This started as something fairly simple. My thoughts on this started in regards to a comment I’ve seen on almost every social platform, even Youtube and that is the idea that in some small way, American is doomed to get poorer as our standard of living and our incomes level with the rest of the world. It is no secret that the American standard of living is in the top 5% of the world, only Australia had a higher standard of living that we do. However, thanks to the modern global economy I posit this single idea: Americans are doomed to get poorer because there is a great leveling happening worldwide.
Thanks to globalization, the economy has gone global and is very interdependent. Economics can only be thought of in a global sense. Companies now do business all over the globe. Even small companies end up buying products that are produced elsewhere. Suppliers source parts made elsewhere. Everything comes from somewhere and more often than not, the “elsewhere” is far away. Capital always gravitates towards the place of greatest return and in our modern economic environment, labor is one of the few places where companies can cut costs. Commodities are fairly fixed in price meaning that inputs will be priced in a way that most companies can only control through futures. Most companies that supply parts that go into making real goods buy from suppliers of raw inputs that in turn buy from the companies producing those commodities. Most companies don’t own their own mines or their own steel mills. That represents a huge economic system that employs many people, however, keeping labor costs down, keeps prices down, and if companies don’t keep prices down they won’t be in business for very long.
This has been particularly true for workers in the developed world. Labor in the developed world is expensive and has regulations around healthcare, vacations, and taxes. Labor in the developing world doesn’t have those extra costs and so for companies, they have spent the last 20–40 years off-shoring, out-sourcing and generally creating tremendous profits on the only part of the balance sheet where they can: labor. This means that most American labor, thinking on a global scale, is simply overpriced. We see this now in the real economy. Wages haven’t’ grown since 1977 and yet productivity and corporate profits have skyrocketed in the intervening period.
America Has Been Hollowed Out
The consequences of this can be seen all around. We live shorter lives than our OECD counterparts, we have fewer hospital beds and a higher rate of poverty, especially child poverty. By the numbers, we aren’t a developed nation anymore. When UN researchers come to America to look at poverty they are appalled at places in Alabama that do not have running water or sewage. We spend 17% of GDP on healthcare and yet have worse outcomes. If we weren’t the United States we would be offered an IMF loan to improve the lives of our citizens.
Since the Great Recession, job growth has been strong, however, the jobs that have been created have been within the gig economy and other low wage jobs. These are not the sort of jobs that allow people to buy homes, cars, or anything else really. This is part of the reason why people look around and wonder why the media reports the economy is doing well but their wallets don’t seem to be enjoying such rosy news.
Global Wages Have to Stay Low
The cost of labor, in order for the global economy to continue, has to stay low. This facilitates the extraordinary profits that stockholders have come to expect from companies but also because all workers, all over the world are now competing with one another. Is the competition fair? Hardly, wages in the developed world rose after World War II thanks to regulations, high taxes, and the gains of the labor movement from before the war. However, developing economies have no such regulations, which makes them attractive forbusinesses. Those regulations do have costs and moving manufacturing sources to countries with far fewer regulations means that businesses can save money. This is also driven by economics. If businesses want to continue to generate profits, and not just profits but windfall profits, there are only a few places that money can come from: supplies/commodities or labor. Raising prices will reduce demand. Commodities and supplies cost what they cost and there is only so much savings to be gained there. That leaves labor as the part of the business who must bear the cost-cutting. Workers in developed countries are simply too expensive for modern capitalism. Now that all workers, all over the world are competing against one another, those with the lowest cost of labor will win almost every time. This keeps global wages low which is one of the reasons that wages have stagnated in developing countries.
As the cost of living increases in the developed world and wages stagnant, we’re going to continue to get poorer over time. However, I do believe there is a chance for hope. One of the ways in which developed economies excel is in local industries that can’t be easily outsourced and in high skill professions. This can provide a great deal of hope for the next generation. To take full advantage of the future will require a re-tooling of our economy and our education system. Students should no longer be leaving high school without the tools to pursue additional education and skills training. It is important to raise the minimum wage and it is important to continue to develop businesses where people can work in these higher wage jobs. The modern globalized economy isn’t going anywhere. People have been left behind due to a lack of adaptation. Little has been done at the public level to adapt the US economy to these changes. For most of the nation’s history, we’ve taken a very loose approach to economics just letting things work themselves out in the market. In a globally competitive environment, this approach will simply not work. The Asian Tiger nations have made vast investments in their people and their economies to have the success that they have had and the US must now do the same.