Counting the cost of the regressive recovery

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The recession may be over, but the headline figures mask deep problems. Quantitative Easing has enriched the wealthy while wages have fallen for the rest, leading to an unequal and unstable economy.

Scott Lavery Jeremy Green
25 April 2014

The Bank of England by JM Gandi - wiki

With GDP growth of 1.8 per cent in 2013, the growing consensus is that Britain’s long economic downturn has finally come to an end. Adding to this perception, last week wages outstripped inflation for the first time in over five years. These trends, along with positive employment figures, might suggest that the British economy has turned a corner.

However, we should remember that in the period before the 2007-8 crash, headline economic figures served to obscure deep underlying weaknesses in the British economy. Unemployment was consistently low throughout New Labour’s first two terms, while GDP growth registered at between 2-3 per cent each year. Britain then experienced the worst economic crisis since the Great Depression. The lesson – and policymakers should have learned it by now – is that when it comes to the economy, underlying trends and imbalances matter.

In the aftermath of the Great Recession, the British economy groans under the weight of its own internal imbalances. Private debt is increasing, with household debt ratios well above 150 per cent of income once again. Low productivity, low skill work has proliferated. Asset-price bubbles, concentrated particularly in the property market in and around London have returned, while the regions remain mired in a spiral of disinvestment and stagnation. These trends all suggest that the Coalition has effectively resurrected the dysfunctional ‘Anglo-liberal’ growth model which was in place before the crisis, with debt-fuelled consumption once again taking on its role as the principal driver of Britain’s economy.

Rather than economic ‘re-balancing’ from finance to manufacturing, we have seen a deepening of long-standing imbalances at the heart of Britain’s economy. In a SPERI paper released today, ‘Britain’s post-crisis political economy: A ‘Recovery’ through Regressive Redistribution’, we add to this picture, by outlining how the ‘recovery’ has deepened distributional imbalances in the UK. We argue that the recovery has been secured by privileging asset-holders through Quantitative Easing (QE) whilst imposing deflationary measures on low and middle income earners. This has deepened inequality in Britain, and bodes very badly indeed for the future shape of our economy.

Two mechanisms have served to redistribute wealth and income in a regressive manner throughout the recovery.

The first regressively redistributive axis was channelled through the Bank of England’s monetary policy. With interest rates near the zero-bound, the Bank opted to begin undertaking QE from March 2009: injecting new money into the financial system by purchasing Treasury bonds. Crucially, the policy was encoded with distributional prejudices right from its inception: it was targeted at increasing the wealth of asset holders in order to boost demand. While wage earners experienced an unprecedented period of decline in real earnings, asset-holders received a huge wealth boost from the Bank’s monetary policy committee. Stock and bond prices rallied on the back of QE 1 and 2, with the Bank itself calculating that the gains in value amounted to around £600 billion. Picking winners in this way undermines pretensions of central bank independence and helps establish a two-track recovery where asset-holders prosper while wage earners suffer.

The second regressively redistributive axis of the recovery was premised upon wage deflation. Workers’ real average earnings declined by 7.9 per cent four years after the onset of the recession, a trend which compares unfavourably against the recessions of the early 1980s and 1990s. While the Conservative party boasts of an ‘employment rich’ recovery, in reality 77 per cent of net job creation has been focussed in ‘low pay’ sectors, where pay falls below £8 per hour. On top of this, there has been a regressive re-composition of the British labour market, with growing numbers of precariously employed individuals finding themselves on part time and ‘zero hour’ contracts.

This puts the recent news regarding above-inflation wage growth into perspective. Wages might be rising, but this is taking place after an unprecedented slump in real earnings. Indeed, wages are not set to rise to their pre-recession levels until at least 2020, suggesting that this really has been a lost decade for Britain’s low and middle income earners.

What does the regressively redistributive nature of the recovery mean for the future of the British economy?

Over the past thirty years, the ‘wage share’ – the amount of overall economic output which goes to labour – has declined substantially. While in 1982 the wage share in Europe was 72.5 per cent, by 2007 it had declined to 63.3 per cent. This distributional shift has been particularly pronounced in Britain, where wealth and income inequalities have been tolerated, if not openly celebrated, by Whitehall officials. But this growing inequality is not only socially corrosive. It is also economically highly damaging. There are two principal reasons why growing inequality is linked with instability and crisis.

The first is that workers are not only a cost of production. Their incomes also form a key component of aggregate demand. When productivity growth consistently outstrips wage growth, the question inevitably emerges: where will the demand for newly created economic output come from? In the absence of a solid export base, the answer in Britain over the past thirty years has been to encourage debt growth amongst low and middle income households. So, while in the early 1990s household debt stood at 40 per cent of income, by the 2000s it had risen to over 160 per cent. Wage decline is therefore intimately linked to the financialisation of the British economy.

The flip-side of the declining wage share, and the second link between inequality and economic imbalance in Britain, has been the growing concentration of wealth at the top of society. Those at the top of the income distribution are likely to spend a far smaller proportion of their income on consumption. The higher the proportion of economic output controlled by the wealthy, the greater the likelihood that excess funds will be used to finance speculative activity in high-yielding but risky financial products. For example, before the 2007 crash, banks invested £50 billion in manufacturing, but over £1000 billion in property. This shows that a high profit share need not translate into productive investment in the real economy.

This is where the impact of the regressive recovery really bites. Wage deflation has disempowered those who might have challenged Britain’s dysfunctional distributional settlement, whilst asset-price inflation has further empowered precisely those groups which benefit from it. As a result, the wage share is already showing signs of further decline – bringing with it all the familiar pathologies of finance-led, debt-driven growth.

Sectoral and geographical re-balancing will be a core element in any progressive strategy to redress the British economy’s failings. But this narrative of ‘rebalancing’ can miss the core imbalance at the heart of Britain today. This is the long-standing political imbalance between labour and capital and the growing share of overall economic product which accrues to a tiny but dominant economic group at the top. Britain’s recovery through regressive redistribution might have belatedly delivered a spurt in GDP growth today, but the cost of Britain’s recovery will be a less equal, more imbalanced, less sustainable tomorrow.

Responding to this distributional question will be a key task for progressives in the years ahead.

This piece first appeared on the website of the Sheffield Political Economy Research Institute.

Jeremy Green and Scott Lavery’s paper ‘Britain’s post-crisis political economy: A ‘Recovery’ through Regressive Redistribution’ is available to read as a SPERI paper here.

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