Mariana Mazzucato - The Value of Everything - Making and Taking in the Global Economy

Governments rejoiced when banks offered mortgages to low-paid, marginally employed home buyers on the assumption that their debt could be ‘securitized’ and quickly resold to other investors. It seemed less a reckless gamble and more a social innovation, helping to broaden property ownership and boosting the ‘property-owning democracy’, while increasing the flow of income to an already buoyant investor class. Greater revenue from financial-sector incomes and associated high-end purchases even pushed the US and UK government budgets into rare surpluses around the turn of the twenty-first century. 40

Loosening the availability of credit to sustain consumption is not in itself a bad thing. But there are dangers. One is cost. It seemed to make sense to relax controls on lending when interest rates were low or falling. It makes less sense if borrowers, lulled into a sense of false security, are caught out when interest rates rise. Another fundamental danger is the tendency of the system to overexpand: for credit to become too readily available, as the Bank for International Settlements has recently recognized. 41The system is stable when the growth in debt is matched by the growth in the value of assets whose purchase is financed by that debt. As soon as people begin to have doubts about the assets’ value, however, the cracks appear. That is what happened when US property prices collapsed after the crash of 2008. Home owners may find themselves in negative equity and even have their property repossessed, although not before lenders have extracted rent in interest and loan repayments. But banks can always choose to provide other services than loans. When uncertainty about the future is high, they can even decide to hoard cash rather than invest it – often a sound decision, as high interest rates are associated with a high risk of not obtaining enough for the investment.

The rise in private debt in the US and UK has resulted in household savings falling as a percentage of disposable income – income minus taxes – especially in periods of sustained economic growth (during the 1980s, the late 1990s and the beginning of the 2000s). Simultaneously, household consumption expenditure has been buoyant. It has outpaced any rise in disposable income, and its contribution to GDP has grown. 42

Income inequality has been on the rise in most advanced economies, especially in the US and in the UK, over the past four decades. Increasing inequality in the US has taken three complementary forms. 43First, real wages have fallen or stagnated for many low- and middle-income households. For instance, OECD data on the US economy indicate that the annual real minimum wage (in 2015 US dollars) fell from $19,237 in 1975 to $13,000 in 2005 (in 2016 it was $14,892). Second, in almost every OECD country wage shares have declined by several percentage points in favour of rising profit shares, even when real employee compensation has gone up. 44As Figure 9 below shows, this was the result of average productivity growth rising faster than average or median real-wage growth in many countries, especially in the US.

Third, personal distribution of income and wealth has become more and more unequal. In both the US and the UK, and in many other OECD countries, those with the highest incomes have enjoyed an increasing share of total national income ever since the 1970s, as can been seen in Figure 10. Furthermore, income distribution is extremely skewed towards very high incomes, not just the top 10 per cent and 1 per cent, but especially the top 0.1 per cent. 45Wealth distribution reveals a similar pattern. A 2017 Oxfam report, An Economy for the 99% , found that in 2016 eight men own the same wealth as the poorest half of the world’s population. In a report published a year earlier, An Economy for the 1% , Oxfam calculated that the club of the wealthiest 1 per cent of individuals globally shrank from 388 members in 2010 to just sixty-two in 2015; in other words, the very richest were getting even richer relative to others who were also by any sensible standard very rich. The wealth of the sixty-two very richest individuals increased by 45 per cent in the five years to 2015, a jump of more than half a trillion dollars in total. Over the same period, the wealth of the bottom half fell by just over a trillion dollars – a drop of 38 per cent. 48

Figure 9.Labour productivity and wages in the US since 1974 ( left ) and the UK since 1972 ( right ) 46

Figure 10.Income inequality in the US and the UK, 1960–2010 47

The upshot of growing inequality of income and wealth was that, to maintain the living standards they had enjoyed from the Second World War to the 1980s, workers had to shoulder an increasing debt burden from the 1980s onwards. Looking at the broader economic picture, without growing household debt, demand might have been weaker and sales by businesses lower. Finance bridged the gap, in the form of new forms of credit whose resultant interest flows and charges underpinned the sector’s expansion.

As a result, private debt, and particularly household debt, increased substantially as a percentage of disposable income. Figure 11 below shows that total household debt as a percentage of net disposable income grew by 42 per cent in the US and by 53 per cent in the UK from 1995 to 2005.

Figure 11.Household debt and income in the US and the UK, 1995–2005 49

In the US, mortgage loans were a principal cause of rising household indebtedness (Figure 12), partially a reflection of households’ propensity to extract equity from the rising value of their houses. 50

In 2007, the US Congressional Budget Office lent weight to the argument that the increased value of real estate represented a typical ‘wealth effect’: the assumption that as people’s assets such as their houses go up in value, they are psychologically more disposed to spend. The rise in US real-estate prices translated into higher rates of mortgage-equity withdrawal and ultimately boosted consumer spending. 51

The Survey of Consumer Finances produced by the US Federal Reserve shows that the poorer a family is, the more heavily indebted it is likely to be. Using data for the 2004 (pre-crisis) period, Figure 13 is based on all families whose ratio of debt payments relative to their disposable income is greater than 40 per cent. The families are broken down into groups according to their income bands (measured as percentiles) and levels of indebtedness. In the group with the lowest income, the poorest 20 per cent of the income distribution, 27 per cent of families were ‘heavily indebted’. Among the richest 10 per cent, it was only 1.8 per cent. This means that poorer families were much more indebted than richer ones in relative terms. The stagnation or outright decline in real incomes of the poorest group forced them to borrow to finance current consumption.

Figure 12.Household debt as a percentage of disposable personal income 52

Figure 13.Indebtedness and family income (2004) 53

Sustaining economic growth through household borrowing has been aptly defined as ‘privatized Keynesianism’, 54because ‘instead of governments taking on debt to stimulate the economy, individuals did so’. 55But it was an unsustainable solution to the lack of wage-led demand growth. Aided and abetted by government policy, central banks, instead of being the lenders of last resort, became the lenders of first resort to the financial sector, cutting interest rates to avert financial crises. But this policy drove up the price of assets such as shares and houses and further encouraged households to borrow. The result was that households were enrolled in an indirect – if not in fact ‘private’ – management of effective demand, through highly financialized consumption that left many ever more impoverished and indebted.