Marxist moment: Income inequality hurts growth
THE global rise of populism in recent years is understandable. It’s a worldwide phenomenon. Ordinary citizens are feeling ignored – and fed-up. Widespread corruption and more-of-the-same in politics and government have resulted in a global “groundswell of discontent,” in the face of growing inequalities in income, wealth and opportunities.
Both liberals and conservatives agree that income inequality has increased globally since the 1970s. Just look at the rich Organisation for Economic Co-operation and Development (OECD): the rise in inequality in the decades running up to the 2008 financial crisis has persisted. While in the ‘80s the top 10% of earners had incomes that were seven times as large as those of the bottom 10%, that ratio had risen to 9.6 times across the OECD’s 34 members by 2013.
In the United States, that ratio rose from 15.1 in 2007 to 18.8 in 2014; for the top 1%, income rose 275% but for the bottom 20%, the increase was only 18%. Moreover, the top 10% of US households had net worth of US$60 trillion in 2013, 75% of the total. It’s that bad.
Furthermore, wealth naturally accumulates and concentrates, so that familial riches (patrimonial capitalism) become ever more critical in determining an individual’s success or failure in life.
Such inequality threatens not only social cohesion but also hurts economic growth – OECD now estimates that rising inequality has knocked 4.7% age points off cumulative growth in the region between 1990 and 2010.
This is worrisome. By not addressing inequality, governments are cutting into the social fabric of society as well as hurting their long-term growth prospects. Evidence that inequality is hurting growth and upsetting the populace is cropping up with increasing regularity.
Last month, the unexpected happened in Malaysia. A coalition of populists overthrew the entrenched 60-year-old government with a promise of reforms to reverse the damaging rise in inequality, including easing the obstacles that make it difficult for all Malaysians – regardless of race – to have ready access to work, boost educational attainment and enhance skills acquisition among the children of workers at the lower end of the income distribution; and foster better paying jobs for a larger proportion of the workforce.
The focus will be on policies to promote quantity and quality of jobs – jobs that offer reasonable pay as well as career and investment possibilities, jobs that are stepping stones rather than deadend.
Last week, Italy and Spain also witnessed the swearing-in of populist governments. In Italy, the unusual coming together of the populist “Five Star Movement” and the far right “League” will for the first time no longer treat European integration and the euro as an act of faith.
And, the new minority Socialist party in Spain will need to work with other “populists” to remain relevant and sustainable. We are in for interesting times.
Lessons from Marx
For now, much can be learnt from reading Marx’s “Capital.” UK Labour’s Corbyn and McDonnell have already become known as the “Marx brothers.” It was Marx who concluded first, that the capitalist class consists not of wealth creators but of rent seekers.
Not unlike many on Wall Street, British businesses do reflect a lot of rent seeking going on. In 1980, bosses of the 100 biggest firms earned 25 times more than a typical employee; in 2016 they earned 130 times more in bloated salaries with fat pensions and golden parachutes. In 2000-2008, the FTSE all share index fell by 30%; yet the pay of bosses running them rose 80%.
My old professor, J.K. Galbraith once said that “the salary of the chief executive officer of the large corporation is not market reward for achievement. It is frequently in the nature of a warm personal gesture by the individual to himself.”
Corporate Britain is more subtle: CEOs sit on each other’s boards and engage in an elaborate exchange of such gestures. The political system is no less rife with rent seeking. Both Tony Blair and George Osborne are already cashing in – big time.
Second, Marx predicted that capitalism would become more concentrated as it advanced. Concentration is particularly pronounced for example at Apple, Google and Amazon.
Third, Marx was also right that capitalism would be increasingly dominated by finance, which does become increasingly reckless and crisis prone.
Finally, capitalism inevitably produces immiseration of the poor, even as it produces unusual profits for the rich.
At the same time, many other trends are worrying. Average wages are still below their level before the crisis in 2008 and are not expected to exceed it anytime soon.
Whether we like it or not, Marx has to be taken seriously. As Trotsky once wrote: “You may not be interested in the dialectic, but the dialectic is interested in you.”
Piketty’s ‘Capital’
Thomas Piketty’s “Capital in the Twenty-First Century” in 2014 (laying claims to the intellectual traditions of Ricardo and Marx) compressed his narrative into a compact mathematical expression: r › g; that the return on capital (r) has historically been greater than the rate of economic growth (g). This meant that:
(i) the ratio of an economy’s wealth to its output will rise over time;
(ii) because wealth is distributed less equally than income, overall inequality will also rise;
(iii) the share of capital in income will rise relative to labour’s share.
So, inequality in capitalist society will inexorably lead to the dominance of inherited wealth.
Krugman lauded the book as a “sweeping meditation on inequality” and called for (like many others including Stiglitz, Atkinson, Rose) robust taxes on the wealthy and that government should meddle in the markets to influence the distribution of economic rewards.
I think Piketty’s theory is too simplistic – it ignores the dynamic role of human capital, the central role of political and economic institutions as well as the impact of technology in shaping the distribution of resources in society.
Lest we forget, rising income gaps punish those who suffer bad luck – they undermine economic growth and social cohesion. Inequality often translates directly into inequality in personal opportunity.
True, rising income inequality is a feature of most rich and many emerging nations, including China. There is a paradox, however. While global inequality has decreased sharply since about 1990, inequality within many nations, both rich and emerging, has increased.
Still, the global good news is marred by the persistence of severe poverty. And, while the overall trend is positive, the income gap between developed and emerging remains very wide.
PH’s emergence
The perspective: McKinsey Global Institute’s 2016 report concluded that:
(i) real incomes of two-thirds of households in 25 rich nations were flat or fell between 2005-2014;
(ii) hardest hit are young, less-educated workers, raising the spectre of a generation growing up poorer than their parents;
(iii) while the recession and slow recovery are a significant contributor, other factors include aging, smaller household size and falling wage share in GDP;
(iv) many fear their children will also advance more slowly;
(v) situation likely to worsen with workplace automation;
(vi) however, government taxes and transfers can make a difference.
Nevertheless, the economic and social impact is potentially corrosive.
No question, income inequality was a major issue at Malaysia’s GE14 – made worse with widespread corruption, rising living costs and falling purchasing power of the ringgit. It is widely perceived that real incomes have not risen – indeed, wages at the bottom 20% remain low – below the living wage; while the rich are getting richer and inequality is higher than ever. Also, most of the gains from the recovery have gone to the top 1%.
“Reported sugar-high growth” in the economy is not felt on the ground. Whatever growth there appears to have been is being “eaten” by rising prices – goods and services tax and depreciating ringgit are deemed to have sparked the vicious spiral of street price increases.
Official data point to Malaysia’s rather impressive Gini coefficient of 0.401 in 2014 (where “1” represents complete income inequality and “0”, complete equality) as against 0.441 in 2009 and a target 0.385 in 2020. Many economists question the numbers.
Though the Economic Planning Unit (EPU) collects a huge amount of income data, most benchmark statistics are calculated based on surveys. Surveys for this purpose are far from perfect and are particularly bad at capturing the very rich, who matter hugely to inequality. The rich are known to downplay their earnings: under-reporting by as much as 30%-40%. So, inequality is higher than is believed.
Mean monthly income of the bottom 40% (B40) households was RM2,537 in 2014, up from RM1,440 in 2009. Popular perception doubts the reality of these numbers; indeed, most feel income inequality has been creeping up – hence, it became an election issue and ended with the eventual election of the Pakatan Harapan (PH) coalition government.
To be clear, none of these “facts” change the larger story – inequality is higher (worse) than presented and this has been so for the past few decades. As I see it, the government has tried to combat inequality through a combination of tax and spending policies. These efforts weren’t aggressive enough to bring real benefits to most B40 families and the very poor at the bottom end.
The income gap was too big, corruption too rampant, leakages too obvious, and government’s response too restrained (despite bloated spending). Efforts were just not aggressive enough nor focused enough to make a real difference.
What then, are we to do?
The 1%ers are today gobbling up more of the pie in the world and US – that much is well known. It’s no different in Malaysia. Though disconcerting, it is not unique in the modern era. Because the rise in inequality is so deeply embedded in our economic structures, it will be hard to reverse it.
Changing institutions, policies and relationships between economic actors that have been with us for so long will be far from easy. And the forces of technological change and globalisation are not going away. These forces will change the way we behave and work. Still, we will need fundamental structural reforms.
And, in so doing see to it that such reforms encourage businesses to invest and boost workers’ productivity. But reforms – which must be done – will take time. In the meantime, the new government has to give the people (populists) what they want.
It all starts with economic growth. This is the heart of it all. With growth comes jobs. Without it, living standards cannot rise. Growth can emanate only from two sources – population growth and rise in productivity.
Population and labour force are stagnating. So not much help here. Reliance has to be on productivity for income growth to be sustainable. To do so means going up the value chain with the help of artificial intelligence (AI) and automation.
For a start, avoid the import of cheap, unskilled labour in manufacturing, plantation, construction, transportation and services. Jobs have to be for “Malaysians First.”
There is need (with government’s help) for a living wage – sufficient to maintain a minimum acceptable living standard. Sustainability of this wage requires the consistency of its purchasing power. In the Malaysian context, this simply means a stable (and predictable) ringgit exchange rate policy.
So top priority has to be given to continuing growth backed by rising productivity, a living wage and a stable ringgit. That’s the populist agenda for now, as I see it.
Finally, a word on the scattered pockets of poor among us. The poor do not just lack money. They are also often short of basic knowhow, support of functioning institutions and faith in their own abilities. It will take that much more skill, willpower and commitment for them to get ahead.
Realistically, lifting them out of dire poverty works only for some people, in some places, some of the time. Indeed, the poorest are often the hardest to help. Even as it is, the plight of abject poverty looks a little less intractable. Former banker, Harvard educated economist and British Chartered Scientist, Dr Lin is the author of “The Global Economy in Turbulent Times” (Wiley, 2015) and “Turbulence in Trying Times” (Pearson, 2017). Feedback is most welcome.