You hear it in Davos; you see it here in Washington DC, where I am at the moment; and you are certainly made aware of it in Britain. It is the sharp contrast between economic optimism and social pessimism. The great global wealth machine is at last on the move again and is starting to pull up even the laggards – the countries who through bad luck or mismanagement have so far failed to make much of a recovery. But the benefits of that recovery, by contrast to previous upswings, have been narrowly shared. It is hard to see quite why this should be so, and, until we understand why, it is even harder to know what can be done about it. Hence the pessimism.
The run of news captures the optimism. Equity markets demonstrate that investors are more positive by the week, with the S&P500 just a couple of points off an all-time high, European shares at a six-year peak and the possibility that the FTSE100 will pass its previous zenith – reached in 31 December 1999 – in the next few days. Another rather different measure of the shift is Ireland back borrowing from the markets, with an interest rate on its five-year debt lower than that of the UK. Still another measure is the British housing market. And so on.
This mood extends beyond the developed world. Bill Gates has just predicted that there will be almost no poor countries by 2035, a thought made more credible by the news that Africa is now the fastest-growing continent. To be sure, China is slowing – but to rather more than 7 per cent growth, which by any other standards would be stunningly rapid. It seems that Beijing may be achieving the “soft landing” as hoped.
But embedded in all the good news is the bad. A housing boom benefits the owners of houses, not the people who must borrow to buy them. Soaring equity prices benefit the owners of shares, not (or at least only indirectly) the people who work for the companies. Indeed, the measures that the authorities have used to boost developed-world economies, such as quantitative easing, actually increase inequality by pushing up asset prices and thus benefiting the owners of those assets (though this of course was a side-effect, not the aim).
Those left behind vary in different regions. Here in the US, the contrast is not only between the high-earners and the rest. It is also between those with jobs and those without. Though GDP is well above its previous peak, employment is not. Joblessness is down, but more because many have withdrawn from the workforce than from job-growth. In Britain, we have had massive growth in jobs but falling real wages. In Germany, there have been plenty of jobs but many paying little, hence plans for a minimum wage. In Italy, those in secure jobs are fine, but the young find themselves excluded from any employment at all.
On both sides of the Atlantic, the reaction has been shaped by politics. In the UK, the outrage is about “fat cats”. Here, it is Wall Street versus Main Street. But if the rhetoric sounds different – and different again in Europe – the underlying concern is the same: that something has happened to the structure of the economic system that increases differentials.
There is a cyclical problem – as noted, the measures to tackle the recession may have increased inequality – but it should eventually correct itself. The deeper issue is the structural problem that seems universal – in China, India and the rest of the emerging world as well as in North America and Europe. That will not go away even when the upswing reaches its peak.
No one really knows why this is happening but there are two broad strands of thought. One is that rising inequality within countries is an effect of globalisation. Remember that between countries inequality is plunging, in that the emerging world is narrowing the wealth gap with the developed world. That means that people with skills that are in high demand (or maybe are just lucky) can go for the best return on those skills wherever in the world they are needed. But people without those skills (or the luck) find themselves underbid by people from other countries prepared to accept lower wages.
The other approach is to see this as a function of technology rather than geography. Many of the middle-skilled jobs are being eliminated by new technologies. Many middle-manager/admin-assistant jobs have already disappeared and another swathe may follow. Could many legal functions be next? We simply do not know how much further this will go, but here in the US the contrast between well-paid and poorly paid ones is particularly stark.
We will see. The best hope is that these two forces, both squeezing the middle, are nearing their natural conclusion. If they don’t, we’ll have to think more about how to make all jobs more rewarding and respected. Actually, we should do that anyway.Reuse content