How Soaring Inequality Contributed to the Crash: Inequality Is a Cause, as Well as an Effect, of the Crash

By Lansley, Stewart | Soundings, Spring 2010 | Go to article overview

How Soaring Inequality Contributed to the Crash: Inequality Is a Cause, as Well as an Effect, of the Crash


Lansley, Stewart, Soundings


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Despite a series of 'stop-go' crises between the Second World War and the early 1970s, the UK experienced only one very shallow and short-lived recession in this period-in 1961. In that year output fell by 0.2 per cent over two quarters. (1) Since then, the UK has suffered four much deeper recessions-in 1973-4, 1980-1, 1990-1 and 2008-9. With the exception of 1991, each of these has become successively more severe. In 2008-9 output fell by close to 6 per cent.

A similar pattern applies to the world economy. The last two decades have seen a series of global financial crises-the Latin American and Asian crises of the 1990s, the collapse of the dot-com bubble at the turn of the millennium, and then the global credit crunch which triggered the latest global meltdown.

A comparison between the post-war decades and the post-1980 period shows the former to have enjoyed higher and more sustained growth, less unemployment and lower inequality. (2) And the success of the post-war decades can be attributed to the exceptional circumstances of the time-sustained post-war reconstruction along with new international co-operation and global economic stimuli-which helped create the long boom.

The period since the end of the long boom has been characterised by a very different set of factors-the rise of globalisation, the freeing up of domestic and global markets and the emergence of the new global super-rich. Each of these factors has been fuelled by the wider shift in economic philosophy from one of managed global capitalism to what has become known as the 'Washington consensus'-the belief in efficient and self-regulating markets. The theory of self-regulating markets emerged out of the eventual stalling of the post-war boom and the arrival in the 1970s of stagflation-the combination of rising inflation and unemployment. This ushered in the subsequent era of privatisation, deregulation of financial and labour markets, balanced budgets and inflation-targeting. At the heart of this theory was the idea that if wages and prices were completely flexible, resources would be fully employed. But instead of the steady growth, greater stability and full employment promised by the theory's advocates, the global economy has suffered a series of successive shocks that have triggered the greater turbulence and inferior economic record of the post-1980 decades.

One of the key effects of the shift in ideology has been a steady but sharp rise in inequality, especially in the two countries that became most heavily wedded to the new economic theories-the US and the UK. From the early 1980s the central social and economic trends of the previous three decades-falling poverty, reduced inequality and spreading employment and social opportunities-were set on a reverse course. Since the beginning of the 1980s, the proceeds of growth have been much less equally shared than they were in the post-war era. While poverty and inequality rose sharply in both the UK and the US throughout the 1980s and 1990s, middle-income groups were also increasingly left behind in the battle for the spoils of rising prosperity. (3) In contrast, the period brought the re-emergence of a domestic and global super-rich class, able to accumulate fortunes at levels not seen since well before the Second World War.

These trends not only ushered in increasingly divided societies; they also proved to be an economic time-bomb. Widening inequality became a key-if largely unrecognised-ingredient in the growing fragility of the economy and played a central role in the build-up to the credit crunch and the subsequent recession.

How the 'profits squeeze' gave way to the 'wage squeeze'

Figure 1 shows that, while the share of UK national output taken in wages held its post-war level-at between 58-60 per cent-until the early 1970s, and then reached a high of 64.5 per cent in 1975, it has drifted steadily downwards since then. …

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