Given his propensity to lies, half-truths and ‘alternative facts,’ it’s perhaps not surprising that Donald Trump would withdraw one of the few true things he said. Early in the Republican primaries, he said America was losing jobs because its wages were too high. This obviously didn’t go down well with the rust-belt crowd he was trying to impress, and he soon rowed back his comments. Instead, he has begun harassing the migrants who accept lower wages while threatening to block trade with low-wage countries.
As I’ve written before, in the short term this will probably boost the economy but undermine its long-term position. The party will end badly. The simple fact is anyone trying to restore the growth rates of old to Western societies is paddling up river, and the only thing they can do is inflate speculative bubbles that juice short-term growth, then burst. The dotcom bubble of the Clinton years, the housing bubble of the Bush years, and now a new stock-market bubble caused by Trumponomics will go the way of every other one. Ordinary Americans will be left with another hangover.
Growth in the Western economy hasn’t stopped, but it has dwindled to an annual average of around one percent per year, and shows no signs of returning to the levels our parents and grand-parents knew. That’s because, to put it crudely, we’ve all grown too rich and lazy. There are billions of people in developing countries, willing and eager to do the job for less.
That’s not a normative statement, it’s just a fact. Ha-Joon Chang points out that a Swedish bus driver earns fifty times what an Indian bus driver does, but you’d be hard-pressed to say the Swedish bus driver has the harder job or applies more ingenuity to the task (thereby earning what economists call a skill premium). If anything, the opposite is true.
The standard response on the left to this blatant discrepancy in earning-power is to say that we all deserve higher wages, both the Swedish and Indian bus driver. But that reasoning is actually a bit lazy. The high incomes of western societies were, for the last two centuries, subsidised by the booty of empire, but now the empire can no longer assert its dominance. In fact, measured in financial capital flows, the net direction of the movement has switched in the opposite direction, with capital flowing to the periphery.
This has been a golden rule of empires throughout history. The empire expands when the rich go looking for cheap land and labour abroad. It peaks, then the poor come looking for their opportunities. If they don’t move into the heartland, as happened in the Roman Empire, the empire goes looking for them. Given that capital today is so mobile, it has started out-sourcing to low-wage zones to maintain its position.
If we compel capital to stay at home, as President Trump is trying to do by bullying and cajoling firms to stay in America, the end result will be higher output prices and a lower standard of living. As the labour supply dwindles in the West amid an aging population, and as the cost of looking after those old people rises, what’s keeping us afloat is that we’re still able to import human capital from the periphery: migrants who come with skills and work-ethic and who keep the economy turning over. Send them back home, and you might as well fasten your seatbelts: after a few years of cruising on a highway of higher growth and rising wages, the car’s gonna crash.
I’m not saying we have to live by the rules of the free market. I’m saying the market has never been free, but was backed up with the force of arms. The slaves that helped power the rise of the West didn’t freely enter their contracts, nor by and large did the native populations in the Americas, Antipodes and Africa who gave up their land and resources.
But, every empire has its day, and we have had ours. Even though Third-World countries won their independence in the middle of the last century, it took them until the end of the century to build up the bureaucratic and political capacity to start getting fairer trade deals and creating the policy environments that encouraged the development of their own economies.
As I have always written, the inevitability of relative Western decline — and let’s remember it’s relative, because our economies will continue growing — needn’t be a cause for fatalism or resignation. Instead, it’s an opportunity for imagination. You see, there may be something to gain from slower growth. There are grounds for believing the gains in well-being due to income growth have peaked, and that our future well-being will be tied not to getting more, but to using what we have more wisely. However, a left pining for the good old days isn’t going to get us any closer to crafting that new narrative.
Image: Thames Embankment, after the rain