Maybe the real factors behind the current economic crisis lie elsewhere.Keynes correctly identified that the poorer you are, then the more you spend on consumption as a proportion of income. He also likened cutting interest rates at a time of high debt, to pushing on string. That’s why he advocated tax cuts, and government handouts geared towards the poor. He was not necessarily being an idealist, more a realist.
But in recent years we have witnessed two phenomena.
Distribution of wealth and income has become more and more uneven. In fact, as the Institute of Fiscal Studies has shown, the change in income distribution has really affected the top and bottom ten per cent of income earners the most, with people in the top ten per cent enjoying much faster income growth than average, and tax payers in the bottom ten per cent much slower growth than average.
Secondly, most of us are not getting any better off. A raft of reports have shown that after deducting items we have no control of (in the short-term) that’s things such as mortgage/rent payments, cost of travel to work, council tax and utility bills, the average household is worse off now than a couple of years ago.
How can the economy be growing if average households are getting worse off? Partly of course it’s down to the public sector, but also it appears corporate profits have been taking up a bigger share of GDP.
It’s not like this just in the UK. According to the US Economic Policy Institute, since 2003 the median hourly wage in the US has fallen by 1.1 per cent, while production has risen by 5 per cent. At the end of 2006, Future magazine ran an article saying that US corporate profits as a proportion of GDP were at their highest level since 1929.
It seems then that the economic boom of the last few years has disproportionately benefited owners of capital and top income earners, the very people who Keynes said consume the least as a proportion of income.
Maybe, then, we have described the conditions that could lead to a deep recession. Maybe, up to now, recession has been avoided for this reason: Consumers, and especially those who have not enjoyed the full benefits of the economic boom years, have been borrowing, and as a result their disposable income might not have risen so fast, but their spending has.
Consumer borrowing fed banking profits, which in turn fed six- and seven- figure salaries for senior bankers, exaggerating the gap in income between higher earners and the rest.
What’s the answer? Tighter regulation of banks, and action by central banks to pump out more-liquidly fixes the short-term problem only.
The long-term fix relies upon finding a way in which a higher proportion of the populace can benefit from rising productivity.
© Investment & Business News 2013