Crisis and Inequality

The Political Economy of Advanced Capitalism

Mattias Vermeiren

• Publisher: Polity
• Year: 2021
• ISBN:
  9781509537709
• Edition: 1
• Topic: Economics
• Subtopic: Economic Policy
• Index: Economics

Spiralling inequality since the 1970s and the global financial crisis of 2008 have been the two most important challenges to democratic capitalism since the Great Depression. To understand the political economy of contemporary Europe and America we must, therefore, put inequality and crisis at the heart of the picture.

In this innovative new textbook Mattias Vermeiren does just this, demonstrating that both the global financial crisis and the European sovereign debt crisis resulted from a mutually reinforcing but ultimately unsustainable relationship between countries with debt-led and export-led growth models, models fundamentally shaped by soaring income and wealth inequality. He traces the emergence of these two growth models by giving a comprehensive overview, deeply informed by the comparative and international political economy literature, of recent developments in the four key domains that have shaped the dynamics of crisis and inequality: macroeconomic policy, social policy, corporate governance and financial policy. He goes on to assess the prospects for the emergence of a more egalitarian and sustainable form of democratic capitalism.

This fresh and insightful overview of contemporary Western capitalism will be essential reading for all students and scholars of international and comparative political economy.

1
Rising Inequality in Advanced Capitalism

In this chapter we will provide a brief overview of some issues related to rising inequality in advanced capitalist countries. First, how is it measured? There are many ways that inequality can be measured, but we will restrict ourselves to those measures that are most frequently used in contemporary debates on inequality: (1) measures of personal income distribution like the Gini index and the shares of different groups in national income; (2) measures of functional income distribution like the labour and capital share in national income; (3) measures of wealth distribution. By all measures, economic inequality has risen sharply in many advanced capitalist economies. Nevertheless, significant cross-national differences can be observed in terms of both the level of inequality and the evolution of inequality since the 1980s: patterns of inequality have been shaped by national varieties of capitalism, with the Anglo-Saxon LMEs displaying higher inequality and growth of inequality than North and West European CMEs.

Second, how can rising inequality be explained? Cross-national divergences in patterns of inequality suggest that the neoclassical interpretation remains inadequate. Neoclassical economists have emphasized exogenous market forces like skill-biased technological change (SBTC) and globalization to explain the rise in inequality. Since advanced capitalist economies have more or less equally been exposed to these market forces, they fail to clarify why the trajectory of inequality has been so markedly different in the Anglo-Saxon countries and the other advanced countries. So while technological change and globalization may act as powerful forces for income inequality, continued cross-national diversity suggests that other factors influence both the magnitude and the rate of change in inequality and top income shares. From a political economy perspective, the effects of technological change and globalization on the distribution of income and wealth in the advanced economies have been shaped and mediated by a variety of government policies and economic institutions that will be examined in subsequent chapters.

Finally, why does rising inequality matter? A growing body of research in social sciences and political economy suggests that excessive inequality can have different kinds of undesirable social and political effects. While it is important to be aware of these effects, the main focus of this book will be on another adverse consequence of rising inequality: financial instability. There is a growing consensus that the rise in income and wealth inequality was one of the deeper, structural causes of the global financial crisis of 2007–9. In this chapter we briefly discuss the main mechanisms behind this connection and sketch out why heterodox political economy is more adequate to understand the causes and consequences of rising inequality than neoclassical economics.

Measures of economic inequality

Personal income distribution

For many decades, both the IMF and the OECD have collected data on the evolution of income inequality, which they usually measure by the Gini index, developed by the Italian statistician and sociologist Corrado Gini (1884–1965). Essentially, the Gini index measures the extent to which the actual distribution of disposable household income deviates from the situation in which every household has the same income, ranging from zero (indicating ‘perfect equality’) to one (meaning ‘complete inequality’). In order to understand the origin of the Gini index, we need to have a look at the Lorenz curve – shown in figure 1.1. The Lorenz curve depicts the cumulative percentage of households (from poor to rich) on the horizontal x-axis and the cumulative income share of these households on the vertical y-axis. For instance, the poorest 20 per cent of households earn 5 per cent of total income in our example. The Gini index is then calculated by the ratio of the area between the line of perfect equality (the 45-degree diagonal line) and the observed Lorenz curve to the area between the line of perfect equality (line ab in the graph) and the line of perfect inequality (line acb). The higher the index, the more unequal the distribution is.

Figure 1.1 The Lorenz curve and the Gini index

The Gini index used by the OECD, which is depicted in figure 1.2, measures the distribution of disposable income after all taxes have been paid and government transfers have been received. It includes income from labour (wages and salaries, profit-sharing bonuses and other forms of profit-related pay, income from self-employment) and capital (income from non-financial assets like real estate and financial assets like banking accounts, bonds and stocks). Several conclusions can be drawn from this figure. First of all, Anglo-Saxon countries tend to have higher levels of income inequality than most continental European countries and Japan. Inequality also rose faster in the former countries between 1985 and 2017 than in the latter. Although Finland and Sweden are an exception to this trend, their Gini indices were the lowest in the 1980s and they remain among the most equal countries according to this measure. France and Belgium are the only two countries whose Gini index remained more or less the same during this period. So while the rise in income inequality was an almost universal phenomenon in the advanced capitalist world, there are substantial cross-national differences between OECD countries in terms of both the level of inequality and the pace at which it has increased since the 1980s.

Figure 1.2 Gini indices of selected OECD countries, 1985 and 2017

Source: OECD

One problem with statistical indices like the Gini index is that they summarize the entire income distribution in one single number, making it a relatively abstract measure of inequality. For this reason, it is more illuminating to rely on distribution tables, which present data on the shares of different income groups in the total income that is earned every year in a particular country and how these shares have evolved over time. French economists Thomas Piketty and Emmanuel Saez collected such data, using tax records that enabled them to track changes in the levels of inequality over very long periods of time – even going back for more than two centuries for some countries. These authors are best known for their historical data on the evolution of the share of the ‘top 1 per cent’ in total income, which are shown in figures 1.3 and 1.4.

Figure 1.3 Share of the top percentile in total income in Anglo-Saxon countries, 1920–2014

Source: World Inequality Database, https://wid.world

Figure 1.4 Share of the top percentile in total income in continental Europe and Japan, 1920–2014

Source: World Inequality Database, https://wid.world

There is a considerable difference between the Ang...