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.

Big business, small government

Governments increasingly pale in comparison to business but this is about more than size

The title of this post is not a slogan but a mere statement of fact. Globalization has resulted in businesses spanning borders and increasing in clout, whereas governments seem to, if anything, have become more diminutive. This trend not only stems from the bulking up of global multinationals but is also due to changes in the nature of both business and government. The potential solution to weakening powers of government might come from a change in size but to being smaller rather than bigger.

More than ever, bigger is better when it comes to business. With companies able to operate on a global scale, a wider scope of business means that more running costs can be spread over a large volume of sales. Size can bring heft in other ways such as big retailers like Amazon or Walmart being able to get better deals from their suppliers. And for some companies such as banks and many online businesses, their size is the big drawcard with network effects playing an important role in their business models.

Having operations spanning across borders gives companies greater leverage in terms of where to locate. Governments, on the other hand, like business to set up shop within their borders to provide jobs for their citizens as well as to pay taxes. Yet, governments often struggle to get much out of multinational companies. International firms from Amazon to Starbucks are known for managing to get out of paying much tax. Many businesses such as banks or online business also have a habit of getting their own way in terms of regulation. And with lots of funds to spend on lobbying, it is easier for big business to keep government onside.

As the scales have tipped in favour of big business, governments have struggled to get on the front foot. The current fractious nature of politics in many countries means that it is more difficult to form a general consensus about how governments should act. Without a clear sense of direction, governments often seem as if they are flailing. And with higher taxation or more regulation typically involving more government action, such policies make for a tough sell when governments seem so out of sorts.

With politicians finding it difficult to enact policies within their own borders, international cooperation as a means to deal with big business seems well beyond reach. Elites across different country often see the world in similar ways but only because the rise of business works in their favour, which puts them at odds with their many of own countrymen and women who are on the economic backfoot. Any response is further hampered by global firms often being the source of the good jobs that are so prized by both workers and their government.

The solution may not be in bulking up in size to compete with the heft of business but instead in making countries smaller. A smaller nation would likely to have a stronger sense of identity and higher degree of social solidarity, thus helping to facilitate government action. It would also make democracy function better due to politics being less remote while also enabling more grass-roots participation and policies better fitted to the smaller economy. And smaller political units would allow for greater experimentation of different policies rather than a one-size-fits-all measures within the system of globalization. Small might also be better in terms of more pragmatic politics rather than falling back on ideology as a means of governing.

Part of the argument behind smaller political units is that globalization has done away with many of the function of what a state might have done in the past. The main reason behind bigger being better for countries was in terms of defense, but the interconnectedness created through the global trade system has made it much less likely that trading partners will go to war. Global flows of money and goods also dwarf even the biggest national economies so that even the US government struggles to bend international economic forces to its will. And national prosperity no longer means wealth for the majority of its citizens as it might have done in the past, with regional economic differences within countries becoming increasingly pronounced.

These old elements of the nation state could be realised in new ways with smaller countries. Even though trade might reduce the possibility of war, it would still be prudent for likeminded small countries could band together their less considerable resources to man their mutual defense. And groupings of similar countries might have more success in clubbing together to influence global rules in the same way that the European Union has made some progress on data protection. In this manner, the larger collections of countries could provide the proverbial “night-watchman” role on international matters, while leaving governments free to focus on domestic issues.

While seeming to be optimal in theory, it is still unlikely that anything like this will be put into practice anytime soon. But still, the idea in itself can be used as a reference point to evaluate our current circumstances. One particular conclusion could be that local government will likely help in the implementation of policy. For example, regional leaders did seem to garnish more authority when dealing with the COVID pandemic compared to national politicians who were trying to manage measures over larger range of diverse areas. And a further step in this direction would involve giving more regions the possibility of moving towards outright statehood.

Business is only likely to get bigger as the global market continues to expand and prosperous companies take an expanding share. Instead of trying to compete on size, a multitude of small governments might be the best way to balance out big business.

Shop global, vote local

The demand for cheap goods and strong government might be too much

One of the catch cries of the environmental movement urges us to “think global, act local”. This slogan points to how our actions in our community can have an impact on a bigger scale. Paraphrasing this in the title of the blog refers to how the economic and political actions of some can work in opposite directions. When out shopping, we often get lured in by cheaper goods on offer thanks to globalization, while many are voting in opposition to the global economy that keeps prices down. With people being tugged in both directions, there might not be a way out.

From the consumer’s point of view, globalization has resulted in a bonanza in terms of a growing selection of goods at low prices. Everything from clothing to computers has benefited from production being coordinated on a global scale. Globalization can achieve more for less because it increases the size of the market for many businesses. In general, a larger number of goods being produced at one place will typically have lower costs. So it would be cheaper in most cases if goods can be produced in large quantities and then shipped around the world (especially if transport costs are low). This approach also means that production can be situated where it is most efficient rather than close to where the goods will be consumed.

The lower price tags for global goods means that we can buy more, but also that production for international markets is also likely to shrink. The reason being that higher levels of output acts as a spur for automation which involves more machinery and fewer workers relative to the output. Offshoring of manufacturing jobs and basic service-sector work has added to this trend within industrialized countries where the wages are higher than elsewhere. The result is that most people are global consumers to a certain extent, while fewer and fewer people provide goods for the global market.

On top of this, global jobs have increasingly become concentrated mainly in the cities, stripping many other places of high-paying work. The more the pay packets of the locals in such communities take a battering, the greater the attraction of the cheap products that globalization is good at offering up. Even though neighbourhood businesses are likely to suffer due to this, the government has little power to mitigate the impact especially as social solidarity is on the wane. It is not surprising then that many people left behind in the wake of these changes end up feeling powerless and abandoned. Not only have jobs disappeared but individuals have been left with few meaningful ways of contributing to the economy so as to earn a wage.

With the negative effects of globalization being concentrated in specific places, location has become a more important issue in politics. Many people see their own prosperity as closely tied to the economic wellbeing of their own neighbourhood. When this manifests itself in political terms, the nation state thus becomes the obvious flagpole to rally around for those on the economic backfoot. But this resurgence in patriotic sentiment has come with its own problems, and rather than providing solutions, has split society into rival camps that do little but bicker.

An obvious solution would be to get more people to “shop local” as promoted in many corners of the world. Although buying things from stores in your neighbourhood does help a bit, it matters more where the goods are produced (although lots of services are produced locally). The trend to buy locally source agricultural produce (particularly common among people in city who would tend to “vote global”) is a step up but unlikely to be substantial enough relative to the size of global economic flows.

If those who “vote local” can only afford to “shop global”, the situation seems more likely to get worse especially since the political system seems to offer little scope for improvement. Democracy would normally find a way to mediate between competing claims but the traditional split between left and right is not set up to cope with these issues. Instead, it is our politics that is also being cheapened by the division that globalization has wrought. And it is something for which we might have to pay a lot more for as the situation is only likely to deteriorate.

Paleopolitics

Without a shared way of looking at the world, the changing economy has split us into warring tribes

Diets tend to be faddish but even the Free Range Economist got caught up in the notion of the paleo diet. The idea behind it is that our stomachs evolved over thousands of years to the foods (such as vegetables, nuts, and fish) that we would eat back when we were hunters and gatherers. The same concept can be applied to how are minds developed to operate within small tribes so as to ensure that the group (and hence the individuals within it) would survive. The means by which we have been able to move towards interacting with more and more people has been eroded away as economic changes impact on how people understand the world around them.

Humans, like all other creatures, have adapted over time to better fit in with their environment. Our bodies developed to survive feast and famine and we still store up any extra calories, but rather than being helpful in the modern world, this now causes problems such as obesity. Our minds also are fine-tuned to operate in relatively small groups of a hundred or so people based around the larger family unit. While the world around us has changed, our tribal brain can also play havoc with how we cope with life in a global world.

Previously, the key for survival would be a strong group identity so that everyone would put in their all to guarantee the survival of the whole even if it were to mean sacrifices for the individuals. One way of doing this was to create clear boundaries between those within the group and outsiders who were often viewed with distrust. But the growth of larger and larger social groups shows our ability to go beyond these basic building blocks for society and work together with people from different backgrounds.

The key to managing bigger masses of people outside of our kinship grouping is shared narratives that bind everyone together. These narratives develop over time so that society can expand in size and get individuals working together for the good of the whole. In this way, society became more inclusive despite its past of excluding people from outside a narrow group. Religion and nationalism were two such grand narratives that help large numbers of people work together toward common goals while also accepting new recruits that shared their beliefs.

In more recent times, economic progress has become the rallying cry for society. We rely on the economy for lots of our wants and needs and toil away to do our bit. It is understood that economic activity might result in job losses or businesses going bust, but the economy had also provided people with a way to get back on their feet. The economy does not instill devotion or passion in the same way as religious or patriotic beliefs, but steady improvements in our daily lives meant that most people were happy to do their bit.

Things seemed be going so well with solid growth in the few decades up to the 1970s that people rallied together to form a generous welfare state for the less fortunate. However, these years of plenty slowly melted away with the rise of globalization along with automation and computers that have eroded away economic gains for many. The effects of these trends have not been even but have instead resulted in a large portion of the population seeing their livelihood stagnate while others continued to prosper.

While religion or past national glories might provide some consolation for those who have fallen on hard times, economics provides little comfort. There is the expectation that those without jobs or those not earning high enough wages should move elsewhere or take up new skills to find better work. After all, it is expected that each of us will do our share and thus earn a wage. Yet, what the economy provides, the economy can also take away, and as such, many previously prosperous areas in industrialized countries have suffered from seemingly terminal decline. Flight was the preferred option for many but those who stayed to fight have struggled as economic activity has drained away.

As well as suffering through a lack of job opportunities, those left behind have had to go without a helping hand from their own countrymen and women. On top of this, the story that economics would tell suggests that it is all their own fault and that they have no one to blame but themselves. With this tale not looking likely to have a happy ending, it is little wonder that many have turned to conspiracy theories so as to understand why previously industrious folk have ended up falling on hard times. The situation is further compounded by minorities on issues such as race, gender, and sexuality seeming to be getting a lot more sympathy from some.

For their part, those still happy with how the economy operates see those without work or decent jobs as not playing by the rules. Those who have prospered hold themselves as examples that anyone should be able to succeed. And we rely more on those who thrive to spur on the economy so we tend to have little compassion for those who struggle (which is one of the reasons why tax rates have been falling). Instead, the left behinds are often looked down upon for not being able to keep up with progress or being fooled into supporting populist politicians.

Despite the obvious analogies, this is more than an us-versus-them story but one in which many people have lost faith in their economic future. While immigrants have taken some of the blame, tribalism looks set to become particularly fierce among people that look alike but who have differing economic fortunes. Our past tribal selves might have treated outsiders with disdain, but the worst treatment was dished out to those within the group who did not look after their own. Without a shared story to believe in anymore, our disagreements could swell over so as to push back against further economic progress.

To transcend the tribalism within each different countries, the narrative of economic progress needs to be rebuilt so that it rings true again for the majority of the population. The assumption being that issues of culture and identity could potentially ease if more people had control of their economic destinies. Otherwise, the increasing rancor will continue to mount and only make the issues worse. Tribes are not so good at working together but are instead much better suited to warring with one another. But conflict will not help us progress and is instead more likely to drive us all nutty (and not in the good paleo diet way).

Capitalists of the world united

Skilled and mobile workers benefit from a united front but it cannot last forever

Karl Marx tried to kick start a revolution with the catch cry of “workers of the world unite”. But in this, as in many other things, the father of modern communism was wrong in his reading of history. Instead it is the capitalists that seem closer to unifying around a shared ethos, whereas workers around the globe seem increasingly at odds with each other. The solidarity among the well-off have put them on the front foot as they continue to grab a growing share of global output, but they are unlikely to continue to get their own way.

Capitalists of old were the owners of factories and other businesses who made their living off employing others. Ownership of the means to produce goods put them at an advantage in relation to workers who could only make a living by earning a wage. The status of labourers only improved as the level of their skills became more important to production which put them in a better position to demand higher wages and improved working conditions.

The structure of ownership changed as growing scale meant that businesses could no longer be run by individual capitalist. Instead, corporations that issued shares on financial markets took over, and everyone, whether the chairman or the cleaner, worked for such companies. The level of pay was relatively flat with even the lowest rank of workers able to earn a decent wage (but only in the industrialized countries).

Globalization broke up this relatively harmonious arrangement on two fronts. Due to an increase in the supply of (typically low-skilled) workers across the globe, the higher levels of pay for everyone in the West could no longer be sustained. Yet, skilled workers from the West were now spread thin across the entire global market and so could demand a premium for their labour. In this way, it is not what you own but what you know that has become what defines your status within the economy.

The university-educated are thus now the holders of the valuable productive assets and could be seen as the modern-day capitalists of our time. But different to the capitalist of old, their assets are often put together in combination with each other rather than by employing others with fewer skills (as a factory owner might have done). The result of this has been that skilled workers tend to work together in big cities linked to the global economy but partially separated from the rest of the national economy.

This concentration of productivity in specific locations has resulted in many losing out at the hands of globalization. Previously, manufacturing jobs might have provided a route for people with fewer skills to earn higher wages. As many of the goods produced were destined for export, manufacturing was a means to tap into the gains from globalization. This path to prosperity has been cut off with such production being shipped off to low wage countries. What was left in terms of work for low-skilled workers typically tended to be service jobs supplied to the local economy.

The result of this has been diverging interests between those benefiting from globalization and those who want the domestic economy to be given priority. The differing views have also fed through into contrasting political outlooks. Those with more skills are likely to be happy with the status quo where globalization continues to dominate, while low-skilled workers have become open to options for change. For those wanting something new, populist politicians have risen to prominence through promoting national interest against external threats.

Populist from the left and right have offered up differing approaches, while mainstream politicians struggle to come up with a suitable middle ground. Whatever the policies, the manufacturing industry in the West has continued to be eroded away. With only so many factory jobs to go around, the battle has become a zero-sum game where some workers can only benefit while others miss out. Low-skilled workers in different places are thus pitted against each other in the fight for a brighter future.

The opposite is true of the winners from globalization who are not only benefiting themselves but also tend to have opportunities open up when their peers do well. Thus, the share of the economic pie for skilled workers thus grows as it feeds off itself. The situation is further enhanced as the high cost of living in the large prospering cities tends to shut out others. Cultural differences between city and country folk adds to the sense of separation. Residents of large metropolises often share more in common with each other, irrespective of location, rather than their countrymen and women.

The low-skilled workers share a similar plight with others in the same situation but who live in other countries. Yet, the reliance on their local economy prevents any common bonds. Their identities too are more rooted in regional traditions, making them more nationalistic in outlook. So even if the number of those left behind by globalization continue to rise, their mounting number may not translate into political strength on a global scale. Instead, they may be left at the mercy of populists, whereby any victories will come with some feel-good factor but no respite.

In this way, it is through populist and the political system that the left behind will fight back even as capitalists continue to pile up the economic gains. United as the global skilled workforce might be, they look likely to lose out as the numbers in opposition mount up in their individual countries. And then any cross-border solidarity will not amount to much if the winners from globalization cannot keep their fellow nationals on side.

Have we reached a globlock?

Growing grievances against globalization may see further progress blocked if left to fester

Globalization seems like a force of nature when considering the expanding rate at which goods circulate around the world. But globalization has also prompted resistance as some have done better than others. Trends suggest that the unequal share of gains from globalization is not likely to change and could instead become more pronounced. With discontent feeding through into the political system, it may reach a point where globalization hits up against its own built-in limits.

Both the growth and demise of globalization could stem from the notion that markets will always grow in size. Successful businesses expand as they search out new customers as well as offer up different products. This process has been given a further boost by the growing ease at which products can be transported. Goods can now be mass produced in one location and shipped across the world, providing benefits in terms of growing economies of scale. Even online businesses such as Google and Facebook prosper as the reach of their services spreads across the globe.

The expansion of globalization has provided dividends in the form of greater efficiency, higher corporate profits, and cheaper prices. Yet, globalization has attracted increasing levels of unease in Western countries as many workers have missed out with benefits being captured by a shrinking portion of the population. The issue has been further exacerbated as the main means by which economic gains have often been shared (taxes and social spending) have been curtailed in the past few decades.

The bulk of those losing out from globalization in Western countries are made up of low-skilled workers whose jobs can be easily automated or moved elsewhere. While being pushed towards the side lines of the economy, those being left behind still have their political voice. The volume of their resentment has been turned up with the rise of populist in many countries. With their attacks on the status quo, populist threaten to derail the gains from globalization.

This begs the question of whether globalization was always likely to create resistance within democracies and thereby halt its own expansion. The bigger markets and greater levels of automation have resulted in gains that workers had made in the past being eroded away. Manufacturing had opened up a route for low-skilled workers to climb into the middle class (through exports tapping into global markets), but improvements in productivity have meant less need for workers. Transitioning people from manufacturing to the service sector has involved a drop in the level of technology on the job and hence wages.

These trends would still play out even without the economy expanding across borders. But globalization has served to act as an accelerant, both in terms of increasing the rate at which businesses could scale up in size as well as resulting in low-skilled workers (who were already set to lose out from automation) being hit even earlier due to offshoring. The international element also meant that it is the overseas rather than domestic winners from globalization who have been attracting people’s anger.

Governments have also been hampered in their response as globalization has seen its power wane relative to business. Along with their increase in size, the ease at which companies can move operations across borders has resulted in growing leverage over government policy. The resulting business-friendly policies have tended to be good for the global economy but also hampers the ability of governments to deal with the consequences of globalization within their borders.

Populists have stood up as the flag bearers for the anger against globalization as the mainstream political system offers up few solutions. The traditional left/right split in politics is ill equipped to deal with issues such as whether the economy should be more or less open. Politicians may be able to patch together a compromise, but the outlook does not look bright. Without genuine solutions to the economic pain wrought by globalization, the lure of populist will grow and may reach the point at which globalization stalls and begins to be reversed (in Western countries at least).

As much as populism is seen as wayward by those who think that they know better, it is likely to continue as a force in politics if the underlying frustrations that it feeds off remain. And the structural nature of the issues to do with both globalization and the political system means that they will not go away anytime soon. Without any solution in sight, globalization may be stopped in its tracks by, for want of a better term, a democratic globlock. Without enough winners from globalization, we might all lose out.