Weekly Geopolitical Report by Bill O’Grady
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Weekly Geopolitical Report By Bill O’Grady June 8, 2020 deregulation and globalization. These policies included the rollback of regulation, The Geopolitics of the 2020 the offshoring of production, free trade Election: Part III agreements, increased immigration and sharply lower marginal tax rates. Inflation In this five-part series on the geopolitics of fell to acceptable levels; it is arguable the the 2020 election, we have divided the U.S. has experienced controlled inflation for reports into nine sections. Last week, in Part nearly four decades. II, we discussed the second and third sections, understanding the electorate and The positive outcomes of these policies party coalitions. In this report, we continue generally fell to the owners of capital, while our coverage with the fourth and fifth labor bore the costs. Put another way, the sections, the incidence of the establishment populists suffered the negative consequences coalition and the impact of social media. of these policies as the establishment flourished. Inequality rose, wages The Incidence of the Establishment stagnated, and unionization collapsed. The Coalition following charts show what occurred. Ignoring the class interests of the populists has economic ramifications. The INCOME SHARE OF THE TOP 10% OF HOUSEHOLDS establishment “rebellion” in the late 1970s 52 was in response to a serious inflation 48 problem. 44 40 36 32 20 30 40 50 60 70 80 90 00 10 20 Sources: Emmanuel Saez, CIM This chart shows the top 10% share of income from 1913 through 2018. The last year available shows that 50.5% of national income has gone to 10% of households, meaning, of course, that the bottom 90% are From the mid-1960s into the early 1980s, capturing 49.5% of income. inflation rose with each business cycle, reaching a peak of 14.8%. The inflation Measuring long-term wages is quite problem was perceived to be caused by a difficult. That’s because jobs change over constrained supply side. In response, time as does the cost of living. What a policymakers adopted policies of household purchased 150 years ago doesn’t Weekly Geopolitical Report – June 8, 2020 Page 2 exactly match with what we buy now. Still, there are some series that try to capture wages. Measuringworth has a series of long-term data that can allow us to make some comparisons. REAL WAGES, UNSKILLED PRODUCTION WORKERS 700 ) ) R R U U 600 O O H H R R E E 500 P P ( ( S S E E 400 G G A A W W 300 L L A A E E R R 200 D D E E X X E E 100 D D N N I I 0 The persistence of these deficits is more 1775 1800 1825 1850 1875 1900 1925 1950 1975 2000 2025 INDEXED REAL ANNUAL WAGES, UNSKILLED PRODUCTION WORKERS TREND, 1775-1931 than just offshoring. The U.S. fostered TREND, 1932-72 TREND 1973-2019 increasing global trade which required larger Sources: Measuringworth.org, CIM offshore dollar balances. The best way for This chart shows inflation-adjusted wages countries to acquire dollars was by running for unskilled labor dating back to 1775.1 trade surpluses with the U.S. Consequently, We calculated trendlines from 1775 to 1931, this led to larger U.S. trade deficits. 1932 to 1972, and 1973 to the present. In However, the costs of this policy fell on the the first trend line, we see a gentle upslope working class, who was competing with in wages in the first one-and-a-half centuries lower wage labor around the world. of the U.S. Wages fell below trend in the Civil War and remained below trend during Globalization isn’t just about trade and the Industrial Revolution. By 1890, wage offshoring. It’s also about increased growth had returned to trend. During WWI, immigration. wages rose well above trend. In the PERCENT OF FOREIGN BORN POPULATION Roosevelt era into the early 1970s, wage IN THE UNITED STATES growth rose at a strong clip. Although 20 wages remained elevated in the 1970s, high 18 inflation generally prevented further growth. 16 14 But, since the early 1970s, as the trend line % % 12 shows, wage growth has been mostly flat. It 10 does tend to rise near the end of a long 8 expansion but falls back to trend. 6 4 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 Rising globalization has been part of this 1850 Source: Census Bureau, CIM policy mix. We have seen persistent current account deficits throughout the 1980s. Compare the foreign-born level of the population and the wage trend graph. As the 1 foreign-born level of the population fell, the Because the data is indexed, it shows the change in sharp uptrend in wages rose during 1933-72. the level but not the actual dollar wage. We deflate the data with annual CPI from the same source. Although this isn’t the only reason for the rise in wages, the lack of immigration likely played a role in supporting wage growth. Weekly Geopolitical Report – June 8, 2020 Page 3 And, finally, these policies led to a decline consumption, debt rose…until the 2008 in unionization. Financial Crisis, which revealed the fact that household debt had become excessive. TOP 10 % SHARE OF INCOME & UNION MEMBERSHIP 28 56 And so, the policies of the past four decades 24 52 T O have generally been beneficial for the top P 1 P P I I 0 % H H 20 48 10% of households in terms of income and S S S R R H E E A B B R M M 16 44 have been devastating for lower income E E E O M M F N N households. It has led to declining income. I N O O I I 12 40 C N N O U U M Higher paying unskilled jobs have become E 8 36 less prevalent, and household debt levels 4 32 have become unsustainable. Angus Deaton 20 30 40 50 60 70 80 90 00 10 20 and Anne Case have done extensive research UNION MEMBERSHIP AS % OF THE LABOR FORCE TOP 10% SHARE OF INCOME Sources: Emmanual Saez, Haver Analytics, CIM on what they describe as “Deaths of Despair”—fatalities caused by alcoholism, Unions can only flourish in conditions of opioid addiction, obesity and suicide. This restrained labor supply. The combination of is the situation of the populists; however, the increased technology, trade and immigration RWP are probably most affected because all contributed to the fall of union their status suffered with the breakdown of membership. the Roosevelt Coalition. The loss of income growth led households to This situation was brilliantly captured by employ both spouses, complicating columnist Peggy Noonan in a 2016 op-ed childcare. Eventually, there was the where she described the establishment and widespread use of consumer debt to the populists as the protected and the maintain consumption. unprotected, respectively. The establishment created an economy in which DEBT VS. WAGES AS % OF CONSUMPTION they didn’t bear the risks associated with the 100 N N O O H policies they created. She states: I I O T T 80 P P U S M M E U U H S S O N N 60 L O O The protected make public policy. D C C D F F 100 E O O 40 B The unprotected live in it. T % % 95 / G S S D A A 20 P N N 90 O O I I T T It has become increasingly difficult for A A S S 85 N N E E P P populists, but especially right-wing 80 M M O O C C 75 populists, to accept the establishment has 55 60 65 70 75 80 85 90 95 00 05 10 15 20 their best interests at heart. They were told COMPENSATION AS % OF CONSUMPTION HOUSEHOLD DEBT AS % GDP globalization and deregulation would be Sources: Haver Analytics, CIM good for them. As the above charts show, it’s hard to make that case. Accordingly, it This chart shows how much of consumption has reached the point where populists don’t is funded by total compensation and the know what to believe anymore. For level of household debt to GDP. Until the example, we suspect many populists early 1980s, wages generally accounted for understand that climate change is occurring. 90% to 97% of consumption. Since then the Anyone looking at the changes in nature can percentage has dropped below 80%. As see something is going on; areas that never compensation failed to keep up with needed air conditioning now require it. But Weekly Geopolitical Report – June 8, 2020 Page 4 the rub is that if the populists agree with this Changes in the media throughout history position, they fear the policy prescription have been important. It is quite possible the will cost them. In other words, if a carbon Reformation may not have occurred without tax is the solution, the incidence will almost Gutenberg’s moveable type, which allowed certainly be more negative for lower income for the widespread distribution of the Bible. households. So, instead, they argue that Newspapers became important vectors for climate change either isn’t real, is overstated political messaging; the Spanish-American or is due to natural changes, because to War was partly driven by the “yellow accept human actions as the primary cause press.” Franklin Roosevelt used radio for invites greater burdens. his famous “fireside chats” during the Great Depression. Television ushered in political The Impact of Social Media advertisement and the televised debate.