Wednesday, 6 August 2014

Economic Recovery - Downgraded

Amid talk of economic recovery, we may not get back to living the life we had in the past

Being downgrading can be tough – no one likes having to get by with less – but this is what we might have to put up with regard to the economy.  Life was much easier around a decade ago when we were enjoying the perks of strong and steady economic growth.  But the upgrade was likely temporary when considering that it was funded with a borrowing binge that was unsustainable.  With wages likely to continue to stagnate for years to come, we may not have it so good again for a long time.

Anything but first class

Gains in wages are typically the main route to the good life for most of us.  Bigger pay packets at the each of the month give us more money to spend.  This money goes back into the economy to create a virtuous cycle helping create a healthy economy so that wages to rise again in the future.  The main avenue through which wages rise is higher output per worker.  This involves people being put to more productive use whether through raising their levels of skills, working together with machines or computers, or doing business in a better way.  The economy usually operates to ensure that this happens automatically as businesses, which want to maximized their profits, will try and make the most of their staff. 

Yet, the past few years, if not the past few decades, have shown us that the tendency for higher wages is not something that we can take for granted.  This is because the two forces of globalization and technology have made life tougher for many people in richer countries.  The sectors of the economy which typically supported the middle class with stable and steady jobs have been eroded.  Jobs such as those in manufacturing along with clerical work have been either moved to countries where labour is cheap or increasingly carried out by machines or computers. 

This has led to a polarization of the work force between high and low skilled areas with a shrinking middle ground.  At one end of the spectrum are bankers, IT experts, and professionals whose knowledge and training ensure a high level of pay.  The rest of the workforce is left with menial jobs such as taxi drivers, shop assistants, and delivery personal only because these are jobs that can’t be shipped overseas.  On top of this, austerity measures in many countries also mean that public sector workers are also suffering.

No route out

With many of us now competing with machines or overseas workers, our bargaining has been considerably diminished.  So while wages rises is a perk that many are missing out on, profits for many businesses have never been higher.  Profitable firms could be the agents of economic growth by expanding their operations and investing in more equipment.  Yet, with weak wages crimping consumer spending, most companies prefer to hoard their cash until the economic recovery is more robust.   What seems like a common sense strategy for each firm has added up to a prolonged slump for the economy as a whole.

The government could step into the breach and provide the investment in worker training or infrastructure to boost productivity.  Yet, the infiltration of pro-market economic theory has pushed the government to the sidelines of the economy.  Even the wealth that had been created in the boom years before the crisis was only benefiting a small portion of the economy.  One example is the finance sector that was creating wealth that mostly went to those working in finance rather to the economy as a whole.  Building a road or new schools creates benefits now and in the future while repackaging of loans only generates money for a lucky few working in banking.

Stuck with a second class economy

Workers have been battling with the consequences of globalization and technology for decades but could rely on debt in the past to enjoy some of the high life.  But like an ever expanding credit card balance, this spending spree was never built to last.  To make things worse, even politicians got involved.  The US government with Bush junior in charge slashed tax rates while the Labour government spent lavishly on the UK public sector around the turn of the century. 

Government finances had been boosted by economic growth fuelled by debt but this was a luxury that would prove fleeting.  Now government is like the rest of us in having to cut back.  Without many goodies going around, voters are likely to become increasing tetchy.  Politics is also getting ugly with constructive policy making likely to go out the window.  Low interest rates and more debt have been offered up as a way out but this creates even more problems in the absence of economic growth.

Something special will be needed to get both consumers and businesses to hope for something better.  Yet, the grim realities of life mean that this may not happen anything soon.  Like being in a long haul flight in economy class, we might be stuck here for a while.  


  1. I live in Silicon Valley, California, where I have personally witnessed globalization invade our neighborhoods and erode our futures.

    The high tech CEO's decided (with venture capitalists dictating to them) to offshore jobs and relocated factories overseas. As engineers, we though our jobs were safe as we worked long hours and were totally dedicated to our companies and success.

    Yet since 2000, about 1 million U.S. born engineers and technologists who worked here have been fired from their jobs (out of a total engineering labor force of about 1.5 million before the dotcom bubble.) Those engineers (who were barely 35-40 yrs old) were replaced by H1B visa workers mainly from India, China and South Korea.

    They were replaced because of the lower price tag for their services, not because US. engineers where inferior in any way. Today there is a system which supports even more of this wholesale replacement of engineers and every other profession in the U.S......Our universities prefer foreign students because they charge them 2 to 3 times the tuition as U.S. citizens, so a large percentage of foreign graduates now present themselves to U.S. industry, who prefer H1B visa holders as they are cheaper and can be controlled (a kind of post-modern plantation arrangement). They cant complain and push for higher pay or better conditions, and have no leverage or voting rights. Sound like the past.....this is what the Oligarchs have been doing for hundreds of years and they are doing the same in high tech today.

    So this issue can easily degrade into a blame game of anti immigrant sentiment, but this issue is real, and it has a devastating effect on millions of people who worked hard, did their jobs and were paid with devastation and careers cut very short by CEO's and companies who break our laws by replacing the educated and dedicated native workforce with non-immigrants at cut rate prices.

    Globalization was an economists idea-----what I have described to you is just one example of the consequences of ideas without people in mind. Sure, India and China have a lot of talented people, but why don't they make their countries better, why do they have to flood into our country and take everything we have, and leave our populations devastated? Of course this was never their intention, but it is the consequence of our CEO's lack of interest in the local population. Money is there highest value, people mean nothing to them.

  2. Thank you for your comment.

    I think your story is one that is seen in many places around the world and is a story that I sympathize with. But it is not a reason to close our borders to shut out immigrants or the other forces of globalization.

    Immigrants travel to richer countries for a better life and should be allowed to do so especially if they have skills to bring with them. Businesses want to employ workers at a cheaper rate in order to stay competitive. Anyone who was either a potential immigrant with skills from a poor countries or a business operating in a competitive environment would do the same thing.

    Both immigrants and overseas trade have been beneficial for rich and poor countries alike but it is not all good. I would like to see the governments in wealthier countries do more to people, as you mentioned above, that have been put at a disadvantage through globalization. If skilled immigrants are coming into the countries, we need to have even more skills ourselves. More clever and innovative people will help the economy grow more and create jobs for many more people.

    Sometimes attack is the best form of defence.

  3. It's all very well to say globalisation/immigration benefits a country's economy as a whole.
    I am sure it does, however if it's benefits are going to the top 1%-10% it does not help the majority.
    If Governments want to pursue this policy, they need to find ways of making sure those at the bottom & in the middle share the benefits.

  4. Thanks for your comments which I completely agree with.

    As much as I would like to see greater redistribution of wealth from those benefiting to those suffering from globalization, it will not happen unless we rethink the role of government. The current trend is to limit the activities of government when instead the government has a critical role to play. Left wing parties are one of the main reasons behind this as they cannot come up with an argument for this.

    Here are a few of my thoughts on this which I posted recently...