Downing Lecture 2012 – GFC and Household Incomes

I attended my first Downing Lecture on Thursday night, and heard a fascinating speech by Professor John Micklewright, a research fellow from the Melbourne Institute. It was an interesting account on how the GFC had affected household incomes and income distribution across OECD countries. This blogpost will focus only on Professor Micklewright’s research on household incomes, starting with his findings and then giving you my response and reaction to his research.

His research concluded that despite the sharp downturn in the global economy (global GDP falling 5% from 2007 to 2011), there was very little change in real household income in the short run (defined in this case as the first 4 years since the crisis). In fact, some countries experienced growth in household income, with US, Belgium, Greece and Spain experiencing 3-4% household income growth. Ireland was the most extreme example, with 13% fall in GDP, but no fall in household income in the same period.

He gave two main arguments as to why this has occurred. Firstly, across all countries, government support filled the income gap.  Higher welfare spending, expanded and generous state benefits, and lower income and consumption taxes contributed over 2% to real income growth worldwide. Secondly, the report analysed household income, and not individual income. The report found that, across all OECD countries, the percentage of households where no resident had a job was unchanged in these 5 years. Employment falls in male-dominated sectors, such as construction and manufacturing, were compensated with rises in female employment (10/21 OECD countries saw female employment rise during GFC). Rises in youth unemployment, which reduced youth incomes, were tempered by rising employment to those over 55 (who could earn higher incomes to compensate).

Professor Micklewright predicted that the medium term may bring a different outcome, with government policy prolonging income growth in the next 5-10 years. High government debt, which resulted from poor fiscal positions pre-GFC and large spending programs during the crisis, has meant that governments are now looking to reduce expenditure and raise taxes to improve their unsustainable fiscal positions. Across the OECD, governments are cutting welfare entitlements, public sector wages, pensions and health spending, whilst also raising consumption and income taxes. The report predicted that these measured combined will have a negative effect on individual income across all genders and ages, consequently stagnating or reducing real household income.

After the lecture, I had a great discussion with Professor Borland about the impact of governments filling that income gap in the short term. The most interesting point that was raised was whether personal utility would remain the same regardless of the avenue which income was derived. I would argue that a person would yield lower utility from income claimed through the government welfare system as opposed to income personally earned from working. This is very similar to the argument surrounding the use of food stamps; the humiliation associated with using food stamps as opposed to actual currency to purchase food means the person gains less utility from the food purchase and consumption than they otherwise would.

The lecture also raised a serious question surrounding government fiscal intervention: did governments overstretch in their fiscal support to households? In hindsight, given the current austerity programs being implemented across the Western world, many people would argue that they did – and this of course could be true. Indeed, hindsight is a wonderful thing. I would hesitate to agree with those sentiments purely due to the unforeseen circumstances occurring right now in the global economy. When proposing their fiscal stimulus packages in late 2008, not many governments were predicting that 4 years later we would be experiencing meagre growth and the possibility of a double-dip recession. The previous two recessions in the early 90’s and early 2000’s saw a quick rebound in global growth. Hence, governments saw their expansionary policies as short term measures that would be repaid once private sector growth recovered and tax revenue rebounded. Unfortunately, the rebound never came, and as Professor Micklewright predicted, this will have painful negative impact on global household income in the next few years.

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 The audio of 2012 Downing Lecture is now available – you can listen to it here: http://www.fbe.unimelb.edu.au/alumni/past_lectures.html