Inequality is the source of the Economic Crisis

Europe depends on Germany. The success of the German economy can be traced to stable institutions that provide a complementary relationship between fiscal, labour market and monetary policies. The Euro currency provides a comparative advantage for their trading sectors in high end manufacturing. The competitive advantage of these sectors are premised on the collective skill formation that results from their coordinated labour market institutions and social security system (i.e. organised capitalism or a social market economy, that gives a central role to trade union and employer associations).

This is not the case in Southern European countries, Eastern and Central Europe, the UK and Ireland. If the Euro (and in many ways, the European union, which is primarily a single market) is to survive it requires not just fiscal federalism but a coordinated labour market that provides citizens with real wages and secure employment prospects. Within member states, such as Italy, it requires a radical redistribution of wealth, which is primarily stocked and housed in the north, to the rest of the country.

In the USA there has been almost zero growth in real wages, over the past 30 years, for most working families. The wealth created was recycled into finance markets with minimal toil by the rich. The outcome is one of the most unequal countries in the developed world. In Germany, the Benelux countries and Scandinavia, inequality was kept relatively low because of coordinated wage policies between highly resourced employer and trade union associations. Employers have been breaking up these collective bargaining arrangements over the past 30 years, with the effect that they are no longer solidarity enhancing.

There have been growing levels of inequality in Italy, Spain and Greece since the collapse of their fascist dictators and rise of populist political parties. A legacy of distrust, clientalism and corruption is rampant. Without family transfers most young people would live in consistent poverty. This family support is the equivalent to the credit card for most young people in liberal market english speaking countries (i.e. both replaced the welfare state). Since the onset of the crisis, the policy response in these countries was not to tackle inequality, but the employment security of those who work in Unionised sectors of the economy.

In Ireland, high levels of inequality have remained stable over the past 15 years but have increased rapidly since the banking crisis. In the UK, inequality has been growing since Thatcher demolished British labour market institutions, trade unions and the manufacturing sectors. Given the credit card boom over the past 15 years, which was associated with aggressively de-regulated finance markets, a lot of people made quick cash, bought overpriced houses, and are now swimming in debt. Higher taxes and wage cuts, in addition to paying back debt accumulated, has resulted in a collapse in domestic demand. The outcome is an employment crisis. Those with capital only know how to gamble.

In all of these countries inequality is the source of the economic crisis. Enough money exists, it is simply concentrated in the hands of too few people. The economic crisis is ultimately about the politics of distribution. The only way to resolve this is to completely rethink the politics of production so that it leads to a radical re-distribution of wealth and income between social classes.

One response to “Inequality is the source of the Economic Crisis

  1. Excellent overview. The solution is so easy and yet an immensely daunting task to siphon that money off the top; especially when the oligarchs have so much influence/money to rig and buy elections, politicians, and push their misinformation propaganda on the less astute among us. Anyone smart enough to understand the inequity situation at hand,(including the uphill battle we have to curtail the effects of climate change) has to feel some sense of helplessness and gloom. I fear uprisings/revolutions are at hand, as history proves they often present the only viable way to effect that kind of broad sweeping change.

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