Unequal growth, unequal recession?
The world has seen recent decades of rapid growth. This has been most obvious in newly-industrialising countries, notably China and India, but has been shared by OECD countries. Yet the fruits of this economic growth have not been equally divided–either between countries or within countries. As it is put in the introduction to a new OECD report, Growing Unequal?, “there is widespread concern that economic growth is not being shared fairly” (page 15, see references). A rising tide does not necessarily raise all boats. Or, to use another liquid metaphor, we cannot rely on trickle-down.
This major OECD report assembles a wealth of evidence about changes in income inequality and poverty over the period from the mid-1980s to the mid-2000s, covering all 30 developed countries of the OECD. The sober statistics provide a much needed counterpoint to what the authors call the “Hello magazine effect” that highlights the super rich. The statistics show that few OECD countries have reduced inequality over the past 20 years. The past five years saw growing inequality and poverty in two-thirds of OECD countries. The report quotes the US president, George W. Bush in his 2007 State of the Economy speech: “our citizens worry about the fact that our dynamic economy is leaving working people behind”.
The OECD report has growth in its title, but the time of its publication inevitably leads the reader to ask: what will happen if the next decade is one, not of world growth, but of world recession? If a rising tide does not lift all boats, how will they be affected by an ebbing tide? Recession–if it comes–does not sound like good news for those on the margins of the labour force. Small savers, as well as bankers, are affected by the financial crisis. Is it a case of “heads, the rich gain; tails, the poor lose”?
Many commentators on the current economic crisis say that it is unprecedented in the post-war period; they are harking back, not 20 years to 1987, but some 80 years to 1929. In considering the distributional implications, too, we need to go back in time. Here the data are sparse, but we can say something, particularly about the upper part of the income distribution. In our book, Top Incomes over the Twentieth Century, Thomas Piketty and I have brought together studies for a number of OECD countries that show how the share of the top 1% changed following the Great Crash of 1929. This did indeed affect the rich, who had prospered in the Roaring ‘20s. In a number of countries, top income shares fell: in the US, the shares of the top 0.1 and 0.01% were reduced by between a quarter and a third. Top income shares fell in Australia, France, the Netherlands and the UK. But they did not fall universally, and, as the Great Depression ensued, other income groups were seriously affected.
If, today, recession follows, then we can look at more recent experience of the distributional impact of unemployment, although it means going back before the mid-1980s. By then, unemployment in Europe was around double that in the 1970s and four times that in the 1960s. From this rise in European unemployment, we learned that the impact on household living standards depended on government policy. It was not inevitable that unemployment led to mass poverty.
Here the OECD report is both reassuring and disquieting. In the chapter on financial poverty, it concludes that the rise in market-income poverty from the mid-1980s to the mid-1990s was, at least in part, offset by increased government redistribution. But between the mid-1990s and the mid-2000s, when market-income poverty stopped rising, the redistributive effect of transfers and taxes fell back, leading to higher poverty rates based on disposable income–that is, the income people actually have to spend or save.
There is a message for policy today. Government budgets are under stress, but citizens are going to expect that, if funds can be found to rescue banks, then governments can fund unemployment benefits and employment subsidies. If governments can take on the role of lender of last resort, then we should be willing to see government as the employer of last resort. Put bluntly, governments have to step up to the plate, as Roosevelt did in the Great Depression.
Of course, the world has changed greatly since the 1930s. Many of those affected are not workers but pensioners, and the landscape for pensioners is now very different. The OECD report documents the remarkable reductions achieved in pensioner poverty. In the US in 1969, those aged 65+ accounted for a fifth of those living in poverty; today they are under a tenth, despite the growth in the size of this age group. But we have also seen in a number of OECD countries a withdrawal of the state from the provision of pensions. In the UK, the disengagement of the state has been taken to considerable lengths; people are now expected to rely much more heavily on private savings.
One of the little remarked aspects of the current financial crisis, at least in the UK, is the role played by this change in pension policy in generating both the housing price boom (as people acquired buy-to-let properties to provide an income in retirement) and the much increased dependence on financial services (as people had to replace state pension provision by personal private pensions). At the very least, the state should provide an alternative pension vehicle for those who do not wish to follow the private route.
The state has also withdrawn, in a number of countries, from the financing of education. This is another respect in which the world is different today, with much greater proportions completing secondary school and receiving university education. But there are the same fears that an extended recession may leave scars on future generations of workers. It is striking how media interviews with recently redundant workers have emphasised their concern with funding the university education of their children. Very relevant here is the discussion in Growing Unequal?of intergenerational earnings mobility, and the conclusion that “more unequal countries are prone to developing an ‘underclass’ who are poor themselves for long periods and so are their children”. A prolonged recession, with extensive child poverty, may exacerbate this problem.
The impact of the crisis has been discussed in terms of unemployment. But there is another feature of the world macro-economy that affects inequality: changes in relative prices. In his study of industrialising Britain in the 18th and 19th centuries, Peter Lindert finds little evidence of a Kuznets curve–that is, a rise in inequality with industrialisation– when looking at shares of money income, but does find such a rise when account is taken of the changes in food prices and rents. In recent years, the poor in OECD countries may have benefited from the falling prices of imports from newly-industrialising countries, but they have been hit by rising prices of food and energy. This is an aspect to which the OECD is no doubt giving thought.
I have emphasised the need to learn from the past. When reading accounts of life in OECD countries a 100 or more years ago, one cannot but be struck by the difference between the insecurity of the poor compared with the security of the rich. The OECD report rightly emphasises wider measures of deprivation, but we need to go further to capture this concept of security. Here I am thinking of subjective indicators, as to how people view their own circumstances, but also of objective measures of the degree of vulnerability of individual households. On what resources could they draw in the event of job loss? How exposed are their retirement savings? Politicians talk about “confidence”. This is a matter, not just of the Dow Jones or the FTSE, but of the very real concerns of households for their future and that of their children and grandchildren.
For more on inequality, read our book review on Growing Unequal?
- Atkinson, A B, and Thomas Piketty (2007), Top Incomes over the Twentieth Century, Oxford University Press.
- Lindert, Peter (2000), "Three centuries of inequality in Britain and America" in A B Atkinson and F Bourguignon, eds, Handbook of Income Distribution, Elsevier.
- OECD (2008) Growing Unequal?, Paris.
©OECD Observer No 270/271 December 2008-January 2009
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