Nine out of ten: the losers of Italy's long crisis

Every ultra-rich person has the income of 100 poor people. But this is not Dickensian England or Depression-era America. It is the Italy of today. Halting the rise of the super-rich will be a crucial issue for the politics of the future.

Mario Pianta
Mario Pianta
16 May 2012

In the analysis of inequality in advanced countries it is often argued that the wide array of changes in economic activities, labour markets and public policies result in a complex picture of changes in individual incomes that escape any general interpretation. However, the evidence strongly suggests that almosty all benefits of the (modest) economic growth of the last decade have gone to the richest 10 percent.

This outcome is a consequence of the combined effects of economic decline, the rise of finance, stronger firms, weaker labour and pro-rich public policies that have characterised recent decades. While these developments are typically associated with neoliberalism and are present in most European countries, Italy stands out as an extreme case of decline and privilege: nine out of ten Italians are worse off today than they were ten years ago.[1]

Slicing decline

The Italian economy is expected to shrink by 2.2 percent in 2012 according to IMF forecasts. It had already contracted by 1.2 percent in 2008, 5.1 in 2009 and stagnated in 2010 and 2011. Real national income in 2012 is back to levels of a decade ago. From 2002 to 2011 average rates of GDP growth in Italy have been 0.3 percent against 1.1 percent in Germany and France. From 2000 to 2009 Italy’s labour productivity has decreased by 0.5 percent per year on average and is now back at the levels of the early 1990s. Such a decline is unprecedented among advanced countries.

At the same time, Eurostat’s national accounts figures show that in the 17 countries of the euro area the share of GDP going to gross profits was 40 percent in 2010, with that of wages at 60 percent. In 1999 the share of profit was 39 per cent; it has thus remained basically stable. In Italy, however, the profit share is larger than the European average at 45 percent in 2010 against 55 percent for wages. It is thus a quarter higher than in other large European countries and 50 percent higher than in highly efficient Sweden, which spends three times as much as Italy on research and development.

In the past two decades the Italian economy systematically underperformed in relation to the European average. Nonetheless, profits increased by 3 percent per year from 1993 to 2000 and by 0.6 percent per year from then until 2007, while the average wage (earnings per worker) has actually fallen at an average annual rate of 0.1 percent for two decades.

This shift of income from labour to capital is common to all countries of Europe, but it has been especially sizeable in Italy. In terms of gross earnings, Italy’s 10.7 million manufacturing and service employees are worse off now than ten years ago, and worse still with respect to twenty years ago. How many ‘winners’ can Italy have – against the ‘losers’ consisting of employees – in the game of sharing out the slices of national income?

In 2010 there were 208,000 entrepreneurs, 840,000 professionals, 313,000 managers. That is, 1.4 million people whose incomes depend on profit, rents and executive jobs which on average certainly did not follow the downward course of wages. We can add the ‘successful’ part of the formally self-employed – craftsmen, shopkeepers, providers of services. Self-employed workers number 2.6 million in all, but a million of them are ‘collaborators’ and part-time workers, whom we can confidently place among the less fortunate in the distribution of income. That leaves 1.6 million self-employed workers, mostly low-skilled, but let us suppose that half – 800,000 workers on own account – have managed to do better, on average, than wage and salary earners.

All told – from the top manager to the Mercedes-driving plumber – that makes 2.2 million ‘winners’. One out of ten, given total Italian employment of 22.8 million in 2010. Nine out of ten ­­employees and the weakest among the self-employed are worse off than ten years ago. And on average these groups are probably poorer even than they were twenty years ago.

This picture of increasing inequality is supported by the Gini coefficient of market incomes of the entire population, which, before taxes and public transfers, rose from 0.42 in the mid-1980s to 0.56 in the mid-2000s, then slipped slightly to 0.53 in 2008. For disposable income, after taxes and public transfer payments, inequality is less marked but the trend is the same: from 0.30 at the end of the 1980s to 0.35 in the mid-200s and 0.34 in 2008.

Income: a hundred poor for every rich person

OECD reports show a generalized increase in income inequality in virtually all OECD countries since the 1980s. Italy has done even worse than all other countries. All indicators show a significant increase in income inequality between the early 1990s and the mid-2000s, with a slight reduction in the years since then. Inequality in Italy – by any measure – is now more pronounced than in Europe, on average, and is exceeded only by that in Portugal and the United Kingdom. In these two decades an ever larger share of total income, which experienced little growth, has gone to the richest part of the population. Between the mid-1980s and 2010, real disposable income for the working-age population increased by €126 billion. The top 10 percent took a third of the increase, €42 billion; the bottom 10 percent got only crumbs, €8 billion.

Comparing Italy with other countries in Europe, the average income growth over the period was the lowest on the continent, save for Hungary, and the only country in which things went worse for the poor was Germany. In high-growth countries, the incomes of the rich rose faster than in Italy, but the rich-poor gap did not widen everywhere. In France, Belgium, Ireland, Spain, Portugal and Greece, the incomes of the poorest 10 percent actually rose faster than those of the rich.

In Italy, the richest 1 percent – 380,000 persons of working age – took a slice of the total income pie equal to nearly 10 percent in 2008, compared with 7 percent during the 1980s. Today their income share is four times as large as that of the entire bottom 10 percent: every ‘super-rich’ Italian makes as much as 40 poor people.

This pattern of income concentration grows even more striking at the top of the income distribution. The top 0.1 percent – 38,000 ‘ultra-rich’ Italians – increased their share from 1.8 to 2.6 percent of the national total, totalling €19 billion or €500,000 a year each. This is the same amount that the poorest 10 percent of working-age Italians have to share among themselves. In other words, the top 38,000 can spend as much as the bottom 3.8 million: every ultra-rich person has the income of 100 poor people. But this is not Dickensian England or Depression-era America. It is the Italy of today.

Wealth: three hundred thousand poor for every rich person

Moreover, the rich are wealthy because they have wealth: holdings of real assets (real estate, land) and financial assets (bank deposits, bonds, shares, financial investments) in excess of their debts (mortgages, bank loans, etc.). The Bank of Italy documents the wealth of Italians through a sample survey of households. The total wealth of Italian households was estimated at €9.5 trillion in 2010, and historically it has increased many-fold. At constant prices, total wealth is now 7.5 times greater than in 1965, reflecting an average annual growth rate of 4.7 percent, which is astonishing given the overall stagnation of income. Dividing by the population figure, this gives us per capita wealth of €143,000. Nearly two thirds of this consists of real assets (such as buildings), the rest of financial assets; debts are equal to 9 percent of total assets.

What are the sources of the accumulation of wealth? First of all, inheritance. Second, the flow of savings by households, fueled mainly by self-employment income and business profits. In recent years, however, the flow of savings has diminished considerably. Third, wealth increases with capital gains – the rising market value of assets, both real estate and securities. House prices in Italy rose by 50 percent between 1989 and 1992, swelling wealth by 33 percent. Between 1995 and 2009 wealth increased by 40 percent, half of the rise coming from savings and half from capital gains.

How is this great national wealth distributed among Italians? Much more – incomparably more – unequally than income. The wealthiest 10 percent of Italian households possess nearly 45 percent of total wealth, while they receive 27 percent of the total income. The poorest 50 percent have just 10 percent of the total wealth. Calculating a Gini coefficient for household wealth in 2010 we get a value of 0.61, compared with 0.29 for disposable income.

How is Italy’s wealth distributed in terms of social groups and classes? Setting average net household wealth equal to 100, we find that the occupational group of managers had an average of 246 (increasing over the past ten years), professionals of 203 (rising since 2000), entrepreneurs and self-employed of 153 (declining). The decline of the middle classes can be seen in the position of white-collar workers, whose level of wealth is now below the average at 95, whereas in 1993 it was above the national average at 106. The real ‘losers’ are production workers, whose wealth was 62 percent of the national average in 1987 and just 44 percent now. As the population ages, the ‘winners’ now include pensioners; at the same level as production workers in 1987, their wealth is now equal to the national average. Looking at the distribution of wealth according to age, the ‘losers’ by comparison with 1987 are all age groups below 55, which now all have less than the national average wealth. For people through age 34, the impoverishment has been particularly pronounced: from 83 percent of the national average in 1987 to 62 percent in 2008.

A major factor in increased wealth was the spread of home ownership, from 50 percent of Italian households in 1977 to 70 percent in 2008. The increased access to wealth assets (subject to swelling value through capital gains) has tended to limit wealth disparities, but even so the inequality of wealth has not been significantly reduced. What is more, real-estate wealth is relatively illiquid; and for those who own their homes the increase in wealth in connection with rising property prices has no effect on their economic situation or their welfare.

Financial wealth, by contrast, is much more mobile, and more comparable on a cross-country basis. Istat’s report for 2009 shows that on average from 2000 through 2008 the net financial wealth of Italian households was equal to 1.6 times GDP, a higher ratio than in all the other main European countries, including the United Kingdom. France, Germany and the Netherlands reported net household financial wealth of around 1.2 times GDP. A greater financial caution of Italian households has safeguarded them, in part, from the crisis. Nonetheless, the magnitude of Italian households’ ‘financial power’ relative to other countries is nevertheless surprising. We have seen that the flow of Italian savings has been greatly reduced, but in the other countries it had long been smaller. The Italian stock market has not outperformed the others, so the value of shares has declined. Other forms of investment, such as mutual funds, have taken heavy losses. So what has kept financial wealth in Italy at such a relatively high level?

The right question is ‘what has not dragged it down?’ The answer is simple: private sector debt. In Italy, while nine tenths of households have suffered a decline in real income, consumption has been sustained not by borrowing but by the reduction in saving. There has been a greater recourse to debt, but on a much smaller scale than in other European countries.

The lesser presence of ‘finance’ in the life of Italian households has reduced the vulnerability of the country and limited the repercussions of stock market swings. Households’ wealth remains very substantial, far greater – relative to the size of the economy – than in the other large countries of Europe.

This carries two implications. The first one is that Italy’s vulnerability associated to high public debt is reversed if we consider total debt, public plus private. The ratio of public and private debt to Italian GDP is 8 percentage points lower than the median of European countries. That is, the large public debt is more than offset by the fact that the debt of households and firms is 30 points below the European median. For the total debt ratio, France is near the median, Spain slightly above it, Britain and the Netherlands 20 points above. Among the ‘virtuous’ countries in terms of total debt ratio, only Germany is in a better position than Italy.

The second result is the extent to which profits and rents have built up wealth. Italy’s economic decline has meant that income has grown very little, the slice going to wages has shrunk, and low-income earners have become poorer (and are extremely poor in terms of wealth). On the opposite front, managers, businessmen, professionals and the self-employed have made great profits, beyond comparison with the other countries of Europe, and have rapidly augmented their wealth. It is from this great wealth (real-estate wealth, and even more, financial wealth) that the resources could be drawn, through suitable economic policies, to finance a recovery from the recession, find the way out of economic decline and undertake a ‘great redistribution’ to improve living conditions and produce greater social equity.

Conclusions: the rich and the rest

The power and wealth of the richest 1 percent of the population, in Italy as in most western countries, have risen to unprecedentedly high levels that are unacceptable in democracy, problematic for economic growth and efficiency. In the past, concentrations of power and wealth have been abruptly reduced by economic and political upheavals – such as financial crashes, war and its destruction of physical capital, and high inflation eroding the value of financial wealth. They have also been diminished, less sharply, by nationalization, egalitarian political movements to limit the concentration of income, measures like inheritance taxes and highly progressive income taxation. All this worked very well everywhere from the end of the Second World War until the 1980s and continues to work in the countries that have kept divergences in wealth under control. But in the last few decades most countries have adopted policies to favour the super-rich, eliminating inheritance taxes and making income taxes less progressive.

How has the current financial crisis affected the incomes of the super-rich? If past crises impacted mainly on the stock market, listed companies, the value of capital investment and – directly – the incomes of capitalists and rentiers, who accounted for a large part of the top 1 percent, today this direct link appears to have been greatly weakened. The crisis may well affect the big banks and financial enterprises, but their super-managers continue to pay themselves super-bonuses that keep them easily among the super-rich. Financial markets are dominated by large investment banks, pension funds and investment firms, and it is these institutions, more than individual investors, that suffered most from the crisis. In short, the preliminary evidence is that the super-rich have managed to defend themselves, much better than the 99 percent, against the risks of financial crisis.

The ‘dissociation’ that finance makes possible between the fortunes of individuals and those of the enterprises from which they draw their income and wealth poses a more general problem. We are used to thinking of capitalism as a system in which capital is provided by capitalists who raise it, invest it (and risk losing it) and in this way become “super-rich”. But now the accumulation of capital in business and finance appears to take place increasingly through agencies and actors – super-managers, consulting firms, investment banks, investment funds – that perform some of the functions of ‘capitalists’ but offload the risks onto the system as a whole. In this way, those who reap the greatest benefits from capitalism secure their own income, power and wealth. The rise of the super-rich may well continue even over the course of the current crisis. Halting it will be a crucial issue for the politics of the future.

For more than twenty years in western countries neoliberal policies have shaped income distribution and increased inequalities. In Italy this has taken the form of an extreme protection of privilege while the economy experienced a serious decline. Nine out of ten Italians are worse off than ten years ago. The worsening of the current crisis is likely to reduce other European countries to a similar condition. However, many among the ‘nine out of ten’ do not (yet) perceive themselves as ‘losers’; the evidence of a clear divide in the economic and social conditions of citizens is largely ignored in research and policy; the responsibility of neoliberal policies in such outcomes is largely ignored in the political debate. All this may rapidly change with the worsening of the recession in Europe. The emerging question is whether there is a possibility to reverse this tide, building an economy and a society that are less unjust, more equal and more capable of sustainable growth.

[1] This article draws from my book Nove su dieci. Perché stiamo (quasi) tutti peggio di dieci anni fa (Pianta, 2012). I have a website in Italian on these themes www.novesudieci.org

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