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Summary
This page considers the effects of economic & trade policies on growth and inequality. It may seem to cover rather a mish-mash of loosely connected issues, but considering them together offers the following conclusions:
Global trade has delivered dramatic and rapid reductions in extreme poverty across the world,
And yet, inadequately taxed capitalist markets have also dramatically increased inequality over the last 40 years (since the beginnings of deregulated capital markets and tax changes favouring the wealthy), which is especially apparent within nations.
Efforts to manage national economies through tailored fiscal and monetary policies – suited to each nation's particular needs – have been hampered by the power of global capital markets (particularly affecting small nations) and yet also, where nations come together in strength, as in the EU, they are instead restricted by the inflexible constraints of a single currency.
The increasing power of global markets and the wealthy elite who control them has contributed to a rise in nationalist populism – reflected most notably by Britain's exit (“Brexit”) from the EU. Yet a retreat to national boundaries is the opposite of what is needed to promote the continued alleviation of poverty through global economic growth (which can be most readily achieved in the poorest nations, such as in Africa, as they have the most growth potential).
Inequality should be tackled by challenging a range of current orthodoxies, including through more-progressive and efficient taxation, unconventional monetary policies (including promoting productivity growth with public sector pay rises), and stronger collective bargaining that's more responsive to worker's needs through reformed unions that could be integrated within competing international business networks (“Capitalist Co-ops”, which may even effectively have their own currencies), supported by international trade agreements that bolster workers’ and citizens' rights.
Declining poverty yet rising inequality
Over the past 175 years, technological innovation, facilitated by competitive trading markets and supported by liberal & social-democratic governments, has reduced the share of people living below the threshold of extreme poverty from 80-90% to under 10% (reducing 75% in just the last 75 years), and halved the absolute number even as the total living above it has increased from about 100m to over 6.5bn. Also global life expectancy has risen from a little under 30 years to over 70 (& 80 in the developed world) and literacy rates have increased more than fivefold, to over 80% (90% of the world’s population under the age of 25 can now read and write, including girls, compared to less than 15% – mostly men – for most of Europe's history).
Overall economic progress is accelerating, with global trade lifting about a billion people out of extreme poverty in just the two decades to 2013 (e.g. in Vietnam), and half the global population in 2018 considered middle class or wealthier.
However, that's not the whole story. People living off the land in undeveloped areas of Africa, India & China some hundred years ago may have had very little money but a better quality of life than after they were thrown off the land and forced to seek a meagre wage. Moreover, whilst measures of "extreme poverty" may show genuine improvements in more recent years, those struggling with lesser poverty haven't necessarily enjoyed similar benefits, with only 12% of all new income from global growth from 1980 to 2016 "trickling down" to the poorest 50% (and only 5% going to the poorest 60% over the decade to 2008) — thus concentrating an increasing level of global wealth (& power) into fewer hands, such that by 2018 the richest 1% of the world's population owned about half of all its wealth (& was on course to own two thirds by 2030), and the world's 26 richest billionaires had the same total wealth as the 3.8 billion people who make up the poorest half of the planet’s population (who must live off less than US$6 per day).
In the following chart of global income distribution (2011), the large populations of Asian & African countries are shown by the large areas, predominantly at low incomes. The relatively small numbers of people on higher incomes are almost exclusively in developed countries (and note income is on a log scale, thus understating how much higher their income is).
"Trickle-down" economic policies (tax cuts for businesses & rich executives/investors) started c. 1980 under Reagan (& Thatcher), resulting in dramatic growth in the wealth of those at the top of society, relative to the rest.
Evidence of wealth "trickling-down" to the poorest in society seems piss weak!
In 2007 the richest 1% of the American population owned 35% of the country's total wealth, and the next 19% owned 51%. In 2011, the richest 1% in the United States owned 40% of its wealth and they basically control its government & society. By 2021 they owned more than the middle 60%.
Further charts on inequality in the US and Australia are at the end of this page.
Global trade competition combined with similar economic ideology in Anglo countries especially (UK & Canada) led to similar trends of increasing inequality, though less so than in the USA. More recently, Germany seems to be also following suit:
Problems arising from global trade competition
Rising inequality is an especially important factor impacting affordable housing, because land prices are determined by the total wealth of society, and it is the relative wealth of individuals that determines what they can afford to buy.
However, because the liberalisation of international markets coincided with tax changes benefiting the wealthy, it's important to distinguish between the effects each have had on inequality. Whilst increased global trade has benefited those in poorer countries, and also effectively increased wealth in developed countries by providing cheaper goods, the increased competition might also be seen as a threat to the pay & conditions of people working in previously protected industries. Ultimately though, the ability of ordinary working people to demand better conditions (e.g. through collective bargaining &/or the political process) depends on the productivity potential of their community & nation, which is largely determined by its physical & human capital that is founded on public infrastructure & services (whether owned by government or private sector) such as transport, telecommunications & other utilities, universal education & health care and the fair & effective rule of law.
So whilst global trade may be a key component of tackling poverty, we also need to maintain national democracies' sovereign-right to regulate corporations with laws and active measures to support society & the environment, including the rights & needs of the working masses, through means such as unions (or "Capitalist Co-ops"), public services and not least, a more progressive tax & welfare system that reverses the trend of recent decades of replacing higher-rate income taxes with regressive consumption or sales taxes (in the name of "economic efficiency"). As an indication of the potential magnitude of change possible (though perhaps not the best approach), a wealth tax on the richest 1% would raise an estimated $418bn (£325bn) a year — enough to educate every one of the world's 262 million children not in school and provide healthcare that would prevent 3 million annual deaths.
Increased global competition can also create adjustment problems, even though it may have net benefits over the long term. For example, economic progress is generally not spatially even or temporally consistent, so some people can lose out from a rapid pace of change over the short to medium term. Trade between people and nations undoubtedly improves human welfare in general, but it inherently creates interdependencies, which can be a good motivator for avoiding war, but can also result in stability problems when major changes cascade across individuals, businesses, nations and the global economy.
The question of how best to respond to increased global competition depends on whether a loss of local industry competitiveness is likely to be sustained or temporary (and perhaps artificial if it is caused by changing protectionist policies). For example, developed countries should consider how long "emerging" or rapidly-developing economies such as China are likely to be able to maintain low export prices, because if prices rise as their wealth and labour costs increase, then it might be a mistake to expose competing local production to potentially being eliminated by currently low import prices. On the other hand, if low prices are likely to be maintained indefinitely through continued investment in technology and innovation, then – putting aside strategic self-sufficiency & resilience concerns – tariffs will just protect local inefficiency, ultimately to the importing nation's own cost.
Another potentially negative consequence of trade is that economic stability is dependent on confidence in others, and loss of confidence can become self-fulfilling and reinforce a crisis, as occurred in 2007-08 and after — the fallout from which has extended for over a decade, and encouraged a retreat to damaging nationalistic & protectionist trade policies, as reflected in the "Brexit" vote and election of Trump.
So to address the underlying issues of concern, whilst avoiding the worst inclinations and possibilities from these movements, we must challenge existing orthodoxies for national and global economic management.
Modern Monetary Theory & Public Sector Wages
After bad past experiences of spiralling wage & price inflation, controlling this through monetary and employment policies has been a major focus of western capitalism over recent decades. But as inequality has increased in some areas (especially the USA), these policies have negatively impacted workers' income security and consumer demand, which in turn reduces business investor confidence and economic growth — resulting in monetary policies trying to compensate through extremely low interest rates, which (writing before 2018) still don't seem to be having strong effect.
In response to this failing, new views are developing on "Modern Monetary Theory" (MMT) — developed by Professor Bill Mitchell at The Centre of Full Employment & Equity (CofFEE), Newcastle University, Australia, and espoused by former Chief Economist for the US Senate & adviser to Bernie Sanders, Stephanie Kelton. Though I don't claim to understand all the detail of MMT, my thoughts on its fundamentals are in the side column.
Two potential policy options stemming from MMT are described in this news article, which says:
"One controversial option being canvassed by experts is for central banks to deliver "helicopter drops" of cash directly to citizens' bank accounts in the hope they will spend it and revive growth.
Even more radical is a proposal for governments to mandate an across-the-board pay rise for workers."
One way of acting on the idea of "helicopter cash drops" could be to implement a Universal Basic Income (UBI), which could encourage consumption and economic growth by reducing the risks faced by low-income households, thereby increasing their confidence to spend and to bargain harder for higher wages, even if the UBI didn't directly change their current net income (note however that many MMT advocates don't favour a UBI because they think – wrongly in my view – that it could discourage productive work). Alternatively (or in addition), "Capitalist Co-ops" could offer a new approach for unions to push for higher & more secure wages (particularly if they are good for the co-op network as a whole), which have been suppressed in recent years by de-unionisation trends that have reduced job security & bargaining power and thereby contributed to lower equality & economic growth, whilst CEOs have grabbed obscene pay levels for themselves, with no evidence that has delivered greater value to shareholders.
Another option could be to abandon public-sector "Wages Policies", which limit wages growth to only CPI unless offset by productivity improvements. Wages policies place the onus for productivity improvements on workers instead of management, which is perhaps arguable under Labour/union-controlled governments, but far less appropriate under Liberal/Conservative ones, when it is a lazy approach to fiscal management that removes budget pressures on Ministers that could otherwise encourage them to pursue productive reforms. They can also distort government agencies into favouring outsourcing, potentially at higher cost than in-house labour. Government Treasuries need to stop micro-managing service agencies in this way, and instead focus on providing them with relatively stable medium-term funding guidance, as the foundation for a transformation of public sector financial management.
It's no surprise that with Australian public sector wages being restricted like this in recent years, it has flowed through to lower wage increases in the private sector (at a record low in 2016), and in turn, lower growth in consumer demand, productivity, GDP & tax revenues. The charts in this article clearly show the slump in Australian wages growth, which after briefly recovering from the 2008-09 Global Financial Crisis, commenced soon after the election of Liberal-National State governments that began strictly enforcing public-sector Wages Policy (Victoria in 2010, NSW in 2011, Queensland in 2012) and was further reinforced after the 2013 national election of Tony Abbott.
So after this failed experiment on low-middle income households, the obvious policy to test is the converse, i.e. increase public-sector wages (with public sector management developing offsetting efficiency savings to ensure medium-term fiscal sustainability), which should create pressure in labour markets for higher private-sector wages and encourage private companies to invest & innovate in order to increase productivity and fund these wage increases without higher-priced goods (see below on why wage increases should happen first with this strategy).
MMT — what's it all about?
Drawing substantially on this article, along with my own thinking, my interpretation of what MMT advocates are essentially saying is as follows:
Money is not a real restriction on society's productive capacity; it is only a tool we've invented to facilitate more efficient trade than is possible with bartering (swapping one good for another), thereby enabling us to determine how society's true resources – human labour and raw materials – should be utilised for maximum benefit. Collectively, governments and individuals use money to determine what we as a society should produce with our labour.
Unfortunately, for the last 40 years economists and politicians seem to have lost sight of these fundamentals and have been treating money as if it is itself a resource constraint. Worse, monetary theory has been using the unemployed – i.e. wasted human resources – as a tool to achieve monetary goals, particularly low inflation. The absurdity of such back-to-front economic thinking in general is brilliantly portrayed in the "Hitchhikers Guide to the Galaxy", when idiot humans establishing a new colony on a new planet decide to make the leaf their currency, and then plan to burn all the trees down in order to control inflation! (see this video)
At its core, MMT simply points out that we need to refocus on what really matters, which is to use our limited resources to produce things of maximum value to society, which we fail to do if we waste human resources by leaving them unemployed. How this is achieved – whether by printing money, borrowing, taxing or whatever, really doesn't matter – these are just monetary and fiscal tools for achieving the economic objective.
To some extent, MMT theory embraces Keynesian economics, which relies on sovereign power to print money or borrow to "fund" government spending and thus stimulate consumer & business confidence and further economic activity & investment — with a particular focus on eliminating unemployment so there isn't an offsetting impact through higher inflation and a reduction in private spending & investment. In practice though it may be based on other nations lending you money, which is fine as long as the opposite policy suits them because they're running a trade surplus — which essentially means they're producing goods for you now in return for you promising to do likewise in future.
MMT seems to be often misportrayed as a philosophy that "debt doesn't matter", when really it's saying, "debt doesn't matter if using debt increases the nation's valuable output". But there are of course other considerations, like confidence in the currency. For example, if you borrow money from abroad and then devalue the currency and the bonds you've issued by "printing money", then those foreign lenders will be less keen to lend more money in future (and therefore will demand higher interest rates). So this still leaves much room for debate about what fiscal and monetary settings, governance systems, rules and individual obligations & incentives will help to achieve our ultimate social-economic goals.
I am not convinced that the MMT alternative of financing budget deficits by printing money is sustainable as a routine practice (see article here). If governments abandoned independent central banks so they could balance budgets by printing money, with just the promise that things will get better in future, this would lack transparency & credibility, which could well cause a loss of confidence in capital markets, as it did in the 1970s.
The other option of effectively financing deficits through "Quantitative Easing" (Q.E.) – where central banks print money to buy government bonds – probably adds credibility through somewhat independent endorsement of the deficit-based fiscal strategy (which enables the government to finance it at lower interest rates), but it should be reserved for exceptional circumstances, because it artificially suppresses interest rates (with a variety of undesirable consequences, such as inflating the value of assets held by the wealthy and propping up "zombie businesses" that are fundamentally not economically beneficial), and it is hard to withdraw from Q.E. without spooking the markets. Ultimately this requires a credible, long-term fiscal/budget strategy that can be sustainably financed by private bond markets and supported by a progressive tax system.
Nevertheless, it's still important to challenge monetary policy orthodoxy, not least by seeking to develop new ways that fiscal policy could respond fast enough to tackle inflation more fairly (e.g. see my suggestion here).
Why increase public sector wages first?
If real wages growth ultimately needs to be funded by productivity/efficiency improvements (to stay competitive), does it matter whether you increase wages first and then find savings to fund them (as I'm suggesting) or achieve efficiency savings before you increase wages (as public sector wages policies have stipulated in Australia over recent years)? I think there is a difference, and it lies in the degree of certainty and the psychology of most people, including business managers.
Whilst greed can be used for good (if society's rules manage and direct it well), for most people sloth trumps greed. Life's a bit of a grind (or really tough) for most people; we just want a break — something for nothing, a lottery win, chilling in the breeze on an extra public holiday! And throughout history, it has been necessity, not greed, that is the mother of invention. Humans didn't invent water and grain storage for the droughts of Africa as a luxury; they did it because if they didn't, they would die!
Likewise, if public sector wages increase, the economy-wide impact is so great that business owners will do the same for their employees — because they HAVE to (otherwise they'll lose employees to the public sector). Then, their next decision is whether to innovate to improve productivity/efficiency and reduce costs, or simply pass this through as higher prices and hope their competitors do the same. Clearly the immediate market pressure will encourage cost-cutting to survive, with price increases only being an option if the wider response of the market allows it.
These financial and psychological incentives seem likely to be much more effective than what government wages policies have produced, which having discarded the pressure of higher wages on private businesses, rely solely on people's greed to promote innovation & productivity, with only a risk that competitors will do likewise and make it a necessity. Moreover, it relies on the greed of employees to pressure management to initiate productivity improvements (that union management don't want as it could reduce union numbers) and then to trust management to use the cost savings to fund wage increases, even though there's only a risk to management (not a certainty) that competitors will do likewise and attract employees away. Why would employees & managers do that? Well the evidence seems to be that they don't! The natural, lazy response of most people to this situation is to wait until it's absolutely necessary, but if all companies act this way then productivity and wages growth stalls — which is exactly what has happened.
The Euro & international economic networks post 'Brexit' — competing currencies?
Despite the importance of reconsidering current approaches to monetary policy (as discussed above), European nations have limited flexibility to do so in practice, due to the constraints of the common European currency, which prevents the European Central Bank providing stimulus to one part of Europe with greater need for it than others. Thus the Euro concept seems flawed, and it has in practice caused serious economic problems across Europe. The constraints of the Euro was one factor inhibiting Britain's greater integration with the EU, prior to it voting to leave in the "Brexit" vote of 2016 (which is when I started writing this).
Yet returning to isolated member states with separate currencies has serious problems too, and in any case, the same problem also commonly exists in the discrepancy between regional and major city growth within a country (e.g. London vs the north UK, or Sydney & Melbourne vs the rest of Australia in 2017).
For Europe to balance the benefits of integration with the need for flexibility in monetary & fiscal policies, I think it would be worth considering dividing the remaining EU (post Brexit) into separate, but linked groups of East & West (or Tier 1 & 2), each with their own currency and trading arrangements (albeit closely aligned to each other) that enable them to better manage the different needs of their respective areas and many individual nation interests.
But is there another way? Well, with modern cashless money systems there is no longer a need for everyone in the same country to use the same currency.
A potential alternative to the Euro could come from global Capitalist Co-ops, which could develop their own currencies based on the power of their network's "cloud capital" and payment systems. These networks of companies could effectively enable voluntary & dynamic membership of their network and currency, for those people that chose to invest their pension/superannuation in the network. Membership of the network could then affect one's income, via employee share-ownership bonuses, and also the price of goods bought from member companies through customer-shareholder loyalty schemes. Each network's currency could be based on a common Euro, but with effectively a variation to the currency value implemented through these loyalty schemes, which could be adjusted to apply the principles of MMT according to the economic needs of the network (e.g. shareholder discounts stimulating demand when required), but with excessive monetary stimulus being controlled/avoided by competitive economic forces between alternative Co-op networks.
Complementing this more flexible membership of the Euro could be voluntary EU citizenship (for a fee), as proposed by a European Parliament MP and included for consideration in Brexit negotiations.
As the City of London scrambles to develop a strategy to maintain its Euro trade post Brexit, perhaps developing Capitalist Co-op business networks and currencies could be their salvation?
The British should also now be keen to form free trade & people-movement agreements with Australia and its Asian neighbours (as long as they are based on the public interest and not shrouded in secrecy), which could pave the way for strong UK-Australasia economic & business networks. Whilst migration from Britain to Australia should help Australian economic growth (consistent with my proposed Sydney planning & transport strategy), it could also benefit Britain if it rethinks the boundary of its economy as being the Commonwealth rather than the British Isles (just as China – which has voluntarily embraced lower trade barriers – is now viewing its economic boundary as being well beyond its national boundary). And besides, what's the point of colonising a sunny continent if you're not going to have a holiday-home there?!
With huge opportunity from growth in free & fair trade across the former British Commonwealth (within which English is generally the only common language), including Canada, Africa, India, Australasia, Singapore & Indonesia, plus Hong Kong & China, maybe Brexit could turn out well after all. Many of these nations have enormous populations but relatively low wealth at present, which means they offer the greatest potential to underpin future global economic growth (in 2018-19, China & India alone contributed 46.2% of global GDP growth, with the USA adding 13.8% but Germany + France contributing only 3.1%). Just India, China & Africa together already have a combined population of 4.4 billion or 53% of the global total, and Africa may well add another billion over the next few decades. As Zimbabwe's President said at a China-Africa summit in 2018,
"There is now a transition to a new world order and those who don't see it are blind."
If Britain can help develop & be part of new trade agreements across these nations, the pressure could then be on Europe, rather than the UK, to agree post-Brexit trading arrangements that give Europe better access to such a big global market (& to reform the EU's disgraceful subsidies for unsustainable farming).
And then look out USA — the Empire Strikes Back!
Time to acknowledge a failed independence 😉,
and rectify the flawed democracies of America, the UK & Australia
(& get Britain looking forward instead of glorifying its atrocious and at times evil imperial history).
😂
And let's face it, what's the alternative? "Oh sorry EU, we made a mistake with our vote, please let us stay in and we'll bend over for you to do whatever you like"!?
But to get there the tone of UK-EU debate needs to shift from, "Who's going to pay the cost?" and "What will the EU let the UK get away with?", to, "How can we make this a win-win for all parties?", and for that, the EU needs to reconsider its trade barriers with the rest of the world (which benefit no-one in the long-run) and the fundamental reasons for its continued existence, which, whatever they were historically, I think are now primarily to overcome the enormous inefficiencies that would otherwise exist if all member countries had different currencies and regulations and had to negotiate separate trade agreements with each other and the rest of the world.
The problem is that the EU is still rather abysmal at this task (e.g. taking 7 years to negotiate an agreement with Canada), though perhaps not because they're less skilled; they simply have too many competing interests to manage. Some competition in co-operation might be the way forward — maybe the UK can become a satellite European negotiator, with greater freedom than EU bureaucrats have to quickly negotiate deals around the world and then further negotiate with the EU to integrate these new trade deals with the rest of Europe? First priorities should be India and the RCEP free-trade group of Asian countries (together accounting for about 45% of the world's population at 3.4 billion people – equal to 7.6 times the EU excluding the UK – and 40% of global GDP at US$50 trillion in 2017, or 30% of global GDP for RCEP in 2021 after India withdrew), or the overlapping and expanding group of BRICS (about 42% of global population and 32% of world GDP in 2023), as well as Africa, where there is huge potential for increased, mutually beneficial trade, not least to lift millions more people out of extreme poverty (which could be partly blamed on past British colonisation, so whilst any trade deals may, pragmatically, need to be a "win-win", Britain should be willing to make some big concessions — including to India, as at least partial repayment of the $45 trillion Britain stole from it whilst killing around 100 million Indians, and also to Africa as some kind of reparation for its past slave-trade crimes).
Border controls
One of the problems with current European Union (EU) policies is they are founded on a naively simplistic view of economic geography, which is especially telling in terms of the EU requirement for free movement of people. Of course this is highly desirable from any individual's point of view, especially in terms of global social equity, because it means someone who through no reason other than bad luck was born in a poorer country can move to richer areas and enjoy a better job and life. In principle this could also reap more benefits from all people's potential and hence add to total global wealth. The mixing of people and cultures across national boundaries can also help to reduce the risk of war, and this has been a key historical factor in the EU's policies, but some of the complicating factors have been overlooked, and when policies are elevated to "principles" it suggests people are unable to argue the case on logical merit.
From an economic perspective, it does make sense for people to be able to migrate from one area to another where their skills are in greater demand, especially as different regions specialise and focus on particular activities with economies of scale.
However, the counter to this is the apparently increasing importance (despite modern communications technology) of "agglomeration economics", which attract knowledge-sharing and high-value economic activity to existing economic centres. This is why places like London are increasingly sucking all economic activity towards themselves (like a black-hole's gravity gets stronger as mass increases), despite the economic theory that lower property prices in depressed areas should preferentially attract new regenerative investment. Essentially the dominant forces of the modern knowledge economy are geographically unstable, and this justifies a range of potential policy interventions such as regional development funds, transport links and yes, some degree of border controls.
It's also important to remember that places matter because people are not simply free-moving employees; they have cultural/family/psychological links to places, and not least language barriers to movement, which substantially tie them to particular places. So if you want equality it makes more sense to move money to where people are than to move people to where the money is.
Finally, border controls can be an indirect means of managing total global population growth (preventing people in over-populated regions moving to less populated ones), which is placing increasing pressure on our global environment, although addressing poverty and women's economic empowerment (e.g. through improved literacy programs) is a more positive and probably better solution (as besides being fair, it reduces the economic forces that encourage people to have more sons).
Conclusions on Brexit
Concluding on this around 2017-18, when there were still Brexit details to sort out, I concurred with The Economist that something like the "Chequers" proposal was a sensible way forward (especially as there didn't seem to be any other realistic option).
But of course, thus far (in 2024) the approach taken has been dysfunctional chaos driven by narrow political interests with no serious, or realistic & cohesive economic strategy — largely due to the inconsistency between the economic opportunities discussed above and the populist politics of national isolationism. Even worse, the protectionist policies of the EU have intensified, as they slavishly follow the USA's destructive global bullying & warmongering.
The other conclusion I have from the shambolic negotiation process is that you should never enter a union without clear rules for separation!
Appendix to first section: Charts on increasing inequality
The USA has had 40 years of worsening inequality, leading to poorer, shorter lives for the masses (whose income has risen slower than GDP, because so much of the new wealth has been taken by the few at the top):
The following chart shows US wages have hardly increased in decades, despite continued improvements in productivity (that have funded continued corporate profit growth whilst competing with cheaper overseas production), and minimum wages have decreased in real terms.
After 20 years, the wealth had still not "trickled down". On the contrary, increasing inequality has accelerated in the USA since 2000, as shown in the following chart by the dramatic reduction in labour's share of national income as a result of George W. Bush's 2001 & 2003 tax cuts for the rich:
Australia has shown a similar long-term trend to the USA of falling labour income as a proportion of the economy (as the wealthy make more and more money from their investments — which is the fundamental nature of capitalism):
Consequently, Australia has seen the same trend of the wealthiest gaining the most (though not as bad as some countries), with obvious negative impacts on housing affordability for those in the middle or below:
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