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By Peter W. Atwater
Thomas Piketty’s surprise bestseller, "Capital in the Twenty-First Century," has economists and policymakers focused on the further widening of income and wealth gaps, and their consequences. However, they are concerned about the wrong problem. The current popularity of Piketty's bestseller, along with Elizabeth Warren’s "A Fighting Chance" and Michael Lewis’s "Flash Boys," suggests that the public is becoming increasingly concerned with the growing income and wealth gaps. Populist sentiment and concerns about inequality are rising both in the United States and across Europe; and if we continue down this path, the political and business landscape for both regions is in for a significant shock.
Recently, I looked at how American popular interest in income inequality correlated with their level of confidence in the economy. Using Google Trends data for the search phrase “income inequality,” I compared the figures to Gallup Economic Confidence.
The results were striking.
Beginning in late summer 2011, U.S. economic confidence fell sharply and the Occupy Wall Street movement first emerged. These events brought a resurgence of public interest in income inequality throughout the fall period. Americans’ political focus changed due to this decline in confidence.
Changes in our level of economic confidence alter our interest in and concerns about inequality. When confidence is high, we are less hostile toward others who may be faring better. This perceived economic certainty brings generosity and trust. What is good for one is good for all. When we feel strong, we believe there is opportunity for everyone to succeed.
On the other hand, when economic confidence declines, we believe that opportunity is finite. We see success as a zero-sum game in which someone else’s gain must have come at our expense. They have something that should have been ours. This perception led to the Occupy Wall Street movement in the United States during fall 2011, a similar experience in Great Britain that resulted in spontaneous riots and vandalism.
In both cases, however, subsequent increases in confidence quickly restored order. The London riots were short lived, and by the end of 2011, the Occupy Wall Street camps had been cleared.
The recent spike in interest in income inequality suggests that something important has changed from the days of “Occupy” three years ago. This issue has only further intensified since last October when the government shutdown over budget disagreements had prolonged the confidence down cycle.
Income inequality is now mainstream. Where the issue was seen three years ago as a concern of a small group of tent dwellers in Zuccotti Park at the fringes of society, today income inequality is a topic for citizens all across America.
What is remarkable, however, is how little Washington and Wall Street are paying attention to the shift in mood. Both groups still see income inequality as a hot button for a small subset of Americans who have little influence. Income inequality still conjures up images of Zuccotti Park, not Main Street.
The Google Trends data suggests that this view is woefully naïve. Populism is taking hold and unless social mood improves quickly and dramatically, it will have serious implications not just for Washington and Wall Street, but also for the global economy.
With this environment, a populist like Senator Elizabeth Warren, could easily give the more politically moderate and apparent shoe-in Hillary Clinton a run for the Democratic Party presidential nomination. As a study by Alan Hall of the Socionomics Institute notes, as confidence falls, voters naturally move away from the center to both the political left and right. Political pundits forget, for example, that the Tea Party came to the fore just as American confidence was bottoming in March 2009. An even greater polarization took place in the parliamentary elections in Greece, which occurred during a period of very low confidence in 2012. Due to extremely weak social mood, there was no political center. Votes were cast across the full political spectrum with the extreme far left and extreme far right receiving large and nearly identical percentages. (See a related WPI article here.)
With popular concerns over income inequality taking hold, both Republicans and Democrats will be forced to respond.
So too will corporations. To date, most have sloughed off concerns about rising minimum wages and high executive pay. Shareholder interests have been paramount. With perceptions of income inequality now high, something will have to give.
Given current sentiments, companies will be shamed by policymakers and customers into raising wages for their lowest paid employees with the cost coming out of executive and shareholder pockets. Higher wages will be deemed “good business” as corporations are pushed into action. Just this week, Wal-Mart gave up its opposition to an increase to the minimum wage (see story here), and more than 75 percent of Chipotle shareholders voted against ratifying the company’s current executive compensation plan.
Weak social mood will also increase firms’ cost of regaining public trust. While the banking industry has already had a taste of this (e.g. BNP Paribas and Credit Suisse), non-financial corporations are likely to also face public ire as well, particularly as falling confidence increases public scrutiny. While not yet completed, the potential merger of Pfizer and AstraZeneca is already under the microscope on both sides of the Atlantic, and the sale of Alstrom energy assets to General Electric has the French government on edge.
Weak confidence and growing concerns about income inequality will also factor into corporate and individual tax rates as voters demand a more level playing field from policymakers. And it won’t be just fiscal policy that is impacted. With many U.S. voters viewing the extraordinary actions of the Federal Reserve as contributors to higher food and energy prices and the current state of income and wealth inequality, monetary policymakers could find themselves constrained by public sentiment.
These experiences are by no means unique to the United States. A severe drop in economic confidence in the Middle East in 2011, driven by high food and energy prices, led to the Arab Spring. The recent social and political unrest in Ukraine too has its roots in an extreme decline in confidence.
Based on what I see, weak economic confidence could easily wreak havoc with this week’s European elections. This week The Economist shared:
After five grueling years, many of Europe’s citizens must wish they could dispatch the entire political class to hellfire and torment. As it happens, the ballot for elections to the European Parliament from May 22nd to 25th does not include that option, so a record number will probably not bother to turn out. Many of those who do will back populists and extremists. Broadly anti-European parties may take well over a quarter of the seats. The French National Front, the Dutch Party of Freedom and the UK Independence Party are likely to win their highest vote ever. This will cause domestic political ructions, but it is also an indictment of the European Union, a project that millions of voters have come to associate with hardship and failure.
If these weak confidence-driven sentiments are true, incumbents on both the left and right across Europe face a very tough political future. When confidence is weak we oust incumbents indiscriminately. European incumbents aren’t the only ones who should be worried. According to a recent Gallup survey, thanks to weak social mood, U.S. voters think only 22 percent of Congress members deserve re-election.
To be clear, none of what I have presented above is meant as punditry for or against on the matter. I am only trying to share what history, socioeconomics, and my research in confidence-driven decision making suggest may occur from here.As I noted above, a sharp rise in confidence will reduce our zero-sum thinking and our concern about inequality. Just like rising confidence led to the end of “Occupy,” positive economic sentiments will lead to a more moderate political environment and greater global commercial and political integration.
Still, if the strong sales of Mr. Piketty’s book surprised the publishers at Harvard University Press, Washington, and Wall Street, then many policymakers across American and around the world may be equally blindsided by what unfolds should mainstream confidence in the economy further deteriorate.
Peter W. Atwater is the president of Financial Insyghts LLC and the author of Moods and Markets. An adjunct professor at the University of Delaware, he speaks and writes frequently on confidence-driven decision making.
[Photos courtesy of Darwin Yamamoto]