Mattias Vermeiren - Crisis and Inequality

The key to full employment and economic growth, many at the time believed, was high levels of aggregate demand. But high demand required mass consumption, which in turn required an equitable distribution of purchasing power. By ensuring sufficient income for less well-off consumers, the government could continually expand the markets for businesses and boost profits as well as wages. 14

This Keynesian consensus unravelled during the economic crisis of the 1970s, giving rise to a neoliberal turn in economic thinking and policymaking that heightened income and wealth inequality and ultimately contributed to the global financial crisis of 2008. In this book we will trace neoliberal transformations in four policy domains that have played a pivotal role in fuelling economic inequality and financial instability over the past four decades:

1 macroeconomic policy, which refers to the tools of the government to manage the business cycle, fight unemployment during economic recessions and maintain price stability;

2 social policy and industrial relations, which is about the organization of the welfare state and labour market;

3 corporate governance, which consists of formal and informal rules and norms shaping firms’ business strategies and the distribution of profits between their main stakeholders (i.e. shareholders, managers and workers); and

4 financial policy, which is about the regulation of the banking and credit system.

This book is the first to give a comprehensive and systematic overview of neoliberal transformations within these four policy domains since the 1980s and show how these transformations have made advanced capitalist societies in Europe and the United States both more unequal and unstable.

The book will examine these changes from a ‘growth model’ perspective. It will provide a synthesis of a nascent comparative and international political economy literature that has linked the global financial crisis to the formation of two mutually dependent but unsustainable growth models: the Anglo-Saxon liberal market economies (LMEs) as well as several Southern European mixed market economies (MMEs) pursued debt-led growth models, whereas the Northern and Western European coordinated market economies (CMEs) adopted export-led growth models. The development of these growth models was deeply connected to distinctive patterns of income and wealth inequality in these advanced capitalist countries – patterns that have been shaped by divergent institutions that both reflect and shape the bargaining position of various classes and groups in these countries. From the growth model perspective elaborated in this book, these institutions reflect temporary and fragile attempts to resolve structural tensions and conflicts between different classes and groups, making the capitalist system intrinsically unstable and prone to crisis.

The book is structured in eight chapters. In chapter 1 we introduce various economic concepts and measures needed for a systematic study of these challenges. The most important objective of the chapter is to give a comprehensive and empirically grounded overview of the cyclical patterns and interlinked nature of economic instability and inequality since the birth of democratic capitalism in the beginning of the twentieth century. We will discuss different measures of income inequality, highlighting the important distinction between personal income distribution and functional income distribution and their connection to wealth inequality. Empirically, we will show that dynamics of inequality are deeply connected to varieties of capitalism: the Anglo-Saxon LMEs have more unequal personal income distribution and experienced a much sharper increase in the national income share of the top 1 per cent than the Northern and Western European CMEs, which witnessed a starker decline in the share of national income going to labour (which is the main measure of functional income distribution). Moreover, we discuss the neoclassical interpretation of rising inequality in the advanced capitalist world since the 1980s and criticize its neglect of power relations, the role of institutions and the structural instabilities that permeate capitalist economies. As such, the chapter explains why (comparative and international) political economy is needed for a deeper understanding of rising inequality, and of how it is connected to the global financial crisis of 2008 through the development of two unsustainable growth models.

In chapter 2 we give an overview of the rise and fall of egalitarian capitalism, which is linked to the expansion of the Keynesian welfare state (KWS) during the 1950s and 1960s and its subsequent demise since the 1970s. The KWS, which arose in the wake of the Great Depression, was based on a wage-led growth model that had three features: (1) there was a cross-party political consensus that achieving full employment via activist macroeconomic policymaking had become a central responsibility of the government; (2) the KWS aimed at expanding social security and advancing collective bargaining, empowering labour unions in ways that ensured wages grew in line with average productivity; (3) the KWS was supported internationally by the Bretton Woods regime, which established rules for managing post-war international financial relations and offered a conducive external environment for domestic state intervention. In this chapter we also discuss how the KWS came to a halt in the wake of the breakdown of the Bretton Woods regime and the stagflation crisis in the 1970s, which undermined the legitimacy of the Keynesian paradigm and set the stage for the rise of neoliberalism as a new framework for economic policymaking in the advanced capitalist world. The KWS collapsed due to inflationary pressures associated with intensified industrial conflict in the 1970s and longer-term secular trends of globalization, deindustrialization and financialization, which forced governments in the advanced capitalist world to find a replacement for the wage-led growth model in the form of either debt-led or export-led growth. In chapter 2we sketch out why a post-Keynesian account of these growth models is more suitable to clarify the linkages between rising inequality and the global financial crisis than the account delivered by the ‘varieties of capitalism’ literature.

In chapter 3 we examine the neoliberal shift in macroeconomic policymaking, from the Keynesian focus on full employment towards a ‘sound money’ consensus about the necessity to pursue low inflation and public debt levels. Monetary policy was delegated to politically independent central banks with a principal mandate to maintain price stability, leading to a regime of monetary dominance in which fiscal policy was subordinated to that mandate. The shift towards neoliberal macroeconomic policy is often interpreted as the result of the deficiency of Keynesian ideas during the 1970s stagflation crisis and the fiscal crisis of the welfare state during the 1980s, which set the stage for monetarist and neoclassical views on macroeconomic policymaking that eventually culminated in the New Keynesian macroeconomic policy paradigm. We go beyond such an ideational interpretation by pointing to new institutional constraints on Keynesian macroeconomic policymaking, as well as to the distributional effects of neoliberal macroeconomic policy. By subordinating fiscal policy to the inflation target of central banks, governments became entirely dependent on foreign investors in transnational sovereign bond markets to fund their public deficits. This put new constraints on the capacity of governments to pursue reflationary Keynesian macroeconomic policies, making governments more attentive to the preferences of sovereign bond investors and credit rating agencies for low inflation and public deficits. Drawing on class-based perspectives, we will clarify why restrictive macroeconomic policies served to weaken the bargaining power of workers and labour unions, allowing firms to restore their profitability (and contributing to a falling labour income share in the industrialized economies). Drawing on sectoral perspectives, we will explain why the transition towards low inflation particularly advanced the interests of banks, asset managers and their wealthiest clients.