Inequality and Social Unrest
Debates over inequality have become more intense since the 2008 “shock” and the ensuing job destruction and bank bailout party. Some feel that what happened was unacceptable and that large and failing institutions should have been “let go” towards failure, even if the consequence could have potentially been a much deeper and longer depression (we will never know for sure), more unemployment and an even tougher economic reality for ordinary people. What really “broke” was not the financial system, it was the implicit social contract. It crystalized the growing vibe of cynicism.
This whole mess and the seemingly eternal issues of the Eurozone create perceptions of unfairness: “bankers” are bailed out while hard working, honest middle class ordinary people struggle year after year with stagnating wages and ever-increasing financial risk and pressure from all sides. “Private profits and public losses.” These are legitimate frustrations. The masses still await the gains from globalization and technology, while the party seems to be never ending in the upper spheres of income and power. Trump and his strategists saw this frustration and knew how to harness for political gain.
“INVISIBLE” GAINS
We need to recenter the debate before going any further. Current material standards of living in rich countries are very high relative to history and relative to most other parts of the world, even for the masses in the 80% of the population that belong to the “middle” class stuck with stagnating real wages.
The trouble is that the increasing material standards of living of the past 20 years are perhaps less “visible” than what happened prior to that. When people suddenly got access to drinking water out of the tap, washers and dryers, dishwashers, refrigerators, stoves, cars, and TVs, these were very “visible and life changing” products.
Today, the almost unimaginable functionalities obtained with a simple iPhone or laptop are mind boggling if you compare to any other time in history, as is the case for transport, health care technology and effectiveness, and so much more.
We have access to more products, ever-increasing performance and ever-decreasing prices, and the increased performance of the digital world is not close to be fully captured in prices, which means our wages may seem to be stagnating, but they are “increasing” in the sense that they do indeed access MUCH more technological performance with either stable or falling prices. So, in a way, wages that stagnate DO buy “more” stuff, but the 100 times more “performance” you get from your current laptop relative to a decade ago does not show up in prices or wages, even if the price of laptops dropped.
We have MANY improving products with an increasing performance that far outpaces the falling market prices, but people still see their wages stagnating relative to the prices of important goods and services, so the perception of “falling behind” remains, and people feel pressure from all sides due to automation, offshoring, and the complexification of what is required to have a truly valuable human capital input in the production and innovation process.
The stagnation must also be carefully detailed, because government transfers to individuals in the form of direct payments or public goods or services is also “income” that is not captured in wages. However, for the USA since the turn of the millennium, it is not clear that the stagnating wage of the majority is “compensated” by more transfers of any kind, and it is even less clear that transfers in cash or in other forms such as health care, education or less working hours is coming. In fact, the important “markets” of housing, health care, and education had significantly higher price growth than did nominal wages for the vast majority, which means these “life changing” markets are pricing out a lot of people.
WHO WE COMPARE OURSELVES TO
You can say as I do now that current material standards of living are much higher from any other time in History. People live longer and better than ever before. You can say that “things are gradually improving” globally, which is certainly true, if you look at murder and crime rates, war and brutality, slavery, and so much more. You can say that the proportion of the world population in extreme poverty is at a record low today. You can say that the iPhone the average person has in their pocket has more “computing power” than super expensive mega computers that occupied entire rooms only 50 years ago. You can say that having the possibility of flying to anywhere in the world within roughly 24 hours for an accessible price to most people in rich countries was an impossible dream of the rich and powerful only 100 years ago. You can say that we are getting access to the world’s biggest knowledge and information source in world History for close zero dollars per person. You can say that “at least atrocities today are more quickly exposed than before” thanks to smartphones and social networks.
You can say all these things and more, but people don’t care. It sounds “hollow” for most people. This is the typical discourse of a typical economist, and it IS correct in factual terms. Things ARE “getting better” (except for everything related to “the environment and animals”). When you look at very long run trends spanning hundreds or thousands of years in pretty much anything other than the environment, you see a trend towards general improvement: crime and murder rates, famines, wars (yes, I wrote that), slavery, authoritarian (and brutal) rulers, science and knowledge, democracy and Rule of Law (as imperfect as it may seem to the cynics), women’s condition, the rights and protection of minorities, religious freedom, and general material well-being. Life was brutal and rough for most of History, including up to very recently, even in North America. Human life conditions have been very rough for thousands of years.
Perhaps we were better off before the advent of sedentary civilizations approximately 10 000 years ago? Perhaps not at all? I don’t know, but that is not useful to ponder because it is not pragmatic — we aren’t going back to hunter gatherer tribes, so we must deal with our collective situation as it is now, as shitty as it may sometimes seem for many people.
People compare to the recent past, to their own recent experiences, to their perceptions of how things are for others in their country and in other countries, and to their perceptions of the state of their own country relative to their perception of what their country once was. They compare to what they see “elsewhere”, and in today’s world of hyper information, mass media, and social networks, what they see is that there is a party in the top 10% or top 1% of the population, while they feel their life is a constant struggle.
The lives of individuals have been a constant daily struggle for quite some time. My maternal grandmother had to care for 10 children in Northern Quebec, Canada, where Winter is hell, and since she was so busy managing this little army, my grandfather had to work several blue-collar jobs just to stay afloat, including busting his health in the coal industry. As a kid, my mother never had Christmas presents because they were too poor. My father’s situation was pretty much the same. These were the lives of my grandparents in one of the richest countries in the world — not the lives of some far-away and abstract ancient ancestors or war-torn poor country. Maybe you think this is special for Canada? Nope. It was the norm. You think this is rough? I agree … and this has been the lot of humans for thousands of years, and it is still like that or MUCH worse for most of the world population today. We have lots of work to do!
But all this doesn’t matter, because what is going on now is that people feel that the good life is withering away for them while there is a party in upper income brackets, who seem oblivious to the day-to-day reality of “life in the trenches.” The short lived isolated bubble of the 1950–2000 period is gone, and the global and technological reality is hitting home. For the past 20–25 years in the USA, real median disposable household income barely budged while increasing about 150% for the top 1% over the same period. The perception is one of unfairness, even if reality may be quite more nuanced and complex.
Please note that I am NOT saying that the 1% group is “taking from the others” — this is not a text on class warfare and I admit I find that debate rife with stupidities and over simplifications from all sides. Perhaps their gains are simply caused by globalization and technology, and their gains are not other people’s losses. Perhaps they also benefit from having better contacts in strategically “advantageous” social circles. Perhaps they are using their influence to preserve their privileges and “rents” for themselves, their friends and family. Yes, there probably is some of that, too. Maybe they “should” be taxed more to finance education, public infrastructure, and health care for the rest of the struggling masses… I don’t know. Make up your own mind.
In any case, the issue is that the perception is growing that the deal of capitalism and globalization is a shitty one for most people, and perceptions matter. Especially if you want to avoid total social dislocation.
Perhaps that perception comes from stagnating wages, ever-increasing demands for “qualifications” and performance and references and experience for ordinary jobs and wages, and increasing financial and economic risk on the individual, and that type of deal seems to be hitting the limits of its overextended contract…
THE BROKEN SOCIAL CONTRACT
In 2008, something happened. A general failure of the entire financial system in the USA and Europe. I made presentations on this to explain the details of what had happened, including what brought us to that point and the elements that created amplification and domino effects, and the policies to absorb the shock… I don’t want to discuss this here.
The bailout party that followed broke the social contract, even if this may have been the appropriate thing to do (we will never know for sure). It was the “lesser evil” and it sucked, but it may have prevented a much deeper depression. The management of perceptions in this mess was awful. People build opinions on small and fast things they see on TV or read in a short text, not after a long process of pondering all sides of the problem. Read the amazing book “Thinking, Fast and Slow” by Daniel Kahneman to really understand this. We can point fingers all day at the media, one political party or the other… It won’t change the reality of people stuck with stagnating wages and perceptions of bailouts and fraud in upper circles.
The implicit social contract in industrialized countries is simple: you have a “fighting chance” if you work hard and remain honest, and you won’t have to carry disproportionate financial risk, unless you launch a business or invest in stock. It varies by country and in the details, but it boils down to this.
The “bailout party” on top of stagnating wages, job destruction, offshoring and automation has broken the deal. Many countries have entered or are close to entering “suboptimal equilibrium” situations — a social, economic, and political context in which things are quite bad and could be improved upon, but the insiders of the system in the upper circles AND in the general population are enough to keep things from changing. This breeds rage and frustration against “something”, anything… “elites”, “evil bankers”, immigrants, Democrats, Republicans, “those damn rich people”, “those damned leftists”… whatever…
Take France, for example, which overburdens firms with all kinds of taxes and laws that essentially beats them into inertia or outright closing. Jobs are not created and wages received by workers are low and stagnating, while the number of unemployed remains incredibly high and masses of outcast immigrants add to the sluggish labor market. That country is not functional, as is the case in other EU countries. A bloated and inefficient public sector with lots of privileges for the insiders of the labor market prevent any change from being possible… and you get eternal status quo.
TRAPPED IN DEEP SHIT
As is said in development economics, France is “trapped” … this is the story of most countries of Latin America and Africa — they are simply “trapped” in a lower GDP per capita context relative to France, especially for the bottom 90%. A “trapped” country is stuck in a highly suboptimal situation, but the combination of insiders and lobbies, incompetence, broken policies, corruption, and the new norm of stagnation make it impossible for any positive change to emerge. Sometimes this comes to a breaking point and the resulting “social trend” that emerges can replace one bad situation with an equally bad or even worse one.
Wage stagnation, and increasing financial and economic risk have obvious consequences: divided and divisive politics and policies, lots of nonsense in the public debate, and overcautious political correctness that simply aims to avoid any “touchy” subject or “telling it like it is.” People want to reject the “deal” but most people can’t articulate clearly their feelings of frustration about the perception or reality of unfairness and decreasing equality of opportunity. The result is a broken social contract and the risk of social dislocation. Clap and share!
Pascal Bedard
