Over the last year there has been much talk of the wealth and power of the top 1% heralding the return to the Gilded Age of the early 20th century. The Occupy Movement arose in response to this increasingly blatant concentration of income and wealth at the top of society, compounded by corporate malfeasance and complicity in the origins of the ongoing financial crisis. This radical inequality has been most obvious in those countries most traumatized by years of supposedly free market restructuring.
Whether or not this political-economic restructuring was 'neoliberal'—and I am coming round to the view that it wasn't—we can agree that it has led to rising inequality across a number of countries. This is especially evident in countries like the USA, UK and Canada (and, to a lesser extent, Australia and New Zealand) which are characterized by a U-shaped trend in the percentage of income going to the top 1% over the twentieth and early twenty-first centuries—see the graph below derived from the extremely useful World Top Incomes Database.
In contrast to this U-shape trend in the so-called Anglo-Saxon world, several countries, especially those in Scandinavia and continental Europe, have not witnessed similar levels of income inequality. Why the difference? One answer is that it is all the fault of the top 1% in the Anglo-Saxon economies. But is it that simple?
Obsessions with housing, house prices and equity value
It's always useful to compare a variety of trends to get a sense of what has happened to our economies over time. As can be guessed from the title of this essay, I think there is a link between inequality and home-ownership. I do not claim some unique insight into these issues: others have made the same connection, if somewhat differently. Nor am I making this claim in relation to the growth of sub-prime mortgage lending that eventually brought down the housing market in the USA, UK and others, and which still threatens to pop the ongoing bubble in Canada. Rather, what is noticeable over the last 40 odd years is that inequality has risen along with rates of house ownership in the UK (especially since the 1970s) and the USA and Canada (especially since the early 1990s). These countries now have ownership rates close to 70% of households.
Instead of neoliberal restructuring, to me these changes signal a far more radical political-economic transformation from income-based economic systems to asset-based ones. What I mean by this is that these economies have become dependent upon the expansion of supposedly wealth-creating assets like housing, as well as new financial instruments like derivatives and the expansion of certain forms of savings like mutual funds and pensions managed by large financial institutions. In his 1987 book Secrets of the Temple, William Grieder argued that in the 1970s these types of asset-holders and savers revolted against the threat (real and imagined) posed by income inflation to their savings and wealth. Quasi-Keynesian policies following World War II had led to rising incomes for the majority of workers, which, in turn, was financed by loose monetary policy that caused the rising income inflation feared by asset-holders and savers. Put simply, more workers had more money that they could spend on goods and services, but these goods and services couldn't be produced fast enough to outpace the rise of wages; the only way this could work was for the cost of these things to rise as well—which they did. This is why inflation became such an issue in the 1970s. There are more complicated reasons than this for rising inflation, which I have discussed elsewhere, but this is the gist of it.
Here's where the connection between inflation and home ownership started to become entrenched. As inflation rose during the late 1960s and 1970s it eroded the value of savings and certain assets that fell behind the rate of inflation. This damaged the wealth of asset-holders and savers—including a growing number of workers with pensions, savings and houses—especially during the 1970s when real interest rates (i.e. interest rates minus inflation) fell below 0% (see graphs here for the USA and Canada and here for the UK). This meant that anyone with assets or savings was losing wealth year after year. Income inflation was seized upon by free market (or, if you like, neoliberal) ideologues, particularly by those espousing monetarist views, as the root cause of all the problems facing countries like the USA, the UK and Canada. To again put it simplistically, the argument these ideologues made was that inflation eroded the incentives for savers to save their money which led to a fall in investment for new companies, capital equipment, infrastructure etc. leading to rising unemployment to accompany rising inflation (i.e. stagflation). On this basis they advocated monetary stability, rather than rising incomes, as the means to get these countries' economies up and running again.
In practice what this meant was that interest rates were used as a blunt tool to attack income inflation, and this had to be carried out by reducing the power of workers: first, through the impact of rising unemployment as high interest rates reduced investment in new employment opportunities; and second, by promoting the idea of what Margaret Thatcher and other conservatives called a 'property-owning democracy'. What resulted was the demonization of income inflation and the promotion of asset inflation as an alternative, meaning that rising house prices and asset values came to dominate economic thinking and policy over the concern with full employment that characterized previous Keynesian thinking and policy.
What the obsession with housing and other assets means for inequality
At this juncture it is important to stress that economic thinking and policy are political decisions, they are not reflective of some eternal truth about the workings of economic systems. This is why it is necessary to think about the implications of the decisions taken some forty years ago for our current situation. The most obvious consequence of the transformation of our political-economic system from one based on rising incomes to one based on rising asset values is that median real wages have stagnated since the 1970s, even though productivity has kept on rising (see this graph for a helpful visualization). The working classes had benefited most from rising incomes in the post-War period, since they did not have assets that would appreciate in value. In contrast the richest and middle classes have benefited most from the rising asset values that followed the revolt of the 1970s and the attacks on income inflation. The key consequence of this reversal of fortunes has been that the link between living standards and incomes has, for most people, been severed.
In order to maintain rising living standards since the 1970s and 1980s, most people—working and middle classes—have had to borrow money through new forms of personal debt (e.g. credit cards) encouraged by the so-called wealth effect of rising asset values. The wealth effect refers to the perception that you are better off because your house, for example, keeps rising in value which then increases your ability to spend more by taking on more debt. This is exactly what happened during the 1980s and 1990s — see Robert Brenner's piece here. As income inflation was controlled by cutting wages, asset inflation was stimulated by making it easier to borrow money, especially to buy housing (mortgage interest tax relief, privatization of social housing, etc.). More recent inventions made it even easier, until the crash at least. We've all now heard of the sub-prime mortgages offered to low-income groups in the USA and of 125% mortgages offered to house buyers in the UK; these represent key elements of what Colin Crouch has termed 'privatized Keynesianism' or what Matthew Watson calls 'house-price Keynesianism'. Basically broad-based house ownership was deliberately promoted as a policy in order to create demand via private borrowing against rising house values, first by conservative governments and then by liberal-centrist governments in the USA, UK and Canada. As a political-economic strategy it all hung on continuously-rising house prices and, perhaps more importantly, individual citizens buying into the idea of home ownership as the be all and end all of their lives. Wages or income would no longer need to matter as much as getting on the housing ladder and, crucially, climbing ever upwards towards… well, that’s never really clear.
From the 1980s until the financial crash of 2007 it was entirely rational for individuals to want to buy into this new set of values—that is, rising house values over rising wages. House prices rose significantly during the 1980s, and after a brief dip in the early 1990s surged upwards from the mid-1990s to 2007. However, despite appearances, the gains made in the housing market may not be as significant as they at first appear. In an interesting discussion of this apparent wealth revolution many bought into, John Lanchester argues in his book I.O.U. that rising house prices actually did little better than long-term averages for other forms of investment, once you take inflation into account. So, house values did not rise more than other forms of investment, but they represented a key, and often the only, form of investment for people outside the richest 1% (and still do). Rather than a wealth revolution, then, it might be better to think of it as a wealth illusion. What the expansion of home ownership has done, more importantly, is to change the values of individual citizens, turning them into what has been described as 'investor subjects' or 'investor citizens'. In this sense it has helped to spread fiscal conservatism beyond the confines of right-wing parties—by which I mean the fear of inflation engendered by the threat of interest rate rises meant to stop inflation but also threatening cheap mortgages. And this is crucial for the following reasons.
Owner-occupiers in an asset-based economic system are reliant upon continually rising house prices and house values since they are unable to finance rising living standards through wages (which are stagnant) and end up depending upon the use of personal debt instruments (credit cards, store cards, hire purchase, etc.). All of these entail extra interest payments to finance new purchases, meaning that they cost more than straight purchases—this 'financialization' of the economy fuels the expansion of banking, insurance, pension and other sectors dependent on the accrual of interest from loans. This means that owner-occupiers are doubly in hock to interest rate movements: first, to finance their mortgages, which take up an increasing proportion of their income; and second, to finance their other spending via personal debt. Ultimately house owners need to make sure that the value of their house rises faster than income inflation so that its real value rises and enables them to pay back the interest on the mortgage and to afford the interest payments of their other purchases or expenditures (cars, renovations, university tuition, etc.). Politically this means that owner-occupiers tend to support governments that promote the interests of the wealthiest because their own interests have come to match those of richest, i.e. ever-rising asset values.
To ensure that house prices rise faster than inflation, owner-occupiers are complicit in supporting limits to, and the reduction of, income inflation (e.g. through support for fiscally conservative political parties—which, admittedly, means almost all mainstream parties—and lack of support for more radical political parties). More simply, they are complicit in keeping wages low so that there is no increase in inflation above increase in house prices. It is here that inequality and house ownership are joined at the hip. Maintaining the real asset value of a house depends on keeping incomes low and rising more slowly than house prices. At the same time, this helps to pump up other asset values by encouraging the expansion of the new private debt and financial instruments we heard so much about during the financial crisis (e.g. securitized debt obligations). This is because all the new debt taken out by owner-occupiers (and others, but to a lesser extent since they do not have mortgages) has provided financial institutions—especially banks and other financial intermediaries—with the necessary assets to leverage huge sums to speculate in the market. Ultimately, the so-called wealth effect of rising asset values—housing or otherwise—made many people feel better off, but it made those who owned a lot of assets—i.e. the top 1%—much better off. On the other hand, it made some people much worse off. Not only are some people excluded from the benefits of house ownership, this wealth inequality has become embedded over generations as those with housing assets can pass on their privilege to their children through the benefits of access to finance (e.g. housing equity paying for university tuition).
In summary, the transformation of the economy into an asset-based system was built on the expansion of home ownership which has, in turn, necessitated stagnant (even falling) real wages in order to maintain the real value of the housing stock. Inflation has to be kept in check in order for owner-occupiers to feel secure in the value of their houses, and that means that incomes have to be ‘moderated’ and workers made to feel ‘insecure’. The poorest members of society generally do not own housing assets and hence are hardest hit as they also tend to depend more on their incomes for their living standards. Owner-occupiers, on the other hand, can draw on the equity they've accumulated to continue spending beyond their means, as long as they buy into the need to keep income (but not asset) inflation low. In turn they can pass down their privileged position to their children.
A significant and often unheralded structural shift occurred across many capitalist economies during the 1970s and 1980s. The impacts of this transformation from income-based to asset-based economies are far-reaching. One might have thought that it would, therefore, provoke significant resistance. Despite a clearly unequal distribution of assets, however, the expansion of asset ownership— especially of housing— was enough to win the support of a significant and increasing proportion of the population to this new economic dynamic. What this means in political terms is that the ire directed at the top 1%—while thoroughly deserved—also needs to be redirected towards everyone complicit in the continuation of an asset-based economic system that reinforces and perpetuates inequality. Owning a house, getting a mortgage, using credit cards; all these things tie us into an asset-based system to the exclusion of alternatives.
This article is part of NLP’s series on the politics of housing.
Kean Birch teaches social science at York University, Canada. He is currently writing a book tentatively titled We Have Never Been Neoliberal, but which he may rechristen Manifesto for a Doomed Youth, forthcoming from Zero Books.