The threat of a recession: inequality worsens in crises and is not compensated when the economy grows

An economic consensus runs through the world like a chill: the agreement between central banks, orthodox economists and organizations such as the International Monetary Fund (IMF) on taking "aggressive" measures to combat inflation, even if they cause recession and unemployment. Stopping fueling price increases is the priority of these institutions, among which is the European Central Bank (ECB), which began to increase official interest rates in the eurozone in July and will continue to do so at the meeting held on September 8 its monetary policy committee.

This "cooling" of the economy by tightening financing conditions implies serious social risks, since it directly affects family consumption, business investment or the spending capacity of administrations in a context of energy crisis and geopolitical uncertainty due to the Russian invasion of Ukraine.

Above all, in states like Spain, which suffers from a marked fiscal imbalance (between public income and public spending) and a structural unemployment rate above the average of the other large economies in the eurozone. And with the condemnation that inequality between rich and poor grows more in crises than it decreases in stages of economic growth, as demonstrated by the professor at the University of Alcalá, Olga Cantó, and that of UNED, Luis Ayala, in the first chapter of the report "Inequality and social pact" of the Social Observatory of the Caixa Foundation.

Thus, the threat of "self-inflicting" a recession, a controlled slowdown, as a recipe for price stability is especially "painful" for the poorest families in an inflation crisis –according to the qualification that the president of the Reserve himself Federal (Fed) of the United States, Jerome Powell, used to describe his 'road map' for the coming months–. On the one hand, these families have been suffering greater damage from price increases because they spend more of their budget on energy and food –up to 25% of the total income of the 25% of the poorest households–, which are services and products that have increased the most, while wages remain stagnant.

And, on the other hand, the increase in inequality is primed with these same families. "The evolution of income distribution in the last decade and a half has been marked by the worsening of the economic situation of households with [no solo tienen en cuenta los salarios] lower. In contrast to this evolution, in that same period the income of the highest income households performed significantly better than the average", explain Olga Cantó and Luis Ayala.

"Especially notable was the drop in the lowest incomes due to the Great Recession [2008], which hampered his subsequent chances of recovery. Spain, without being where the average income of the population fell the most, was the EU country where the income of the poorest 10% fell the most compared to the richest 10%", continue the economists, who stress that "from the beginning of the crisis in 2008 until the recovery in 2014, all income groups saw their income fall, but these losses were greater for the poorest groups. The subsequent recovery until the pandemic made it possible to moderate them, although growth was unevenly distributed, benefiting higher income groups more.

Currently, "the eurozone is entering a recession. The consensus has changed from 'there will be no recession' to 'the recession will be shallow'. The next thing is: 'we are headed for a deep recession.' orders and inventories of the industries in the PMI indices. The further east you go, the worse it gets..." warns Robin Brooks, chief economist at IIF.

In this context, Spain appears as the economy with the least weakness. this very friday, Bank of America agreed with the vision of Bank of Spain or the Government and trusted that our country will avoid recession due to the explosion in demand in the face of the first tourist season without restrictions due to COVID since 2019, and the boost that the stimuli of the pandemic and those that have now been deployed against the impact of the Russian invasion of Ukraine, despite the blow of inflation caused precisely by the energy crisis exacerbated by the war.

Our country leads the growth estimates for the end of 2022 and 2023 in the eurozone, also because the rebound is delayed due to the importance of tourism and services in general in total GDP, and reconstruction will not be completed from the shock of the pandemic until next year or 2024, while Germany, France or Italy have already achieved it.

"Except for the deep and prolonged crisis of the seventies of the last century, in all periods of economic contraction, inequality grew considerably. In the expansionary stages, however, with the exception of the eighties, inequality decreased only slightly", observe Olga Cantó and Luis Ayala in their report.

"In the two periods cited as exceptions, the reason for this more moderate behavior of inequality lies, above all, in the increase in the redistributive capacity of the tax and benefits system. The role of this system has been different in each phase In the 1980s, it had the great containment effect already mentioned; between 1994 and 2001, on the other hand, it had an effect contrary to that of the dynamics of reducing inequality in primary incomes; finally, between 2013 and 2019, its incidence was almost neutral", develop these experts.

Regarding the moment closest to the present, "the fall in income since the start of the pandemic invites us to anticipate a significant effect on the distribution of income. The restrictions on activity exposed the weaknesses in income from work, the main source income of households. The different possibilities of access to teleworking exacerbated the salary differences between the most qualified workers with more stable remuneration and those with less qualification. The pandemic has also shown that a high number of households live day to day and with many difficulties in meeting unforeseen expenses", they add.

"The projections of the European Commission show that Spain is the country of the European Union (EU) where inequality would have increased the most once the changes in the system of benefits and taxes were introduced during the pandemic", conclude Olga Cantó and Luis Ayala.

"With data immediately prior to the start of the pandemic, Spain, along with some Eastern European countries, remained among the EU countries where inequality is greatest. There is some consensus that the main reasons for this problem are the structure productive sector –with a lower weight of high-tech branches than in higher-income European countries–, the high level of unemployment, the notable incidence of low-wage work and the small size of the system of taxes and monetary benefits", they explain .

Crucial measures to respond to this threat involve achieving a rental agreementas it is called the distribution of the damage of inflation with the limitation of business profits [la capacidad de obtener ganancias de los ingresos crecientes por las subidas de precios] and salary increases. Or by executing the advertised new increase in the Interprofessional Minimum Wage (SMI).

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