The Bear’s Lair: The decline of Western incomes

Posted by Guessedworker on Monday, 23 July 2007 22:40.

A not-so-wealthy West, foreseen by Martin Hutchinson at the mainstream financial bulletin, Prudent Bear. The piece is a follow-on from his - to mainstream financial minds - sobering prognostications on the matters of outsourcing and migration.

Negative earnings surprises by Pfizer and Caterpillar at the end of last week may indicate a new reality: the income premium for being a Westerner and having access to the centuries of Western intellectual property and business acumen may be sharply diminishing. We can all rejoice as poor and middle income countries are brought up to Western levels of affluence, but our rejoicing will presumably be sharply diminished if we come to realize that much of their gains may be at the expense of our children’s living standards.

The vision of the world of 2050 or 2100, in which the great majority of Third World peoples enjoy more or less Western living standards, has always been a but fuzzy. Thirty years ago, if you had asked people to imagine the world of 2050, all but the most manically environmentalist would have envisaged Third World residents enjoying living standards comparable to those of current Westerners, while the affluent West had reached living standards that could currently be dreamed of only by an affluent few.

The more thoughtful would have recognized that there was simply not enough space for the squirearchical dream of robot servants for all, together with country houses and rolling parklands. However the 18th century customers of Capability Brown didn’t enjoy modern plumbing, found travel impossibly time-consuming and uncomfortable, and had a nasty tendency to die in childbirth at 30 or of flying gout at 50. 2100’s median Western real income of $250,000 or so would have to be spent differently, but the income itself seemed pretty assured, given the continuance of technological development.

That is no longer the case. Elite opinion remains wedded to globalization as the best of possible economic policies, and believes with fanatical devotion that David Ricardo’s Doctrine of Comparative Advantage will ensure that there will be no significant class of people, even in rich countries, who lose out because of it. However it is becoming increasingly obvious to the populace as a whole that globalization produces substantial numbers of losers, particularly among the less well educated inhabitants of Western countries. No amount of cheaper consumer goods will assuage your pain if you have been forced to exchange a $25 an hour factory job for a $8 an hour service job.

I have discussed previously the effect of outsourcing and international migration on living standards at the bottom of the scale. Here I want to examine the extent that the advantages which have traditionally kept Western countries affluent—in particular those of financial capital, intellectual capital and a near-monopoly on innovation—are all losing their power to differentiate living standards.

The period of monetary expansion since 1995 has reduced both interest rates and risk premiums on emerging market investments. This has caused a huge reorientation in the world financial markets, albeit so far of a very comfortable type. The lack of credit discrimination in world bond markets, for example, is shown by the total lack of emerging market defaults since Argentina in 2001-02. Capital has become more readily available for emerging markets, narrowing their traditional capital cost disadvantage against Western countries and speeding the process of outsourcing and resource transfer to cheap-labor environments.

If this were all that had happened, it would be a purely temporary phenomenon. Once monetary policy was finally tightened and interest rates rose, risk premiums would reappear and the flow of resources to emerging markets would be correspondingly slowed. However, on the savings side, very low interest rates and continued asset price inflation have depressed savings rates in Western countries far below their historical norms. This has caused not only an excess in consumption but also in the United States a persistent and very large payments deficit that has transformed the country as a whole into the world’s largest debtor.

This is much more serious. Once interest rates rise again, the US and much of Europe will find themselves in a major savings deficit position, having run down their savings through consumption and devoted excessive amounts of capital to unproductive investments such as luxury housing. Asset prices will decline, causing bankruptcy among those consumers who have over-borrowed on mortgages and credit cards, and the world’s capital stock will be found largely concentrated in Asian countries such as China, Taiwan, and (because of high oil prices) the Middle East, where savings rates have remained robust.

At that point, the wealth of the West will no longer be an advantage to it in the search for resources. Instead the major Asian countries will have the lowest real interest rates and capital will flow to projects in those countries, which will offer the prospect of the greatest net returns. The imagined nightmare of the late 1980s, in which Japan’s lower capital costs were thought likely to transfer much of the West’s industrial base to Tokyo, will be played out in reality on a much larger scale with respect to East Asia as a whole. With lower capital investment and higher financing costs, the West’s living standards will inevitably enter relative decline.

Intellectual property is a second area where the value of the West’s assets is declining. As globalization intensified in the 1990s, the major Western media, IT and pharmaceutical companies saw it as an opportunity. Poor countries could only be expected to buy modest quantities of US software, media products and drugs, and would operate active black markets to keep prices low. However countries that were becoming richer, and exporting their products to the West, could be compelled to enforce intellectual property rights, raising the domestic prices of software, media products and pharmaceuticals to world levels. US IP owners imposed a draconian new US copyright regime in 1998, they ensured that the World Trade Organization’s membership rules included protection of intellectual property, and they pushed for a further extension of Western intellectual property rights via the Doha round of trade talks.

This effort is now coming unstuck. The widespread adoption of broadband technology and high-level cellphones have increased the means by which media products can be reproduced to such a point that it appears unlikely that rights owners can protect their property adequately, except to a limited extent in their domestic markets. The slowing rate of innovation hardware has made “open source” software much more competitive with copyright software, so that the Linux operating system now has a world market share of 15% and the Firefox browser a market share of 25%. The Doha round of trade talks has collapsed, as dying Western farming industries proved themselves more politically powerful than soaring Western IP owning industries.

Probably most important in terms of long term value, two changes have weakened the hold of the major pharmaceutical companies on the patent system. First, new competitors have arisen in emerging markets, and their research capabilities have become comparable to those of the drug majors. Thus in any third country in which property rights are weak, drug buyers will quickly have a credible alternative to patented drugs, manufactured outside the magic circle of the major Western drug companies. Second, drug research itself is changing. Many of the new drugs invented in the future will be designed through gene manipulation, and will be effective only for patients with the appropriate genetic markers. With more new drugs being invented and smaller potential markets for each one, the patented “blockbuster” drug is likely to disappear, and Third World drug manufacturers with lower research and manufacturing costs will prove themselves highly competitive against the majors.

Intellectual property isn’t just a mechanism to reward the likes of Time Warner, Microsoft and Pfizer, it is the principal barrier to entry protecting millions of highly paid skilled workers in Western countries. If that barrier disappears, and those workers are subjected to competition from countries with much lower labor costs, their living standards must inevitably decline.

Finally, the West has lost its near-monopoly on innovation. Knowledge, capital and entrepreneurial skill are much more broadly shared globally than was the case in the past, so a much higher share of innovation, in the form both of new products and new ideas, will come from non-traditional sources. This is important; innovative products and services, by definition, face limited competition in their earlier years and so can bear higher prices than would be the case if their provision were fully competitive. Again, not only will Western entrepreneurs find returns lower and commoditization faster than was previously the case, but the returns to higher education will also decline, as a PhD from Harvard will prove to be worth little more than a PhD from Kolkata.

Westerners have always supposed that a free-market regime and high levels of international trade will allow the world’s economic growth to accelerate, providing higher living standards not only for the newly enfranchised citizens of emerging markets, but also for Westerners themselves. There is in reality no reason why this should necessarily be the case. If the West’s advantages of capital, intellectual property and near-monopoly on innovation are dissipated more rapidly than global growth enriches the planet as a whole, then the West’s share of global wealth will decline more quickly than global wealth itself increases. The result will be declining Western living standards, likely to be a major feature of the next generation’s economic changes.

There are no solutions to this problem, whose causes have been mostly a decade of cheap money and the communications revolution of cellphones and the Internet, together with technological changes reducing the salience of intellectual property. However, there are palliatives. Tight money, imposed as quickly as possible, will preserve the remainder of the West’s capital stock and begin the lengthy process of rebuilding it. Increased resources to education will indeed produce a more highly skilled workforce, which will be able to command higher remuneration. A tax system heavily weighted towards taxes on consumption will increase savings rates. Restricting immigration will preserve as far as possible the living standards of those engaged in the vast personal service sector – a barber in Bangalore is paid less than in Boston – thus providing adequate opportunities for those unable to benefit from the highest levels of education.

Above all, steps should be taken to reduce the level of population growth, particularly in the poorest countries. In a market that is becoming increasingly global, only by reducing the supply of undifferentiated labor will it be possible to maintain its price. A more modestly growing African population will allow Africa to enter more quickly into the joys of rapid economic growth, and will lessen the disruption to the rich West from it doing so.

By speeding the rate of global growth, while at the same time reducing the rate by which the West’s share of the world’s income is reduced, policymakers can ensure that the decline in Western living standards from globalization is moderate, and hasten the day when the entire world is close to Western living standards, so that the free market of ideas, products and services increases the wealth of all.

Martin Hutchinson is the author of “Great Conservatives” (Academica Press, 2005)—details at his website.

Tags: Economics & Finance

Comments:

Posted by James Bowery on Tue, 24 Jul 2007 04:12 | #

First, as I have discovered while researching the roots of capital corruption—the placement of capital in the hands of the incompetence or the rendering incompetent the hands into which capital is placed—Ricardo provided a bad definition of economic rent. The labor theory of value is fundamentally corrupt and must be replaced by an intellectual property theory of value—working smart not hard.

Second, the real definition of economic rent—the sum of all externalities—lets us see how rent seeking (including public choice rent seeking) corrupted Western elites to they point that they didn’t recognize what W. D. Hamilton said:

Often, however, the cost in fitness of such altruism and sublimated pugnacity to the individuals concerned is by no means metaphorical, and the benefits to fitness, such as they are, go to a mass of individuals whose genetic correlation with the innovator must be slight indeed. Thus civilization probably slowly reduces its altruism of all kinds, including the kinds needed for cultural creativity (see also Eshel 1972).

And in their ignorance, probably rendered invincible by a subconscious recognition of themselves in Hamilton’s phrase “slight indeed”, they thought themselves actually meriting their wealth and did not recognize they were merely inferior rent seekers when pitted against the global pool of rent seeking cultures. Hence, when vectorists like Jews—themselves premiere rent seekers—opened up the borders of the West to the rest of the world’s rent seekers, the economic rent drained out of the West to the superior rent seekers.

Posted by Megapode on Tue, 24 Jul 2007 12:42 | #

Actually, come 2050 or even 2100 what goes on (or economically speaking what doesn’t go on) in England or even the USA, will scarcely matter a jot.

The future is in China.

I have full, total confidence that the Chinese and other East Asians will breach the stratospheric GDP per capita figures alluded to (in proportionate terms they have already done just that if you compare GDP in 1970 to the current GDP).

The Chinese have all the racial characteristics to do this ie intelligence, discipline, hard-work.

The nations of Europe and North America will probably be majority non-White by then anyway.

Posted by Al Ross on Tue, 24 Jul 2007 13:35 | #

It is tempting to ignore the nonsense posted by Megapode. However,those of us who wish to know a thing or two about the Chinese might glean certain traits about that interesting race from a reading of the biography of that great Chinese, Lee Kuan Yew.
One of LKY’s major problems was that, even in a small alien venue,where one might expect racial cognates to gel, like Singapore, he coudnt achieve racial unity without employing Draconian socialist measures like suppressing regional dialects (mainly Hokkien,Teochew, some Cantonese and Kek) in favour of the imposition of Mandarin for the lower orders and English for people like himself (double first Cantabrigian).

China will implode because the people of that nation, while superficially amenable to localised free enterprise, will balk at the trojan horse of the one thing that enabled them to halt a thousand year decline - Western Industrial Capitalism.

Posted by James Bowery on Tue, 24 Jul 2007 15:17 | #

Give them credit for burning their merchant fleet when it brought African slaves to China. How many of us would be willing to trade all the European colonies for the expulsion of Jews from Europe in 1492?

Posted by Al Ross on Tue, 24 Jul 2007 15:53 | #

Admiral Cheng Ho was offered Congoid slaves upon his fleet’s arrival at Malindi. He judiciously declined that offer, accepting instead, through barter, a veritable menagerie of exotic wildlife which was doubtless more aesthetically pleasing to his Emperor than the biped domestic livestock which the Americans imported.

Posted by Maguire on Tue, 24 Jul 2007 16:36 | #

“China will implode”

The esoteric writer Michael Hoffman once wrote the “Cryptocracy” really has only one supreme advantage; they’re not susceptible to believing their own propaganda tales.

One of these fairy tales was propagated in the early 1990s by Neocon Francis Fukuyama and his neocon sponsors like Paul Wolfowitz, Scotter Libby et al. This was that ‘history’ had ended, Liberal Democracy had triumphed for all time and everything in the future would be decided by paper money, free trade and elections mediated by centralized meda.

‘Leviathan’ or “ZOG” possesses a naval imperium unique in history. This is one very reliable check on a state like China that must import critical amounts of oil & coal by sea. The Great Red Dragon would look a lot different 60 days after the last oil tanker docks at a Chinese terminal.

Writers like Martin Hutchinson always posit the stable parameters of a continuation of present trends in their prognostications of the Future. And they do this even though they know the past, and even the recent past, is punctuated by very radical discontinuities with then apparent ‘trends’.

Specifically, radical discontunities brought about by state action. A few of these discontinuities include:

—- A force commanded by a man from Louisiana, and including a cannon battery commanded by a Jew, opens fire on a South Carolina harbor fort garrisoned by a tiny peacetime caretaker party. This was in one of the largest Sephardic Jewish centers of North Amerian settlement of the era.

(Note to Scimitar. The man concerned, PGT Beauregard, was married into the same Creole sugar planter aristocracy as Judah P. Benjamin. Post-war this ‘son of the south’ spoke out in favor of negro civil rights while pursuing a lucrative career as a railroad executive.)

—- The assassination of an Austrian archduke by state sponsored terrorists, followed by a government headed by a Jew issuing a blank check of military support to the aggrieved government.

—- A sudden and radical contraction of credit by a hyper centralized banking system in October, 1929.

—- Another government issuing a blank check to an unstable military dictatorship to mistreat minorities who are directly adjacent to a militarily superior majority state, followed by the first government imposing a continental wide oil blockade affecting even neutral countries.

Posted by Fred Scrooby on Tue, 24 Jul 2007 18:14 | #

“was married into the same Creole sugar planter aristocracy” (—Maguire)

I’m not sure what Maguire has in mind with that comment but just in case, I’ll remind everyone that “Creole” didn’t mean part-Negro then as some today falsely insist it meant and means.

“The esoteric writer Michael Hoffman once wrote” (—idem)

Michael Hoffman, a mixture of bordeline-wacko tinfoil hat stuff and excellent material worth reading, deserves a link. I linked to his site in this comment.

Posted by James Bowery on Tue, 24 Jul 2007 18:38 | #

Al, thanks for the correction on the historic detail—the essential fact remaining that China, wisely, abandoned world trade and colonization upon merchant ship contact with Africa.

I’d be interested in a cite for the claim that Cheng Ho was not seduced into bringing back a sample of the slaves made available to him by African merchants.

Posted by Prooofreader on Tue, 24 Jul 2007 20:25 | #

The future is in China.

Not so fast! A least according to Guy Sorman:

China’s success is, at least in part, a mirage. True, 200 million of her subjects, fortunate to be working for an expanding global market, increasingly enjoy a middle-class standard of living. The remaining 1 billion, however, remain among the poorest and most exploited people in the world, lacking even minimal rights and public services. Popular discontent simmers, especially in the countryside, where it often flares into violent confrontation with Communist Party authorities. China’s economic “miracle” is rotting from within.
http://www.city-journal.org/html/17_2_china.html

It´s well worth the read. By the way, Megapode´s mannerisms remind me of Razib, particularly “stratospheric”...

Posted by Commonsense on Tue, 24 Jul 2007 22:18 | #

It is amusing to see modern writers become aghast at the poverty in the Chinese countryside. There is nothing new in any of that. China has been a brutal tyranny for thousands of years and so it shall always be. That by itself does not mean it will be unstable.

China did go through a lot of instability in the 19th and 20th century. But this was due to the weakening of the Chinese monarchy. It was not because of economic inequality.
However, Proofreader may be right that the Chinese will never reach even current US levels of GDP per capita. But they don’t have to in order to become the world’s largest economy and overtake the US militarily and economically. Also, having a massive population of poor serfs helps in building up the military with approproate doses of racial nationalism. There is little evidence to indicate that the Chicoms are unwilling to do this.

Posted by Fred Scrooby on Tue, 24 Jul 2007 23:21 | #

“The nations of Europe and North America will probably be majority non-White by then anyway.” (—Megapode)

The Ancient Nations of Europe will never be non-white because that’s impossible: if a nation is non-white it’s not an Ancient Nation of Europe. If the population residing in the territory of Germany gets transformed from the present 80 million Germans to a mixture of 10 million Germans and 70 million Turks the German nation (which will have shrunken from 80 million to 10 million) will still be all white and all German and ten-million strong, and the task lying before it will then be to build its numbers back up again (German nationality coming only through descent from German parents) and re-conquer its sacred territory. But the nation, here the ten million, as before the eighty million, always stays the same: the same white German Euros untouched by the Jewish-launched race-replacement war, whether reduced to 10 in number, or 10 thousand, or ten million, or grown to ten billion: the nation is made up of all Germans and only Germans. If the population residing in the territory of France is transformed from its present 50 million (or whatever the number is) Frenchmen to five million Frenchmen and 45 million North-African mulattoes, the same thing holds: the French nation will still be all white and all French but will have shrunken from fifty million to five million and will have before it the job of restoring the racial/ethnocultural/terrotorial status quo ante. Same for the Irish nation if it succumbs to Professor von Whatshisname’s plans to make the territory of the Irish Republic be inhabited by 80% Chinamen with Irishmen a small minority: that small minority of Irishmen will still be the Ancient Nation of Ireland and its task will then be the recovery of what it had lost (and of course the severe punishment of the men who’d brought the shame about). A Chinaman isn’t an Irishman, never was, never will be, nor the latter the former. A European nation can’t be non-white because that’s intrinsically impossible. I want to say it’s impossible by definition but it goes way deeper than “definition,” infinitely deeper. It’s sacred. The nation is the people, not the constitution, or the government, or the alien races brought in by government to race-replace the people. It’s the people. White people can never be non-white, Euro people can never be Negro, Irish people can never be Chinese people. I know this will give the Jews acid indigestion and keep them awake nights in frustration but I’m sorry, I didn’t create the truth, I just tell what it is.

Posted by yuuio on Tue, 24 Jul 2007 23:51 | #

Why do you speak of Jews in the third person, Scrooby? Are they not your kith and kin? Can a Jew be an Irishman?

Posted by Guessedworker on Wed, 25 Jul 2007 00:04 | #

“Can a Jew be an Irishman?”

Can a son of Ireland be ethnically Jewish? And isn’t it Jewish law, as well as common sense, that answers that in the negative?

Posted by Fred Scrooby on Wed, 25 Jul 2007 02:00 | #

“Are [Jews] not your kith and kin?” (—yuuio)

I have some Jewish grandparentage, some other Jewish blood-relatives, and two Jewish in-laws. I’m Catholic, not Jewish.

“Why do you speak of Jews in the third person?”

Not being Jewish, obviously I’d never speak of Jews in the first person any more than I’d speak Canadians, Swedes, Danes, Greeks, Mexican mestizos, Macedonians, Papua-New-Guineans, Paraquayans, or Liechtensteiners in the first person: I’m none of those.

Now, if your intention is to needle me, Yuuio, I’ll ask you not to.

Posted by Maguire on Wed, 25 Jul 2007 02:03 | #

“Can a Jew be an Irishman?”

Can a dachsund be a German Shepherd? And more to the point, can a leech ever become the host it attached itself to?

“The nations of Europe and North America will probably be majority non-White by then anyway.”

This statement is possible if one replaces ‘nation’ with ‘country’. These ‘countries’ would then be larger examples of what’s happened to Detroit, Michigan; that is, the process of racial cleansing, race replacement, consequent artifact and infrastructure decay and active destruction that has overtaken this former white city.

The speed with which the negro race can depopulate and then reduce a white city to ruins reclaimed by wilderness is breathtaking indeed. Aerial surveys have recently confirmed a large proportion of the land area of the “City of Detroit” has already returned to a rural condition. I think Egyptologists of all periods would benefit from a close study of this living laboratory.

Posted by Mark on Thu, 26 Jul 2007 17:38 | #

The US is rotting from within more so than China; ever look at any major US inner city? The US will implode when the welfare state is unaffordable, and deservedly so, for not repatriating the blacks to Africa. Now, however, the government is the problem and best get out of the way and while chaos reigns for a while.

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