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Globalization’s So-Called Winners and Losers – Article by Chelsea Follett

Globalization’s So-Called Winners and Losers – Article by Chelsea Follett

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The New Renaissance HatChelsea Follett
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A recent Washington Post analysis has argued that political events as diverse as the Brexit and the rise of Donald Trump can be explained by a “revolt” of the world’s economic “losers.”

Before proceeding, it is important to keep in mind that all income groups in the world have seen gains in real income over the last few decades. That said, some have gained more than others. Between 1988 and 2008, for example, the lowest gains were made by people whose incomes fit beteen the world’s 75th to 90th income percentiles. That includes much of the middle and working class in rich countries.

The Washington Post calls the people in this group the bitter “losers” of globalization. But, are they?

follett1There are at least two problems with characterizing such people as “losers.” First, it seems to suggest that income growth rate matters more than absolute income level. Yet a person in the 80th income percentile globally would not want to trade places with or envy someone in the bottom 10th percentile, despite the latter’s much higher income growth rate.

Consider real GDP per person, adjusted for differences in purchasing power, in China and the United States. Between 1988 and 2008, China’s per person GDP grew by over 340 percent. America’s per person GDP, in contrast, grew by “only” 40 percent. China may be making gains more quickly, but it would be wrong to argue that the United States was a “loser,” for American GDP per person in 2008 was $52,704 and China’s $8,104.

chinagrowth

Poor countries are seeing faster income gains partially because their starting point is so much lower—it’s a lot easier to double per person GDP from $1,000 to $2,000 than from $40,000 to $80,000.

The second problem is that the Washington Post piece suggests that the incredible escape from poverty that has occurred in poor countries during my lifetime has come at the expense of the middle classes in the developed world. (This is a fascinating reversal of the more popular, but equally inaccurate, opinion that the Western riches came at the expense of poor countries).

Thus, the Washington Post piece claims, “global capitalism didn’t always work so well for workers in the United States and Europe even as—or, in some cases, because [emphasis mine]—it pulled hundreds of millions of people out of poverty everywhere else.”

Fortunately, prosperity is not a zero sum game.

When trying to understand the “winners” and “losers” of globalization, it is important that we do not compare income growth rates over the last few decades with some imagined ideal. Instead, we should compare income growth to what would have happened in a world without globalized trade. In such a world, hundreds of millions of people would have remained in extreme poverty. And the middle class of the developed world would also have made fewer gains. Just look at the amazing reduction in price of consumer goods that we have collected at HumanProgress.

A few individuals in select industries would benefit from protectionism, like the U.S. sugar industry does now. But on average everyone would be poorer, just as in 2013 Americans collectively paid 1.4 billion dollars more for sugar than they would have without protectionism. (The U.S. manufacturing industry, it may be worth noting, would not be among the “select industries” to benefit—most manufacturing job losses have come from mechanization rather than outsourcing, and have been offset by new jobs in other sectors).

Thanks to trade and exchange, people in all income percentiles have made real gains, and living standards for the middle class in advanced economies have soared in ways not captured by looking at income alone. America’s middle class is getting richer, and the people in the world’s 75th to 90th income percentiles are also winners.

Chelsea Follett is the Managing Editor of HumanProgress.org, a project of the Cato Institute which seeks to educate the public on the global improvements in well-being by providing free empirical data on long-term developments. Her writing has been published in the Wall Street Journal, Newsweek, and Global Policy Journal. She earned a Bachelor of Arts in Government and English from the College of William & Mary, as well as a Master of Arts degree in Foreign Affairs from the University of Virginia, where she focused on international relations and political theory.

This work by Cato Institute is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported License.

Why Is the Middle Class Shrinking? – Article by Steven Horwitz

Why Is the Middle Class Shrinking? – Article by Steven Horwitz

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The New Renaissance HatSteven Horwitz
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Two Arguments in Favor of Economic Inequality

Economic inequality continues to be a major political issue even as the headlines scream about terrorism and climate change. Bernie Sanders has made it a centerpiece of his presidential campaign, and other candidates have addressed it along the way. And a recent study by the Pew Research Center has added new, though misplaced, fuel to the fire of those concerned about inequality.

The Pew study has been discussed in the media, and one key point has been grossly misunderstood. Among other things, the study found that the American middle class is shrinking and is now just under half of the population. Commentators quickly began to refer to the “hollowing out” of the middle class and to tie this study to the concerns about growing inequality.

However, a close look at the data shows that the middle class has shrunk since 1971 because more members of the middle class have moved up the income ladder than down it.

Don’t believe me? Look for yourself at the terrific graphic that the Financial Times created to illustrate the data:

ft2015inequalitygraphYou can watch as the folks on the left slowly slide to the right over 44 years. When you compare the 1971 distribution with the 2015 one, what do you see? A growth in households earning around $80,000 or above, adjusted for inflation, since 1971 and a significant decline in those making less than that amount (with the exception of the folks right around $0). It’s true that there’s not a fat middle class anymore, but why should that trouble us if there are more high-income households and fewer low-income households overall?

The funny part of this is that if you read the story in the Financial Times that accompanies this graphic, it’s as if they never actually looked at the graphic they produced. Their narrative is at odds with it, as the narrative proclaims the doom-and-gloom story that the graphic actually refutes. As they say, never let the facts get in the way of a good story.

This growth in household income may, to some extent, be a by-product of the same economic processes that have produced the concerns about inequality, illustrated in this graphic by the significant growth of the ultra-rich.

There are far more very rich people today than there were 44 years ago, but the growth of the upper class has gone hand in hand with the enrichment of a large number of less-well-off households. Are there ways in which economic inequality is good, then? I think the answer to that question is yes. If so, then, what are they? Here are two defenses of economic inequality that proponents of the free market could make.

First is the more obvious one: growing inequality is good because it might be a consequence of economic institutions that produce all kinds of results that we think are desirable. For example, if competitive markets lead to peace and rising prosperity for all but also create inequality along the way by allowing some folks to get very rich, then we should at least tolerate that inequality because the things that produce it also produce other things we like.

This is the usual defense libertarians invoke, and it’s a good argument. The critic, however, might say that even if the defense is true, it doesn’t prove that inequality is necessary for that result. There’s a difference between saying, “Good economic institutions will produce inequality while creating good economic outcomes for all,” and saying, “Good economic outcomes for all can’t be produced without inequality.” The critic would likely ask how reducing the inequality that markets produce will harm their ability to produce those good results.

And here is where we come back to the Pew study and get a second defense of inequality. One way the middle class (and all of us) has become richer in the last generation is that the cost of so many goods and services has dropped in terms of the number of hours we have to work at the average wage in order to purchase them. The lower price of basic goods has enabled more and more people to afford things like large TVs, smartphones, and new, cheaper medications.

One thing that has made this process happen is inequality. In The Constitution of Liberty, F.A. Hayek argued,

A large part of the expenditure of the rich, though not intended for that end, thus serves to defray the cost of the experimentation with the new things that, as a result, can later be made available to the poor.… Even the poorest today owe their relative material well-being to the results of past inequality.

Having a group of very rich people is what enables yesterday’s luxuries to become today’s basics.

There are two parts to this process: cost bearing and discovery. The very rich are able to afford the high prices of new technologies, thereby providing an incentive for firms to market new and expensive products. Once the rich pay the high initial price and cover the fixed costs of research and development, sellers can begin to price closer to the much lower marginal cost of producing additional units, making the good much more affordable to more people.

But the rich are also an economic canary in the coal mine that informs producers whether they are getting it right.

For example, a critic of inequality might complain that no one “really needs” a $100,000 luxury car with all kinds of new high-tech gadgets on it. But the fact that some can afford it and want to buy it helps the car companies figure out which new features might be popular. Rear-view cameras were once only available on top-end cars, but they have slowly become a standard feature. The same may soon be true of collision warning systems now available on high-end models of some cars.

In fact, everything we think of as basics today was once the province of only the well-off. The first microwaves were expensive and bought mostly by the rich. I can remember my parents paying about $900 for a VCR in the late 1970s. VCRs, of course, fetch a price close to zero these days. The rich who bought the early LCD TVs helped manufacturers defray the fixed production costs and figure out what people wanted, and now these TVs are in the vast majority of houses at a more affordable price.

The inequality at any point in time is a key part of the process that creates wealth for the rest of society over the years to follow. The very rich enable producers to experiment and cover their costs, and that makes more goods more affordable for the rest of us, from fun toys to life-saving necessities.

The inequality produced by the market is a key part of how the market moves forward, enriching all of us in the process. And that’s why the middle class is shrinking: the rich, through the competitive market, have helped make the middle class richer.

Steven Horwitz is the Charles A. Dana Professor of Economics at St. Lawrence University and the author of Hayek’s Modern Family: Classical Liberalism and the Evolution of Social Institutions. He is a member of the FEE Faculty Network.

This article was published by The Foundation for Economic Education and may be freely distributed, subject to a Creative Commons Attribution 4.0 International License, which requires that credit be given to the author.