Fiscal withdrawal and real wage repression: a stock-flow consistent analysis in the context of the Global Financial Crisis

While the 2007-2009 global financial crisis (GFC) began as a localised financial disturbance due to the collapse of the US real estate boom, it was quickly transformed into a global economic downturn due to the interconnectivity of the international financial system. Although many commentators have focused on the weaknesses of the "originate-and-distribute" model of securitisation as the main culprit, there are two deep-seated factors that are often overlooked. First, the wage share of national income has plummeted in most advanced industrial nations. Accordingly, these nations have increasingly relied on the unsustainable growth of credit-driven consumption to maintain rates of accumulation. Second, neoliberal policies of fiscal withdrawal have destroyed real wealth and forced non-government sectors into deficit. This study examines these aspects of the crisis by explaining how they can be embedded within a stock-flow-consistent (SFC) modelling framework (Godley and Lavoie, 2007). In addition it suggests ways that Minsky's analysis of Financial Instability can be incorporated into the proposed SFC model.