Home > crisis, income redistribution, The Economy > Changing the narrative. Inequality as a cause for the Euro conundrum.

Changing the narrative. Inequality as a cause for the Euro conundrum.

from Merijn Knibbe

If this post is right there is a relation between inequality and the Euro problems. According to the post, high inequality leads to deficits on the current account (an idea vindicated by the ‘plutonomy reports’, see the posts obout these on this blog!) while, especially in former authoritarian countries, tax systems are designed to minimize the tax burden of the rich – which makes it hard for governments to change this ‘structural-deficit-situation’. Is there something to this line of reasoning? Is it a viable alternative to the mistaken view that government deficits (which did not exist, prior to 2008, in Ireland and Spain…) caused the crisis? According to the graph below there is.

The graph, based upon Eurostat data, shows total disposable income of the richest 20% of households divided by total disposable income of the poorest 20% of households. A high level means that inequality is high (the richest 20% in Romania earned seven times as much as the poorest 20%). The graph shows that inequality was high in Italy, Spain, Portugal, the Baltic states as well as in the UK, Bulgaria and Romania. Almost all these countries experienced large currency problems and had to be bailed out, at least when they either used the Euro or had a Euro-peg. Countries whith low inequality generally did have much less problems or were even booming (Sweden!). The idea that inequality has something to do with deficits on the current account and Euro problems clearly squares much better with the facts than the neo-liberal ‘government deficits in these countries were too high’.

Beware! Quite a lot of these rich might well be government employees. According to Eurostat, industry wages in Italy, Greece and Spain are about 60 to 75% of public sector wages, in Germany industry wages are higher than public sector wages… But again, Spain did not need to borrow to pay these wages and neither did Italy (which, hard to believe but that’s what the IMF states, has a primary surplus in 2011. A primary surplus means that when you do not pay interest on your debts you can still pay all government employees and finance all government investments. For Italy, default is a viable option, surely when it increases taxes a bit). Highly paid government employees may have been part of the cause of the crisis – we should not rule this out. Lack of fiscal discipline didn’t (at least not in Spain, Ireland and even Italy).

  1. yoganmahew
    September 17, 2011 at 11:00 am

    I’m not entirely convinced that the UK has either the euro or a euro peg…

    I also think that the income inequality argument is looking at the wrong thing with regards to Ireland and Spain (much like the fiscal surplus argument). The problem in Ireland is not particularly income inequality (though it is a general problem in the current crisis, I believe), it is income to debt – net income is not sufficient to service debt. I believe the same is true in Spain.

    Likewise, the fiscal surpluses in both Ireland and Spain were the result of debt-fueled consumption – largely of property (current spending rose on the back of transaction taxes – transaction taxes that depended on an increase in debt).

    • Merijn Knibbe
      September 19, 2011 at 8:02 am

      Thank you for your comment – I agree with you.

      I included the UK because (1) it was in the Eurostat database but (2, more important and I should have been more explicit about this) because the UK experience fits a pattern, just like the experience of Portugal, Spain, Ireland and the USA. To an extent, Greece and Italy can be added to this list. Which pattern?

      * high (private + public) debt
      * relatively high inequality, coupled with an inability to tax the rich/to stop explicit and implicit subsidies to the rich (just think of mortgage interest tax deductions and the like)
      * (sometimes very large) deficits on the current account
      * large government deficits (at the moment generally more than 9% of GDP)
      * with the exception of Greece and Italy: debt fueled asset inflation and bubbles (not just consumption, also investments);

      This is consistent with your view of the situation, though I would like to add that the present government deficits are partly caused by bailing out the banks.

      Inequality is only part of and surely not the only cause of this macro-economic pattern – but it is part of this pattern. I wanted to attrackt attention to this. INequality has to become part of macro-economics (again…).

      Greece and Italy are somewhat different, as the total burden of (public + private) debt in these countries is comparatively (!) low: about 430% of GDP against 490% of GDP for Germany, 540% for Spain, 610% for Portugal and an incredible 1253% for Ireland.http://www.mejudice.nl/artikel/665/de-eurozone-staat-op-een-tweesprong

    • Dave Taylor
      October 11, 2011 at 2:02 pm

      @ 1. So engrained is the habit of thinking of money in terms of a valuable – gold – rather than a token, a means (metallic, paper, electronic) of conveying information, that no-one seems to see economics is starting at the wrong end.

      The real question in Ireland was not whether there was enough money to buy the bricks needed to build its new housing, it was whether there were enough already existing bricks standing around doing nothing to enable the builder to complete the houses. The bankers’ job was to check over the builder’s business plan and authorise his loan as reasonable (and likewise other loans for the ongoing production of bricks and the nurturing of Nature’s harvest for the ongoing self-maintenence of the builders).

      The bankers have no right in justice to demand the credit authorised be paid back to them rather than to suppliers of bricks, seeds and other produce. Such right as they have is a fraudlent legal right, previously prohibited by Christians and Muslims alike, enshrining the Goldsmith’s Fraud of authorising commercial use of more gold than there was available. It was only reintroduced by Henry VIII when bankers had him over a barrel for military costs arising from his matrimonial follies.(See Shakespeare’s coded cricisim in “The Merchant of Venice”). So, it dates from the days when money was not information reproducible at negligible cost but a costly and scarce if not particularly valuable commodity.

      The technical problem is an accounting one, and is resolved simply by credit actually used reappearing as credit in the suppliers’ accounts, not as debits in the bankers’. The moral problem is trusting every pretty banker and salesman to be honest, instead of trusting that enough dirty workmen will have the good sense and competence to do what actually needs doing.

      • October 11, 2011 at 3:58 pm

        “The real question in Ireland was not whether there was enough money to buy the bricks needed to build its new housing, it was whether there were enough already existing bricks standing around doing nothing to enable the builder to complete the houses.”

        This has absolutely nothing to do with bricks and everything to do with land. Credit has been used to churn land values not to build new houses.

      • October 12, 2011 at 5:40 pm

        Perhaps you might be interested in the National Organization for Raw Materials, at the link “NORMeconomics.org” I am familiar with this group because of the magazine “Acres USA” who’s editor (now deceased) Charles Walters was on the board of NORM. The caliber of his thinking can be seen in the pages of the magazine, and his other writings. “Acresusa.org”

  2. Merijn Knibbe
    October 11, 2011 at 12:45 pm

    A larger graph is here:

  3. October 11, 2011 at 10:01 pm

    Seemingly, it might lend more credibility to the whole argument (all sides) if the current updated figures on the rate of polar meltdown (no summer sea-ice up north by 2030) are used to update the meltdown predictions for Greenland & Antarctica. Then do some graphs showing the most likely impacts on the Plutonomy with a plausible range of climate change refugees (CCR) — say 150 million, 300 m, 900 m, and 2 billion. There should be enough data and reasonable projections to factor in other consequences of unpreparedness as well. The numbers of CCR can be extrapolated from the obsolete reports of the Pentagon, UN, et al. Arguing about the past (who did what when, etc.), short term financial effects, and rivalry among schools of theory about a totally bogus hoax (as if the plutonomy is a valid, viable economic system instead of a system of mass corruption & fraud), seem much less useful than studying the most likely consequences & damages being caused by the plutonomy, or all the economic, social, and cultural “costs” of doing nothing about it. I would really love to see and use some of those charts & graphs in my ecotecture & sustainability consulting & educational projects. My thanks in advance to the truly noble RWE team that tackles the RW projections for the next 18 years (and uses the work to wake up the sleepers, et al).

  4. Dave Taylor
    October 12, 2011 at 5:46 am

    Carol @ #4: My comment had been based on two visits to Ireland half a century apart, and reports of houses being left half-completed because the bank had pulled the plug. No doubt you are right: that a fall in overblown land prices is why they pulled the plug. But what the hell, their paper money had been “made from thin air” and it had kept trade and industry moving.

    Michael, I entirely sympathise with you, and of course the big picture speaks for itself even apart from the Whys and Wherefores, but on what grounds are you to argue it is “caused by the plutonomy”? More importantly, what can one do about it without an understanding of how the plutonomy works and what the alternatives are?

  5. October 12, 2011 at 9:21 am

    @Dave

    Yes, there is an intimate relationship between credit and land which determines house prices. The market of no other essential commodity behaves in this way. Why is it, for instance, that when married women started to enter the work force significantly house prices rose to accommodate the extra family income? Did food or travel become more expensive? Economists are ignoring the special attributes of land and, therefore, the simple solution to correcting the land market.

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