A political rebalancing may be the key to helping us get over the culture wars

Democracy is supposed to be messy as different groups within society argue over how to best look after everyone’s interests. But politics nowadays is chaotic and particularly acrimonious without serving much purpose. The timing is particular bad as major developments such as automation and globalization have been reshaping the economy with some benefiting while others miss out. Despite arguments over culture issues dominating, relief will only come when the root causes of conflict, which often relate to the economy, are dealt with. For this to happen, politics needs a find a new balance to offer up a genuine choice for voters.

The gains from economic growth in the post-war years has been parcelled out between business and workers with political parties representing either side. The competing interests would balance each other out, ensuring moderate policies with a wide degree of consensus. Neither side would push too hard for their own interests as that would potentially damage the conditions necessary for the economy to grow. But this political comprise relied on prospering Western economies without the challenge of global competition.

Changes over the past few decades have seen the gradual dismantlement of the old political system. Politics shifted to the right as pro-market politics became increasing popular and the scope for government action has correspondingly been limited. Without being able to rely on proactive government policies, parties on the Left became more business friendly rather than potentially remaining out of power. This shift meant that the Left have had little to offer their traditional working-class voters and instead took up the cause of minorities around issues of race or sexual orientation.

The loss of a champion for their economic interest has come at a bad time for the working class who have been hit hardest by automation and globalization. These developments have eaten away at the manufacturing which had been the main sources of employment, with few options for its workers to find work on similar pay. The deterioration in the economic circumstances were concentrated in areas outside of the bigger cities and have decimated entire communities. Along with the economic hardship, there is a sense that their way of life is also threatened by a growing number of immigrants that come as part and parcel of globalization.

Despite their economic decline, those who feel as if they have been left behind still have their political voice. The sheer number of people who feel at odds with current economic developments gives greater impetus to their frustrations. It has been parties on the Right that have been more success in winning over this new group of voters. With government action curtailed within the current low-tax climate, the Right have promoted identity politics with the feel-good factor of calls to “Make America Great Again” or to “take back control”. These rally calls have the benefit of being relatively cheap – neither costing much or having too much of a negative effect on the economy (in the short term anyway).

Yet, as an economist, it seems strange that those suffering at the hands of economic shifts look for relief in claiming back losses in cultural terms. Pushing back against change may give a sense of empowerment but will inevitably ring hollow unless it is followed up with improvements to material circumstances. And battles over culture are essentially zero-sum gains where wins by one side can only come with losses for everyone else. Economic contests are different in that gains from economic growth can be parceled out as long as the economy continues to grow.

What would potentially break this impasse is if cultural and economic interests were to line up to be represented within the political system. If groups are losing out economically and are averse to social change, their views should be ideally be represented by a party pushing for a slower pace of change and more sharing of economic gains. This gradually seems to be happening as the Right drifts towards a coalition of the conservative white middle-class supporting a religious and nationalist view of the world. The Left have shifted to representing minorities and cosmopolitan voters who thrive within an open and inclusive society.

This realignment is being impeded by the old battle-lines drawn up between the Left and Right. But perhaps the main sticking point is the support of the wealthy and business. While likely to benefit from an open economy, both companies and the rich prefer lower taxes which keeps them wed to parties on the Right. Both business and the well-off seem to be thriving irrespective of the political turmoil, with corporate profits and the biggest personal fortunes at unprecedented highs relative to the rest of the economy.

The main agitation for change being funneled into support for populists which have been mostly on the Right but also increasing on the Left. The demise of the center in politics may be because mainstream parties are muddled up in terms of what and who they represent. As a result, politics has become increasing distorted with right-wing politicians, such as Donald Trump or Boris Johnson, not being particularly business friendly, while radicals on the Left such as Bernie Sanders or Jeremy Corbyn not having the support of working-class voters. Without politicians better reflecting the different interests within society, democracy is unlikely to find any balance.

We seem to be working longer even though many don’t need to

Time and money – two things that we can never seem to have enough of. Economic theory suggests that we have the ability to choose between the two in terms of coming up with our own mix of work and leisure. As we earn more, it would be expected that people would also want more time off, but data suggests that even those earning big pay packets are working longer. Is the lure of being able to earn more and more likely to see us forever stuck at work?

We all need to work to provide ourselves with food and a roof over our heads. But few of us want work to be all-consuming so that we don’t have time for anything else. The balance between time and money has been mediated through the 40-hour week even though there are many that work overtime as well. Lots of jobs offer flexibility in terms of working hours, but uptake of “flexitime” seems to be limited and the nine to five schedule continues to dominate.

If we continue to work a full working week and more, economic theory suggests that we prefer money over time. This seems even more true for those earning more who tend to work even longer hours than the rest of us. In high-paying work such as law, consultancy, or finance, studies show that workers in the United States tend to spend at least 60 hours on the job. This would suggest that no matter how much money we earn, we still want more pay instead of opting for some additional leisure time.

Economists would counter with the argument that time-off is expensive when you are earning big money. This relies on the concept of opportunity cost, which refers to, in this case, that any time not working means forgoing all of the wages you could have been earning. Another reason for big earners being happy to put in the hours might be that the work itself is pleasurable in terms of providing challenges and opportunities to develop. If this was true, time-off is not as necessary when you enjoy what you do for a job.

Another reason that people might work more than they want to is that employers that pay well also demand a certain commitment to the job. On the other hand, jobs with flexibility seem to involve less responsibility and tend to be more clerical in nature. The higher pay may be needed to attract more talented workers as the larger scale and faster pace of global operations may demand more of employees. It also may be that because jobs offering big money are scarce enough that companies will expect their employees to work harder to keep the job.

This takes us back to opportunity cost. To work less and leisure more not only involves missing out on wages but also involves shifting to work that pays less even when on the job. The trade-off then becomes even more unfavourable. The move to a lesser role with more flexibility will also likely to be a less rewarding job with less responsibility, thus adding to the reasons why it pays to put in the hours at work. It is only after a slog up the corporate ladder (along with the build-up of skills) that more options become available to balance out work and leisure.

The rest of us (who might be able to afford more time off) seem to follow along with those earning more than us. People tend to be aspirational and look to the habits of the well-off to see how they should lead their lives (along with other things such as politics). This feeds through into our spending where we tend to buy things not only for our own pleasure but also to keep up with everyone else (known in the lingo as “positional goods”). Time to ourselves, on the other hand, is not something that we can show off like a flash car or a new kitchen. We are also devoting more money to our children to help give them a leg up in an increasingly competitive job market. Even an exotic holiday away (which looks good on Facebook) comes with a hefty price tag.

The more well-off among us can afford to buy back a bit of time in the form of hiring others, such as nannies or cleaners, to do tasks that we don’t have the time for. But it leads the rest of us with harried lives where earning money takes priority over other things that have been shown in studies to bring us more pleasure such as spending time with family and friends. Moving to a life beyond money will not be an easy choice to make for people as individuals until bigger changes are made in terms of how we work. Until then, better keep working at it.

Uber is taking us down an uncharted road and we may not like where we end up

Uber seems to augur in a new world of freedom. The app allows people to get picked up and dropped off with relative ease. The drivers themselves also benefit from a flexible schedule, working when and for how long as they like. While greater freedom tends to be seen as a good thing (especially to the Free Range Economist), Uber may to taking us to a new world that comes with a nasty twist.

Technology is increasingly freeing up people to work whenever and wherever they want. Previously, it was only those who were self-employed and running small businesses that had control over this. While the needs of customers had to be looked after, business owners were free to determine their own schedule. Apps like Uber (and others such as TaskRabbit) have essentially lowered the bar to reaching this point. By reducing the start-up costs and making it easier to find customers, the apps have opened up new opportunities for people to earn money.

Along with managing your own schedule, the freedom of self-employment also comes with the ability to decide how much to work for. Normally, businesspeople pay themselves relative to the success of their ventures but there are times when their pay would be abnormally low. For example, to kick start a business or during temporary slow periods, people who run their own businesses may choose to pay themselves next to nothing. Even though this would in theory contravene the notion of minimum wage, it is not seen as a problem as it was at the discretion of business owners.

As the drivers on Uber (along with others who provide services through apps) operate under the same premise, they can take whatever wages they are happy to accept. This is also true of any cases where the pay is less than the minimum wage, which may be the case if it so happens that demand on the app is slow or work takes a long time to complete. While the drivers are not sure how much they will get paid before they hit the road, the ability to earn some money, even if it is not much, can in many cases be seen as preferable to earning nothing at all.

There is the free-market argument that workers should be able to choose whatever wage to work for. There is always the option to quit if they don’t think that they are being paid enough. However, workers who are willing to work on the cheap, even if only for short periods or on a part-time basis, open up the possibility of businesses being able to take advantage of workers. Accepting a low wage not only impacts on the individual worker but on others who may also be paid less or lose their job.

When we think of the minimum wage, it can be easy to forgot that it not only applies to how much companies must pay its employees, but also as a way that stop workers underselling each other for cheaper and cheaper wages. Uber drivers don’t necessarily compete with each other, but could be seen as selling themselves cheaply compared to taxi drivers. And, it is this relatively low cost of labour that puts Uber at an advantage against taxi companies. Even the convenience of its app (another of its merits as a business) with faster pickups relies on lots of driver waiting, without pay, for rides.

It seems ironic that advances in technology are bringing us back in time to a world before the minimum wage. Uber continues to resist changes to the way it relates to its drivers so it remains to be seen if regulations will be adapted so as to also apply to Uber. Otherwise, this erosion of the minimum wage could be seen as part of a bigger trend, including stagnating wages and zero-hour contracts, as the balance of power continues to shift away from labour. Cheap rides are a boon for many and many people have been set free as a result, but lower wages could hurt the overall economy if people have less and less money to spend. Uber is driving us into a new future but even GPS is not useful in knowing where we might be heading.

Could there be a reason behind why taxes are seen as hurting so much?

Paying taxes is painful, but one of the unfortunate necessities of life. Getting people to pay tax has, in the past, been compared to plucking a goose with the key being to get the “largest quantity of feathers with the least possible amount of hissing”. Yet, our taxes do go towards numerous things that we could not do without. Finding the optimal balance between the right amount of taxes is therefore crucial. The trend of late has been for lower taxes and less government, and this might be because if enough of us pay enough taxes, everyone finds it all too much pain to be worth bearing.

The amount of tax we pay relative to what we earn has been in a downward trend since the 1980s. The level of taxation had been set to high levels during WWII and remained at elevated levels until the political winds changed with Thatcher and Regan. Rising levels of income have resulted in the absolute amount of tax payment increasing for many even as the tax rate fell. Although many people do pay considerable sums in tax, it is the very wealth that increasingly pay the bulk of taxes. Despite this, voters (who may themselves actually pay little in taxes) have continued to elect governments that promise even more cuts to taxes. To do the opposite has been a tough sell.

It should not come as a surprise that people prefer to pay less in taxes but this also limits the ability of government to provide services. There seems to be lots of things that governments could do with more money, such as spending on infrastructure or childcare, but tax cuts seem to win out. The extent to which this ethos has remained unchallenged suggests that bigger forces could be in play. This all got me thinking about whether a reason behind this might be a tendency for voters to prefer lower taxes as their income levels rise. This might be something that impacts on us as individuals but also affects decisions we make in electing our governments.

It seems an obvious thing that say that voters would be put off by a larger amount of money being taken out of their pay packets as taxes. There could, in theory, be a level of income at which more people are likely to prefer lower taxes even if they accept that this will results in fewer government services. Large tax bills could also make people more sympathetic towards arguments that taxes in themselves are bad. Taxes can be seen as “unfairly” taking away money from hardworking and successful business people who would otherwise work more.

If a majority of people pay a decent chunk of their earnings in taxes, these arguments are more likely to ring true. Rising incomes may also means that, not only do people prefer to pay less tax, but also that they also have less need for government. There are many things that government provide that all of us need. Examples of this include roads, policing, and national de fence. But a certain level of income can also bring less reliance on other government services such as health or education.

The combination of these effect would create a feedback mechanism, whereby less need for government among the well-off would drain their willingness to pay taxes which would, in turn, restrict the capacity of government. This tendency is one part of a bigger picture in which views on government change as society gets richer. Other potential developments could include such things as increased bureaucracy as government grows in size and difficulties in providing higher standards for schools and hospitals. Sympathy towards the less well-off might also be weakened if everyone has access to government-provided education and healthcare. Even the policies of austerity and paying off government debt would make more sense to people with a mortgage to pay back.

In this way, increasing wealth can be seen as a way in which social solidarity wanes as more people prosper. If this were the case, it has profound effects on the way in which government may develop in the future. There may be a limit to the size of government as suggested by total government spending having stopped growing (if not declined slightly) relative to GDP in many countries. The trend for less government may continue if the majority of people think they are better off just looking out for themselves.

Yet, economic forces, such as globalization and automation, has been buffeting the middle class who, in turn, have been feeling the pinch. This economic hardship has fed into politics, leading to the rise in populism and a revival of policies from the old Left. If the economy is no longer provide as it has done in the past, voters may start wanting the government to get to work plucking more taxes.

Politicians think they know better but voters are trying to tell them otherwise

I admit that the title of the blog is a bit nonsensical. After all, voting does not have a speed. It refers instead to the speed at which we choose who to vote for and paraphrases the title of a recent influential book “Thinking, Fast and Slow”. One of the main concepts in the book is how some decisions are made quickly and instinctively, while other decisions take longer with more thought. It seems as if the action of voting has become faster as people vote with their gut. Voters have, as a result, been blamed for making bad choices, but they should not be blamed when none of the options are appealing.

For this to all make sense, I should give a bit of background about the book. “Thinking, Fast and Slow” brings together a wide range of studies on our thinking patterns. Fast thinking is the decisions we made almost automatically and are often based on emotions such as fear or hunger. Taking more time to think things over sounds better but is not always optimal. We are constantly called on to make decisions and contemplating every option would leave us mentally drained. So our brains have developed to respond without much thought to most of the things we are confronted with in day-to-day life.

For a long time, we didn’t even have to think much about voting. Society was essentially split into those who voted for either the left or right, and these choices did not change much over time for individuals. Voters followed along with what their leaders in government would tell them would be best for the country. The policies of mainstream parties involved different version of restraint now for rewards later. Economic growth in the past had made this trade off seem worthwhile, and sound theory was enough to convince anyone who wanted to think it through.

This no longer seems to be the case. The world has changed in ways that mainstream politicians have yet to catch up with. More of the gains from economic growth tend to be going to the well-off, while the loss of manufacturing and clerical work has eroded the middle class. Governments, as much as they would not like to admit it, have lost power relative to business that has more weight to throw around now they operate on a global scale. It takes a degree of faith to continue to wait for a better world that increasingly seems unlikely on the current path.

Populism does away with complicated trade-offs and instead offers up simple solutions that appeal on the emotive level. Mistrust of people that don’t look like us makes it easy for politicians to blame foreigners for any problems. Increasing inequality with growing concentration of wealth challenges our sense of right and wrong. And when the world seems against us, talk of “taking back control” appeals. This call to arms is even more attractive when the basis of these policies come across as so instinctive.

This makes the choice of voting for a mainstream or populist party like choosing between a healthy salad or a burger with fries. The choice is being bias toward burgers after a history of eating salads has resulted in few if any of the health benefits. Even the health conscious among us would be tempted with a switch in diets to the more satisfying option. Going along with our gut feelings also feels good, rather than going along with what we are supposed to believe.

It is no surprise then that many choose to vote fast due to distrust in what we have been told in the past as well as an erosion of hope for a better future. People who have voted for the short-term “feel-good” option have been criticized, but the economically neglected should not be blamed for pushing back politically. The onus should fall instead on those that argue for an open global world to show that it can benefit everyone.

Economists remain obsessed with inflation, but could suppressing rising prices also be clamping down on wages as well

Inflation has long been an obsession for economist, so much so that it is the basis around which monetary policy is set. As such, central banks are charged with making sure we have a little bit of inflation, not too much or too little. It is a policy framework that was put in place after the stagflation of the 1970s when the economies in Western countries were plagued with high inflation and lots of unemployment.  For good or bad, monetary policy has remained stuck in the same mold.

Monetary policy continues to involve raising or lowering interest rates to keep inflation in the “Goldilocks” range of close to two percent. Central bankers must keep up persistent vigilance as, were inflation to escape from this range, getting inflation back under control is seen as potentially problematic. This is because changes in the price level are thought to affect how people think prices will move in the future. Higher inflation now, for example, would create a feedback loop to create even higher inflation, as it is thought to have happened in the 1970s.

The story goes that, back in the 1970s, trade unions pushed for more pay as the oil price shock pushed up the cost of living.  Companies responded to a bigger wage bill by increasing prices, which thus fed into demands for even more wage hikes. It was only crushing high interest rates that stopped wages and prices spiraling out of control. Ever since, we have had central bankers aiming to keep their foot on the throat of inflation.

The notion of how expectations of the future can affect inflation has mainly focused on how wage gains feed through to higher prices. Low unemployment in recent years has kept central bankers on their toes as greater demand for workers is expected to translate into higher wages and potentially increases in the level of prices. Yet, this tightening of the job market has been relatively benign so that the Federal Reserve in the US has even cut interest rates.

Part of the reason behind the limited increases in wage (so far) is the extent to which expectations of inflation affect not only wages but also the actions of consumers and companies. Having become accustomed to prices remaining stable (if not edging downwards), consumers are likely to shun any business attempting to push up prices. Companies are likely to anticipate this and hold off from price hikes and say, for example, shrink the size of their product instead.

The focus on inflation thus adds to a number of forces that are already acting to keep a lid on prices. Globalization has allowed business to get access to cheaper raw materials and low-wage workers as well as boosting economies of scale in production. The Internet has also been a boon for those wanting to find cheaper prices.  Amid these changes, the scope for raising prices has been significantly curtailed.

The overall effect is to lock the economy into low prices. This doesn’t sound like a bad thing. But what benefits us as consumers has a negative impact when it comes to being paid. In the same way that higher wages can feed through to higher prices, leading to wages and prices to spiral upwards, the opposite could also be seen as happening. Low prices limit wages which in turn hurts spending and further depresses prices. Without much scope for increasing sales, company can only boost profits through reducing costs such as the wage bill.

The feedback mechanism can thus act to hold down growth in an economy. Yet, there seems little scope for a let-up as worries about inflation continue to dominate. Freeing up scope for higher wages would improve the lives of many people living on low incomes and would help with inequality. And the extra spending this would generate would be welcome at a time when spending remains subdued. With inflation proving less troublesome than in the past, we should think about whether low wages are worth paying the price.

 

We may have gotten past the point of needing to be afraid of inflation

There are seemingly few things scarier to an economist than inflation. Rising prices are seen as holding the potential to wreak havoc if allowed to get out of control. Yet, these fears are based on past periods of history such as hyperinflation in inter-war Germany and stagflation in the 1970s. Changes in the economy and the experience of loosening monetary policy in the aftermath of the global financial crisis suggests that the threat of inflation may not be worthy of its reputation.

Higher wages or increases in the money supply are two of the main things that keep economist up at night worrying about inflation. An increase in wages acts to push up prices as companies cover the high wage bill. Although an issue in the past, workers’ pay has been stagnating for decades (which may be a side-effect of central banks in reigning in inflation). More money within an economy is also seen as inflationary as extra cash chasing after the same amount of goods will inevitably push up prices. It is seen as a given within economic theory that, for example, a doubling of the money supply will also double prices.

This relationship between money and prices seems strange as it relies on the assumption that consumers will buy more of the same things if they have extra income. Even the notion that more funds will be spend seems dubious considering that some of the money will likely be put aside. As consumers have more money, any further gains in income are more likely to be saved or invested. This would then suggest that an increase in money supply would raise the value of investments rather than the prices for everyday goods.

This is what happened in the aftermath of the financial crisis when central banks raise the money in circulation. This was done through quantitative easing which amounted to pumping extra cash into the financial sector and did not result in the uptick in inflation that many had feared. Even the surge in debt (which also lifts money supply) in the run up to the global financial crisis did not see any inflation (but did see a big jump in house prices.

The key distinction here is between prices for investment assets and for everyday goods and services. The former is not included when calculating inflation, while the latter is. If extra spending tends to go to buy investment assets, more money does not mean higher prices. If any increases in funds flows to wealthier people (which is likely the case), this effect is likely to be even more pronounced. Taking this to an extreme would mean that, in an economy where the consumers have everything they might want, a doubling of the money supply would, in theory, double asset prices with no impact on inflation.

This story seems to suggest that economies can reach a point where they become too prosperous for inflation. Add in other factors such as a global economy and online shopping creating a competitive environment for many of our purchases. Any attempt to increase prices by one company would just result in their customers going elsewhere. Global production is also so vast that increases in demand could (in most cases) be absorbed through a rise in output. Only the odd commodity such as oil tends to be subject to chronic limits on supply.

This all suggests that inflation may not be as tricky to manage as economists once feared. Rising prices still create economic havoc in places such as Venezuela and Zimbabwe, but high levels of consumer spending and global markets seem to insulate many other places. The prominence given to inflation when managing the economy and particularly within monetary policy thus seems out of place. Surely there are more worthy things to worry about.