Popularly known as the globalisation elephant thanks to its shape, the chart above describes how, between 1988 and 2008 the real incomes of both the world’s richest and poorest people soared. In contrast, lower earners in developed countries saw their real incomes fall. Since then, the global financial crisis and its aftermath have seen average worker real incomes in much of the developed world stagnate. In the UK, average weekly earnings are still significantly (7.7%) below their 2008 peak in inflation-adjusted terms.
We think the chart helps explain why populist politics have taken root in developed markets. If you’re part of that ‘squeezed middle’, globalisation is likely to have been less a force for good and more a source of anxiety over the past three decades. No surprise, then, if people have turned to new political voices in search of solutions. Certainly in the US, President Trump has made clear his desire to put America first – but in other countries too, a shift in grass-roots opinion suggests the developed world’s middle classes are questioning whether free trade is in their best interest.
Yet this kind of rhetoric ignores a fundamental problem, namely the much higher cost of labour in developed markets. If more tariffs were put in place in the US, for example, this would just increase the cost of these goods for US consumers. And even if some manufacturing production were re-shored, this would likely be automated to a very high degree with few additional jobs created. Finally, given the potential for retaliatory measures from other countries, we think any rise in protectionism would be a lose/lose situation, with a very real possibility of higher inflation and lower GDP growth.
Douglas Reed – Newton, a BNY Mellon company