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Last week, I published an article examining the links between financialization, income inequality and the recent emergence of populism. My argument is that the turn toward neoliberal (“free market”) policies beginning in the 1980s, notably the financialization of U.S. economic activity, has contributed to rising income and wealth inequality and ultimately triggered the recent emergence of populist movements.
A couple of charts will underscore this argument. The first illustrates the sharp downturn in the share of income earned by U.S. workers from about 50% in 1970 to 43% today. This drop was especially pernicious during the 1970s, 1980s and the first five years of this millennium. During the 1970s, the drop reflected declining productivity growth, rising inflation, successive oil crises, the collapse of Bretton Woods, the decline in the dollar, a deep recession in 1974-1975 and finally, the exhaustion of the prior postwar political regime. That regime had successfully linked wage increases with productivity growth, as the government was committed to full employment. The post-1980 period moved in the other direction, with much greater adherence to “free market” (neoliberal) policies across-the-board, including the deregulation and liberalization of finance.
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The deregulation of finance triggered a number of financial crises, and ultimately culminated in the near collapse of the global financial and economic system in 2007-2008. The circles in the chart above indicate that labor’s share of income rose during the 1995-2000 and 2003-2007 periods, in which debt-driven asset price bubbles percolated. However, when the global financial crisis occurred in 2007-2008, wealth and income for the bottom 80% of households fell sharply, with no offsetting adjustment to their debt levels.
During the Golden Age (1945-1970), wage growth was closely linked with productivity growth, as illustrated in the chart below. Wages and productivity increased at approximately the same rate from 1948 to 1973. However, wage increases decoupled from productivity growth beginning during the 1970s and the difference has widened considerably over the subsequent decades. Activity has become financialized since the early 1980s. In this period, as markets were liberalized, increasing quantities of credit were used to finance asset transactions, rather than fostering capital formation and production of goods and services. The links between labor, business and government that had existed during the Golden Age vanished as neoliberal policies were adopted.
In truth, the decision was not to neutralize labor; rather, it was to repress wages by decimating labor’s bargaining power. There was an unusual degree of aggressiveness utilized by the Reagan administration during the 1980s, and in combination with double-digit interest rates and successive recessions, the policy shift delivered a fatal blow to the previous labor-business-government compact. Labor remains in a weakened state today.
Read the full article here by John M. Balder, Advisor Perspectives