A Proposal to Reverse the Populist Tide
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The rise in income inequality is closely linked to the financialization of U.S. economic activity that began during the 1980s. Prior to that time, during the "Golden Age of Capitalism" (1945-1970), the economic system was doing a pretty good job at generating rising wages, productivity and economic growth, based on a robust partnership between labor, business and government. This framework also sharply reduced income inequality.
This unraveled at the end of the Golden Age, as the Bretton Woods monetary accords collapsed, inflation surged and the dollar fell, compelling then-Fed Chair Paul A. Volcker to hike short-term rates to stratospheric levels. This bold move was accompanied by the adoption of neoliberal policies during the 1980s that demonized labor, eviscerating its bargaining power.
Real wages have been stagnant for several decades. In recent years, corporate profits have hit record levels, benefiting investors. However, the combination of stagnant wages and high profits ignores a key driver of economic growth: people must be able to purchase the goods and services that companies produce. In the Golden Age, rising labor incomes were sufficient – more recently, not so much, requiring ever-increasing levels of indebtedness. And this trend, as we learned in the global financial crisis, is not sustainable. We are trapped in an economy with 2% real growth.
From 1980 to 2007, rising debt-to-income ratios offset the slowdown in wage growth. Increasing debts also fueled serial asset-price boom-bust cycles in property, equities and other asset classes. Most (nearly all) of the benefits from rising asset prices went to the top 20% of households. Their share of total wealth in the U.S. rose from 81% in 1983 to nearly 90% in 2013. Whenever those booms threatened to unwind, the Fed would step into the breach (the “Greenspan put”), reigniting the financial cycle.
Also during this time, non-financial corporations focused on "maximizing shareholder value," via stock buybacks, LBOs, M&A, etc., that pushed up share prices at the expense of labor and other stake holders. Finally, when this debt-driven edifice threatened to collapse in 2007-2008, the government stepped in and protected the financial system from a depression, but once again did little to assist the bottom 80% of households.