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Thursday, September 22, 2022

Review: The Economics of Discontent

 I don't remember how The Economics of Discontent made its way into my Kindle, but given that it's currently free on Amazon as of this writing, I'm guessing I picked it up as some sort of freebie.

I started reading it and discovered that it makes a lot of sense, and explains much of today's political landscapes:

Electoral successes kept coming, each one making these majorities seem less foolish, or at least less lonely. It has become harder to isolate the populist parties. Time and time again these electoral gains have been dutifully explained away as flukes, the results of unique circumstance. But if all the boats are rising at once, it must be that the tide is coming in. The dissenters voting for these parties are the losers of globalization: younger, poorer, less educated. Blue-collar voters indeed tend to vote either for strong redistribution – the far left – or for suppression of immigration – the far right. (loc 387)

It's one thing to report on what's obviously been happening in the last few elections, but Jean-Michel Paul has cogent and relative explanations, tying together quantitative easing to  how disinvestment in education, increasing unskilled immigration, and reduced investment in societal infrastructure in Western countries led directly to the current state of political affairs. Even better, Jean-Michel Paul has an international perspective, teaching me that it's not just the US that have faced these problems in recent years:

The same phenomena can be observed even in Sweden, where the portion of GDP going to wages is now the same or lower, depending on whether or not one accounts for capital amortization, than it was in the ’70s. Not surprisingly, the drop is more pronounced in manufacturing, which is more susceptible to competition from lower wage countries’ imports than local services. In Sweden, the share of wages going to high-skill workers is growing, leaving less for their low- and medium-skill counterparts (Sanandaji, 2013). (kindle loc 644)

 Paul makes the good point that when extreme inequality happens, property rights and private property can suddenly be taken away through revolution or even more or less peaceful change. He tells a very personal story:

My family worked in the Belgian Congo in the ’50s and ’60s. It genuinely thought, and indeed most probably did, help develop the country. It worked hard and generated some savings that it invested in a magnificent local property in Kinshasa. But somewhere in the process, along with all the other colonists, it lost track of the fact that the wealth generated was not sufficiently shared, that it may have been partly the product of their hard work but also of the country and its population at large, that a new local elite was not progressively trained and handed power to as it should have been. Popular resentment among the local population understandably grew in face of the lack of progress and the concentration of wealth in the hands of a privileged caste with little desire for change*. When this beautiful country finally became independent, it was ill-prepared, and events took a drastic turn. My family’s property was nationalized and their life savings lost. Along with so many other formerly privileged, they returned to Europe with nothing to show for their years of toil, unable to comprehend what had gone so badly wrong. History is full of similar short-sighted ruling classes that failed to understand the social contract that guaranteed their property. (kindle loc 899)

 Paul does not do what many neo-liberal or liberal commentators do, which is to dismiss the concerns of the working class over lower-skilled immigrants:

Migrants accounted for 47 percent and 70 percent of workforce growth in the U.S. and Europe, respectively, over the last 10 years. But, in Europe, only 14 percent of the increase in the high-skilled workforce came from immigration. That is, while the high-skilled have benefited, the low- and medium-skilled population has had its earnings ability capped, or even lowered, because of greater external and internal competition (Elias Naumann) (OECD). The locally established low skill population rightly recognizes the new entrants as competitors. Their economic prospects will be negatively affected on the one hand, while on the other, resources dispensed through the state from which they benefit will have to be shared among more people. Indeed, a majority of those opposed to immigration are in fact in favor of high skill immigration. This makes sense as the new high skill immigrants are expected to be net contributors and thus not an economic drag or competitor for the lower skill native population (Gallup) (PEW)...Western societies have to make a painful moral choice. They can continue to provide an internal safety net for all inhabitants by rejecting low skill migrants and enforcing deportation. Or they can accept there will be two classes of citizens that will be treated very differently and fundamentally renounce the universality of social protection and basic public services. This is a choice that states should have made clear to their electorates long ago but have preferred to ignore as elites have racked up the short-term gains of an unsustainable status quo. Ignorance cannot remain bliss forever, and the choice is only becoming harder the longer it is deferred. GLOBAL TRADE Globalization and trade liberalization were supposed to make us all better off through the mechanism of trickle-down economics. (kindle loc 1583-1639)

He also points out that the global economy and globalization (outsourcing) is a political decision, driven by tarriffs, rather than a result of improved technology reducing transport costs:

Western societies have to make a painful moral choice. They can continue to provide an internal safety net for all inhabitants by rejecting low skill migrants and enforcing deportation. Or they can accept there will be two classes of citizens that will be treated very differently and fundamentally renounce the universality of social protection and basic public services. This is a choice that states should have made clear to their electorates long ago but have preferred to ignore as elites have racked up the short-term gains of an unsustainable status quo. Ignorance cannot remain bliss forever, and the choice is only becoming harder the longer it is deferred. GLOBAL TRADE Globalization and trade liberalization were supposed to make us all better off through the mechanism of trickle-down economics...The authors found strong correlations across U.S. regions between increased exposure to Chinese imports and lower employment, labor participation, and wages. They estimated that a sustained increase of $1,000 in imports per worker resulted in a $500 reduction in effective annual wages per working age adult and an increase in government benefit spending of over $50 (kindle loc 1666-1689)

He gives a cogent argument about how the EU and Euro zone is actually much worse positioned to absorb this kind of shock than the USA, where the blue states seem happy to subsidize red states by huge amounts of transfers through the federal government almost indefinitely. 

The solutions that Paul proposes are fairly straightforward, but unfortunately probably impossible to adopt:

Illegal immigrants should be treated with basic human decency. At the same time, Western majorities have rendered their judgment on illegal migration at the ballot box: They need to be forcibly repatriated to either their last point of embarkation, or their country of origin if it can be determined...A system that legitimizes and gives access to illegal immigrants is fundamentally unfair to legal immigrants and to the most vulnerable members of Western countries, who will face unfair wage competition, reduced public service access, and a smaller slice of the social spending pie. It is ultimately unsustainable...Western leaders are paying the price for ignoring how globalization imposed costs on the middle class and pain on those with lower skill levels. The answer isn’t trade isolationism but smarter policies to correct these imbalances. In particular, preference should be given to free trade with countries that have similar income levels and do not run systematic current account surpluses. (kindle loc 4019-4098)

He also has similar proposals regarding houses that are bought and then left empty, as happens in a lot of places like Vancouver and San Francisco, as well as increasing investment in education and public infrastructure. But he proposes no plan for any established parties to adopt such a movement. 

The book is full of data, references, and cogently thought out arguments. It was very much worth my time. I recommend reading it. 

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