Populism: Response To Declining Wages And Rising Income Inequality

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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.

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.