The pendulum between capital and labour
The Great Financial Crisis (GFC) and the corona crisis will have a major impact on the structure of the economy. It will cause the capital-labour pendulum to swing in favour of the labour factor. Over the past forty years, the share of corporate profits in the economy has risen continuously. At the same time, the share of compensation from the labour factor has fallen. In addition, income inequality and the skewed distribution of wealth have increased. This is particularly true in emerging markets and Anglo-Saxon countries. Continental Europe never really believed in the neoliberalism of Thatcher and Reagan and the welfare state put a brake on neoliberalism. In emerging markets, the general level of prosperity has risen so rapidly that the skewed distribution of income is not yet seen as a problem, but in the United States and the United Kingdom, stagnating incomes are causing increasing unrest. Before the GFC, inequality was masked by rising nominal incomes and by households going deeper into debt to maintain their living standards. After the GFC, this became more difficult. As large groups of voters are involved, it is natural that this trickles down to politics. Post-Corona, politicians have therefore ensured that the burdens of the last crisis are not borne by the lowest incomes. The economy is being stimulated to the extent that even the last unemployed person gets a job. Whereas after the GFC governments started to economise, now the fiscal tap is wide open. There has not been such a large fiscal stimulus package since the Second World War. A large proportion of the American unemployed now has a higher income than when they were working. There is a great deal of pressure for a higher minimum wage and many companies are raising wages on their own initiative. Not only because of the many vacancies but also because of reputation risks. Social media is more powerful than trade unions. The G7 has decided that companies worldwide must pay at least 15 percent tax. The government is demanding a bigger role: more regulation, bigger budget deficits and higher marginal tax rates. This contributes to the fact that the share of the labour factor in the economy will increase in the coming years.
The last time labour began to gain strength was during the Great Depression of the 1930s, mainly through the trade unions. This was interrupted by the Second World War but continued throughout the 1950s and 1960s. The peak was reached in 1979. At that time, union power, excessive regulation and economic stagflation left little profit for the business. In 1980, Paul Volker’s war against high inflation began and Ronald Reagan’s opposition to the power of the trade unions began. Deregulation was the motto from then on. It was the beginning of the era of increasing corporate power. Since then, automation, the waning power of the trade unions and globalisation have meant that an ever-greater share of the market has gone to companies. Supply-side reforms, deregulation, privatisation, smaller government, lower taxes, low inflation, globalisation and also the peace dividend have all led to excellent returns on both the stock and bond markets in the last 40 years.
Now we are at a point where the unequal balance of power gives such an advantage to business that this inequality threatens the system. The pendulum has stopped swinging in favour of business and has begun to return to the labour factor. In the United States, support for trade unions has risen to the highest level in the last fifteen years. It is mainly young, multicultural, unemployed millennials who are joining unions. They cannot afford to pay off their student debt and buy a house. Growing inequality, pension insecurity and rising healthcare costs create a sense of economic vulnerability. Strikes are back, and not just for more pay, but also, for example, because a company is not committed enough to the energy transition. Millennials have strong opinions on major social issues. They and other employees are increasingly making clear to management what is and is not a responsible way of doing business. Especially in the knowledge economy, companies are nowadays confronted with petitions, demonstrations and pseudo-strikes. The public reputation of a company in the field of social issues such as climate change, equal opportunities for men and women, equal ethnic opportunities, relations with the military and, for example, sexual harassment in the workplace is also becoming increasingly important. Employees are voicing their opinions on questions relating to company values and investment decisions and, thanks to social media, are gaining increasing power.
The consequences for investors of the pendulum swinging from capital to labour are great. Bigger government, more regulation, less globalisation and higher taxes are holding back productivity development and thus economic growth. This brake on the supply side of the economy leads to higher inflation. In the United States, inflation has been below 2 percent for a long time and, even after the temporary effects resulting from the corona crisis, there is a good chance that inflation will remain above 2 percent thereafter. It is possible that inflation will continue to rise above 2.5% on a structural basis. This extremely stimulating government policy also ensures that economic cycles run more quickly. Now there is plenty of stimuli to achieve full employment. A pressure cooker is being used to reach that point. This means that soon the tough measures will have to be taken to get inflation under control and there is a risk that this can only be done by causing a recession. The advantage for Europe is that they have never really embraced neo-liberalism. Where Europe lagged behind 40 years ago, it is in the lead in this new Keynesian era. Rest assured, we are only at the beginning of the pendulum swing from the capital to labour. We are not directly in the stagflation of the 1970s. The fifties and sixties were fine for investors.
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