Tag: economic growth

Economic growth – far, far away

Prosperity is becoming more like a fairy tale to many as economic growth recedes

Many a story begins with the words – “once upon a time, in a land far, far away”. For a growing number of people in developed countries, this opening line sounds like the beginning of a tale about economic growth. Trends such as globalization have increasingly resulted in winners and losers in a way that those who gain are increasingly separated from those who miss out. Thus, economic growth can seem a world away to many people as if a mere fairy tale.

For a few decades after the world wars, it seemed as if the tale of economic growth would be one of those stories with a happy ending. In the West at least, the economy was providing decent wages for most people in jobs and mass consumerism was offering up everything anyone might want. The rest of the world was still stuck in relative poverty but the expectation was that they too could catch up later.

The narrative changed as manufacturing started up in developing countries. Factories had helped boost wages in the West by making workers more productive, but rising pay also increased the lure of cheaper labour elsewhere. The progress was gradual but eventually the growing capacity of manufacturers in Asia, culminating with the rise of China, eroded the high-wage manufacturing sector in the West that had helped build the middle class. Automation was always likely to have the same effect but globalization accelerated the trend and has thus borne the brunt of the blame.  

Globalization has made things worse in other ways too. The ease of transportation that is a part of globalization also means that places where goods are produced often being separated from the point of sale. So even though everyone will benefit from lower prices, any wage gains from more productive manufacturing will tend to remain close to the factories. So just as has happened in the West, China prospered as manufacturing created a new middle class there.

The site of production is important in that it takes away not only the work but also much of the future benefits of higher wages generated by productivity gains. And once a manufacturing base is established, a whole ecosystem of business builds up around it. So, the high-tech production facilities central to electronics and computing are likely to stay in Asia in the same way that Detroit dominated car making for so long.

On top of this, globalization has had an impact through offering up larger markets and hence creating bigger business. An increase in scale usually helps companies be more efficient and provide goods and services more cheaply. But bulking up in size also comes with more automation and outsourcing that are used as means to save on labour costs. Being bigger also helps business get its own way with governments as well so as to limit the extent to which policy might boost wages or provide economic support.

The increase in the scale of global markets is also good for those with skills to sell on an international level. Such skilled workers tend to migrate to the larger cities where it is easier to promote their increasingly specialised talents. And the freedom to move around within borders means that people increasingly sort themselves into likeminded neighbourhoods which often overlap with economic outcomes.

Previously, greater proximity of people from different economic classes would have meant that some of the spending by the well-off would have gone into the pockets of people from the “other side of the tracks”. With the service-based economy, much of the spending nowadays would not reach to the other side of the country. Even when able to work for big business or the wealthy, those on lower wages miss out as, even though their earnings would probably be higher, they also typically need to fork out more for higher living costs.

So previously, market forces might have been sufficient to spread the wealth. Higher consumption by some would see more money going to others who had less to spend. So even if some were doing better than others, a rising tide would have lifted all boats as JFK suggested. But the changes to the economy outlined above means that things are different from the 1960s. The greater physical and cultural separation means that market forces would not be sufficient to spread wealth as in the past.

What is true within borders is even more relevant when looking on an international scale. The growing levels of wealth in places like China could potentially offer opportunities for work in the West. Yet, the intricacies of Asian culture often mean that many consumer goods are produced locally for the domestic markets. With limited access for imports, Asia has become just a source of cheap goods and not so many job opportunities for workers in the West (bring us to the same conclusion that was expected of automation).

Out of those prospering from globalization, it is no surprise that the foreigners are getting most of the blame. The greater distance separating those prospering in the East from those struggling in the West means that it is more difficult to share around the new-found wealth. And big business is more likely to provide the precious jobs back home, which is used as a reason to argue for measures such as lower taxation to help create work.

Yet, there is a good argument for the government needing to come up with resources to do more. There is a notion in economics that, if the market is not working as one would hope, then there is scope for the government to step in. We are seeing this happening in terms of the “levelling up” policies of Boris Johnson and the stimulus package by the Biden administration. Yet more permanent policies need to be established to rectify what seems like a persistent feature of the economy and what could potentially result in a backlash. And that would be an ugly end to the story of economic growth.

Economic omelette

The economic is supposed to create new from old but this seems to hurting more

Economist often talk about the economy as a pie but it could also be seen as an omelette in that it requires at least a few eggs to be broken. This refers to the sense in which parts of the economy are broken down and formed again into something new so as to ensure that resources are put to efficient use. This process is an essential part of capitalism as there would be no progress if everything was to stay the same. And yet the breakage involves some economic pain which seems to hurt more than in the past and is making our politics suffer.

This economic omelette-making already has a name, creative destruction. This term was coined to describe how old parts of the economy are destroyed so that new businesses can be created. This is necessary because the economy has limited resources such as the number of workers or shops on a high street. Without businesses going bust or people losing their jobs, it would be a lot more difficult for anything new to ever be made.

It is expected that the resources that are freed up from any economic demolition will soon be put to good use in the newer sectors of the economy. It is thought that workers would inevitably move onto something better as higher wages are typically offer in up-and-coming industries. The new companies could pay more as they exist thanks to new technology or an improved way of doing business that was more productive.

But even the most cutting-edge technology eventually is put to use so much that it becomes routine and easy to use. For example, the earliest computers would have required specialist knowledge to operate but have long ago become basic for most users. The benefit of more people being able to use any given technology expands over time while the wages of those workers will fall as expertise becomes less essential.

The expansion of our knowledge expands drives new technology further in terms of applying even more complex and specialized learning. In pushing the boundaries of what is possible, we come up with technical know-how which typically fewer and fewer people know how to use. The pay is high due to the skills required but such work is only available to the relatively few people can educate themselves enough.

The resulting trends is for existing technology to be simplified while new advances demand more in terms of expertise. Work is thus increasingly polarized between highly-skilled and less-skilled work with little in-between. The progress in computing along with the Internet has been particularly disruptive on both fronts. A lot of middle-class semi-skilled work has been replaced by either a few well-paid workers or a multitude of minimum-wage jobs.

The obvious solution seems to be to invest in more education but not everyone is suited to acquiring large amounts of knowledge. And anyway, schooling systems in most countries suffer from underfunding which means that a lot of effort goes into securing a limited number of routes to good-quality education. Instead, many companies seem to find it easier to import skilled immigrants than to find a ready supply from within their national borders.

On the other hand, technology seems to be developing so as to make use of workers with few skills. For example, an Uber driver does not need to know the streets nor does an Amazon worker have to work out how to put together a shipment as the technology is there to do the thinking for them. While having their skills being taken over by technology, low-skilled workers also lose out as any potential collaboration with more skilled colleagues is limited as more educated workers tend to congregate together in the cities.  

Things are likely to get worse as well as the economic trends are unlikely to change. The full deployment of existing technology has yet not reached its full capacity, without even factoring in the possibilities of advances yet to be conceived of. This economic situation would be difficult to manage at the best of times, and yet the political system is struggling. Any measures to alleviate the issues are hampered as the diverging economic outcomes are further exacerbated by differences in culture, creating tribalism within borders.

A political solution is needed so as to allow for better sharing out of pain as well as the gain. Without intervention, it is likely that destruction will shift from the economic realm into something a lot less creative in politics, resulting in a stagnating economy but fierce battles over how to do things. In much the same way that economic growth creates its own virtuous cycle, the reverse may drag us all down. Thus, if we continue to break economic eggs, we may end up walking on political eggshells.