Sunday, February 1, 2009

Recession and redistribution

We're in the middle of the deepest recession since 1982/1931* (*choose your preference) and it's all bad news. Rising unemployment, collapsing house prices, falling output. What could possibly cheer us up?

Well Dean Baker has an interesting line on this: the recession is redistributing from the rich to the rest. Baker's argument refers to the United States, but works equally well for Britain.

The basic point is that the destruction of paper wealth mainly harms the very wealthy - since they have most of the wealth - and affects ordinary people rather less (unless they need to sell a recently bought house, or are just about to retire). The $14 trillion of wealth destroyed by the financial collapse (falling property prices, share prices and bond yields) means that the holders of wealth lose $14 trillion worth of claims on what the economy actually produces, leaving more of it for the rest of us.

A second redistributive dimension of the recession is that real wages - for those who have not been unlucky enough to lose their jobs, ie most of the labour force - have increased. Nominal wages are notoriously 'sticky' - some vulnerable workers may take pay cuts, but most will simply be looking at smaller, or no, wage increases. This means that most workers will have the same nominal wages as before, but lower prices, as the recession pushes down a range of prices and forces all kinds of producers and suppliers to offer big discounts. In other words, higher real disposable wages.

Add declining - correction, plummeting - interest rates, which reduce many ordinary homeowners' mortgage repayments by significant amounts, and we find that probably most of the British population is actually better off than six months back. The value of our houses has fallen, but they are the same houses, and are costing us less to maintain than they were before the recession started. Unless you need to sell, why worry?

So, is recession a good thing? Well, the downside is that the losers - those who lose their jobs or businesses and therefore take a real hit on income - are very often already in the lower income groups and can barely afford this enforced leisure. Some of the more vulnerable may turn to crime, making us all less safe. Also, the pervading uncertainty affects us all, so that we cannot really enjoy our newfound prosperity because of the quite rational fear of losing it through involuntary unemployment or bankruptcy. And of course, GDP has fallen, so there is a bit less output to go around. But just as the boom was a bit of a confidence trick, so is recession - most of us were not really that much better off before, nor much worse off now.

In any case, one good thing to come out of all this is the end of the fabulous wealth enjoyed by some on the basis of 'fictitious profits' (to use Richard Lambert's phrase), and, hopefully, an end to the myth that 'dealing' is any kind of substitute for production of goods and services that people want and need.