What’s behind the Austerity Consensus? New Polling Suggests Income Inequality.

A guest post by Hayden Munro.

One of the most frustrating things for Progressives about the world-wide policy response to the Great Financial Crisis and the Long Slump that we are still in, has been the incredible amnesia with which most policy makers have responded to the crisis. For Progressives, the Great Financial Crisis is nothing new, it’s a crisis brought on by dangerous under-regulation of the financial industry, which created a financial meltdown, a liquidity trap and depressed aggregate demand. In other words, it’s a repeat of the 1929 crash that caused the Great Depression.

This is the central theme of some must read works like “This Time it’s Different” and pretty much Paul Krugman’s entire output since 2008. To progressives, the answer should be simple, the financial crisis has damaged the engine of growth that should be powering our economy, and Government has a role to play in lifting growth and stabilising the economy, putting people back to work and restoring the financial security of the middle class that has been so damaged by years of trickle down economics and the financial crash that followed.

This was the immediate read on the crisis and the thinking that underlay the early response to it, moves such as the bank bailouts in the US, the nationalising of banks in the UK, and the general rounds of economic stimulus all over the world. Since early 2009 however, Progressives have watched as policy makers, having successfully stabilised the financial sector, promptly abandoned any moves aimed at restoring pre-crash levels of growth, instead favouring harsh austerity measures aimed at cutting the deficits run up in the lead up to the crisis, and by the emergency response itself. For Progressives, it boggles the mind at a time when flagging growth is so obviously the most important challenge facing our economies, all of the attention has been on “the debt problem” rather than the “growth problem”

This is evident in the New Zealand context as well: think about Bill English and his zealot like commitment to a “zero budget” when New Zealand actually has very low public debt by global standards, yet worryingly low growth.

Joe Biden”s former chief economic advisor Jared Bernstein sums up the progressive astonishment well here:

Over the last decade, too many households, governments, firms, and banks borrowed recklessly, nudged by financial “innovations,” negligent underwriting, and pure disregard for their ability to meet the liabilities they were taking on. Then, in September 2008, the system snapped. One particularly over-leveraged investment bank, Lehman Brothers, went bankrupt, and the global debt bubble popped. Millions of people lost, and continue to lose, their homes. Unemployment is rampant, and just under half of the unemployed have been jobless for more than half a year. The debt burdens of sovereign nations, Greece in particular, pose existential threats.

And yet policy-makers seem frozen in place, unwilling to take the necessary actions for one basic reason: doing so would mean deficit spending. Indeed, those at the helm in the advanced economies seem intent on shifting into reverse, pursuing austerity measures that, like medieval bleeding, only make the patient sicker. We recently inflicted more wounds on our already injured economy by arguing about whether or not to default on our own sovereign debt. This frustrating and destructive debate would have been a pitiful sideshow had it occurred during a period of full employment. For it to happen in the midst of the worst jobs crisis in decades amounts to malpractice by the policy-makers involved.

UK Labour Leader Ed Miliband is one of the few progressive politicians making this case explicitly. In his 2011 Conference Speech Miliband told voters…

I have a fundamental disagreement with the Government.

They believe Britain can address our problems of debt without addressing our problems of growth.

They are wrong.

Think of how you pay off the credit card bill.

You need to make savings in the household budget.

But if you lose your job and the money stops coming in, you can’t pay off the bill.

People in Britain are losing their jobs.

They aren’t spending.

Government is cutting back.

And the recovery has stalled.

Of course, the world economy is suffering.

But our Government is making it worse.

The argument by people like Bernstein and Miliband is simple: countries like New Zealand, America and the UK have a growth crisis, not a debt crisis, and by focusing exclusively on debt, we are missing the point and prolonging the recession. So this leads us the question: Why? What is causing our policy makers to ignore our growth problems in favour of a laser like focus on deficits? Some new polling and research into how policy makers decide their priorities provides some hints, and for those of us who want to see economic growth atop the political agenda, it’s worrying news.

According to some much publicised research by Martin Gilens, a political scientist at Princeton University, there might be a surprising factor at work here: Income Inequality. More specifically, the way that vast differences in wealth lead to vast and worrying differences in political power. The Washington Post’s Ezra Klein explains:

Gilens has been collecting the results of nearly 2,000 survey questions reaching back to the 1980s, looking for evidence that when opinions change, so too does policy. And he found it—but only for the rich. “Most policy changes with majority support didn’t become law,” Hacker and Pierson write. The exception was “when they were supported by those at the top. When the opinions of the poor diverged from those of the well-off, the opinions of the poor ceased to have any apparent influence: If 90 percent of poor Americans supported a policy change, it was no more likely to happen than if 10 percent did. By contrast, when more of the well-off supported a change, it was substantially more likely to happen.

What Gillens’ research shows us is that, especially in America, widening income inequality has led to massively increased political power for the most well off. And this has meant that those in the top 10% and especially those in the top 1% have a vastly out-sized say in the policy making process, not only dictating what policy answers become law, but also what “questions” policy makers focus on.

Doesn’t this sound a lot like the problem we are trying to understand? To the vast majority of people, especially the middle class who are suffering in the current recession, economic growth seems to be the major problem. Yet our policy makers are focused on something else? So can we find evidence that this is actually what’s going on, and that divergent opinions on the nature of the challenges our policy makers should be addressing might be driving this disconnect?

Over to Fivethirtyeight.com which tells us that a recent sudy:

Authored by the political scientists Benjamin Page, Fay Lomax Cook, and Rachel Moskowitz and recently released by the Russell Sage Foundation, found that the politics of the very wealthy are strikingly different (from other incomes groups).

Their study, which was part of a larger project called the Study of Economically Successful Americans and the Common Good, involved something unusual: a random sample of the rich. In particular, they interviewed 104 wealthy individuals in the Chicago area between February and June 2011.The sampling frame, constructed from various sources, was essentially the top 1 percent in terms of wealth (not income, as in the Gallup analysis).The response rate among the wealthy individuals they contacted was 37 percent, which may seem low on its face but is quite respectable by contemporary standards. The median wealth of this group was $7.5 million. (Of course, the broader project is surveying wealthy people nationwide, not only in Chicago.)

So this study lets us compare opinions on economic policy issues between the top 1 percent of income earners, and the rest of the population? The findings are exactly that Gilen’s research suggested we would find: a real and substantive disagreement over which policy questions our politicians should be focused on, with the views of the top 1% matching the actions of policy makers:

The 1 percent cares more about deficits than the economy. When asked to name the most important problem facing the country, 32 percent of respondents said the deficit and 11 percent said the economy. By contrast, in an April 2011 CBS News/New York Times poll, 49 percent of Americans said the economy or jobs and only 5 percent said the deficit.”

This polling suggests that the bewildering focus on debt issues at the expense of growth, at a time when economic growth has never been a bigger issue, is more than just a mistake. It is symptomatic of wider power imbalances in our economy, and further proof that massive income inequality is a threat not only to economic stability, but to the fairness and responsiveness of our democracy.

Why this research is so interesting is that it illustrates in a really important way the extent to which our current economic problems are connected to, and caused by, deeper political problems. The sort of trickle down economic policies that the Right told us would lead to greater prosperity, led not only to massive income inequality, they deeply unbalanced the power structure of our politics. By giving more and more wealth and political power to the wealthy, they created a political system that was increasingly tailored to meet the demands of the well-off. And that meant more  more tax cuts for the rich, more financial deregulation. And then when these same policies drove our economy off a cliff, it was the well-off who got to dictate how we responded. And their answer has been uniformally to move away from the policies that history tells us actually solve financial crisis and their ensuring recessions.

So what’s the lesson here? It’s that a progressive response to the financial crisis must be one that not only gets the economy moving again, but one that rebalances the power structure of our politics. We need a politics that puts more power in the hands of the middle class, and that means more wealth in their hands. This adds a new dimension to debates like the need for more progressive taxation and things like a financial transaction tax. It’s why Labour’s proposal for a tax on capital gains is so important, because it will rebalance not only our economy, but our politics. Such moves, which would shift wealth back to the middle classes, and lessen the shocking levels of income inequality in countries like America and New Zealand, would go a long way to solving the political problems that underlie our economic woes.

In my next post: A look at other forces driving the austerity consensus, and an in depth look at how it’s holding back the global economy.

4 thoughts on “What’s behind the Austerity Consensus? New Polling Suggests Income Inequality.”

  1. Good review Hayden. And how do we get the economy moving again? (I’m sure that you will look at this more in your next post). Do you think that Sir Paul Callaghan’s push for doing more of what we do well already in manufacturing (i.e. F & P Healthcare, Galligher etc) which are high yeilding businesses that create well paying jobs. Or do we head into the area’s that we have not tried out yet such as clean tech (i.e. Shearers favourite LanzaTech).

    And how do we support these businesses to grow? It seems that the writing is on the wall about R&D research tax credits as NZ is woefully behind many nations in this area of spend. Good to see that Shearer has taken this portfolio to his new number one spot in the party.

  2. Intriguing article, it’s nice to see some history brought into this debate.
    Btw, I caught this via a tweet from @Occupy_Boston

    P.S. Would you like a spell-check that includes context?

    Re. well-off, uniformly, ensuing

    ie. this:
    “And then when these same policies drove our economy off a cliff, it was the well-ff who got to dictate how we responded. And their answer has been uni-formally to move away from the policies that history tells us actually solve financial crisis and their ensuring recessions.”

    Should be:
    “And then when these same policies drove our economy off a cliff, it was the well-off who got to dictate how we responded. And their answer has been uniformly to move away from the policies that history tells us actually solve financial crisis and their ensuing recessions.”

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