The Economic Drivers of Political Disruption in Advanced Economies

By Jayati Ghosh, Professor of Economics and Chairperson at the Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi. Cross posted from

Across the world, people have been watching recent political changes in developed countries with a mixture of bemusement and shock. From the recent anointment of Donald Trump as the Republican candidate for US President, to the rise and spread of blatantly racist anti-immigration political parties and movements in Europe, it is clear that there are tectonic shifts under way in the political discourse and practice in these countries. As these changes have gone from the unthinkable to the depressingly predictable, there are increasingly desperate attempts to understand what is driving them. This is especially the case because – despite all the talk of a shift in global power to some large “emerging nations” – what happens in the developed countries still matters hugely in international relations and to all of us in the rest of the world.

It is now obvious that increasing inequality, stagnant real incomes of working people and the increasing material fragility of daily life have all played roles in creating a strong sense of dissatisfaction among ordinary people in the rich countries. While even the poor amongst them still continue to be hugely better off than the vast majority of people in the developing world, their own perceptions are quite different, and they increasingly see themselves as the victims of globalisation.

But while this is increasingly recognised, the full extent of recent economic trends is probably less well known. A new report from the McKinsey Global Institute (“Poorer Than Their Parents? Flat or falling incomes in advanced economies”, July 2016) brings out in detail how the past decade in particular has been significantly worse for many people in the developed world.

The report is based on a study of income distribution data from 25 developed countries; a detailed dataset with more information on 350,000 people from France, Italy and the United States and the UK; and a survey of 6,000 people from France, the United Kingdom and the United States that also checked for perceptions about the evolution of their incomes.

The results are probably not surprising in terms of the basic trends identified, but the sheer extent of the change and the deterioration in incomes still comes as a surprise. In 25 advanced economies, between 65 and 70 percent of households (amounting to around 540- 580 million people) were in segments of the income that experienced flat or falling incomes between 2005 and 2014. By contrast, in the previous period between 1993 and 2005, less than 2 percent (fewer than ten million people) faced flat or falling incomes.

The situation was much worse in particular countries. In Italy, a whopping 97 per cent of the population had stagnant or declining real incomes between 2005 and 2014, while the ratios were 81 per cent for the United States and 70 per cent in the United Kingdom. This refers to market incomes, and it is true that government tax and transfer policies can change the final disposable income of households, in some cases improving it. Indeed, for the 25 countries taken together, only 20-25 per cent experienced flat or falling disposable incomes. In the US, government taxes and transfers turned a decline in market incomes for 81 percent of households into an increase in disposable income for nearly all of them.

Similarly, government policies to intervene in labour markets also made a difference. In Sweden, the government intervened with measures designed to preserve jobs, so market incomes fell or were flat for only 20 percent, while tax and transfer policies ensured that disposable income advanced for almost everyone. But in most of the countries examined in the study, government policies were not sufficient to prevent stagnant or declining incomes 2 for a significant proportion of the population, and labour market trends contributed to feelings of insecurity among workers everywhere.

While these changes were evident across the board, the worst affected were less educated workers, and particularly the younger ones among them, as well as women, especially single mothers. The report notes that today’s younger generation in the advanced countries is at real risk of ending up poorer than their parents, and in any case already faces much more insecure working conditions.

This material reality is actually quite accurately reflected in popular perceptions. A survey conducted in 2015 of British, French and US citizens confirmed this, as approximately 40 per cent of those surveyed felt that their economic positions had deteriorated. Interestingly it was also such people, as well as those who did not expect the situation to improve for the next generation, who felt most negatively about both trade and migration. More than half of this group agreed with the statement, “The influx of foreign goods and services is leading to domestic job losses,” compared with 29 per cent of those who were advancing or neutral. They were also twice as likely to agree with the statement, “Legal immigrants are ruining the culture and cohesiveness in our society,” compared to those advancing or neutral. The survey also found that those whose incomes were not improving and who were not hopeful about the future were more likely in France to support political parties such as Front National and in Britain to support Brexit.

One major driver of stagnant worker incomes has been the combination of labour market developments and public policies that have resulted in declining wage shares of national income. The report notes that from 1970 to 2014 – with the brief exception of a spike during the 1973–74 oil crisis – the average wage share across the 6 countries studied in depth (United States, United Kingdom, France, Italy, the Netherlands and Sweden) fell by 5 percentage points. In the most extreme case of the United Kingdom, it declined by 13 percentage points. These declines in wage shares occurred despite increases in labour productivity, as the productivity gains were either grabbed by employers or passed on in the form of lower prices to maintain external competitiveness.

Such declining wage shares are commonly seen to be the result of globalisation and technological changes that have led to changing patterns of demand for low-skill and medium-skill workers. But even here, it is evident that state policies and institutional relations in the labour market matter. In Sweden, where 68 percent of workers are union members and the government has in place policies that enforce contracts that protect both wage rates and hours worked, the median household received a greater share of output that went to wages, and even got more of the gains from aggregate income growth than households in the top and bottom income deciles over the 2005–14 period.

By contrast, countries that have encouraged the growth of part-time and temporary contracts experienced bigger declines in wage shares. Once again, this is especially adverse for the young. According to European Union official data, more than 40 per cent of workers aged between 15 and 25 years in the 28 countries of the EU have such insecure and low- paying contracts, while the proportion is more than half for the 18 countries in the Eurozone, 58 per cent in France and 65 per cent in Spain. This is obviously a concern for the young people who have to experience this, but it is as much a source of unhappiness and anger for their parents who worry for the future of their children.

In the meantime, they can all observe the counterpart in terms of rising profit shares in many of these rich countries. Economic processes and government policies increasingly appear to favour plutocratic tendencies. In the United States, for example, post-tax profits of firms in the period 2010-14 reached more than 10.1 per cent of GDP, a level last reached in 1929 just before the Great Depression. Ironically, in the US this is apparently favouring the political rise of one of the biggest beneficiaries of this process, Donald Trump who is himself emblematic of such plutocracy.

If economic policies do not change dramatically to favour more good quality employment and better labour market outcomes through co-ordinated fiscal expansions, to lift growth in more inclusive ways, things are likely to get even worse. The report projects that even if the previous high-growth trajectory is resumed (an unlikely prospect) at least 30-40 per cent of households would not get income gains over the next decade, especially if technological changes like more automation accelerate. And if the slow growth conditions of 2005–12 persist, the proportion of households experiencing flat or falling incomes could go to as much as 70-80 per cent by 2025.

The unpleasant and even terrifying political fallout of such outcomes is now only too evident. How much more will it take for political leaders to recognise the need for a move away from business as usual to radical change in economic policies?

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20 comments

  1. hemeantwell

    I think this piece is similar to the Bacevich article, in that he doesn’t talk about why the political order is inadequate to the economic crisis he thoroughly describes. If politics is about suppression of class antagonism then, yes, when economic conditions strongly decay you get disruption. But if it’s “real” politics oriented to adequate representation of class conflict, you get, uh, Sweden, at least until capital there threatened to fly overseas. (Whoa on further quoting myself.)

  2. tegnost

    Generally a good post but I’ll quibble with this line…
    “In the US, government taxes and transfers turned a decline in market incomes for 81 percent of households into an increase in disposable income for nearly all of them”
    The greatest impact population wise, IMO, was homeowners who kept their jobs and made it through he foaming the runway phase, and somewhat anecdotally because it’s friends and family, refied and bundled student loans car payments and hey don’t we deserve a vacation so a little cash out too, but not atm style like in ’05. This group also benefited from lowering wages for people like me whose hourly rate has not recovered, but yet my skills increase, oh well. His claim that 65-70% have fallen over the edge seems to ring truer…

  3. [email protected]

    The one thing all these analyses miss is that monetarism acts as a pseudo-gold standard, severely limiting the introduction of new money (as opposed to merely new credit, which must be paid back out) into the economy. This means that as increasing amounts of what had been the wage share were diverted to profits, there was less new money coming to replace it and to maintain the standards of living in all of these economies.

    The solution then is almost trivial; deficit spending (preferably without borrowing) into the low end of the jobs spectrum, especially as a jobs guarantee. This places new money where it is most needed, and allow that money the maximum circulation through the economy before it is skimmed off finally as pure profit.

    1. Patrick

      The solution is simple, but it isn’t fast. At the point when populists are banging at the gates, the technocrats probably missed the boat. Escape is unlikely.

    2. jgordon

      There is no “solution” because we are not facing a problem that is amenable to solutions. Dwindling resources, collapsing ecologies and rampant pollution–coupled with a still increasing population means that we’re all screwed regardless. Inequality, and what passes for austerity these days, just means that those lower on the totem pole are just slightly worse off than they otherwise would be.

      Our entire conceptual framework of life, not just economics and money, is fundamentally broken. There is no conceptual bridge from where we are now to where we need to be. The old order will die off, and then those who are left can try to pick up the peices and do something worthwhile. As long as that idea is kept in mind our daily activities–both today and in the future, will tend to be useful rather than futile.

      1. Ruben

        There are overlapping dynamics at several time scales. On the centennial-millenial time scale there are threats to civilization (not to species survival) due to resources shortage, ecology, etc. The article is about the more immediate concerns on the decadal time scale. On this decadal time scale we are observing the start of the end of an idea, neo-liberalism, whose central tenet is that wealth creates wealth. A very convenient (for state apparatchiks) corollary of this central tenet is that in order to create more wealth the State has to help those who are rich already.

        So in the meantime before “Our entire conceptual framework of life” breaks down we need to face other more urgent issues, such as how to prevent fascism from replacing neoliberalism in developed countries, how to escape forward from a western State paradigm that has led to widespread corruption and suffering of the less educated, waste of talent, and appallingly low standards at the highest levels of the hierarchy.

  4. Watt4Bob

    The issue has never been one of mis-understanding what’s going on.

    The issue is what can be done about it.

    We’ve been standing around watching ‘them’ drill holes in the bottom of our boat for nearly fifty years, and only very recently has anyone come up with an effective plan to do something.

    And it seems that about half of Bernie Sanders’ supporters don’t get what he’s started, which is the first clear action in the direction of reclaiming a place at the table for the most of us.

    The people I’m talking about are laboring under the false belief that Bernie could have saved us, all over the course of one presidential election cycle.

    We all have to firmly grasp the fact that the struggle we face has been going on for ages, and our victories are relatively small, and require much more time, dedication, and effort than we’ve imagined.

    We all have to appreciate the fact that Bernie’s efforts are much like those of the old man planting trees under whose shade he will never sit.

    There are many of us who by this point, do not expect to see much improvement in our daily lives, but we’re hoping for better conditions for our kids and grand kids.

    1. Ike

      Assuming there are trees to cast some shade. The harsh reality of climate change and global warming is that sacrifice will be foisted upon all of us. And our country has been able to export that grief and now our government is well on it’s way to consolidating control, limiting communications, and raising the drawbridge in very limited areas.(read the .01%) Not many of us will make it and this is why Bernie’s message is so imperative. The key to restore any modicum of Democracy means we need to change the government through revolutionary means so that, We the people, can control/restore our own environments. To earn a fighting chance means we have to throw away our complacency and begin to question our representatives with “why”?

      1. beene

        Ike, the answer is restoring the constitution which means a republic that supports the general welfare of the nation and its people.

        A fuller explanation is given by Tony Wikrent at the URL below.

        “The promotion and advance of laissez faire economic liberalism directly undermines the public virtue that is essential to the proper functioning a republic. As I wrote in The Historical Context of Mercantilism, Republicanism, Liberalism and Neoliberalism:” Tony Wikrent
        August 5, 2016 at 8:31 am

        More………http://cfdtrade.info/2016/08/andrew-bacevich-the-60-year-decay-of-american-politics.html#comment-2648836

      2. crittermom

        Ike, I agree.
        I watched the movie “the Candidate” for the first time recently. It was made in 1972.
        As I watched I couldn’t help but see correlations to issues of today. That was 44 YEARS ago, yet the government is no more ‘for the people’ now than it was then. If anything, I see it as being much further away from those values and even more corrupt.

        While I understand the concept of changing the govt from within, I also increasingly fear we’re running out of time to do so. I agree with you that it’s time to throw away our complacency.

        I was glad to see the Bernie supporters were not complacent at the convention as I think that it’s going to take more than gaining an inch here and an inch there toward progress in changing
        things through the govt.
        I don’t think we have the decades to spare. Greed of the 1% is killing the planet and its inhabitants.

  5. Sally Snyder

    Here is an article that explains the key reason why economic growth will be slow for the foreseeable future:

    No matter what central banks do, their actions will not be able to create the same level of economic growth that we have become used to over the past seven decades.

    1. JEHR

      Economic growth does not come from the central banks; if government sought to provide the basics for all its citizens, including health care, education, a home, and proper food and all the infrastructure needed to give people the basics, then you could have something akin to “growth” while at the same time making life more pleasant for the less fortunate. There seems to be no definition of economic growth that includes everyone.

  6. David

    This seems a very elaborate way of stating a simple problem, that can be summarised in three points.
    The living standards of most people have fallen over the last thirty years or so because of the impact of neoliberal economic policies.
    Conventional politicians are promising only more of the same.
    Therefore people are increasingly voting for non-conventional politicians.
    And that’s about it.

    1. jgordon

      Neoliberalism has only exacerbated falling living standards. Living standards would be falling even without it, albeit more gradually.

      Neolibetalism itself may even be nothing more than a standard type response of species that have expanded beyond the capacity of their environment to support them. What we see as an evil ideology is only the expression of a mechanism that apportions declining resources to the elites, like shutting shutting down the periphery so the core can survive as in hypothermia.

  7. I Lost at Jeopardy

    I really don’t have problem with this. Let the financial sector run the world into the ground and get it over with.
    In defference to a great many knowledgable commentors here that work in the FIRE sector, I don’t want to create a damning screed on the cost of servicing money, but at some point even the most considered opinions have to acknowledge that that finance is flooded with *talent* which creates a number of problems; one being a waste of intellect and education in a field that doesn’t offer much of a return when viewed in an egalitarian sense, secondly; as the field grows due to, the technical advances, the rise in globilization, and the security a financial occuptaion offers in an advanced first world country nowadays, it requires substantially more income to be devoted to it’s function.
    This income has to be derived somewhere, and the required sacrifices on every facet of a global economy to bolster positions and maintain asset prices has precipitated this decline in the well being of peoples not plugged-in to the consumer capitalist regime and dogma.
    Someting has to give here, and I honestly couldn’t care about your 401k or home resale value, you did this to yourself as much as those day-traders who got clobbered in the dot-com crash.

  8. Yata

    Let the financial sector run the world into the ground and get it over with.
    In defference to a great many knowledgable commentors here that work in the FIRE sector, I don’t want to create a damning screed on the cost of servicing money, but at some point even the most considered opinions have to acknowledge that that finance is flooded with *talent* which creates a number of problems; one being a waste of intellect and education in a field that doesn’t offer much of a return when viewed in an egalitarian sense, secondly; as the field grows due to, the technical advances, the rise in globilization, and the security a financial occuptaion offers in an advanced first world country nowadays, it requires substantially more income to be devoted to it’s function.
    This income has to be derived somewhere, and the required sacrifices on every facet of a global economy to bolster positions and maintain asset prices has precipitated this decline in the well being of peoples not plugged-in to the consumer capitalist regime and dogma.
    Someting has to give here, and I honestly couldn’t care about your 401k or home resale value, you did this to yourself as much as those day-traders who got clobbered in the dot-com crash.

  9. nothing but the truth

    the capitalist economy is more and more an asset driven one.

    this article does not even begin to address the issue of asset valuations, the explicit CB support for asset inflation and the effect on inequality, and especially generational plunder.

    the problem of living standards is obviously a malthusian one. despite all the progress of social media tricks, we cannot fool nature. the rate of ecological degradation is alarming, and now irreversible. “the market” is now moving rapidly to real assets. This will eventually lead to war as all war is eventually for resources.

  10. Crazy Horse

    My comment never made it to the site. It trust it was a technical error rather than censorship. The basic content argued that income levels have little to do with economic well being unless you factor in consumer debt. That accounts for the fact that “wealthy” Americans fall just below poor Greeks on the scale of median net personal worth.

  11. Valentine Kimbriel

    But what about next year? Many observers consider that the economic situation will continue to unravel.

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