Almost two years since the outbreak of the Covid-19 pandemic, it is now overwhelmingly clear that it has had significant economic consequences and that the most economically vulnerable have been affected the most: the unemployed, low-wage workers, those on fixed-term contracts or working informally, and families and individuals with precarious incomes.
This asymmetric impact of the pandemic has spurred renewed interest on inequalities. In the wake of the 2008 global financial crisis, the issue of inequality made a sensational comeback in political and academic discussion. The Covid 19 crisis has furthered this interest and placed inequality firmly back at the centre of the economic policy debate. This book on crisis, inequality, and poverty is therefore very timely.
The first central theme of the book is the financial crisis, approached in a manner that differs significantly to the mainstream. We have become accustomed to thinking of the crisis as the unexpected breakdown in a supposedly ‘natural’ equilibrium. Market forces, as the economics establishment has been teaching for the last half century, if left to operate freely will lead to a natural equilibrium. Of course, the path towards equilibrium may have its bumps and glitches, but to paraphrase Keynes, in the long run we will survive, and the equilibrium will be reached. And in those cases where this does not seem to have happened, as with the 2008-2009 crisis, this can simply be put down to exogenous forces/agents that have failed to comply with the ‘appropriate’ market functioning.
This book, heir to a long-standing heterodox tradition that understands crises as inherent to the capitalist economy, provides us with an entirely opposing interpretation. For Schettino and Clementi, the crisis is both endogenous to and a direct consequence of the modus operandi of the capitalist mode of production. Capitalist production is not primarily oriented towards satisfying needs, but towards generating profits and continuing the process of capital accumulation ad infinitum. Goods and services are produced without the guarantee that they will be consumed, and thus their value realized. Therefore, not only does supply not generate its own demand (in contradiction to Say’s law), but as the book explains, the increased competition typical of this global phase of capitalism increases the risk of more frequent and intense overproduction crises. This heightened global competition translates into both an ever-greater investment in capital aimed at increasing productivity and a series of measures aimed at reducing the cost of labour; the ultimate effect is – and herein lies the great contradiction – that these interventions lead to a reduction in
Overproduction and underconsumption therefore coexist but are considered by mainstream economic theory to be frictional and solvable through basic adjustments to prices (if the price of goods is lowered, consumption increases). However, such phenomena are structural, and so require intensive external intervention. Yet even where such interventions are carried out, the relief will only be short term, as the experience of 2008–2009 demonstrated to full effect. Indeed, in the long run they exacerbate the problem. Measures like the ones taken in 2008 quickly transform a local crisis (the American real estate sector) into a global financial crisis capable of putting at risk the solvency of entire states (Greece) and the very existence of a currency (the Euro).
Crisis and inequality, the second key theme of the book, are inextricably linked. The growing loss of purchasing power among the American and European working classes observed after the fall of the Berlin Wall translated into growing indebtedness. The problem of debt, particularly in the United States, was further aggravated by the introduction of new forms of credit and particularly low interest rates. The mere desire to have a roof over one’s head or to guarantee a better future for one’s children through access to higher education now requires families to accumulate more and more debt; households are spending more than they earn because they no longer earn enough to maintain a standard of living that had previously been the norm. Incomes therefore lost purchasing power and real household wealth declined, but only for the poorest 90%. In the United States, the income share of the poorest 90% was about 66% in 1970; within 40 years it had fallen to about 52%. Looking at financial and real estate wealth over the same period, this fell from 40% to about 25% (Piketty, 2014).
Inequality and income distribution have returned to the centre of the economic debate after having essentially been entirely absent during in the 1980s and 1990s, despite the fact that for the fathers of classical economics like Adam Smith, David Ricardo and John Start Mill, inequality was central. Leaving aside the reasons for the return of inequality (and poverty) to the limelight, I believe it is far more interesting to reflect on current trends. Today, thanks to research of authors like Piketty, Milanović and Zucman based on extensive analysis of data, we have a range of irrefutable evidence on global trends in inequality. Inequality is increasing in all countries, developed and under-developed. If we use accumulated wealth instead of income as a metric of inequality, the gap is even greater. Finally, in addition to the data on income surveys and tax records, we now also have access to information regarding the wealth hidden in tax
Lastly, it should be emphasized that the book is based on extensive and reliable elaboration of data. It would seem a paradox to reiterate the importance of data and correct data analysis at a time when we are effectively overwhelmed by statistics. However, the current crisis has made it clearer than ever that the supposed neutrality of numbers is a fallacy. Presentation of facts and figures is always underpinned by precise ideological assumptions, and even the constant bombardment of numbers can be understood as an attempt to muddy the waters rather than clarify the situation. Every day, for example, we are inundated with data on the progress of the pandemic, on the number of dead and infected, with a myriad of newspapers and websites making comparisons between different countries. Does all this data really help us to get an idea of the whole picture, and can we extrapolate from it, e.g., information that allows us to understand the economic impact of Covid-19?
Unfortunately, confusion abounds. There are a few reasons for this. Firstly, counting deaths, which historically was one of the first tasks that the administrative systems of modern states assigned themselves, is proving to be a rather arduous exercise and is subject to a great deal of manipulation. So much so that today, for example, despite the enormous effort to standardize statistics and administrative data at the European level, it is very difficult to compare deaths from Covid-19 in Italy, Belgium, the Netherlands or Spain, let alone make valid comparisons between European countries and other continents.
If, therefore, such ‘visible’ statistics as mortality rates are incomparable or even inaccurate, one wonders how precise projections on the economic impact of the crisis can be, especially as economic estimates are, by definition, (predicting the uncertain future) characterised by uncertainty. Yet such predictions are too often taken for granted, not only by the general public, but also by entrepreneurs, financial investors and governments, who make policy on the basis of estimates which, as discussed at length in the book, are often then subject to drastic revisions. Therefore, predictions that may turn out to be wrong immediately condition trends in the real economy, influencing, e.g., the investment decisions of an entrepreneur (the animal spirits of Keynesian memory), but even triggering dizzying speculation on financial markets to the point of jeopardising the financial solvency of a state.
The facts (and well-documented data) are stubborn, and this book demonstrates that very clearly. A series of concrete hypotheses are expressed and are supported by scrupulous use of available information. The reader is led through indicators and often complex numerical calculations, whose methodological assumptions and economic and social significance are explained in a
Rome, 15th November 2021
Vasco Molini
World Bank Economist, Washington DC, USA