There are two fundamental questions that have hardly been asked in all the analysis of the financial crisis. Why was their so much more demand for credit? Where did all the money sloshing round the finance system come from?
There is a simple answer to this – revealed in Unfair to Middling – a Trades Union Congress update to the work carried out earlier in the year on the position of middle income earners. By this, we mean people on the median income of just over £20,000 a year – not the middle classes that obsess much of the media that always turn out to be in the top ten per cent.
What has happened is a three stage process:
- the share of national wealth going to wages has been in long term decline.
- the people at the top end of the wage distribution have done better at hanging on to their pay so the low and average paid have lost out even more.
- people whose pay has not kept up with rising prosperity have borrowed more and saved less.
And the money that has not been paid out in wages has instead gone into profits, thus further boosting the income of the better-off and providing the finance that fed the bubble.
To put this into figures, after the Second World War wages took up a pretty stable 58-60 per cent of GDP until the mid 1970s – the years of the oil shock. Wages squeezed profits – reducing the amount available for investment – and reached 65 per cent in 1975.
But since then wages have fallen back. These figures go up and down with the economic cycle but there has been a long term decline and wages were just 53 per cent of GDP in 2008.
Another way of looking at this is that since 1980 productivity has gone up by 1.9 per cent a year, while real wage growth has been just 1.6 per cent – with that difference ending up as profits. Since 2000 it has become even worse with real wages rising by just 0.9 per cent a year and productivity rising 1.6 per cent.
That, however, are the figures for wages overall – those pay rises have not been equally distributed. Over three decades from 1978 the median wage went up by 56 per cent, while the wage someone on the start of the top decile (that is someone earning more than 90 per cent of the rest of the working population) doubled. The low paid did even worse – with someone at the top of the first decile (that is earning less than 90 per cent of the rest of the working population) has seen their wages go up by just 27 per cent higher. The biggest increases in inequality took place during the 1980s, and the low and media paid have done more or less the same over the last decade, though the rich have continued to pull away.
What about the increase in credit? In 1980 the average household debt was 45 per cent of annual income. This rose to 157 per cent in 2008 – a more than three-fold increase.
As the author of the study Stewart Lansley says in the report:
- “The economy is now as much out of balance as it was in the 1970s when the wage share rose to almost 65 per cent. In place of the imbalances of the mid-1970s Britain now has built an economy highly dependent on financial services in which the gains from economic growth have gone more heavily to profits than wages, credit has become an increasingly significant source of demand, and the number of middle earning jobs has declined. Britain has moved from a high wage, low debt, relatively equal society to a low wage, high debt and much more unequal society.”
It is important to understand that this critique is not just a predictable union call for higher wages. Not only does the paper concede that it went too far the other way in the 1970s, many others share this critique. Nobel-prize winning economist Robert Solow; Chairman of the US Federal Reserve, Ben Bernanke; and the former German finance minister have all made similar points. Tim Lankester, President of Corpus Christi College, Oxford University wrote in the January 2009 edition of the journal World Economics:
“In the latest crisis, the distribution problem – in so far as it contributed to the crisis – has been different: too large a share of national income has gone to high-income earners and not enough to the lower paid.”
The neo-liberal project has been about the rich getting richer, and attacking institutions – such as trade unions, regulation and redistributive tax systems – that can reduce inequality. We can now see that such policies nearly destroyed the capitalist system that they thought they were extending.