The 1%

Everyone starts from their preconceptions or prejudices (e.g. immigrants, China, shareholder capitalism, socialism, globalisation, the global elites) and concludes this is why everyone is angry, why some people are left behind, why people have stagnant incomes, why their community or suburb isn’t very prosperous and crime ridden. I’d argue the economics is important and a good understanding of recent economic history is not something that drives current political narratives. Blaming others for economic woes is not just a late 20th / early 21st century phenomenon. In his magisterial history of the seventeenth century, Global Crisis, Geoffrey Parker explains how an exogenous shock – in that case the so-called Little Ice Age – resulted in a series of uprisings across the globe. The people, instead of realising the climate was to blame for falling crop yields (and therefore poverty and death), instead fixed their eyes up on the elites, and the existing social structure. The result was a century of revolutions, revolts, uprisings, and wars. Fast forward to the second decade of the 21st century and a lot of people in western democracies are angry about their jobs, incomes, housing, public services, crime, poverty, and so on. Some people alive today did have good jobs, but small towns and industry have declined. Where did those people come from in the broadest sense? Well, to understand our current predicament, we need to first understand where we all our parents and grandparents came from. Growing up in the post WW2 period in the developed world was like winning the lottery: you were a member of the global 1% by accident of birth. The reason the developed world was so well off is that it had learned the secret of mass manufacturing, and it was where all the capital (in terms of machines that made things) had been deployed. Back in the 1950s and 1960s, the developed world exported manufactured products and services, while the developing world (including China) exported raw materials. This relationship was very good for workers in rich economies, as they were the bottleneck in world economic production. The producers of raw materials – say Brazil and China for iron ore, and the Middle East and Nigeria for oil – were poor, and the makers of cars were rich. This manufacturing wealth had wider social impacts that aided a feeling of wellbeing. For much of the post war period, developed countries – and their citizens – had it pretty good. Unemployment was negligible, crime low, and each generation successively richer. A German, Japanese or American father could look down on his children and feel confident that their lives would be better than his. There was social mobility through the generations. Generous welfare benefits could be afforded which did not make employing people uncompetitive because the competitors were similar running similar types of manufacturing economies. This began to change with the emergence of the so-called ‘tiger’ economies in the late 1980s and 1990s: Taiwan, South Korea, Singapore and Hong Kong. Entrepreneurs in these countries realised that they had something that the old world did not – plentiful, cheap, labour – and that buying capital goods from Germany or Japan enabled them to compete on the world stage. Where these small countries led, China and others are now following. China – which just 20 years ago was an exporter of coal, oil and various other commodities – is now a manufacturing powerhouse and commodity importer. The developed world’s core competence, turning raw materials into manufactured products, was taken away from them. This of course had impacts on where capital would now be spent and therefore jobs and wealth – and the affordability of welfare and benefits which were now a competing cost against economies without generous welfare states. But it was more complicated than that. Discontent was foaming for other reasons fuelled by stagnant GDP and rising inequality across generations. It was not just about China and others learning to manufacture ‘stuff’ we wanted to buy. The other drivers have been demographics (we are getting older and therefore healthcare is more expense), competition for resources and commodities and globalisation. Western economies continued to grow in capita GDP terms, but median income did not and the symptom of that has been widening inequality fuelling concern about the 1%. That disconnect has been rising from the early 1980s, but not necessarily because of deliberate policy actions. It’s an old adage that it is easier to share gains than losses: when everyone’s income was rising, the difference between the richest and the rest seemed a price worth paying. Across the developed world, people are discontented because the old post War consensus has been broken. We are no longer all getting richer. And worse, we have a situation where a certain segment (the elites, the 1%, etc.) have gotten richer, while many others have gotten poorer. With consumer debt at elevated levels in many places, and the cost of entry into the middle classes – a university degree – both costing more and offering less, we should not be surprised that the stratification in society is resulting in fractures. Those fractures have had real life impacts at the traditional family level. The children of the 2000s ceased being wealthier than their parents. And while incomes had apparently risen, so had the prices of petrol, of energy and of rent. While families of the 1970s could survive – or even prosper – with one working parent, it now required two. Young people were leaving university with ever larger amounts of debt and failing to find the kind of secure, well paid jobs their fathers had. Unemployment in previous industrial areas had other social impacts: more crime, family breakdown, drug use, and poor mental health We see these trends wherever we look. Take the US, generally considered (by us in Europe at least) to have been the most successful developed economy in the world in the recent past. According to the US Federal Reserve, real median household income is down almost 10% since peaking in 1999. That’s an unprecedented reduction, and is all the more shocking in the context of a country where headline GDP growth has been relatively strong. There have been similar problems in the UK with some differences. Income is taxed very heavily, capital is taxed relatively lightly and land not taxed at all. The efficiency of government spending has collapsed as public services are no longer controlled by the taxpayer. That reduction is an inevitable consequence of the unprecedented competition faced by the low to medium skilled from the development of what were previously third world countries, specifically China. The massive increase in global trade simply left those groups, which contain the majority of the population, with no negotiating power. If they don’t like the lower wages the factory was transplanted to another country, and minimal tariffs meant that the business could still produce its product for the market in the US or the EU. In the UK, this dynamic played out with peoples’ feelings towards the EU and Brexit. Before the expansion of the EU to former Soviet countries, the original countries of the EEC were of similar economic standing, especially their labour markets. But more labour from places like Poland suddenly made producing goods cheaper in Poland rather than Birmingham. It was of course possible for the UK to thrive an expanded European Single Market, as Germany did, but it would have needed a completely different policy mix from governments (e.g., higher taxes on wealth) who almost certainly would not have been re-elected. Simplistic, idealistic notions of the benefits of free trade, low or non-existent tariffs we have since emerged as a response to these problems have completely undermined the majority of western society. Those with capital or with exceptional skills at the top have, of course, gained massively and we have seen GDP creep up, usually with increasing trade deficits as we import much of what we used to make. We have heard this song before of course. Between the First and Second World Wars, following the US passing of The Smoot-Hawley Tariff Act of 1930, a wave of protectionist measures were passed around the world. This did not end well: world trade collapsed, and economies – that had been recovering – deteriorated further. The raising of tariff barriers around the world was one of the ultimate causes of the Second World War; something recognised in the creation of the General Agreement on Tariffs and Trade in 1947, which went on to become the World Trade Organisation in 1995. It is true that the benefits of free trade appear very unequal: to an unemployed steel worker in Sunderland, the 1% in his country have gotten wealthier, as have the people of China and other emerging markets, while he has found himself without a job. The problem is that the proposed alternatives – of erecting tariff barriers – make the problem worse. Raising tariff barriers on – say – imported steel to maintain jobs in Redcar or Port Talbot will not save those jobs. Or, if it temporarily does, it will do so at the expense of the steel consumers of the UK – car makers and the like. So everyone is frustrated with some justification. They did not make these decisions about capital or vote for them. Right-leaning ones channel their frustration into what I would see as counter-productive radical politics and/or religious obsessions like abortion; left-leaning ones are simply frustrated that the political system seems unable to respond in any meaningful way to a concern that is so widely shared and rage about the 1%. Politicians are stumped and talk only in platitudes and soundbites about ‘good quality jobs’ without knowing what to really do. It is a mess.