Lisa Adkins is the head of the school of social and political sciences at the University of Sydney.
Martijn Konings is a professor at the school of social and political sciences at the University of Sydney.
They are the authors (with Melinda Cooper) of “The Asset Economy,” available from Polity later this year.
The COVID-19 crisis has put a spotlight on the dramatic growth of inequality, with the wealthy able to take refuge in holiday homes while many workers living paycheck to paycheck cannot afford to socially isolate. Somewhere in between are middle-class families that have been mostly able to ride out the storm by staying inside but at the same time are becoming increasingly aware of how precarious their security — financial and otherwise — really is.
Over the previous decade, no book has done more than Thomas Piketty’s “Capital in the Twenty-First Century” to bring the question of economic inequality back on the public agenda. At the core of Piketty’s argument is the famous formula “r > g,” which he takes to be the central law of capitalism. Now emblazoned on t-shirts and coffee mugs, the formula expresses the idea that, in the absence of remedial state intervention, the return on capital (r) will grow faster than the economy (g).
Piketty tells the story of the runaway (and accelerating) growth of wealth at the very top, which is not in doubt. As governments eased post-World War II financial regulations over the past few decades, unrestrained capitalism created returns on assets that grew at far higher rates than GDP.
Where Piketty’s story is less convincing is in explaining how this trend continues in spite of growing discontent and widespread awareness of its harmful consequences. Piketty claims that the concentration of private wealth has led to the growth of a plutocracy: the concentration of political influence in the hands of the super-wealthy. But this isn’t an explanation; it just raises other questions, like why do electorates keep voting governments into office that facilitate this concentration of wealth? It is strange to see an otherwise politically middle-of-the-road scholar like Piketty embrace what is essentially a crude Marxist understanding of the capitalist state as a plaything in the hands of the wealthy.
The sustained acceleration of wealth at the top in a democratic society is only comprehensible if we recognize that this trend has been embedded in a wider middle-class politics that has come to center on housing and, in particular, property inflation.
During the mid-20th century, Anglo-American countries, in particular, managed to promote widespread homeownership through a variety of policies. This Keynesian model of capitalism brought property ownership into reach for those without access to inherited wealth. Being a wage-earner (someone who, in Marx’s famous phrase, has nothing but his labor-power to sell) was no longer a condition that condemned people to a marginal existence based on getting by from day to day. It was now a social status that could give people a concrete stake in the capitalist social order. Although this state of affairs was characterized by pernicious gender and racial hierarchies, the creation of a broad-based middle class should nonetheless be seen as a unique historic achievement.
The Keynesian model worked on the basis of steady annual wage growth. As the post-war era progressed, this became associated with consumer price inflation that eroded the value of assets. Neoliberalism always had its own, distinctive middle-class politics that centered on the idea of an ownership society. The supply-side doctrine of trickle-down economics was only the crudest expression of an ideology of democratized capital that was integral to the entire project of neoliberal capitalism. Inclusion in the benefits of capitalism was to come not from state protections and the power of unions but from full commitment to the spirit of entrepreneurialism.
British Prime Minister Margaret Thatcher was among the first to understand the emotional appeal of that prospect when, in the midst of her attacks on unions and the public sector, she offered working-class residents the opportunity to buy the homes they had until then rented from the public sector. This, it was hoped, would serve as a buy-in to the psychology of investment and encourage ordinary people to see themselves as asset-holders rather than workers.
The ideology of democratized capital found expression in three key areas: pensions, human capital and housing. The risks associated with pension privatization were never lost on people, but the upward march of stock markets for much of the 1990s refocused attention on the seemingly boundless opportunities offered there. But as stock markets fizzled in the early 2000s, dreams of pension-fund capitalism largely faded along with them. Dreams of human capital too reached their zenith in the 1990s, when “third way” thinking in the context of the “new economy” held out the prospect that highly skilled knowledge workers could monetize their educational assets.
It is really only in the area of housing that the promise of democratized asset ownership found lasting traction. Success in this area derived in large part from the fact that it could build directly on the legacy of democratized homeownership left by the Keynesian era. Liberalizing credit markets appeared to be the most readily available way to push homeownership rates up further. The upward pressure on house prices that this entailed initially led primarily to a democratization of the “wealth effect,” which also became an important source of economic growth.
Over time, it became tempting for governments to respond to each economic slowdown by boosting the housing market, in the process creating an economy that was more and more dependent on stimulus from the wealth effect of asset inflation. As other flagship projects of the neoliberal era floundered, the politics of middle-class aspiration came to increasingly revolve around homeownership.
The home became an asset rather than simply property — an investment that was expected not merely to generate returns but also capital gains. As people with stagnant wages and unstable employment bought houses with large amounts of debt, it became more and more important for those houses to appreciate in value. At least initially, this wealth effect helped to compensate for stagnant wages. The Keynesian household became a Minskyan household, increasingly dependent on the speculative returns on its investment. Capitalism itself transitioned to a Minskyan phase, where the continued appreciation of an asset was a precondition for being able to finance it.
But of course, the very logic of credit-driven home purchases pushed prices up to heights where it was increasingly difficult to enter the market. Property inflation benefits the already propertied and excludes aspiring middle-class households from the housing market. In the U.S. as well as in other countries, including the U.K. and Canada, homeownership rates show a particular pattern over the period from 1980 to 2020 — an upward trend followed by a downward trend. Property inflation over time eroded the possibility of buying a home on the basis of a wage alone. In many large cities, it is virtually impossible to break into the property market just on the basis of an average wage.
The crisis of 2007-8 did significant damage to the reputation of housing as a democratic generator of wealth, but things have become significantly worse since then. Defying widespread expectations, housing markets in large urban centers rebounded with a vengeance. This has raised the bar for entry dramatically: The same salary that would have allowed someone to buy into the property market 10 years ago no longer allows that, because in some places, property prices have doubled in the meantime.
The post-crisis era has also exposed a generational rift. The consequences of property inflation are felt particularly acutely by millennials. Many members of that generation played by all the rules yet, by their mid-20s, still find themselves without any real prospect of a middle-class existence — unless, of course, they have wealthy parents willing to help. Because property gets passed from one generation to the next, it makes little sense to frame the problem in terms of boomers against millennials. The millennial phenomenon is so important because it is in that age cohort that the fault lines produced by four decades of sustained property inflation are becoming highly visible.
This has hardly gone unnoticed, but widespread concerns have yet to translate into significant policy changes. Policymakers and politicians are increasingly concerned about issues of housing affordability, but any policies designed to address the problem are inevitably double-edged: Measures, like lower interest rates, that bring property ownership into reach for some simultaneously push prices up further. In other words, we face a situation of policy lock-in, whereby policymakers can only improve things in the short term by making them worse in the long term.
Academic researchers and public commentators have had a difficult time recognizing the logic at work here, because they tend to think of property inflation as a macroeconomic phenomenon, and they concentrate on the question of whether or not it is sustainable. That focus diverts attention from the distributional aspects of housing inflation and, in particular, the fact that it has built a new class structure that revolves around asset ownership instead of employment. Several decades of asset inflation have produced a group of property owners who are deeply invested in the promise of continued property inflation but whose ranks are less and less open to newcomers. Public policy has become locked into a pattern of catering to a contracting middle class.
The middle-class politics of asset democratization ended up undermining the conditions of its own viability. The refusal or inability to recognize this is a major factor in enabling the ongoing concentration of wealth at the top. For instance, quantitative easing is increasingly portrayed as daylight robbery perpetrated by the asset-wealthy on the asset-poor. But while this may be an appropriate way to characterize some of the distributive effects of this policy, it significantly underestimates the complexity of its causes and sources.
In a system that has become structurally dependent on asset price inflation, propping up asset prices is just the most readily available way to keep the show on the road. Paradoxically, the fact that it is increasingly like pushing on a string, generating fewer trickle-down effects with each round, makes it only more important to push harder, just to make sure that at least something trickles down. Unless we recognize this logic, the project of middle-class politics will continue to enable and legitimate the runaway wealth of the one percent.
All this builds up to a different understanding of what is happening than Piketty’s emphasis on the laws of capitalism and the creation of a plutocracy. Instead, what we are witnessing is the exhaustion of a particular kind of middle-class politics.
The “good” news here is that there is no reason to assume capitalism has exhausted its potential for adaptation. In that sense, the currently fashionable idea that capitalism has entered a phase of “secular stagnation” is off the mark. It is essentially a variation on Piketty’s blunter r > g formula. And to say that “capital” has run out of steam is to mistake a socio-economic system for a natural fact.
The “bad” news is that the political dangers seem far more acute than many progressives assume. They tend to think of the middle class as a pillar of liberal democracy. But despite abundant historical evidence and many reminders in the present, they are not always alert to its dark side. In recent years, we have been warned about what middle-class constituencies are capable of when they find their aspirations systematically frustrated. The tendency of progressive American media outlets to present the election of Donald Trump as the most extreme event that could ever befall a democratic system is unfortunate in this respect. What we are seeing may well be the start rather than the culmination of populist politics. Similarly, the growth of an increasingly serious fault line within the millennial generation around access to wealth seems entirely possible.
It is in this general context of political forces and economic parameters that COVID-19 hit the world. The tremendous threat to the economy posed by a wholesale lockdown made many Western leaders reluctant to move in that direction proactively. Indeed, they were far more alert when it came to managing the economic fallout as its contours became visible. Even as Trump was still playing down the public health aspect of the crisis, he supported a bailout of historic proportions. At the same time, the Federal Reserve stepped up its asset purchases, bringing the scale and scope of quantitative easing to new heights.
The U.S. $2 trillion relief package works largely according to the logic of trickle-down economics, offering financial help to embattled firms in the hope that this will permit and induce them to maintain employment. Other countries, including the U.K. and Canada, have guaranteed wages directly. Such moves have fueled hopes for a more enduring revival of Keynesianism or even for a more radical program of progressive economic policy that would include “bailouts for the people” and nationalization of key industries. At a time when even the pope calls for universal income guarantees, such hopes do perhaps not seem entirely fanciful.
But even though crises widen the horizon of political possibility, nothing will happen without sustained pressure to push the political system in that direction. We should not forget how in the aftermath of the 2008 financial crisis, the hoped-for return to Keynesianism was quickly transformed into virulent austerity politics. The political stakes are even higher this time. If the post-COVID era sees another wave of asset inflation driven by quantitative easing and associated policies, and if homeownership remains the only realistic way for ordinary people to buy into that logic, we are likely to see continued social polarization.
Before the coronavirus crisis hit, the overriding concern among progressives had become ousting villainous characters: the Trumps and Boris Johnsons who embody the spirit of elitist entitlement. But when pursued on its own, this effort is a dead end. Simply replacing Trump with Joe Biden will not do anything to revitalize middle-class politics or to reverse the concentration of wealth at the very top. And in such a context, his more civilized demeanor will do nothing to stem the tide of political polarization that is driven by structural economic trends. What is needed is a new politics that breaks our addiction to asset inflation.