Poorer than their parents? The Mc Kinsey Report and the 1% economy

What kind of society are we dealing with nowadays? What is the current economic system? Is it providing opportunities for the future? The story of the last thirty years shows us deep changes that affect our daily life. The Mc Kinsey Report is a further proof of the model that is coming out in the most developed countries and the forecasts for the future are not optimistic. The aim of the report is to demonstrate the basic aspects of the economic system and the relevant social consequences in the future society of the top twenty-five economies.

Most people growing up since World War II in advanced economies have been able to assume that they and their children will be better off than their parents and grandparents, and for most of the time that assumption has been correct. This positive income trend came to an abrupt halt in the past decade. The Mc Kinsey report shows that in 2014, between 65 and 70 percent of households in 25 advanced economies were in income segments whose real market incomes, from wages and capital, were flat or below where they had been in 2005.

Usually, to discover the roots of the current system, most of the economists and analysists find the starting point in the eighties. Those years, actually, signed by the presidencies of Ronald Reagan and Margaret Thatcher, brought important changes in the political and economic system. The dominant neoliberalism of the Chicago School and Milton Friedman believed that the economic recipe was made of some decisive policies: cutting taxes, lowering public expenditure, privatizations and financial liberalizations. Here a simple evidence of what we are saying: in 1985 the overall value of financial derivatives was slightly more than 1 trillion dollars, in 2007 the value overtook 600 trillion dollars and in 2014 it was still an amount nine times higher than the world GDP. The basic idea was that the whole population could benefit from a quantitative growth shown by an increase in the GDP value. Recently, after the financial crisis of 2007-2008, suddenly we discovered that the ideas we believed in turned out to be not the recipe for the worldwide well-being and that the model we are building is not sustainable. Moreover, with Thomas Piketty and his “Capital in the 21st Century”, we discovered that in the last thirty years the financial gains (“r” in his book) were major than “g” (economic growth) building that system defined by Oxfam as “the 1% economy”, reminding us of the fact that the first 1% accumulated more wealth than the rest of the world combined together. Now, let us see the main causes of the current situation.

First, the labour market worldwide played a key role. As many things regarding the world of economy, many analysists often forget to underline the fall of the share of national income that is paid to workers, the so-called wage share. Almost everywhere, the decline of wage share has taken place despite rising productivity, suggesting a disconnect between productivity and incomes and how the pure quantitative approach can turn out to be not the right one and the panacea for all the problems. Thus, better performances in the labour market can be found in the Northern Europe, particularly in Netherlands, Denmark and Germany. In what is considered the first country in Europe, the reforms implemented by the former social democratic President Gerhard Fritz Kurt Schröder played a key role. The mentioned countries, also, were able to manage the different treatment regarding permanent and temporary work, differently from what happened in the countries of Southern Europe, where the so-called flexibility produced inequality and forms of relative poverty, as known by the definition of the World Bank.

At the same time, the reforms of the pensions system were not able to improve the situation and above all, they were not on the same line of the labour market’s changes. The situation ended up to produce the phenomenon known as intergenerational divide, according to which the new generations will pay the costs of the prolonged pensions paid in the past without the opportunity of benefiting a fair system for their future treatment. What can be taken as example of the worst case in this field? Naturally, Italy and the report is eager to stress the decrease of this worrying framework caused by the reform implemented in 2012 by the former Minister Elsa Fornero.

What has been done in order to face the most dramatic economic crisis since the Second World War? Previously, all the works of the Mc Kinsey Global Institute (MGI) have laid out that long-term productivity growth has been achieved without job losses and that technological innovation in the past has created more jobs than it destroyed. Moreover, the set of economic policies grouped under the term austerity were adopted to demonstrate the government’s fiscal discipline to creditors and credit rating agencies by bringing revenue closer to expenditure. This set of policies, originally defined by the economists Kennet S. Rogoff and Carmen M. Reinhart, may include spending cuts, tax increases, or a mixture of both. The recipe did turn out not to be successful and combined with the situation of the labour market described in previous lines and the demographic factor with a general decline in fertility rate calls for an urgent change. Among the top twenty-five economies analysed in the report, the countries of Southern Europe are the most affected by the current framework. Even an expansive monetary policy such as the quantitative easing decide by the Italian President of the European Central Bank Mario Draghi cannot be sustainable in the long term, producing the economic phenomenon described by the economists like Paul Krugman of the liquidity trap and the helicopter of money. Particularly, this thought underlines the importance of conjugating this kind of monetary policies with a correspondent increase in social expenditure, a fundamental key to ignite economic growth. As a consequence, the report defines urgent the need of reconsidering the market of bond investments and to start a decisive process of public debt deleveraging: so far, nothing similar has happened in countries affected by this economic burden (again Italy as core case) while countries like Sweden with a different set of policies regarding social welfare, public expenditure and taxes can be seen as example with the following public debt: 42% in 2015, only a few more points than the 40% registered in 2008. The most dangerous result can be the so-called secular stagnation as described by the American economist Larry Summers: a situation of slow growth that will take more than ten years to bring a full economic recovery with the loss of entire generations.

Is everything lost? What can be done? In the final pages, the report is punctual at analysing the possible remedies by indicating a set of significant policies, which would mean a change in the current economic paradigm.

First, politicians, analysists and economists have the duty to focus on the connection productivity- inequality and improve the measurement of flat and falling incomes. There is the need to study initiatives to provide more opportunities for low and middle-income households to find work and at the same time new ways to rekindle economic growth and broadly support business expansion and job creation.

Nowadays, the world of economy is considered as something distant and far from reality. Sometimes, we tend to believe that we take our current situation as something coming from outside, external factors that affect and deeply change our daily life. The reality is different: politics and policies can make a difference; this is the last hope of the report. In the book written by Paul Krugman End this depression now! the economist affirms that the most important and dangerous consequence is the loss of entire generations, something that will never be forgiven in the future. In the meantime, time is going by and people do not see themselves at the centre of future significant changes. Something must be done. The alternative of remaining stuck in current the status is simply too dangerous.