De-financialisation

I recently finished reading ‘Unequal gains’ by Professors Peter Lindert and Jeffrey Williamson. It was an analysis of ‘American growth and inequality since 1700’. The book was interesting but not interesting enough for me.  It lacked depth and analysis but it had lots of data. I was more interested in the evidence on how financialisation had played a direct role in the rise of inequality in the US. Causal evidence is hard to produce especially for the first episode in the early nineteenth century when inequality in the United States surged. The authors provide tentative evidence.

However, the evidence is somewhat more compelling for the period between 1910 and 1970 when inequality in the United States declined substantially. De-financialisation and financial regulation played a big role. Similarly, the re-financialisation of the U.S. economy on a massive scale since 1970 has played a direct role in it. That income inequality since the 1970s rose markedly in the United States had nothing to do with the rise in racial, spatial or gender inequality narrows the potential culprits considerably.

In terms of the book’s conclusions, the point about inequality and growth not being correlated one way or the other is important. The Professors make three policy recommendations to reduce inequality without sacrificing economic growth. One is investment in public education. Second is taxing inheritance and the third one is regulating finance. One can tentatively stick one’s neck out and predict that inequality is more likely to drop than rise further, for at least two reasons.

One is slower growth in the US labour force. Other things being equal, that will tend to allow wages to rise faster. It is quite likely for two reasons: one is the baby boomer retirement and the other is the rising income and opportunities in countries like India that would slow down employment and income-seeking emigration from their shores to the US. F course, as the authors note, America tightened immigration rules considerably after WW I. They can and may repeat it. They are probably at it, already.

What will happen to finance? Demographics will slow down asset market returns and, if nothing else, that would rein in finance. I have more hopes on that than on political will and executive action to rein in the financial sector. The book is silent on the broader trend in the USA on Executive compensation. It is also largely inspired by the Financial sector of course.

They admit that the cause of income equality would not be directly helped by financial regulation but it would do so indirectly because the income floor under those near the bottom would be raised by the prevention of unemployment caused by financial busts.

The comment that the two World Wars enhanced America’s standing in the World economic/income tables is very telling:

Again, those wars, especially World War II, catapulted the United States into exceptional world economic dominance.

It has profound and disturbing implications for the evolution of political thinking in the US. I think the message has not been lost on the neo-cons in the US. But, quite what enemies they are picking to fight is the most difficult thing to figure out.

It was disappointing to note that the authors shy away from taking a view on how technological developments in future would aid or impede the trajectory of workers’ wages, in developed countries.

Their policy prescriptions to address inequality do not appear transformational. But, that is different from saying that they won’t be transformational. They suggest investment in public education, financial regulation and taxing inheritances. They quote Andrew Carnegie who was against inheritances and bequests:

The parent who leaves his son enormous wealth generally deadens the talents and energies of the son, and tempts him to lead a less useful and less worthy life than he otherwise would… Wealth left to young men, as a rule, is disadvantageous.

Both political candidates are unlikely to address all the three recommendations that the authors make. Hillary Clinton has taken considerable campaign contributions from the hedge fund community in the United States. Inheritance tax, as far as I can recall, does not figure in her agenda. May be, I am wrong.

Donald Trump, as far as I can recall, has not said anything about these three: public education, financial regulation and inheritance tax. In his Acceptance Speech, he had accused the current Obama administration as having failed on education. But, there was no concrete proposal from him.

[postscript: On financialisation, this polemical and yet factual post by David Stockman on the ‘Warren Buffett Economy’ is well worth a read. The substantive nature of his arguments is diluted by the anger and the tone of his remarks but let that not distract from you from the substance of which there is plenty. As his header correctly observes, America has been divided already by all those who preceded Trump. It is really pathetic to call him divisive without holding to account even one of those who beat him to the job in all these years – from 1987 to 2015.]

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