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“The new mediocre” sustains inequality and won’t beat recession

mediocrityThe ‘new mediocre’, as the response from the deepest recession in post-war history is now often called, is an anomaly that cannot be accounted for by the factors that mainstream economic models normally consider important. One explanation which is gaining currency is that excessive inequality is to blame. Even Lagarde, IMF Director, admits that inequality is casting a ‘dark shadow’ over the world economy, on the reasonable grounds that the rich and particularly the super-rich tend to save a larger proportion of their income than the poor, so that the huge increase in inequality, at least in the G20 and OECD countries in the last 30 years, is not just a source of social tension but also a major drag on demand.

That then invites the further question: why has inequality increased so much in the last 3 decades? Probably the most powerful underlying factor is the rise of the neoliberal Thatcher-Reagan ideology which via untrammelled markets, deregulation of finance, widespread privatisations, and deep limitations on trade union rights which then allowed the rise of excessive corporate power to dramatically expand its share of national income.

Another view is that the vast overhang of public and private debt that the advanced economies have accumulated since 1980 is to blame for their stagnation. When States seek to squeeze economies in order to pay down public debt accumulated in bailing out a financial collapse, it is unsurprising that households caught in the squeeze of shrinking incomes try to pay down their own debts by reducing their borrowing. As a consequence employers have a disincentive to invest because they see that shrinking aggregate demand reduces the market for any increase in their goods or services.

There are only two other sources of demand available. One is foreign demand, the excess of exports over imports, which has kept Germany dominance until the process of contraction in the surrounding periphery shut off even that source. In the case of Britain the biggest balance of payments deficit in the country’s history has meant that has never been an incremental source of demand from that source at any time in the last 35 years. The fourth source of demand is of course government expenditure, but 5 years of enforced austerity has put paid to that.

There are two real lessons from all this. One is that Thatcherism and ordoliberalism inaugurated the pre-crisis era of debt-fuelled growth which the ideology of self-regulating capitalism allowed to get completely out of control. And then, when a profound financial crash tanked virtually the global economy, very big and continuing cuts in government expenditure are the wrong way to seek recovery because of the adverse impact on demand, when what is really needed is public investment to kickstart the economy into sustainable growth to the point where businesses will perceive a rising level of demand sufficient to justify their own increased investment.

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