hypothesis