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When losers from globalisation outnumber the winners, expect changes

Monday, November 14, 2016 7:24
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We live in a world characterised by the wholesale rejection of elites. Exercising the power given them as citizens, voters are striking back at the systems which they see as rewarding insiders and punishing outsiders.

The median is the object in the exact middle of a distribution. For example, in the list of numbers from 1 to 9, the median is 5. The median is a better measure than the average for our purposes.

The median-income household across the developed world is not without resources, nor is it without education. The median household is increasingly without opportunity, or even the hope of opportunity for its children. The median household sees crumbling infrastructure, outsourced jobs, stagnant wages, and the evaporation of what used to be called the middle class.

The median household understands just how damaged its prospects have been by 40 years of policies aimed at increasing the openness of trade, creating winners at both ends of the income distribution in every country that tries it, and losers in the middle.

Let’s define globalisation as that moment in time when the rate of increase of trade is greater than the rate of increase of economic output per person. Imagine there are only two countries, called ‘home’ and ‘foreign’. Increasing trade makes the people who own the production facilities that make the things being traded much better off – they are the winners – but it also allows them to outsource their operations to cheaper countries, making workers in the ‘home’ country poorer and the workers in the ‘foreign’ country richer. The ‘home’ country workers are the losers, the ‘foreign’ country workers are the winners.

When the uncompensated losers from globalisation outnumber the winners, and those people have a vote, expect to see some changes made. The ‘losers from globalisation’ debate is far from settled but as Harvard’s Dani Rodrik and Oxford’s Kevin O’Rourke have repeatedly shown, the losers from globalisation have never been properly compensated. If it is true that the losers are almost never compensated, it is also true that these losses are somehow compounding. My losses become my children’s losses.

Exit polls from last week’s US elections show the divide clearly. If a voter felt their family’s financial position was better today, they voted for Hillary Clinton. If they felt their family’s financial position was worse today, they voted Trump. More people voted Trump. If voters felt the nation’s economy was good, they voted Clinton. If they felt the nation’s economy was worsening, they voted Trump. More voted Trump. If they expected things to be better for the next generation, they voted Clinton. If worse, Trump. Guess what? More people voted for president-elect Trump. We need to get used to saying that. President. Trump.

Chalking the result down to nativism or the KKK or gender issues (pick your correlate of choice) occludes the key decision many households had to make in the US election. They chose something different from the predictable set of policies which seemed guaranteed to make them and their children poorer, or, if they felt things were going okay, they could choose stability.

Populism is on the rise across the world. From Britain and the US to France, Germany, Ireland, the Philippines, Austria, South Korea, and The Netherlands, and across the left-right divide, politics is becoming more fractured. Faced with a choice of more of the same from rubberised, homogenous, well-educated slogan machines who they see as having ripped them off for decades within a rigged system, or something that’s not that, many people across many countries are choosing the second option.

Politics are fracturing along three axes. First, populist attitudes in the general population; second, pluralist attitudes, and third, elitist attitudes. These have always co-existed, but the swing away from elitist attitudes after the global crash is surprising many — especially those in the elites, who helped stabilise the system after the global crisis, but in doing so, lost much of their claim to be able to run the system in the first place.

The result is a huge increase in the incentives for working politicians across the world to turn completely populist. Which is to say, lie through their teeth, tell people they can have whatever they want without recourse to facts, and when challenged, move on and change positions, ignoring the constraints modern societies and economies face. So, of course, you can have Croke Park in your back garden and a Centre of Excellence Hospital in your front garden, and we’ll lower your taxes and bring back jobs and those people not like us can take a long run off a short pier.

This, then, is the biggest change 2016 has given us. The electoral systems of the world, to the extent they ever were, will become less and less interested in truth, and more and more interested in the comforting fantasies of the demagogue.

President-elect Trump begins his first ever public policy job with control of the White House, the Senate, the Congress, and at least one Supreme Court nomination to make. The last time this happened was 1928. I probably don’t need to remind readers of this column how president John Calvin Coolidge Jnr fared, or what happened in 1929 once president Herbert Hoover took over.

The ‘elites’, who we can more or less think of as those groups who have profited from the structures of the last 30 years, are in for a hard time.

Which brings me to Ireland’s public finances and the likely impact of a Trump presidency on Ireland.

First, the populist backlash and Ireland’s elites. If populism represents a wholesale rejection of the elites, then who exactly, are the elites here in Ireland? A very general definition might be: Anyone with regular access to the media, those in elected office, those who are protected when general economic conditions collapse, those in power in banking, health, education, accountancy, legal services, and other sheltered sectors, trade unions, and of course, the senior civil service. So, me, basically.

I’ll be honest, it feels a little weird to be the son of a taxi driver and a member of the ‘elite’, but the shoe does fit given this very general definition. If you’re a member of a state board and you can’t get fired, if you can issue ultimatums to governments via your trade union demanding pay increases you’re probably not entitled to given the current economic situation, you’re probably an elite. Which means your time is coming to an end as a wielder of influence, if the current trend continues.

Second, president-elect Trump’s economic advisers have said the tax and trade policies his administration will pursue will directly imperil Ireland’s multinational base.

One in five private sector workers are employed directly or indirectly by multinationals in this country, so if that threat is real, Trump is a bigger downside risk than Brexit, which the economy already has to face.

The operative question, then, is: how many will leave, should president-elect Trump reduce corporation taxes from 35 per cent to 15 per cent and close tax loopholes allowing multinationals to offset profits they earn outside the US. Most multinationals come to Ireland for the market access to the EU, but stay for the taxation benefits.

The correct comparison, then, is not Ireland’s effective corporate tax rate relative to the US’s, but Ireland’s effective corporate tax rate relative to our EU competitors. And here we are still winning, so I don’t see too many multinationals upping sticks. I do think the funds to deliver increased investment above what is already here might dwindle as a result of lower incentives to keep profits offshore. So we might well see lower levels of incremental investment by our multinationals.

We’re stuck in the middle of two very powerful economies in the middle of populist spasms. The downside risks for Ireland are huge, but so, by definition, are the opportunities. Ireland can take business from British and US firms seeking business-friendly safe havens. Ireland’s tax system is incredibly responsive to international developments, and it can respond very quickly to protectionist threats it perceives abroad. I still have faith in our policy makers. They might be a part of the elite, but they have the skills to help us through this period of heightened uncertainty.

Peter Drucker once wrote: “Every few hundred years in Western history, there occurs a sharp transformation. Within a few short decades, society, its worldview, its basic values, its social and political structures, its key institutions rearranges itself. Fifty years later, there is a new world, and people born then cannot even imagine the world in which their grandparents lived.”

I think we’re living through a time like that.

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