President elect Donald Trump promises to “make America Great Again.” The middle class is under pressure from all sides and real wages have not moved for 20 years for most people. Automation is replacing many ordinary workers with a few highly-qualified workers who design and manage technology and production. Low-cost labor in Mexico, China, India, Indonesia, Brazil, and many other places is replacing ordinary workers. Immigration is adding labor supply to the domestic economy. All this adds up to a hell of a lot of pressure on the 90% of ordinary workers. Welcome to technology and globalization. As you can see, it’s not clear that Trump (or Clinton) can truly make a big difference. Let’s explore further to see the bigger picture of what is going on and what lies ahead.
Low unemployment and no jobs
Unemployment in the USA has reached a new low of 4.6%, yet the proportion of people working relative to total population has barely moved since the low of 2009-2010: the employment rate went from a peak of about 64% in 2000 and hovers just below 60% now. That means there are a full 4 percentage points less people working now than in 2000-2001 and 3 percentage points less than in 2007, right before the big global shock.
Taking the conservative 3 percentage points less and knowing that the pool of total active and potential workers is about 160 million, we can conclude that there are a total of 5 million less workers today than would be if the employment rate had remained unchanged. This is at LEAST 300 billion dollars less income per year for the entire economy. These 5 million frustrated individuals influenced the elections and may have helped make a difference for Trump. However, I am not sure Trump will make a difference for them (nor would Clinton, by the way), and no, this is not due to demographics: many other countries with much faster aging populations than the USA did not even have close to such a drop in the past decade.
Wages and inequality
Since China joined the WTO in 2002 and global trade flows exploded between rich and developing economies, real wages of 90% of the population have been going literally nowhere, while real total income per capita increased about 14%.
Since 2002, 90% of US workers have not seen any improvement in real wages, health coverage or costs, non-wage benefits, better (less) work hours, mental health indicators, access to education, or any other metric you want to look at. The data and proof is so vast that this doesn’t even require much further discussion. Total real GDP per capita is growing, yet nothing seems to be happening for 90% of the population (other than 2015-2016, which finally had improvements). Of course, this means that the top 10% income share is growing, which indeed is the case:
But all this is old news: the USA has high inequality. I don’t want to debate about the acceptability or not of all this and all the complexities, nuances, and important details pertaining to this phenomenon. I want to move on to policies and the bigger picture…
Trump wants to bring back production to the USA. For any firm, there are many types of costs, but the bulk of costs can be boiled down to 4 categories: 1) wages relative to average productivity and non-wage labor costs, 2) all taxes of all forms, 3) regulation and red tape, 4) the cost of capital.
The cost of capital is the cost of getting funds to improve and expand production capacity with machines, workflow, technology, automation, transport, logistics, etc. In the process of production, the firm must respect rules and regulations, which Trump promises to simplify, but I have my doubts on the extent of the simplification that will effectively happen in the reality of everyday business. I want to focus on taxes and labor costs.
Trump plans on slashing the corporate tax rate by about 15 percentage points. This would make production less costly within the USA, provided this plan truly goes all the way and does not become an ad hoc approach of picking and choosing the firms that get a tax break and those which do not. As I explained in my post on taxing corporations and the rich, taxing corporations is NOT a “progressive” policy and does NOT help ordinary people. Read it to get an important refresher.
Trump wants to spend massively on infrastructure, and that is a great thing as well, if it truly happens. The quality and quantity of infrastructure is very important to long run prosperity for a country, so this is a good idea and would increase employment for ordinary workers. Given that the fiscal situation will remain at least under control for the next 4 years, Trump has the possibility to spend massively. It remains to be seen what will be the tolerance for deficits and debt in Congress and the Senate, but for the next 4 years, there are no major fiscal issues for the USA, even under Trump’s planned detaxation and spending. After 2021, it will be another story, but that is a long way down the road.
Trump wants to decrease taxes on individuals, especially the upper incomes. This policy will help the wealthy put even more money in stocks and real estate, which is good for those markets, but may cause a “pricing out” of ordinary people from those markets. Of course, such a policy will certainly not decrease inequality or help to “level the playing field” between the cash-strapped general population and the top 10% that has more breathing room.
As you know, accumulating wealth becomes easier and easier as your income grows, because 1) you don’t need to take on big debt loads to access education, health care, or housing, 2) you are not cash-strapped, so you can put money aside into capital markets, and 3) money makes money, so there is an obvious compounding effect.
Adding to the picture is the fact that high incomes can create high-price issues for the rest of the population in markets such as real estate, land, health, and education, not to mention stock prices. The standard narrative to make things acceptable is to say (rightfully) that prices of TVs, washers, dryers, clothing, and others goods are lower due to low-cost offshore production, but the effect may not fully “compensate” the decreased accessibility to important markets for important goods or sevices and the lost income from being impacted by technology or offshoring. Ask Canadians from Vancouver how they feel about the pumped-up prices of real estate from high-income demand of American and Chinese millionnaires!
All this might make America great again, but it may prove quite elusive down the road for the bulk of the population. Note that this would have been the same under Clinton. Let’s discuss the “hurdles to greatness” for much of the population…
Machines, offshoring, and immigration
The middle class is under pressure from all sides. Automation is replacing many ordinary workers with a few highly qualified (and highly paid) workers who design and manage technology, production, and management processes. Low-cost labor in Mexico, China, India, Brazil, and many other places is replacing ordinary workers. Immigration is adding labor supply to the domestic economy. All this adds up to a hell of a lot of pressure on the 90% of ordinary workers in high-income economies, especially those economies with a lot of multinationals producing goods that can be produced from anywhere in the world. Note that this has always been the case, but the pace at which it is happening seems to be faster than the pace at which economies and the social fabric seem to adapt.
Obviously, some jobs are less “exposed”, such as local “in-person” services like your local plumber or electrician or hairdresser, but even those feel the impact indirectly due to the general wage deflation effect (on ordinary workers) of automation, immigration, and globalization. Wages and the employment rate stagnate, which means people don’t have extra purchasing power, which translates to less business opportunities, as competition to supply the stagnating aggregate demand increases, while supplying the upper-income niche obviously explodes but can’t compensate for the massive stagnation in the overall wage structure.
Any production that can be done elsewhere has been or will be moved offshore, because the cost differentials are simply too attractive, even considering productivity differentials, logistical issues, and transport costs. In theory, an industry that has 10 times higher productivity can pay the workers 10 times more and have the same production costs: for example, a rich-country worker paid 10$ per hour that outputs 10 widgets per hour has a unit labor cost of 1$, while a poor-country worker paid 1$ per hour that outputs 1 widget per hour has the same unit labor cost of 1$... the reality is that MANY industries do NOT have this productivity differential, and the differential is bound to decrease across the sectors due to massive transfers (from rich country to poor country) in human capital, technology, and production knowhow.
All the while, highly skilled workers who are technology and financially literate and have good “social skills” can harness the benefits of globalization and technology and face increasing demand for their knowledge and skills – America is already great for them, and this will simply continue. They will continue marrying within their socioeconomic circle, they will continue sending their kids to the best schools, and they will continue having a well-developed web of contacts to help them and their families access a spot under the sun.
Believe it or or not, most rich-country workers are hugely overpaid. This is because their real incomes are disconnected from the productivity differentials relative to poorer countries. Even many higher-income workers are in this category. There are plenty of qualified and competent doctors, engineers, financial specialists, and managers in Asia, Eastern Europe, and Latin America. Note that institutional differentials (including corruption), work organization and technology differentials DO create a rich-country advantage over emerging markets, but nowhere near the differences in observed incomes in aggregate or by industry. Note also that, historically, proximity to expanding markets in Europe and America gave a boost to rich-world production, but where are the expanding markets now? Asia, Africa, and Latin America...
First, and most importantly, any task that is even close to being repetitive or “standard” has been or will eventually be replaced by a machine/computer or by offshore cheap labor. This decreases production costs and increases productivity and profits, and reduces prices as well. Theoretically, all this creates extra purchasing power that generates new demand, which then creates new jobs - supply creates demand. This is partially true, but the reality since about 2002 is that you have a net loss of total jobs as a proportion of the population and stagnating wages for the masses, because a “few” highly skilled jobs replace a high volume of low-skill jobs, as I explained in my post on income inequality and the end of jobs, with scale effects adding to the overall picture.
Technology is making most people “useless” in the production process, and then there are the hundreds of millions of low-income workers ready and willing to do any task for a fraction of the wage of high-income workers. Perhaps you think this “global labor supply thing” will soon pass, as the year-on-year effect of China slowly dissipates after joining the WTO in 2002 and as it undergoes a difficult transition from export-led growth to domestic-demand-led growth? No! India, Mexico, Brazil, Russia, and even Africa are moving up the “production complexity and capacity” food chain and literally represent an infinite supply of potential labor supply for production.
As explained in a good article by the World Economic Forum, there are 12 pillars of economic development and prosperity:
Most high-income countries have most of these pillars, with some having issues with labor market efficiency. Market size favors the USA, China, India, and Brazil, but globalized markets make market size increase for all countries.
What is happening is that the rest of the world is catching up and moving up the production food chain. These lower-income countries have a growing capacity to produce, at a fraction of the costs of rich countries, making production move there more and more… and it is just the beginning. The entire world is down the pipeline and emerging, even Africa.
This is great for the workers and elites benefiting from technology and globalization. It is less great for many others who face stiff competition of a global supply of labor.
When everything is "global"
Everything is global now. What happens when you have a low price in one market and a high price in another market, and the price differential is sometimes 100-fold, while actual differences in quality are nowhere near 100-fold? You guessed it: prices drop in the high-price region and prices increase in the low-price region… and THAT is what is happening in the labor market… on a global scale. And it has barely begun.
There is an infinite supply of “low and medium skill” workers and even a growing global labor supply of high-skill workers, including a phd supply glut that has phd holders dreaming of the freedom-filled academic world, yet are struggling to make their way. Read about this here and here, among many other articles.
What does all this mean? One thing: the actual market value of most labor in high-income countries is significantly lower than the price it is currently getting (wages), so there is an “adjustement” and offshoring, which can be seen in stagnating wages, decreasing job and income security, increased stress and pressure to perform, and a depressed employment rate.
Will it end? Not any time soon. This means that wage stagnation and a relatively low employment rate are the new norm, and Trump won’t change this harsh reality.
When everything becomes “global” and you have a billion+ low-wage workers ready and willing to work for multinationals in emerging markets that are indeed “emerging” in the global supply chain and represent the markets of the future, you get 1) massive transfers of jobs and production from rich to poor countries, 2) wage stagnation in rich countries for much of the population, 3) solid profits for multinationals that can harness this global labor pool and growing global economy, 4) wage growth in the highly skilled niche.
Wait until China, India, Indonesia, Mexico, and Brazil start down the road of massive car, plane, and telecoms production, with 3D printing and more. Wait for Africa to join the party, along with Malaysia, Vietnam, Chile, and Argentina. Yes, this will boost global demand, but this global demand will benefit owners of capital and the highly skilled and connected, not the bulk of labor in rich countries. We have seen nothing yet. All this means high inequality and a global “equalization” of wages, which means a drop in rich countries for much of the population.
My tip: own capital or die! … learn about stocks and the stock market and access ownership of multinationals for the long run, because the global “adjustment” has just begun and will benefit owners of capital (hence owners of stock, SMEs, and housing), and Trump won’t change it.
Life in rich countries has been relatively shielded from the harsh reality of the world until about the turn of the millenium and it allowed incomes in most jobs to be "artificially high", but that reality is now knocking on our doors, especially since 2008... and it will keep banging hard. Like and share if you liked.