Are the United States and other industrialized countries heading for a fall?
A recent report from the McKinsey Global Institute – “Poorer than Their Parents?” – suggests that greater instability may be on the horizon for the First World. The report outlines a broad stagnation in incomes across the industrialized world, which has strained government finances and could unsettle existing political consensuses. By raising doubts about the fiscal and political sustainability of current policies, it augurs increasing disruption in political systems across the world.
The good news is that conservatives can meet the challenges of this economic sclerosis – and help secure themselves a governing coalition in the process.
McKinsey finds that, in much of the industrialized world, between 65 percent and 70 percent of households saw their market incomes (earnings from labor and capital) decline or stay flat between 2005 and 2014. Increased government transfers counteracted much of the decline, but about a quarter of all households still saw no income growth during this period – a marked departure from previous decades, when most households across the income spectrum saw at least some market-income growth.
While they applied their broader findings to 25 nations, the report’s authors dug deep into the economic experiences of six nations, including the United States. Between 1993 and 2005, over 98 percent of American households saw a market-income increase. In the next nine years, that growth collapsed. Between 2005 and 2014, 81 percent of U.S. households experienced a decrease in their market incomes. Only increased government transfers and tax-cuts caused most Americans not to experience income decline; after government transfers and taxes were taken into account, fewer than 2 percent of American households saw their net household income shrink. On one hand, this means that the tax cuts and increased government spending provided an economic cushion to many households. On the other hand, those efforts cost money, and that money had to be borrowed.
There are limits to how much money can be borrowed. In the United States, the publicly held national debt climbed from about 40 percent of GDP in 2008 to approximately 75 percent of GDP in 2015. The explosion of deficit-spending helped mask a broader economic slowdown, but it is likely unsustainable in the long term. If slow growth continues for another decade, McKinsey estimates that 70 to 80 percent of households in industrialized economies could experience falling market incomes. At the same time, government efforts to redress that fall through increased spending would become more and more costly: Under a scenario of extended low growth, government transfers would have to swell by 20 to 30 percent over their 2012 levels in order to compensate for the declining market incomes of Americans. As the report notes, such an increase in transfers would only heighten the already-grave fiscal challenges posed by our government’s debt.
Broad economic stagnation of the kind addressed in the report carries big political implications, too: It intensifies and spreads public skepticism about the current trends of globalization. According to McKinsey’s report, about 40 percent of Americans feel as though they are not getting ahead. While about two-thirds of those who are not getting ahead feel hopeful about the economic future, another one-third of those who struggle still feel disaffected. Those who feel left behind are more likely to express skepticism about current trade and immigration patterns. And that skepticism becomes especially keen among those who despair about the economic future:
The people who felt they were not advancing and believed this was a persistent problem expressed sharply negative views of foreign trade and immigration. They were nearly twice as likely to believe that “Legal immigrants are ruining the culture and cohesiveness of our society” as those who were advancing or neutral, and one-and-a-half times as likely as those who were not advancing but hopeful about the future. Nearly 70 percent of them also agreed with the statement “Cheaper foreign labor is creating unfair competition to [sic] our domestic businesses,” compared with 43 percent of those who were advancing or neutral. Fifty-six percent of them also believed that “The influx of foreign goods and services is leading to domestic job losses,” compared with 29 percent of the advancing or neutral respondents and 41 percent of those who were not advancing but hopeful about the future.
McKinsey notes that wage stagnation has been correlated with more sympathy to “nationalist” movements such as Brexit, and to the politicians who lead them. Even nearly half of those who feel economically stable or improving are skeptical about the “unfair competition” of “cheap foreign labor.”
By embracing policy reform in response to these underlying trends, conservatives can build themselves a governing electoral coalition. The market-oriented reforms of the 1990s occurred in part due to strong economic growth that benefited Americans across the income spectrum. This growth has slowed: As the New York Times’ Neil Irwin notes, per-capita GDP growth in the United States dropped from 2.2 percent annually between 1947 and 2000 to 0.9 percent annually between 2000 and 2016.
In contrast to the unsustainable status quo of high deficits and low growth, conservatives could offer policies that would acknowledge and address both the symptoms and the causes of economic decline. Pro-family tax policies could put more money in the hands of working families, and a reform of health-care policy could cheapen medical expenses while expanding access to insurance. Trimming guest-worker programs and reforming the legal-immigration system could help arrest the drop in wage-income for “low-skilled” and some “medium-skilled” American workers over the last decade. Education reform could both strengthen academic basics and provide students with valuable skills.
Conservatives, particularly those who hope to defend a proactive internationalism, have a great incentive to confront the troubling trends McKinsey has documented and restore civic and economic hope. Denying the existence of real problems – or using these problems as talking points without doing anything to fix them – will likely only exacerbate the broader public’s anxieties.
The heat of the current election cycle might at times distract from the fundamentals that have brought us to this political crossroads. Our extended economic stagnation has set the stage for many grave challenges to the current international order – and reform, rather than the tiresome politics of calumny and shame, is the best way forward.
— Fred Bauer is a writer from New England. He blogs at A Certain Enthusiasm, and his work has been featured in numerous publications.