2013-04-11

At Least I'm Not The Only One

This may just be a thought experiment for Tyler Cowen, and most of it amounts to nothing more than a back-of-the-envelope "likely story." Even so, he does make a point that has been staying with me for a long time now. I haven't written about it (at least I don't think I have) because, like most of my economic ideas, it is something of a specter that haunts me, more than it is an actual theory. So I will hide behind Cowen's description of it and say, "That's what I'm talking about." Here it is:
IT and China, taken together, seem to imply a big whack to median income.  This whack should be higher for the less flexible polities, and furthermore the wealthy and the well-educated in the U.S. get back a big chunk of that money through tech innovation and IP rights.  Plus we’ve had some good luck with fossil fuels and even the composition of our agriculture.  If you had a country without those high earners in the tech sector, and an inflexible labor market, those economies will have to contract and I don’t just mean in a short-term cycle.  Equilibrium implies negative growth for those economies, at least for a while.
The more people talk about "stagnating median incomes" in the context of the so-called "Great Stagnation," the more I am moved to believe that the developed world has had this coming for a long time. And when I say that, I don't mean to suggest that our buffoon politicians have sabotaged our ability to profit by heaping an ever-increasing regulatory and tax burden upon us, although that is also true.

No, what I rather mean is this: Globalization has been going on now for about 40 years. I am in my thirties, and it's still difficult for me to understand that the 1970s are "way back then" in the same way that the 1950s were ancient history for me when I was growing up. 40 years is an awfully long time. It is an especially long time when it is the span of time over which a major economic event has occurred. 40 years of globalization and supply-chain restructuring, out of expensive-labor countries like the US and Europe, and into cheap-labor countries like China and Brazil is bound to have some repercussions eventually.

Up until the mid-00s, we only really perceived those repercussions to be dramatically falling prices (in real terms, of course) for consumer goods. So our prices have been falling for a full 40 years, during which our incomes rose for the first 30, and then declined for the last 10.

Isn't the story obvious? Rising incomes in developing countries, paired with falling prices in developed countries, paired with increasing globalization of the management of business operations implies greater equality of wages across borders. It is textbook, entry-level international economics.

So, obviously we can expect US median incomes to decline and developing-nation median incomes to increase until a new equilibrium is reached. I have no reason to believe we have yet arrived at that new equilibrium, so my belief is that US incomes still have a lot of room to decline.

But, unlike many other bloggers out there, I don't consider this bad news in the slightest. Prices really have decreased for virtually everything over time. We will make less money, but we will also need less money to enjoy the same standard of living. Global wealth is absolutely skyrocketing, and has been for the last 200 years. No amount of doom-saying about "the Great Stagnation" (what a cheap scare tactic that term is!) can change the fact that the cat is out of the bad. Our friends who lived in mud huts 60 years ago are climbing into the suburbs of what we used to derisively call "the Third World." Successful Asian entrepreneurs have managed to accumulate fortunes that put them in competition with the most storied US billionaires. Living abroad - even living in those "spooky" places where the food is spicy and music is in odd meter - is no longer the terrifying lunar expedition our parents assume it is. Perhaps it never was, but the point is that wealth equality is spreading like wildfire.

And the fountainhead of all these plummeting prices and wealth accumulation is economic production. So none of this is actually bad news. Your income may decline in real terms, but your standard of living will not, nor will your wealth. It is a good time to be alive, and for the first time in history, it is a good time to be alive in the Old World, the New World, Asia, and Africa alike.