Tag: government policy

Taking back control (of the economy)

Voters want to rule but economic forces are not easily subdued

While the economy can often be chaotic, living with the whims of market forces is preferable to being under the sway of potentially despotic government where the whims of the leader(s) can pass judgement for best or worst. Markets have worked to spread political power more widely as money made within the economy creates the means to gain influence against traditional centres of authority. Yet, the reverse has happened as globalization has strengthened the hands of those with economic power while the ability of government to act is being eroded. With the helping hand of government being taken away, many people feel overrun and are looking for ways of fighting back against economic forces but getting back control will probably come with a nasty economic backlash.

One of the core features of capitalism is that no one is in control. The economy instead comes into being through the multitude of actions of individuals and companies in their daily transactions. Everyone involved is a small player relative to the size of the economy and so must play by its rules that are the same irrespective of who you are. Competition keeps businesses on their toes and ensures that resources are put to their optimal use and each of us get some rewards for what we contribute to the economy. For all those willing and playing by the rules, no one can be shut out or needlessly limited in their actions, and hence are free to act as they please (within the law).

What we take for granted today was a major revelation when it first took hold in a world of hereditary monarchy when the word of one person could change the law of the land and impact on the lives of many. This concentration of power was broken up with the rise of the merchant class which offered up new ways of getting wealthy other than through inheritance. Even if other sources of wealth diluted the absolute power of past sovereigns, the growing levels of prosperity that increased trading could create were attractive to rulers at the time as it enabled large armies to be amassed.

The development of manufacturing opened up further avenues to gaining wealth on a large scale for individuals from humbler backgrounds. The growth of cities and the dismantling of the older traditions continued to erode the legitimacy of the rule of monarchs. Thus, political power was dispersed into the general population from a narrow base of land owners spreading until all adults had the right to vote. Democracy as a political system is geared towards preventing the concentration of power and often comes with additional built-in mechanisms, such as checks and balances, to ensure that no one can take over.

The economy also operates in such a way that no one should be able to dominate. Multitudes of businesses offer up similar products and compete for customers in terms of price and quality so that only market forces hold sway. But circumstances can change if one company grows large enough to gain leverage which can then be used against its rivals. This amassing of economic power has been balanced with government regulation that attempts to ensure a free and open marketplace for companies to operate in so that we all benefit.

Maintaining such a level playing field for business has become more difficult with the rise of a large international market. With greater scope for companies to expand and also potentially make use of economies of scale, big business has bulked up. Add in the capacity for companies to move operations to different places and governments have struggled to reign in the corporate heavyweights. With business in the driving seat and globalization unleashing larger market forces, the economy has become less manageable. Without the oversight of government, capitalism also seemed to be less fair and not able to be controlled for the benefit of a wider range of people. On top of this, the gains from economic growth have been spread out less evenly in the West resulting in rising levels of inequality.

Such an outcome has left many people frustrated and the results has been a push within politics to “take back control”. The policies being promoted typically involves lower levels of trade and immigration as a means to promote employment within the domestic economy. While these measures seem like common sense at first glance, less movement of goods and people would result in a reversal of many of the recent gains from globalization that helped bring about lower prices and greater selection. Such an outcome would be likely as more stringent controls at the border limits businesses from boosting production to achieve greater economies of scale and restrict the extent to which people can earn to their full potential.

The worries about being thrown to and fro by the economy is a valid concern as the heft of international business rises. Previously, the emphasis had been to ensure economic growth so that people could achieve a higher standard of living. The trade-off was that livelihoods could be upended if markets shifted due to the uptake of new technology or changes in consumer behaviour and thus put people out of jobs and drive companies into bankruptcy. People would be more willing to accept any ups and downs in their own personal circumstances if the economy offers the promise of a way to get back on track. Yet, wages for many people have stagnated over the past few decades so opportunities to bounce back are limited.

People are thus faced with choices in which any gains are likely to be small but the risk of hard times remains as a genuine threat. It makes it more likely that people will focus on their own narrow concerns without much scope to think of others. And with a greater gap between the have and the have-nots, it is harder to work up the ladder to higher pay and achieve a comfortable life. Even people that are relatively well-off may be less willing to uproot their lives as the economy changes. This is because home ownership and the growing demands of bringing up children mean that more highly-paid workers are less likely to move somewhere for a better employment opportunity.

Thus, it could be argued that with further gains being tough to come by or requiring too much of a sacrifice, more and more people seem to be happier to stick with what they have rather than push for more. It might seem strange considering the constant efforts in attempting to achieve a bigger economy but the environmental movement in the 1970s resulted in the choice being made to forgo a bit of economic growth for cleaner air and water. The way in which this dilemma was resolved in the past was through the government stepping in and recalibrating the economy so as to better achieve the desired results.

The government could thus also do more to help out people struggling due to changes in the economy but such measures have not been popular with voters. Part of the concern is how such policies would impact on the functioning of the market. For example, any policies to deal with inequality could take away motivations for people to look after themselves and potentially make them a burden to society. Increased taxes, which is the main means of funding social welfare, could also sap the incentives of entrepreneurs to work hard and take risks. And, the current political climate means that people tend to frown upon any help for those that have fallen on hard times as it goes against their sense of fairness.

As such, the main political avenue for anyone feeling as if they are missing out from economic growth has been the “build a wall” option rather than the “share the wealth” alternative. The mindset being that the worst of economic forces can be shut out and people would be free to get on with their lives. Yet, such a stance tends to go against past history which suggests that closing off the country tends to end badly. The potential impact from withdrawing from the global economy would be even greater nowadays considering that trade has helped keep inflation down while also facilitating higher earnings for those working across borders.

It is therefore not immediately obvious why such protectionism has garnished so much popularity, and a number of reasons could be put forward. For starters, the measures involved such as putting up barriers to trade or to immigration seem to deliver obvious benefits in the form of less competition for jobs and more of a market for domestic goods. The expectation of relatively immediate gains makes it easy for politicians to put forth such proposals to voters with the added benefits in that no extra spending would be needed and the policies could be framed to appeal to nationalist sentiment. On top of this, higher levels of wealth may mean that people are scare of losing what they have even if that may not be much and are thus more likely to “circle the wagons” against any oncoming threats.

In contrast, higher taxes to help out those struggling is a harder sell at a time when we are expected to fend for ourselves and government cannot be trusted to get the money to those that might actually be deserving. Coming together to help people through hardship is also more difficult when globalization has resulted in more heterogenous societies in the West. The Left leaning political parties have also shifted their focus from those at the bottom of the economic ladder towards people with a cultural disadvantage.

With the Right often being dominated by populist, it might be up to the Left to develop an option that will be more palatable for voters in terms of using the gains from globalization to help out those that have been put on the backfoot. While such measures will come with a cost of potentially slower growth, the results would be far preferable to the potential economic harm that might be done if countries close themselves off from the global economy. Put another way, higher taxes might sap the momentum of capitalism but reducing the flows across borders would be like throwing economic forces into reverse.

The current manifestation of efforts to pull up the national drawbridges has been relatively mild but the supply-chain snags caused by Covid are just a taste of what could happen if globalization is pulled part. A nightmare scenario would be for future attempts to shut off from the global economy becoming more fervent as politicians decide to double-down after the initial attempts fail. With this real prospect of populist policies triggering an economic downward spiral, a slower economy where the gains continue to build up but are shared around more would be better than an economy going backwards.

Unspreading the wealth

Manufacturing was about more than jobs as problems still linger

The ideal role of the economy is not only to generate wealth but to make sure that everyone gets their fair share. Spreading the cash around is important in terms of everyone having enough to get by but also for providing a source of funds that can be used to purchase what is produced in the economy. The relevance of where wages are earnt and spent seems more pertinent as the drop off in employment in manufacturing has impacted on whole regions in industrialized countries. Without the higher wages earnt from employment in the factories, not only the individual workers but whole communities suffer while economic activity shifts elsewhere.

What we think of as the economy only really took off with the rise of the manufacturing industry. Previously, most people had eked a living off the land with workers scattered across farms and toiling away in relative isolation. The rise of factories was a significant change in that it brought people together under one roof and allowed for mass production of goods that had been made by hand. Despite the often-horrendous living and working conditions in the beginning, manufacturing eventually offered a route to a better life, both in terms of providing a large volume of cheap goods but also the higher wages paid out to workers. The lure of factory jobs still draws in people from the countryside in countries that have not industrialised enough to benefit from manufacturing.

In this way, manufacturing was crucial both in terms of generating greater levels of output as well as providing money for people to spend. It was through higher factory wages that a middle class rose up to not only buy the goods rolling off the production lines but also to help create other jobs in the service sector as they spent their earnings. The boost to wages came from the use of machinery on the factory floor which set it apart from agriculture where more basic equipment had been employed. The greater use of technology meant that workers could earn more even without having to acquire any specialist knowledge for the job. The wider spread of wealth was a profound shift from how society had been set up in the past with the middle class filling the long-established gap between an impoverished majority and affluent elite.

On top of these changes, manufacturing also moved people away from their previous attachment to the land and gathered them together to work in much closer proximity. Yet the extent to which cities could grow in size was limited by the need to have essentials such as food and fuel be transported in from the surrounding farms or further afield. As such, manufacturing resulted in a larger number of towns rather than a few big cities. Even once these limits had been overcome with improvements in technology, cities often did not provide suitable location for factories which were instead more likely to be set up in places where land and wages were relatively cheap.

Manufacturing thus acted to offset the tendency for economic activity to be concentrated in cities, serving to not only distribute wealth among a wider range of individuals but also among different regions within an industrialised country. This second effect was due to the higher pay packets for factory workers acting to support a bevy of service jobs in the surrounding community. This spending from the wallets of the employees of manufacturing firms came from sales of goods beyond the immediate confines of the local community. As such, it could be argued that manufacturing brought money into the local economies where ever production was situated.

It is easy to see then that the influx of cash for spending locally would thus dry up if the factories were moved away. Any local economy needs money coming in as funds are always flowing out in the purchase of goods made elsewhere or for other things such as taxes or services not offered locally. It is often the case that the service jobs that remain tend to serve people within the community but are insufficient to sustain the existing businesses as such transactions tend to merely see money moved around the local economy.

Not all sectors within services are like this but some professional services such as finance, accounting, or law serve a wider range of clients who can be based in more far-flung places. Such businesses with their skilled workforce tend to be concentrated in a few places and provide the basis for the large cities which have flourished. The demand for such professional services has grown along with the spread of international markets and the growing complexity of global production. At the same time, a mass of jobs has been created around such global service centres which have become the new focal points for the economy.

The large metropolises may be booming now, in part because of such a role in managing the global economy but also because they are, in some ways, the “last man-standing” in terms of offering high-paid jobs. On top of this, manufacturing is unlikely to make a comeback as, just like agriculture before it, the number of jobs on offer was always likely to diminish over time. Similar to farms, factories have a workforce declining due to the rising use of machines and greater wealth causing people to spend more money on other things. Yet, while rising food prices can bring wealth (if not much employment) to the countryside, trends in manufacturing are more likely to see fewer and fewer sites for production as bigger factories are more efficient especially when goods can be transported cheaply.

Cheaper transport and communication mean that factories no longer need to be limited to places where labour and land are cheap within industrialized countries but are free to be situated anywhere. As such, the effect of manufacturing spreading the wealth, while greatly diminished in Western countries, now instead operates on a global scale. While everyone has benefited from cheaper prices thanks to lower labour costs, it is the places at which manufacturing sites have been located that have seen the most advantages as the higher wages act to lift the local economy. It is as if the jobs in services that would have provided employment in the factory towns in the West have also been offshored.

While many have moved on, these changes have left some in industrialized countries stranded as the shift towards cities offers up little in terms of job opportunities. Manufacturing provided a workplace for people with a range of skills that are different to those who might thrive in the new knowledge economy and even get by in the broader service sector. The wider dispersion of economic activity also allowed more scope for people who preferred the greater security and closer community of smaller towns to the more individualist cosmopolitan culture of city life. On top of this, such challenges would have been easier to bear when placed on the shoulders of individuals dispersed throughout society, but the concentration of people left behind by economic growth is more difficult to deal with.

Although people are deemed to be responsible for their own fortunes, this stance is more difficult to defend when it is previously prosperous regions that suffer as economic activity moves elsewhere. With more to lose in terms of both material possessions as well as a sense of identity compared with the past, many individuals have proven unable to keep up with the demands of economic change. Government policies such as “levelling up” suggest more sympathy towards communities that have fallen behind, but the scope of the problem and the relentless forces of global capitalism mean that there is little that can likely be done. Only time will tell if it is people themselves that will need to continually reshape their lives to fit with the changing economy or if more will be done to bend the economy to the will of the people.