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News : Irish Economy Last Updated: Jan 9, 2015 - 5:15 AM


Globalization, technological change and GDP's disconnect - Part 3
By Michael Hennigan, Finfacts founder and editor
Oct 21, 2014 - 8:38 AM

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Source: The New York Times

In recent decades globalization has been a catalyst of technological change, which in turn has accelerated economic integration through step-changes in communications, science, transport and industry. However, there is evidence of a growing disconnect between GDP (gross domestic product) rises and incomes for most workers.

Aristotle, the Greek philosopher, said in his 'Politics' treatise more than 2,300 years ago: “Great then is the good fortune of a state in which the citizens have a moderate and sufficient property; for where some possess much, and the others nothing...a tyranny may grow out of either extreme. Where the middle class is large, there are least likely to be factions and dissensions.”

Globalization's new normal needs permanent underclass - Part 1

Globalization, the underclass and the need for a new model - Part 2

There is a lot of current focus on the middle class, in particular from politicians.

The Organisation for Economic Co-operation and Development (OECD), which comprises 34 mainly developed countries, says that the share of income accruing to the three middle quintiles of the income distribution (i.e. ranging from the 20% to the 80% poorest households),  which are conventionally used to identify the middle class, has fallen over time in some countries, including in Austria, Australia, Canada, Denmark, France and United States. In some cases, this outcome has been accompanied by large increases in the share of income accruing to the top quintile, especially in Sweden and Denmark, suggesting that middle-income groups have lost ground relative to the most affluent.

By contrast, strong income growth in emerging market economies and developing countries has led to an increase in the middle class conventionally defined for these countries as individuals living in households with daily per capita incomes of between US$10 and US$100 in PPP terms.

The OECD says that estimates of the actual increase in the size of middle classes vary considerably, but there is general agreement that this emerging middle-class remains vulnerable. In Africa, for example, half of the 300m people belonging to the middle-class are considered at risk of falling back into poverty
because of a death in the family or some adverse shock. This vulnerability results from widespread informality in the labour market, as well as limited access to formal safety nets, such as unemployment and health insurance, income support and other social benefits, which cushion individuals and households in more mature economies from income losses as a result of catastrophic events.

Non-standard employment is widespread. Non-standard work arrangements, including temporary employment (part-time and full-time), part-time jobs on a permanent contract and self employment, account for one-third of employment on average in OECD countries. It has grown significantly in Austria, Germany and the Netherlands, almost doubled in size in the Slovak Republic. Over 1995-2010, the share of part time employment has increased in three quarters of the OECD.

 

In 2009, Jeffrey Immelt, CEO of General Electric, said in a speech: "I have taken on the challenge to increase manufacturing jobs in the United States. These are the jobs that have created the midwestern middle class for generations. Manufacturing jobs paid for college educations, including mine. They have been cut in half over the past two decades."

The New York Times reported in January 2012 that in the previous February that President Obama asked Steve Jobs at a dinner in Silicon Valley what would it take for Apple to make iPhones in the United States?

“Those jobs aren’t coming back,” the Apple co-founder said, according to another dinner guest.

The NYT said: "The president’s question touched upon a central conviction at Apple. It isn’t just that workers are cheaper abroad. Rather, Apple’s executives believe the vast scale of overseas factories as well as the flexibility, diligence and industrial skills of foreign workers have so outpaced their American counterparts that 'Made in the USA' is no longer a viable option for most Apple products."

In his 1931 book, 'The Epic of America,'  James Truslow Adams, writer and historian, defined the American Dream as the “dream of a land in which life should be better and richer and fuller for everyone, with opportunity for each according to ability or achievement.”

One of the hallmarks of the American Dream is equal opportunity: the belief that anyone who works hard and plays by the rules can achieve economic success. Recent research finds that 40% of Americans consider it common for a person in the United States to start poor, work hard, and become rich.

The reality is that the American Dream is a myth.

PEW, the polling and research firm, said last year that the rags-to-riches story is more prevalent in Hollywood than in reality. In fact, 43% of Americans raised at the bottom of the income ladder remain stuck there as adults, and 70% never even make it to the middle while only 4% move from rags to riches.

Pew used about 40 years of data from the Panel Study of Income Dynamics, a project of the University of Michigan, which has followed families from 1968 to the present. The findings echo those of a 2012 study from the Federal Reserve Bank of San Francisco, which used the same dataset and found that 44% of Americans in the bottom quintile remain there a generation later.

In Sweden, Finland, Norway, Denmark and the United Kingdom, between 25% and 30% of people stay in the bottom quintile, according to Mary Daly, an economist at the San Francisco Fed, compared to the 44% in the US.

“This is what we call the ‘parental penalty,’ and it’s really high in the US,” she said. “If you’re born in the bottom here, your likelihood of sticking in the bottom is much higher.”

The enduring Indian caste system in rural areas is of course worse while in China the number of people living in cities exceeded the rural population for the first time in 2010.

The census showed that urban dwellers represented 51.27% of China's entire population of nearly 1.35bn - or 690.8m people - the National Bureau of Statistics (NBS) said.

China's government has said it will reform the hukou internal passport system that since the 1950s has in effect treated rural dwellers as second-class citizens.

Migrant workers have limited access to health care, education and other social benefits outside their hometowns and many have to leave their children behind when they move to cities to find work, otherwise they could not attend official schools.

Last January in the city of Guangzhou, in the southern industrial heartland, a young banker told Finfacts that he objected to the reform because of expected overcrowding in schools and health centres.

Last year saw China’s second straight annual drop in its working-age population and the country is facing a labour force fall that the United Nations estimates will total almost 30m in the period to 2025. China’s working-age population, or people age 16 to 59, fell by 2.44m in 2013, the NBS said last January.

“The decline of the labour force just makes everything more difficult in terms of generating growth,” Freya Beamish, a Hong Kong-based economist with Lombard Street Research, told Bloomberg News. “You have less people to take part in production and that reinforces the need to be more productive. It makes more urgent the need for China to find ways to shift capital to areas of the economy that can boost productivity.”

The “China Miracle” has lifted 660m people out of poverty over the past 30-plus years, Chinese state news media said Friday, the country’s first “Poverty Alleviation Day.”

China has lifted more than 500m out of poverty since 1978, the World Bank has said - it's poverty definition is surviving on under $1.25 per day.

GDP per capita and income

In many countries, income inequality has risen while growth in household disposable income has not matched gains in GDP per capita. In over half of OECD countries GDP per capita grew faster than mean household disposable income in the run-up to the crisis. This trend suggests that part of the domestic gains in production has accrued to the government and/or the corporate sector. Even though household disposable income may be underestimated, in particular regarding top income earners a rising discrepancy in the growth rates of GDP and household disposable income could confirm growing income inequality.

The Economist says that over the past 30 years, the workers’ take from the pie has shrunk across the globe. In America, their wages used to make up almost 70% of GDP; now the figure is 64%, according to the OECD. Some of the biggest declines have been in egalitarian societies such as Norway (where labour’s share has fallen from 64% in 1980 to 55% now) and Sweden (down from 74% in 1980 to 65% now). A drop has also occurred in many emerging markets, particularly in Asia.

"In America, the share of national income going to the bottom 99% of workers has fallen from 60% before the 1980s to 50%. When growth is sluggish, these shifts mean that most workers are getting a smaller morsel of a smaller slice of a slow-growing pie.

Politically, that is dangerous, and it is producing a lot of predictably polarised debate. The left blames fat-cat firms and the weakness of unions for workers’ declining share. Those on the right, if they acknowledge a problem at all, argue that the fault lies with big government and high taxes."

Reform

We do not know if global growth will return to pre-crisis levels in the next five or ten years - it appears unlikely given that the impact of China's rise will not be replicated- however, a long period of low growth would give Aristotle's warning renewed potency in modern times.

In Europe, stagnant growth and looming challenges from ageing, may not be amenable to money printing and big fiscal infrastructure programmes while structural reforms will only produce some results in the medium to long-term.

However, a relatively small bet compared with the disintegration of the euro system is a risk worth taking.

Simon Tilford of the Centre for European Reform wrote on Monday: "There is a deal to be done to save the euro from deepening crisis. The outlines of it are generally accepted outside Germany: structural reforms in France and Italy and elsewhere combined with measures to strengthen their long-term fiscal positions; and in return, a large pan-Eurozone fiscal stimulus and quantitative easing (QE) by the ECB. This offers the best way out of the current impasse in the Eurozone, not just for the periphery but also for Germany. But it will take a political earthquake for the Germans to back such a deal. Instead, the stability of the euro and the futures of the participating countries will continue to be vulnerable to the short-term exigencies of German domestic politics. This is a recipe for stagnation, deflation and political populism in France and Italy. It may culminate in a breakdown in relations between Germany and these countries and could even lead to Eurozone break-up."

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