There is a spectre

Following the recent news it is hard not to notice the growing demands to curb the payments of bonuses to bankers – to do away with what is now being called “bonus culture”. It got started when it became evident, both in London and the United States, that a part of the bailout money went to pay out bonuses to investment bankers who, according to the popular view, were instrumental in creating the problem to begin with. By now, the issue has grown out of its initial confines of how the taxpayer’s money is used and has became an issue of perceived justice – Wall Street paying out bonuses that are out of this world by the standards of 99% of the population in the times when people on the Main Street are having some toughest times anyone remembers. It simply is not fair, even if it’s not the government money.

But guess what – it hasn’t been fair for a long long time.

UBS report recently described this time of ours as a “golden age of profitability”. According to the US statistics, wages and salaries now make up the lowest share of the nation’s gross domestic product since the government began recording the data in 1947, while corporate profits have climbed to their highest share since the 1960’s. And, not surprisingly but even more importantly, the average nominal salary has in fact fallen over the same period. Here it has to be kept in mind that those statistics operate with a concept of “average wage” which, while meaningful as an aggregate figure for the economy as a whole, is not very useful metric for describing the lot of an average worker – median rather than mean salary would do much better here. The reason for this being that a lion’s share of pay increases have gone to top 1 or 2 per cent of the wage earners, with people in the top 0.1% having seen their income risen about 500 times over the last forty years. Although the wage stagnation figures have been debated in case of other major economies (there seems to be pretty strong consensus regarding the US), I would be very much surprised if the situation was fundamentally different there. After all, both the overarching economic processes, such as globalisation, technology and outsourcing, as well as the rise of corporate profitability are substantially the same.

Consumption now stands for about two thirds of GDP in developed countries, having increased from below 60% four decades ago, with each percentage point being worth more than $130 billion in today’s money. Middle-class people have been able to increase their consumption due to two main reasons – the growing inclusion of women into workforce (which has increased the average aggregate household income) and proliferation of credit (which has enabled to consume now and pay later). This means that, at least on paper, average middle-class person can both own and consume more than his or her mother and father could at the same age, although their wages were actually worth more in today’s funds. It also pays to dig a little bit deeper in the second part of the equation – proliferation of credit.

The growth of economy that substantially outpaced increases of income for most people became possible only due to an application of leverage that, as Martin Wolf of Financial Times has put it, turned huge parts of population into “highly leveraged speculators in a fixed asset”, the fixed asset in question being the real estate. By being able to set their home up as a security and borrow money against their future income, people now had “equity” just as companies did, and as long as asset prices kept on climbing (with an occasional hiccup along the way), people’s equity also kept rising and they could borrow more and more money. This clever sleight of hand achieved two things at the same time: first it abolished the proletariat and class society the way it was known in Europe at the beginning of the 20th century; secondly it became an engine to the steady economic growth and increase in corporate profits. As already the demonstrators on the streets of Paris in 1968 were fully aware, the working class was no longer required to just produce but also to consume.

Only that the class society was gone nowhere. The European working class of mid-twentieth century was like Hamlet’s mother who was told to assume a virtue if she had it not and become capitalist even if it had no capital. And as such it is a huge meta-bubble, in a way similar to usual cycles of boom and bust that are based on the asset price inflation of a specific asset class such as the real estate or dot-com shares, only that this particular one cuts through to the bone. And now that things are falling apart and the centre cannot hold it becomes evident that the wealthy middle class king is clad in bikinis, if not completely naked – the society of haves and have-nots was transformed into one of haves and those who borrowed from them to pass on as haves too.

This all leads us to one certain bearded gentleman who, after having been rather unpopular for the better part of the last half a century, is in all likelihood staging a major comeback, and on several fronts. In 2000 Francis Fukuyama, author of The End of History, wrote in Time magazine:

If socialism signifies a political and economic system in which the government controls a large part of the economy and redistributes wealth to produce social equality, then I think it is safe to say the likelihood of its making a comeback any time in the next generation is close to zero.

Not as close as he thought. It took less than a decade for Alan Greenspan, out of all people, back the bank nationalisation in, out of all places, the United States. The president of the United States has capped the maximum salary of senior bankers and is injecting astronomical amounts of the government money into private sector. And, what is possibly even more important, people all over the Western world feel that the system we’ve been running, and advocating others to run, over the last half a century is simply unfair.

I can see Marx nodding in approval.


4 thoughts on “There is a spectre

  1. Just one subnote. The middle class happily paid for ”nafta” (driving the SUVs, building suburbias and buying things wrapped in plastics). It means they voluntarily transferred the funds to Arab countries who in turn happily borrowed this money back to the middle-class americans.

    What a strange world.

  2. Toivo: I don’t see the national distinction overly important here, and in any case: why single out arabs? The US similarly ran a negative trade balance with Japan for many decades and, as one result, japanese ended up owning a substantial part of the prime real estate in major US cities, letting it back to americans. More recently, same pattern can be seen with China.

    I think it is going to be very tough to reasonably argue that the current crisis could be blamed on Arab or Japanese capitalists, Chinese communists, Jewish plotters of world dominion or Polish plumbers – although there will certainly be no lack of those trying.

    Ulrich Beck in his “Risk Society” employed a useful concept what he called “distribution of bads”, as contrasted with “distribution of goods”. When the deleveraging of the economy continues it will become more and more evident that, while the “goods” have certainly been distributed a lot more evenly in the so-called industrial societies over the last half a century, the distribution of “bads” (here meaning risks of bad things to happen) has not been so uniform.

  3. Pingback: Blaming the game « ……random…noise……

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