As in other respects, the longer-run implications of the crisis have yet to be fully comprehended. Even when economic activity recovers, consumer credit will be more restricted than in past decades. As a result, there will be no escape from the implications of decades of stagnant wages for workers at the median and below. The traditional avenues of upward social mobility, both through higher education and through promotion within large organizations are being closed off. And as the labour market develops a dual structure, with good jobs increasingly depend on an education at a good university,the chances of climbing the ladder diminish all the time.
Meanwhile, for those who have done well out of the era of market liberalism, the widening gap between rich and poor makes the possibility of downward social mobility ever more threatening. A decade ago, Barbara Ehrenreich referred to the insecurity of the professional middle classes about hte prospects for their children as the ‘fear of falling’. The barriers erected to guard against that fear are getting steeper all the time.
These tendencies are most developed in the United States, but they are evident in all the English-speaking countries, and, at least until the crisis, seemed to be emerging even in the more egalitarian societies of Europe and Japan.
Politically, the failure of the trickle-down theory may produce a resurgence of the class-based politics pronounced dead in the era of economic liberalism. The contrast between the enforced austerity of any recovery period, and the massive, and massively unjustified, excesses of the financial elite during the boom period, will produce a political environment where phrases like “malefactors of great wealth” no longer seem quaint and old fashioned. (1_
But there does not exist a political movement ready and willing let alone to mobilise popular support for a program of income redistribution. Rather, revulsion against the willingness of politicians to bail out the banking system has been reflected most clearly in the confused and angry demagoguery of the Tea Party movement, a movement manipulated to serve the very interests that have generated the feelings of injustice that drive it.
Rather than consider questions of political strategy, however, I will focus on the way in which the failure of the trickle-down hypothesis should change the questions economists ask and the way in which they should seek to answer them.
The failure of the trickle-down hypothesis provides economists with plenty of challenging research tasks.
A crucial problem is to understand why and how inequality increased so much under market liberalism, and why it increased so much more in the English-speaking countries. The idea, which remained the default assumption during the era of market liberalism, that growing inequality was a natural market response to unspecified changes in the structure of the economy (2) no longer appears tenable. Clearly, the huge increases in remuneration in the financial sector and for senior managers more generally has not produced a more efficient and productive economy, with benefits for all. More generally, the crisis has undermined the view that incomes accruing to different groups in the community are an accurate reflection of their marginal contribution.
It is obvious that the policies and institutional changes that took place under market liberalism have almost all pushed in the direction of greater inequality. Corporations have been deregulated while the full power of the state has been turned against unions. Tax schedules have been flattened, and the main income sources of the wealthy, including capital gains, inheritance and dividends have been given progressively more favorable treatment. Corporations have competed with each other to pay ever larger amounts to their CEOs. And, at the very top, there is indeed a trickle down effect, with stratospheric CEO salaries encouraging huge increases for other top executives, and substantial increases in payment for senior professionals, even as wages stagnate or fall for ordinary workers.
But it remains unclear which feature of market liberalism contributed most substantially to the growth of inequality, and how those policies interacted with each other and with other social developments. Understanding these processes will require economists and other social scientists to look beyond purely monetary aspects of inequality, and to examine the interactions between economic, political, social and psychological processes, all of which have contributed to the growth of inequality and economic instability.
The importance of the links between inequalities in income, health, education and political power is evident from the work of Marmot and others. But the links between economic variables like income inequality and personal and social outcomes realised over generations are inherent complex. It seems clear enough that inequality is bad for us, but much harder to say how and why.
All of this analysis is merely a preliminary to the big question - how can the growth in inequality be reversed and the more egalitarian society of the Great Compression restored? Some steps, such as restoring progressivity to the tax system seem obvious. But even these obvious steps must confront the political realities of a system in which political power has shifted overwhelmingly to the wealthy - About two-thirds of United States senators were millionaires in 2008, http://economix.blogs.nytimes.com/2009/11/25/your-senator-is-probably-a-millionaire/?partner=rss&emc=rss and there are similar trends in other countries.
Improving the taxation system is a comparatively easy response. The decline in union membership has almost certainly played a substantial role in promoting inequality in market incomes, not to mention the removal of checks to the power and prerogatives of managers. But, how, if at all, can this decline be reversed? This is one of many questions we need to look at with fresh eyes.
1 Just after writing this, I Googled it, and found it as the <a href="http://swampland.blogs.time.com/2009/01/29/malefactors-of-great-wealth/">title of a piece in Time Magazine’s Swampland by Joe Klein</a>, among the most reliable indicators of the political zeitgeist
2 the term ‘technology’ is commonly used to describe these changes, but this is just a catch-all residual term - there has been little if any evidence linking the growth in inequality to any particular technological innovation