Tgk1946's Blog

From The Retreat of Western Liberalism (Edward Luce, 2017) p32-9

… In that short period since the ‘global’ recession, China’s urban incomes had already doubled. The bulging frame of the elephant only includes some of the developing world. Many other regions, including most of Africa, Bangladesh, Central Asia and corners of Andean South America, have yet to contribute noticeably to the elephant’s bulk. Their absorption is a matter of time. In much the same way that Western investment helped bring China into the global system, Chinese investment is now doing the same for Africa and elsewhere. As China’s wages rise, its demand for cheaper labour grows. The Western worker is painfully familiar with the story. The long-term portents for Western standards of living are disturbing. ‘If this wave of globalization is holding back the income growth of the rich world’s middle classes, what will be the result of the next wave, involving ever-poorer and more populous countries, such as Bangladesh, Burma, and Ethiopia?’ asks Milanovic.

The last part of the elephant is the tip of its trunk, which shoots straight upwards in a suitably celebratory posture. That is the global top 1 per cent. Their incomes have jumped by more than two-thirds over the same period. But as Milanovic shows, that would be dramatically to understate the bonanza the global 1per cent – who are still mostly to be found in the West -have reaped since the start of the Great Convergence. The top 1 per cent’s share of the global economy is 15.7 per cent. But if you measure their net wealth, and provide reasonable estimates of what they have salted away in hidden corners, such as the offshore financial havens of the Caribbean and elsewhere, their share jumps to almost a third of global wealth. The nearer the snout you get, the sharper the growth. The world’s wealthiest subset – the 1426 richest individuals on the planet are worth $5.4 trillion, which is roughly twice the size of the entire British economy and more than the combined assets of the 250 million least wealthy Americans. The asset value of the world’s leading billionaires has risen fivefold since 1988. What one could do with all that money is a parlour game we all enjoy: ‘Suppose now that you inherited either $1 million or $1 billion, and that you spent $1000 every day. It would take you less than three years to run through your inheritance in the first case, and more than 2700 years (that is, the time that separates us from Homer’s Iliad) to blow your inheritance in the second case,’ says Milanovic of the richest group. Meanwhile, between a quarter and a third of people in the West have negative or zero net wealth. They face penurious retirements. As I say, if you want an economic chart that stops you from sleeping you should start with the elephant.

Now, recall what came before the elephant. That was what we now refer to as the Golden Age of Western middle-class growth between the late 1940s and the early 1970s, or what the French call les Treme Glorieuses of rising incomes for the bulk of society. The annual gains were almost metronomic. Then something went wrong. It can be corrected, we tell ourselves. The West somehow managed to step off the natural escalator that assured annual income growth of 2 to 3 per cent, which roughly doubled our standard of living every generation or faster. We had faith that by the end of their lives our children would be three to four times better off than we are. For brief moments, such as during the internet boom of the 1990s, that age looked like it had returned. But the growth vanished almost as quickly as it came. We are still awaiting the productivity gains we were assured would result from the digital economy. With the exception of most of the 1990s, productivity growth has never recaptured the rates it achieved in the post-war decades. ‘You can see the computer age everywhere but in the productivity statistics,’ said Robert Solow, the Nobel Prize-winning economist. Peter Thiel, the Silicon Valley billionaire, who has controversially backed Donald Trump, put it more vividly: ‘We wanted flying cars, instead we got 140 characters [Twitter].’ That may be about to change, with the acceleration of the robot revolution and the spread of artificial intelligence. But we should be careful what we wish for. The squeeze is already uncomfortable enough.

I am nearing fifty. My generation those born in the mid-to-late 1960s and the 1970s straddled the transition from the golden years to the new normal, though we did not wake up to it until we were into our thirties. We grew up with the lofty expectations of our parents, but with the waning hope they would come to pass. The same is even more harshly true of our downgraded retirement prospects. To be clear: the West’s souring mood is about the psychology of dashed expectations rather than the decline in material comforts. A few years ago a New Yorker cartoon caught the essence of how we feel about things. It showed a Chinese mother finger-wagging at her daughter’s uneaten dinner: ‘Eat your rice, Han Ling, don’t you know there are children in West Virginia who are starving?’ Nevertheless, most Westerners of almost any age group, and in almost any income bracket, are still considerably better off than most of their counterparts in China, India and other swathes of the emerging world though those gaps are narrowing. (China’s urban per-capita income is approaching half of the level of America’s per-capita income. A generation ago it was a sixth.) We are also unimaginably luckier than any generation before us. Queen Victoria would envy the medical care that is now free at point of access to even the most socially excluded UK citizen. Andrew Carnegie would marvel at the electronic library that is just a thumbprint away from all but the most disconnected Americans.

Are we simply imagining our woes? No. The West’s middle-income problem is real and deepening. The most crushing effect is stagnation. Many of the tools of modern life are increasingly priced beyond most people’s reach. Robert H. Frank monitors something called the Toil Index – the number of working hours it takes a median worker to pay the median rent in one of America’s big cities. In 1950 it took forty-five hours per month. A generation later it had edged up to fifty-six hours. Today it takes 101 hours. Much the same rising unaffordability applies to the cost of decent health insurance in America, and higher education. If 1985 equals one hundred, then the price of most things, such as food, electronic goods, basic clothes or a car, has fallen to double digits, and in some cases astonishingly lower. These are the products you find on Walmart’s shelves. In contrast, the cost of obtaining a degree, or paying for a reasonable package of health insurance, has catapulted to above six hundred. The US rate of inflation has been hovering around 1 per cent for years. Yet the cost of services that will enable people to survive and their children to thrive is growing at doubledigit annual rates. Inflation is another outdated number that no longer means much to the typical Westerner. It no longer captures what people most value. Without good health and the ability to pick up the cognitive skills you will need to get a good job in tomorrow’s economy, your life chances are badly handicapped. This is not an outgrowth of people’s frustrated imaginations. It is what many, and possibly most, Westerners experience on a daily basis. The runaway costs of acquiring social capital are why so many are so pessimistic about their children’s life prospects.

When people lose faith in the future they are less likely to invest in the present. That sense of personal stagnation – and the gnawing fear you may even be sinking – casts an enervating pall over the human spirit. Ronald Reagan once said, ‘Progress is our most important product.’ He was speaking of General Electric, for whom he worked. But he also meant America. Writing in the 1950s, Daniel Bell, the great American sociologist, said, ‘economic growth has become the secular religion of advancing industrial societies’. He was right. It follows that in its absence, many people lapse into the equivalent of atheism. That sense of listlessness shows up in many ways. In the labour market, it means falling rates of workforce participation. Much as the desire to worship falls in agnostic societies, the yen to work drops in flat economies. In the last decade, America’s share of people in full-time jobs has dropped to European levels, which used to be written off as a sclerotic consequence of the continent’s over-regulated labour markets. Now the US rate is bang on the European average. In some respects it is worse. There is now a higher share of French males in full-time jobs than Americans a statistic that reflects poorly on America, rather than well on France.

America’s opioid epidemic is another warning light. Emile Durkheim, the father of modern sociology, said that when societies hit a civilisational break the suicide rate soars. Deaths from drug overdoses have tripled since 2000: America’s opioid-heroin epidemic now rivals HIV-Aids at its peak. Some of the deaths are accidental. Some deliberate. You can choose your culprit. Heroin comes from Mexico. Painkillers come from your family doctor. The epidemic’s rise is linked to the rapid spread of prescription painkillers. America’s incidence of acute pain has not quadrupled since the late 1990s, yet the volume of painkiller prescriptions has. Sales of OxyContin, the strongest opioid on the market, shot up from $45 million in 1995 to $3.1 billion in 2015. The epidemic is one reason US life expectancy has dipped in recent years, which is not supposed to happen in peacetime. Other symptoms of stagnation include falling tolerance for other people’s point of view, and a fading enthusiasm to join social groups. ‘I believe that the rising intolerance and incivility and the eroding generosity and openness that have marked important aspects of American society in the recent past have been, in significant part, a consequence of the stagnation of American middle-class living standards,’ writes Ben Friedman, in the The Moral Consequences of Economic Growth. De Tocqueville talked admiringly of America’s ‘restlessness of temper’. Today, in a society where Americans are increasingly ‘bowling alone’, as Robert Putnam put it, the great French chronicler might be moved to talk about America’s shortness of temper. Adam Smith, the great theorist of free trade economics, is revered for his The Wealth of Nations. His companion work, The Theory of Moral Sentiments, is mostly forgotten. Yet it is the more important of the two. In it, Smith sets out why capitalism works best in societies where there are high levels of trust between its participants. When social trust falls, the cost of doing business rises. Even in the late eighteenth century, at the dawn of modern growth, Smith grasped the psychological importance of possessing faith in a better future. When trust goes, so much else goes with it. ‘[It] is in the progressive state, while the society is advancing to the further acquisition, rather than when it has acquired its full complement of riches, that the condition of the labouring poor, of the great body of the people, seems to be the happiest and the most comfortable,’ Smith wrote.

When economic growth slows, society loses pace. That might seem counterintuitive in an age of instant connectivity. But we delude ourselves that the frequency with which we post Facebook updates, tweet or communicate on Snapchat amounts to meaningful action. Having hundreds of Facebook friends is no substitute for seeing people. Western societies are steadily getting older. The median age in the US is now thirty-nine compared with twenty-seven in India, for example. In the UK it is forty. During the baby boom years, which ended in 1964, people tended to have large families, as is true today for most of the rising middle classes in Asia and elsewhere. An ageing society is a less entrepreneurial one. Americans are far less likely to move across state boundaries than their parents. Interstate migration has fallen by more than half since its peak in the postwar decades. Older societies are also less likely to launch businesses. The rate of start-ups in America has been dropping for years and is beginning to rival Europe’s less entrepreneurial pace. America’s per-capita rate of triadic patent applications – those that are filed in the US, Europe and Japan, which screens out the frivolous ones – has fallen by a quarter since 2000.