Redistribution in the Age of Austerity

Readers of this blog might be interested in this working paper we’ve just put up on the Levy working paper series. The abstract is below.

We examine the relationship between changes in a country’s public sector fiscal position and inequality at the top and bottom of the income distribution during the age of austerity (2006–13). We use a parametric Lorenz curve model and Gini-like indices of inequality as our measures to assess distributional changes. Based on the EU’s Statistics on Income and Living Conditions SLIC and International Monetary Fund data for 12 European countries, we find that more severe adjustments to the cyclically adjusted primary balance (i.e., more austerity) are associated with a more unequal distribution of income driven by rising inequality at the top. The data also weakly suggest a decrease in inequality at the bottom. The distributional impact of austerity measures reflects the reliance on regressive policies, and likely produces increased incentives for rent seeking while reducing incentives for workers to increase productivity.

By Stephen Kinsella

Senior Lecturer in Economics at the University of Limerick.

23 replies on “Redistribution in the Age of Austerity”

This comment by Simon Wren-Lewis fits into the general thesis.

The idea that the Germans forced the other countries of the EU to (i) allow wages part company with productivity, including, one assumes the introduction of a 35 hour week in France (ii) their citizens to borrow money – from whatever source – beyond their capacity to repay (iii) their governments to blow the tax proceeds of the subsequent consumption and real estate booms and (iv) finally, forced unnecessary “austerity” on them as a result, may be credible in some academic quarters but has zero footing in the real-time efforts to get the European economy back on track.


Re Simon Wren-Lewis’s blog post, I posted a comment in response, but, not surprisingly, he failed/refused to publish it. These academics tend to be very sensitive souls!

Re this paper, what I found interesting is the apparent surprise at finding compelling evidence for a conclusion that probably should have been obvious: “..the push for austerity in the name of markets and growth not only failed to bring about growth, but actually resulted in distorting incentives across the income spectrum in exactly the opposite direction from what they should be to ensure future market-driven growth!”

I’m not sure if the surprise is confected or real. When the initial distribution of income (pre-tax and welfare transfers) is determined by the suppression of competition, the rigging and distortion of markets and the total abuse of economic regulation it is bound to lead to gross inequality and the ferocious pursuit and capture of economic rents. Any effort to increase taxation or reduce welfare transfers will simply encourage an even more ferocious defence of rent capture and retrenchment across the board. In that context in Ireland, most growth is generated by the antics in the MNC enclave and the pressures that have built up as a result of reasonably healthy demoraphics.

Larry Elliott in the Grauniad had a piece on the UK economy recently where he wrote the following

#In retrospect, the miners’ strike marked the end of a 12-year period that fundamentally changed Britain. Between 1973 and 1985, full employment was replaced by control of inflation as the main objective of economic policy; the power of the trade unions was smashed; manufacturing was supplanted by finance as the key industry; and the centre of gravity moved decisively from north to south.#

Carney is unable to generate inflation. What would Milton Friedman say? In fairness, Carney is not the only one. Mario can t either.

Doesn’t zero inflation mean that wealth goes to those holding bonds ? Joe Soap with his credit union account gets far less interest.

Maybe 2% inflation would tone down the inequality.

Why no link to Colm McCarthy’s controversial report on the National Broadband Plan – which incidently was paid for by 37 wireless operators. Understandably these operators want to protect their investment but in so doing they are also seeking to maintain a massive urban:rural digital divide in Ireland by holding rural areas back in the dark ages of 1-3Mbps broadband.

Ironically, McCarthy’s report points a finger at the potential for the roll-out of the NBP to increase eircom’s dominance in the market. Strange then that eircom are probably more delighted with his report than anyone if it manages to scupper the project. They are the ones sitting on hundreds of thousands of low speed copper lines – assets they can milk into perpetuity the longer the NBP is held up. If the NBP was really going to increase eircom’s dominance as a rational agent wouldn’t you expect them to push back on the McCarthy findings – mark my words, you won’t hear a peep – they are dancing around down in Hueston square.

As to Colm’s arguments around a cost benefit analysis – I would have thought the benefits of bringing high speed broadband to the entire country were so self evident only parties seeking to scupper the betterment of the people in rural Ireland would question this issue….and maybe thats the plan!

What is a puzzle, in my mind anyway, is how conventional wisdom on economic policy moved to embrace the idea that fiscal policy had to be tightened from 2010 onwards and that monetary policy was the only game in town, particularly as we had reached zero rates. The proposed solution is effectively to boost private sector credit growth and hence debt while seeing public sector debt as anathema, and this was not solely a euro zone view, although the UK reduced their deficit at a much lower pace than initially indicated. Economies are recovering, of course, in part due to the collapse in commodity prices and subsequent boost to real household incomes, but it does seem odd that with rates at undreamt of levels the solution is deemed to be buying Government debt, which clearly has implications for wealth distribution, rather than issuing it.

There is very little investment and buying Government debt does not seem to do anything for productivity . If the collapse in commodity prices is related to falling global demand we are in big trouble.


I think I can say with near certainty that the answer to the question you pose is “politics” – with (amazingly, but not surprisingly) the fact that “we can’t just print money we don’t have”, “we can’t spend money we don’t have” and “living within our means” are all phrases that resonate with ordinary voters who aren’t macroeconomics nerds.

They are sound-bites that pay off for politicians and they are quick, sure winners that leave Keynesian arguments floundering in ‘real world’ discussion.

The political argument over this was won hands down several years ago. The Keynesian side were useless – not least because the politicians that should have been utilising Keynesian arguments appeared not to understand or believe them themselves.

QE or not QE?

In short, it is an ingredient, but only one, in the mix of actions needed, a message that governments in a number of countries, notably France and Italy, are stubbornly refusing to heed.

As to Ireland (which gets favourable mention, with Spain, in the FT piece), in the welter of papers over the past few years, this has to qualify as one of the most useful, especially in the current pre-electoral phony war period.

Moodys have already indicated that it may downgrade Ireland’s credit rating if a future government fails to hold the course. The collapse of commodity prices, notably the fall in oil, will add to the temptation not to do so.

Good news (or bad, depending on your point of view).

Ireland up to joint 6th (out of almost 200 countries) in the UN Human Development Index (HDI) for 2014 (from 11th the year before) . The U. Kingdom was 14th.

This measures economic and social development based on a composite index made up of separate scores for wealth (GNI rather than GDP being used), life expectancy, and education.

Of EU countries, Ireland was ranked joint 3rd, with only Denmark and the Netherlands scoring higher and Germany equal.

Ireland’s previous best ranking was 4th in 2007/2008, but it then dropped to 11th in 2013. Halting the decline and moving back up the league table was inevitable given Ireland’s high growth rate in 2014.

As the figures relate to 2014, they are already out of date. Given the actual and forecast growth rates for 2015 and 2016, it is absolutely certain that Ireland will overtake these three countries by 2016 (it may even have overtaken them in 2015). So, I confidently predict that Ireland will be the top-ranked EU country on the UN HDI either in 2015 or 2016 at the latest.

When Oxford University published their ‘Good Country’ Index last year, it ranked Ireland 1st in the world. As a reward, the publishers of the Index received death threats from various quarters in Ireland. I’d expect something similar with this.

Am off to Paddy Power now to bet my house that this news will not get a mention in Gene Kerrigan’s Indo column next Sunday or Fintan O’Toole’s IT column next Tuesday.

Austerity is a toxic term but in Europe at least with social safety nets and no general mass unemployment, conditions have not been comparable with earlier times.

Greece and Spain experienced a return to unemployment levels not seen since the early 1990s — both countries have big shadow economies and Greece in particular has a traditional high level of self-employment.

Consumption per capita in Greece has been at the same level as Portugal’s — of course that average masks a percentage of the population experiencing severe hardship.

In Ireland possibly a third or less of the population experienced bad conditions with job losses in particular in one -earner households and thousands of self-employed people saw their businesses collapse.

Over 40% of owner-occupiers had no mortgage on their principal residence while at the other end of the spectrum were people who had over-borrowed and had to live with the fear of losing their homes.

The IMF estimated the broad level of unemployment at 24% compared with 10% in Dec 2007 and it’s about 19% now compared with 10% in the US.

For people with jobs, not overborrowed and a tracker mortgage, the rate fell from 4.25% (ECB rate) + margin in mid-2008 to almost zero today + margin.

Spain was the destination for 1.3m Irish holidaymakers in 2012 according to the Spanish tourist office in Dublin.

Of the 147,000 net Irish national emigrants in 2009-2015, most left a job or had been studying prior to departure.

Ireland borrowed about €100 billion, mainly from foreigners to fund day-to-day public spending.

Targeting spending cuts on carers and other services for ill people were political decisions not dictated by the troika — keep in mind that the troika was not successful in getting Fine Gael to challenge the privileges of the lawyer class or the farmers who resist any changes in the system that makes land so expensive in the EU’s lowest population density country.

As for the overall policy at EU and Euro Area level, besides the support for troubled banks by several countries in 2009, there were also stimulus spending programmes. Eventually there was a common rescue fund.

Is it realistic to argue that there should have been no strings attached to loans from other Euro Area members? — I appreciate that there are lots of opportunities for whataboutery, in particular being forced to use loans to bailout banks.

These issues are not as simple as sometimes presented and in Italy where there has been a burning of junior bondholders in a recent bail-in of rescued banks, the government is under pressure to bailout individuals who have lost money.

QE in the US is seen as boosting stock prices — thus the rich, thereby increasing inequality. Not so according to recent research.

Josh Bivens of the liberal (American definition) Economic Policy Institute found that the Fed’s purchases did help support employment and workers’ ability to command higher wages — while the gain in stock prices attributable to quantitative easing may be lower than previously believed. The Fed not only boosted the value of stocks but also prices for houses, according to a second study by Matthias Doepke and Veronika Selezneva of Northwestern University and Martin Schneider of Stanford University. The authors say that middle-aged, middle-class households, which tend to have big mortgages, benefited at the expense of wealthy retirees.

@Stephen Kinsella

Did you test (Figure 3) using GNP rather than GDP?

If so – what did you find?

If not – why not?

@ MH

I would love to see those stats on middle income and working class American pay rises.QE just reinflated more asset bubbles. There has been very little investment in productivity.

Compare the median earnings now to those of the mid 70s and in real terms there is no change.

The big test will be whether Janet can raise interest rates back to normal levels. My view is that she cant. There is too much mispriced credit .

1. New income generated since 2009 that has gone to the top 1 percent: 95 percent
2. Financial wealth controlled by the bottom 60 percent of all Americans: 2.3 percent
3. Record combined wealth of the top 400 richest Americans: $2,000,000,000,000
4. Real decline in median middle-class incomes since 1999: $5,000
5. Percentage of Hispanic and African-American children living in poverty, respectively: 33.8 percent; 36.7 percent
6. Amount that food stamps will be cut in 2014: $5 billion
7. Federal minimum wage: $7.25
8. What the minimum wage would be if it had kept pace with gains in worker productivity since 1968: $21.72
9. Number of U.S. workers laboring at or below minimum wage: 3.6 million – the near equivalent of the population of Los Angeles.
10.Stealth taxpayer subsidy to the fast-food industry, paid out as safety-net benefits to McWorkers earning poverty wages: $7 billion
11. Global carbon dioxide levels measured in parts per million: 397
12. Maximum concentration of the greenhouse gas that scientists deem sustainable: 350
13. Years since the turn of this century that have ranked among the warmest 15 on record: All 13
14. Rank of 2013 on that list of the warmest years on record: Number Four
15. U.S. defense spending as of 2012: $682 billion
16. Dollar amount by which that surpassed our nearest plausible military rival, China: $516 billion
17. Federal deficit last year: $680 billion
18. Number of Americans disenfranchised from voting for felony convictions: 5.9 million
19. Share of those disenfranchised voters who are African-American: 37 percent
20. Number of Americans arrested annually for marijuana possession: 658,000
21. Total incarcerated U.S. population: 2.3 million
22. Total population on probation/parole: 4.8 million
23. States that could be entirely filled by all of the Americans under correctional supervision: Nevada and Kentucky
24. Official unemployment rate: 6.7 percent
25. Alternate rate including Americans who’ve given up looking for work, or have only been able to secure part-time employment: 13.1 percent
26. Number of jobs the United States is still down from 2008 employment peak: 1.69 million
27. Number of Americans who were cut off from long-term unemployment benefits at the turn of the year: 1.3 million

Redistribution stats should include the costs of state bailouts of institutions unable to price risk. Who keeps their money and who ponies up?

@ seafóid

The English dramatist Micheál Mac Liammóir (1899-1978; born Alfred Willmore) who became more Irish than the Irish themselves, is reputed to have said that America was a country you cannot tell a lie about. In 1983, the late Harvard political scientist Samuel Huntingdon wrote of the 1960s student radicals who he saw as part of a recurring tradition of American puritans, enraged that American institutions didn’t live up to the country’s founding principles: “[They] say that America is a lie because its reality falls so far short of its ideals. They are wrong. America is not a lie; it is a disappointment. But it can be a disappointment only because it is also a hope.”

Beyond the hoopla about interest rates and so on, with ageing, countries have to be prepared for rising spending demands while its mix of tradebale services and goods is what creates wealth.

The age of the big cavernous factory is over and countries do not need to have a high level of investment/output ratio as the past.

Nicolas Véron of the Bruegel European think-tank, in a paper published in 2008, provided an analysis of the FT’s top 500 global companies as at Sept 30, 2007.

Europe’s corporate landscape is dominated by old, established companies.

A look at the age distribution of the world’s 500 largest listed companies showed that European ‘champions’ are generally much older than American ones, let alone those from emerging markets. Strikingly, Europe’s corporate giants included only 12 companies born in the second half of the twentieth century, against 51 in the US and 46 in emerging countries; of these, only three were created after 1975 in Europe, compared with 26 in the US and 21 in emerging markets.

According to the Joint Research Centre (JRC) of the European Commission, over 50% of all US firms in the Top 1,000 global R&D spenders in 2009, were founded after 1975, in Europe the figure was 18% and in Japan just 2%.

Young companies are on average almost twice as research-intensive as old companies (3.3% vs 6.1%) according to the JRC. This suggests that young companies are more likely to be found in research-intensive sectors.

The dataset analysed consisted of 287 companies from the EU, 340 from the US, 199 from Japan and 174 from other countries (OC) . 51 of the EU companies, 185 of the US companies, 3 of the Japanese companies and 87 from the companies from OC are young.

McKinsey, the US management consultancy, says that for the past 40 years, Japanese companies achieved global leadership by dominating their home market, but no longer. Japan’s population is expected to fall from 127m today to less than 100m between 2040 and 2050. A declining population will almost certainly reduce the absolute level of private consumption, along with tax revenues and, potentially, overall GDP.

Austerity has not led to sustainable growth. What was the point of it ? Are we due another dose of loss allocation , this time involving the effin bond vigilantes who have been turned into Jans pussycats? Anything it takes could mean it takes a sucker to buy Italy at 150bps . If the BelPaese gets into trouble with 2 tn of sovs the IMF will not have the wonga to bail it out. Innit.

there is a song in Irish about Niamh Cinn oir and how she got Oisin to tir na nOg

Mheall í é le breathacht,
Mheall sí é le póg,
Mheall sí é gan aon agó
Go Tír na n-Óg

She lured him with beauty
She lured him with a kiss
She lured him no hassle
to Tír na n-Óg

And for Mario it would be

Mheall se iad le QE
Mheall se iad le raimeis
Mheall se iad gan aon agó
Go Deflation via DGSE

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