2012-05-10

Economic woes of the US middle and low classes

My previous post was about religion and its scary effects on a powerful democracy such as the US. However, I started the post by saying good things about the US economic system. This attracted some comments, pointing out the growing income inequality in the US, the unemployment and the lack of income growth for middle and low classes.

I'm not decided on whether that trend is as grim as commonly assumed. For the time being, I think it's plausible to say that employee wages aren't growing, because employees have to compete with products and services provided by developing countries. That's harsh on US employees because they live in a first world country with first world costs, but they have to compete with third world workers who live on third world costs.

From a global perspective, someone who earns a minimum wage of $7.50 per hour, or whatever it is, is still vastly overpaid compared to a Chinese guy earning a few dollars a day. The only competitive advantage of the American person is that he's living in the US, not in China. He doesn't work harder or smarter, he just benefits from being born in the US.

Over time, this situation will normalize such that the Chinese will be richer. Their incomes are growing fast, and will catch up with the developed world. Then, they will no longer exert downward pressure on wages in the US and elsewhere.

The situation in the meanwhile is that those who can benefit from the new markets, can benefit tremendously. Those who can offer a globally attractive competitive advantage, those whose talents are in scarce supply, are rewarded richly. But those who don't have a competitive advantage suffer stagnating wages. That sucks for employees in the US, and elsewhere, who want wages that are globally high, but can't offer commensurate value, other than that they were born there. But on the other hand, the process is a boon for hundreds of millions of Chinese, and other truly poor people in developing nations, whose incomes are growing fast, and lifting them out of poverty for the first time in history.

Overall, US workers have had it great in the decades since WW2, and their standard of living improved to much higher levels than the standard of living of most people on Earth. Now it's time to let the rest of the world play catch up. That, of course, is the part that hurts.

2 comments:

verbatim said...

I don't see any mentioned comments in previous post. Am I missing something?

Everything is in the bubble in West. There are no real economics reasons that an average house in for example Vancouver now costs 750+k compared to 100k in 1984.

denis bider said...

The comments you don't see were received privately.

There are good economic reasons for real estate to cost a lot in parts of the world that are nice to live in. Vancouver is, by many, accounts the nicest place to live in Canada, so everyone migrates there.

Manhattan, London, and other city centers are expensive for similar reasons. There's only limited room, and you're competing for it with top earners who would all prefer to live there, because the convenience and quality of life (when you are rich) are higher than elsewhere.

The scarce commodity aren't the nails and cement the houses and apartments are built of, the scarce commodity is the limited area where everyone would prefer to live.