Income equality, then growth
To increase income, Americans worked longer hours - often juggling several jobs. Still, when life comforts remained below expectations even as two breadwinners worked rigorously, American families turned to credit. Inflated home prices helped to finance loans and, subsequently, spending. With easy credit and deregulation, as much as $2 trillion to $3 trillion went to U.S. households - thanks to higher home values.
Then, the subprime mortgage burst and lenders crashed in 2008. Americans suddenly found themselves up to their necks in debt and with no means to repay it with their limited income.
The Federal Reserve Board headquarters building at 20th Street and Constitution Avenue NW in Washington is named after former Federal Reserve Chairman Marriner Eccles, who served under President Franklin D. Roosevelt. Though without a decent university education, Eccles became a millionaire in his 20s and a leading banker. He championed stimulus policy through fiscal and monetary means to help fight the Great Depression. He became an avid defender of Keynesian ideas even before the famous 1936 publication of “The General Theory of Employment, Interest and Money” by John Keynes.
Roosevelt appointed Eccles as the chair of the central bank in 1936 and he went on to serve on the board until 1951. He was a key participant in Roosevelt’s New Deal policy as well as in establishing the post-World War II financial order at the Bretton Woods Conference of 1944, which created the World Bank and the International Monetary Fund. In his memoir “Beckoning Frontiers” published in 1966, Eccles wrote that the Great Depression had occurred because the distribution of wealth had fallen into a few hands. To continue to make purchases, the vast majority of people were forced to borrow.
Reich sees the vicious cycle repeating itself. According to Reich, the wealthiest 1 percent accounted for more than 23 percent of total American income just twice - in 1928, shortly before the Great Recession, and in 2008 before the Wall Street meltdown.
The wealthiest actually do not spend and contribute to overall demand as much as the middle and working classes. Their increased income does not necessarily translate into consumer spending. Many economists today believe deflation and low growth stem from oversupply and low demand. Consumption fails to pick up because middle- and working-class earners - the driving force behind demand - do not earn enough and have few disposable assets.
Until the 1970s, the economy grew, and because of double-income families, the burgeoning middle class and their income increased. Manufacturers trotted out new cars, refrigerators, TVs and other appliances to whet their spending appetites. Jobs increased and money came into the households uninterrupted, helping to feed the benign cycle of production, income and consumption.
But that cycle came to a stop in the 1980s, as information technology and automation drastically reduced the number of jobs and globalization shifted jobs to emerging countries.
What hit the United States three decades ago has panned out in South Korea over the past decade. Real income, which annually grew 3.9 percent on average and fed the country’s economic growth between 2001 and 2007, contracted starting in 2008. The fruits of growth only fattened companies and did not trickle down to households. According to national statistics last week, real household consumption in 2013 fell year-on-year. Stagnant incomes and thin wallets are slowing down the economy and jeopardizing growth prospects. Without narrowing the widening gaps in income between companies and households, income brackets and companies of different scales, growth for the Korean economy can hardly be sustained.
This is no ideological matter between conservatives and liberals. Even the richest companies and individuals cannot expect to sustain their wealth unless the middle class increases spending. Members of the working class cannot expect their situation to improve simply through lashing out in anger and resentment against the inequalities of wealth. Society must come together and muster the wisdom to jointly combat the problems. The government has announced a three-year economic innovation prescription focused on creating jobs for women, deregulating markets and rejuvenating domestic demand. But what must come first is the work to more evenly distribute wealth to ensure the sustainable growth of the Korean economy.
Translation by the Korea JoongAng Daily staff.
JoongAng Ilbo, Mar. 1, Page 31
*The author is an economics professor of Sogang University.
BY Cho Yoon-jae