Читать книгу Reinventing Prosperity - Graeme Maxton - Страница 11

– CHAPTER 3 –

THE OLD APPROACH NO LONGER WORKS

For many years the pursuit of economic growth has not reduced unemployment. It has increased inequality.

“Capitalism is the extraordinary belief that the nastiest of men, for the nastiest of motives, will somehow work for the benefit of all.”

JOHN MAYNARD KEYNES

IN 1930, ECONOMIST John Maynard Keynes predicted that his grandchildren would need to work only fifteen hours a week.¹ By the time they were of working age, he reasoned, there would be sufficient economic output and the citizens of the rich world would be able to spend their lives working less and doing more of what they wanted. The rich world could focus on leisure, science, and the pursuit of greater knowledge, he thought.

Keynes’s prediction could certainly have been fulfilled by the end of the twentieth century. The average GDP per person in the rich world—at more than US$35,000²—was enough for everyone to live reasonably comfortably. The surge in social progress and output Keynes had anticipated in the 1930s had happened pretty much as he predicted, yet unemployment was high throughout the Organisation for Economic Co-operation and Development (OECD) nations, working hours were often longer than in the 1930s, and inequalities had widened.

The problem was that the income, work, and wealth that had been created were very unevenly divided. By the early years of the twenty-first century, a small percentage of the population had become very rich, while tens of millions still lived in poverty—some of it extreme. The 2008 financial crisis widened the gap between rich and poor even further.³

How did this happen? If economic growth improves average living standards and spreads the wealth more evenly, as economists say, why was the gap between rich and poor so wide—and getting wider? Was it simply a short-term problem, the result of the dot-com bubble bursting in 2000 and the 2008 financial crisis, for example? Or was something else going on?

GRAPH 5: INEQUALITY IS INCREASING, ESPECIALLY IN THE U.S.

Source: U.S. Census Bureau, Current Population Survey, Annual Social and Economic Supplements. https://www.census.gov/hhes/www/income/data/historical/inequality/

Scale: Income in 2014-$ per household per year

The annual income of the richest 20% of U.S. households doubled from 1970 to 2014 (top black curve). The income of the 40% poorest households did not change at all—it has remained constant in real terms for more than forty-five years. The middle-class households (those ranking between 40% and 80% on an income scale) increased their incomes by approximately one third over the same forty-five years. Only the rich got significantly richer.

In 2008, many economists claimed that the financial crisis was an unexpected and temporary problem, a mere hiccup in an otherwise reliable system. They said that the problem could be fixed if governments stimulated more economic growth. With greater growth, unemployment would fall and average standards of living would start to recover. Thanks to the trickle-down effect, the gap between rich and poor would soon narrow again.

At the time, we read this advice with a skeptical eye. We did not think these economists were correct. More economic growth would not solve the problems of unemployment and widening inequality, we said. Rather, we argued, it would make the problems worse.

Most people seemed to think we were slightly mad.

We saw that mainstream economists, bankers, and growth-hungry businesspeople had not understood that the economic environment had fundamentally changed. They had simply looked to the past, seen that economic growth had been remarkably successful for many years and, without examining the reasons for this, assumed that the pursuit of more growth was still the right policy for the future.

If they had scratched a little below the surface, they would have found that the situation was not as it appeared. Real living standards for hundreds of millions of people had not been rising for many years, despite strong headline rates of growth. Moreover, the problem of widening inequalities and gradually increasing unemployment (and underemployment) had not started with the financial crisis in 2008, nor even with the bursting of the Internet bubble in 2000. It had started decades before.

A deeper analysis revealed that economic growth had increased the average purchasing power of Western citizens only up to the early 1980s. After that, declines in the price of many goods led to continued reductions in the cost of clothes, cars, and groceries, and this had made people continue to feel better off. Easier borrowing had led to steadily rising house prices, which had made people think they were rich. There were all sorts of stunning technological developments, too, from the invention of the Internet to the introduction of life-changing gadgets such as cell phones and home computers. These had made the majority of people feel as though they were still living in an era of incredible and rapid social progress. And to all appearances, they were.

But real wages in parts of the developed world had actually been falling. By 2014, more than half the U.S. working population was earning less, in real terms, than it had in 1979. The U.S. economy had grown by more than 140%, but the poorest 20% of the population had seen its income fall, whereas the richest 20% had seen its income more than double.

Since as far back as the early 1960s, the minimum wage in the United States had been falling in real terms while the proportion of workers earning it had risen.⁴ In other words, an increasing number of people had been earning a lower real wage. Other employment benefits had also been cut. Significantly fewer companies contributed to the pensions of their employees in 2014 than in the 1980s, for example, and most of those that did still contribute no longer made any promises about what sort of pension their workers might receive. Company-funded health insurance had been taken away from huge numbers of employees, too.⁵ Union memberships had also sharply declined,⁶ strengthening the power of business owners.

Despite falling wages, working hours had risen. In 1975, the average U.S. worker (including those working part time) put in 1,705 hours a year. A generation later, in 2011, they worked 1,863 hours—9% more.⁷

Keynes would have found all this very difficult to understand. With so much economic and material progress, how could the working year have increased like this, particularly when productivity had been rising steadily? In 1979, the value of the output of every U.S. citizen stood at just under $25,000 a year (see Graph 3). By 2011, it had risen to $40,000—even in real terms. Yet wages had fallen and working hours had increased. This meant that businesses had been making people work harder, so increasing efficiency, while simultaneously lowering wages to boost profits.

Why were they doing that?

The short answer is that businesses were cutting wages and boosting profits because that is what the free-market economic system increasingly demanded. Stock markets and the finance sector had become more influential, and those who worked in those sectors, as well as company stockholders, expected ever-higher quarterly returns. There was enormous pressure from “the market,” in other words, for businesses to eke out the best returns, to shift their head offices offshore, to cut employee costs, to move factories to low-cost countries, to collaborate to reduce the costs of raw materials, and to demand less red tape, tax, and regulation. Without any strong counterbalancing force—from society, the unions, or employees—businesses were passing fewer and fewer of their gains onto their staff or society.

On the surface then, there was progress. Economies were growing and businesses were doing nicely. Profits and productivity were rising, and stock markets were booming. Low interest rates and easy credit meant house prices were higher, too. Between 1980 and 2010, the U.S. economy expanded at an average rate of 2.9% a year,⁸ a remarkable clip for such an economically mature country, and it was much the same in the rest of the OECD countries.

It looked, at least superficially, as if the pursuit of economic growth was still having its magical effect. This is why most economists and politicians would continue to claim that economic growth, and Gordon Gekko’s infamous greed, was still good. It did not matter to them that the underlying social trends showed something completely different. For those on Wall Street and the rich, the boom years and the pursuit of growth were still great.

In reality, the rising incomes of the rich and changes to the tax system were widening the gap between rich and poor all the time. In 1960, the richest 0.1% in the United States paid an average effective federal tax rate of 71%. Forty-five years later, this had plummeted to just under 35%, whereas the average tax rate for 80% of the population had gone up.⁹

Although the economy had been booming, poverty in much of the rich world had been rising. This was not what free-market ideologues had predicted (or even claimed was happening). Rather than spreading the wealth around, the boom had allowed a small percentage of the population to hoard a disproportionately large share of the gains, while the living standards of millions of people throughout the developed world moved in the opposite direction.

The legacy of more than thirty years of rapid economic development is almost 50 million Americans living in poverty, with 44% of them in “deep poverty,” meaning their incomes are less than half the government-defined poverty level.¹⁰ One in every six households and one in every four people under the age of eighteen in the United States are now below the official poverty line.¹¹

In the rest of the rich world, the picture is much the same. Real wages in the U.K. have been falling since 2003, and working hours have increased.¹² A growing number of people in Britain also now work under employment contracts that do not even guarantee them a certain number of working hours per week, so-called zero-hours contracts.

Unemployment has risen throughout the rich world. Between 1980 and 2014, joblessness throughout the OECD averaged more than 7%, far higher than it had been in the 1950s and 1960s.¹³ In the European Union, it is still above 9% in 2016, with minorities and the young particularly badly affected.¹⁴ In 2000, almost 30%¹⁵ of U.S. college graduates under twenty-four were under-employed.¹⁶ Ten years later, 40% were jobless, with many also heavily in debt because of student loans. In much of southern Europe—Spain and Greece, in particular—youth unemployment remained above 50% in 2016.

The length of unemployment periods has also changed. After World War I, people were typically jobless for a few weeks or months at a time, even when there were rising numbers of immigrants enlarging the job pool. In the late 1960s, fewer than 5% of those registered as unemployed in the United States had been without work for twenty-seven months or more. Today, 44% of those without jobs have not had work for more than two years.

This raises an important question.

With so many people out of work and lower average real incomes, how did the rich-world economies manage to keep growing? The GDP of the richest countries was more than twice as big in 2010 as it was in 1980¹⁷ (see Graph 2), but apart from a few brief periods, there has been continuous growth. How was it possible for these economies to continue to expand so quickly when fewer people had jobs and average incomes were stagnant or falling?

The answer to this question is debt. For years, people in the rich world had borrowed to consume, to keep the economic growth juggernaut on the road.

At the end of World War I, the total debts (credit card, housing loans, etc.) of the average American could be paid off with around three months’ take-home pay.¹⁸ By 1980, this had risen to eight and a half months. At the peak of the financial crisis, just over twenty-five years later, it was sixteen months—133% of an annual income. It has barely changed since, leaving millions trapped with such high debts that it is almost impossible for them to borrow more. And since debt requires regular interest payments and usually some element of capital repayment, people cannot pay off their debts without reducing their spending and negatively affecting their well-being. Declaring bankruptcy might help temporarily, but it also hampers their ability to borrow—and so spend—in the future.

It was borrowing that greatly fueled the United States’ economic growth until the financial crisis. And it was much the same in most of Europe, as well as in Australia and Canada. Rising debt made it possible for people to maintain their spending.

Unfortunately, borrowing as a source of demand growth is now mostly over, and spending has fallen back to something nearer the level that people on low incomes can afford once they have made the minimum payments on their credit cards and other debts each month. This is one of the main reasons why the rate of economic growth has remained low in recent years.

Is it possible to create economic growth by allowing people to borrow more?

Yes, but only for a limited time. Debt-financed consumption can only last until the consumer has borrowed so much that the lender no longer dares to lend them any more. As long as the debt is rising, the consumer can maintain a higher rate of spending than before they started their borrowing spree. But when they are unable to borrow more, spending is forced down—and to a lower level than before the borrowing began. The difference—that is, the reduction—equals the amount the borrower has to pay in interest and in repayment of the loan. Borrowing simply makes it possible to increase consumption above what is sustainable for a limited period of time. It cannot lift the rate of consumption in the long term.

We can look at the debt phenomenon another way. The increase in debt meant that the poor (and their consumption) were funded by the rich, whose savings were loaned through the banking system. In effect, the rich boosted their incomes by paying the poor less than before (and making them work longer hours into the bargain). They then became richer still by lending the poor the profits, in return for interest. So it is not just rising business profits and lower taxes that have benefited the wealthiest segments of society. Nor is it purely falling wages and rising unemployment that have blighted the poor. The great borrowing binge of the last three decades has also greatly widened the gap between rich and poor by increasing the flow of money to the rich.

The combined effect of these trends is startling. Instead of three decades of economic growth improving average living standards, as economists said it would, it has led to a decline in living standards for vast numbers of people. Rather than creating jobs and narrowing the gap between rich and poor as expected, millions of people in the rich world are being thrown back to a place they have not occupied for almost a century. In the United States, the U.K., and Ireland, the gap between rich and poor is bigger today than it was in 1917, a remarkable reversal of economic and social progress.¹⁹

It is not the same everywhere, however. The gap between rich and poor in Japan has not widened much. Nor has inequality changed much in Germany, Sweden, or much of the rest of Europe in the last thirty years, despite the hike in unemployment. Inequality has actually fallen slightly in France, Norway, and Italy, as well as in Canada, though it has risen there again since 2011. This is because the unemployed are better supported and the wealthy more highly taxed in these countries.²⁰

This at least shows that it is possible to live in the developed world, to run an open free-market economy, to have experienced thirty years of spectacular economic growth, to have a financial crisis, to have unemployment rise, and still see no widening of inequalities.

It is possible if the extreme effects of the free-market model are properly managed.

In many other OECD countries, though, and most notably in the places inhabited by the loudest proponents of the extreme free-market ideology, the economic growth of the last thirty years has not distributed incomes and wealth more evenly. It has not created enough jobs. It has achieved the opposite.²¹

DESPITE ALL THIS, most rich-world economists and politicians still think that pushing for faster economic growth is a good idea. They still believe that free-market economic thinking can reduce unemployment and inequality. Like captains of a ship that has veered wildly off course and then hit a rock, they think the solution is to push the engines harder rather than to properly understand what is going on. Few have questioned the fundamental wisdom of having a lightly regulated free-market economic system, even though it has not done what it promised for so long.

Rather than trying to bring their economies into balance, rich-world governments have continued as before. As a consequence, the developed world’s economy is becoming more and more like one of those cartoon characters that has run off a cliff, legs still running furiously, despite there being no solid ground beneath them. It is riddled with financial imbalances and burdened with trillions of dollars in debts that are unlikely to ever be repaid. The entire system is off course.

Since 2008, in addition to implementing their usual economic strategies, rich-world governments have employed two especially important and unusual policies to respond to the current challenges: ultra-low interest rates and Quantitative Easing (QE),²² which just means printing money. Governments and businesses have also applied enormous psychological pressure on their citizens to continue spending, encouraging them to borrow more if necessary, to maintain economic growth. Many banks have received cash injections to strengthen their balance sheets and access to low-cost central bank funding to maintain liquidity and boost lending.

As a result, commercial rates of interest in much of the rich world are at their lowest level ever,²³ with several European countries, the eurozone, and Japan offering negative rates, forcing people to pay to save (thereby encouraging them to spend instead).

The consequences of lowering the costs of borrowing like this are that bankers and the rich have gained even more. Between 2008 and 2013, commercial banks increased their profits because their margins (the difference between the rate at which they borrow and lend) rose. Many big corporations also gained, through lower interest payments, while financial investors, such as venture capitalists and hedge funds, were able to borrow more cheaply, allowing them to snap up assets before they increased in value.

Developed-world households were the main losers from the low interest rate policy, suffering $630 billion in lost interest income between 2007 and the end of 2013.²⁴ Those living off their bank savings were hit especially hard. European banks and life insurance companies also lost out, because of the decline in interest income. Many pension funds had problems, too. As their earnings declined, some found themselves unable to meet their future commitments.

As with the wider free-market economic system, the main beneficiaries of this low interest rate policy were the wealthy, especially in the United States, and the finance industry. In effect, ultra-low interest rates increased the flow of money from those who borrow (generally, the poor) to those who lend (generally, the rich), widening inequality even more.

It is much the same with QE.

After the 2008 financial crisis, there was a risk of deflation, when average prices fall. For economists, this is a scary prospect because deflation is extremely hard to cure. When prices fall, people delay spending because they know that whatever they want to buy will be cheaper in the future. Deflation causes the economy to slow and then shrink, with nasty implications for jobs, wages, and asset values.

To avoid this risk, economists advised governments to print money, which is thought to have an inflationary effect.

Between 2008 and October 2014, the United States’ central bank, the Federal Reserve, injected between $75 billion and $85 billion into the economy every month. Cumulatively, it injected $4.5 trillion—more than a quarter of the country’s annual GDP. This was the same as adding another Australia, India, and Spain to the world economy.

The British government did much the same, injecting $500 billion, while the Bank of Japan and the European Central Bank (ECB) also printed many hundreds of billions of yen and euros—and continue to print them today, in 2016.

Together, these countries have injected so much money into the global economies since 2008 that it has been like adding another China.²⁵ If this money was simply converted to demand and output, it would have increased the GDP of these countries by more than 25% between 2008 and 2015. Yet their GDP grew by just 11% in real terms. The rest was kept by business owners and banks, or used to boost asset prices.

Essentially, all this money was created out of thin air, by changing numbers on balance sheets. So, even to describe it as “printing money” is a misnomer—no real effort was required, and certainly no printing presses were involved. It was fed into the economy mostly by central banks purchasing government and corporate bonds, which were typically sold by private banks and other financial institutions, including insurance companies and pension funds. The process provided liquidity, and so cash flow, for these institutions and an opportunity for them to reinvest. The money did not go to the people—and certainly not to all those unemployed who lacked an income, which would have been much more effective. If they had been given the money, they would have spent it immediately—and created the demand that the economy needed.

As with ultra-low interest rates, the main beneficiaries of QE were business owners and financial institutions, who used the increased cash flow to boost their earnings. Or to put it another way, money was created out of thin air by central bankers and paid to bondholders, which allowed them to get richer.

Why does it not work to print money and give it to the rich?

When a central bank prints money under traditional Quantitative Easing (QE), the money is put into circulation by the bank buying bonds from bondholders. The central bank holds the bonds (and the associated interest income), and the former bondholder (typically a person who is rich enough to save and to keep part of their wealth in the form of bonds) ends up with more cash in the bank.

The former bondholder then looks for investment opportunities, for ways to get a higher return on their money. If there is unmet demand in the economy, they may choose to invest in new productive capacity—in new factories or retail stores, for example—which is what governments hope will happen. But if there is no unmet demand, but lots of overcapacity, as existed after 2008 in the rich world, they will typically look for another store of value: real estate, stocks and shares, art, metals, and so on—none of which create many new jobs.

In this situation, the more money a government prints, the more demand there is for assets. The price of those assets then increases endlessly, as the amount of cash in circulation rises.

The result is asset inflation—well known from the post-2008 period—with booming stock markets, art markets, and property values.

That this process continued—that the money was not given to the poor instead, to stimulate demand—illustrates the strong influence of the wealthy (and free-market thinking) on current economic policy.

Since the early 1980s, then, many of the cherished assumptions that underpin free-market economics have been wrong. The belief that economic growth is always good is no longer true, unless you are rich. Economic growth in the rich world has not improved living standards for the majority. It has not created jobs, or at least it has not created enough of them. And it has not reduced inequality.

Printing money and ultra-low interest rates have not achieved what they promised either. They have not led to an economic rebound, full employment, or reduced inequality.

Before we look at how societies can actually fix these problems, there is another issue that needs to be addressed.

Over the next twenty years, unless there is a change in direction, unemployment is going to rise sharply in the rich world because of new technology. Increased computerization will boost business profits, improve productivity, and create lots of new opportunities for entrepreneurs. It will also bring economic growth. But it will increase joblessness and widen the gap between rich and poor further still.

This challenge is the subject of our next chapter.