Seldom has the discourse over economic policy been painted in such broad, simplistic strokes as today.
Populists, both on the left and on the right, describe economics, as well as the entire global economy, as a system in which one player winning means another loses.
The new U.S. president, Donald Trump, is guilty of this. He calls for punitive tariffs to forcibly ensure that products consumed by Americans are mostly produced in the United States like in the olden days. But this is also true of leftist politicians in Europe, who believe the solution to all economic problems is stronger redistribution by the state.
Behind such approaches to problem solving is the notion that a nation’s economy is a pie the government can divide up, like the head of a family, among all the family members at the table, cutting off a bigger or smaller slice for each citizen or section of the population.
When, say, the underprivileged are to receive a bigger slice of the pie, it has to be taken from the rich. Alternatively, immigrants looking for work are to be deported so that those remaining behind can keep more to themselves.
The pie that is to be divided up grows larger almost every year.
But the economy isn’t a zero-sum game. The sum of the gains and losses of all players does not consistently equal zero. If that were the case, the significant increase in prosperity that has taken place around the world in past decades wouldn’t have happened.
On the contrary, China’s unprecedented growth would have resulted in the impoverishment of other countries.
No matter how forcefully Mr. Trump painted the United States as a devastated country in his inaugural address, the U.S. economy has, in fact, expanded robustly in the past 25 years, as well.
It must be admitted, however, that the gains from globalization have been divided extremely unevenly in the population.
In Germany, too, profits from increasing global trade have vitalized the economy and the labor market. But, to varying degrees, this has been to the benefit of certain sections of the population, and there have also been people whose real incomes have shrunk. This has happened although the state income redistribution policy has, through revenue transfers, offset a large part of the disparities produced on the market.
The undeniably growing wealth disparity shows far more clearly than income distribution which groups have benefited from the economic growth of the past to a more significant degree.
The economy isn’t a zero-sum game – the pie that is to be divided up grows larger almost every year.
This is a mistake politicians in Europe should not and cannot afford to repeat in the coming elections.
But that alone isn’t enough. In order for economic prosperity to increase without it resulting in grave political tensions, all sections of the population, as far as possible, must participate in economic growth.
The Hungarian economist Nicholas Kaldor and his fellow British economist, John R. Hicks, already gave this relationship a sound theoretical base back in 1939. They demonstrated that the prosperity of an economy can only grow when the sum total of welfare gains is so great that something remains of them after the losers – of a boost in technology, for example – have been compensated.
In terms of the current situation, this would mean that there is no sustainable increase in macro social prosperity when a small class of equity owners and highly-qualified employees are able to increase their income and wealth thanks to globalization, or soon digitization, while at the same time income is lost to a greater extent because a larger section of low-qualified workers lose their jobs or are forced to work for a reduced salary. That is a significant insight, especially in a digital economy that appears to have an inherent tendency towards being a winner-take-all economy.
The Democratic Party of the United States hasn’t paid attention to this correlation. Its leading politicians surrounded themselves with globalization winners from Wall Street, Hollywood, and the Silicon Valley, but didn’t concern themselves enough with globalization losers in rural areas. By doing so, they left a void that the populist Mr. Trump was able to fill with his simplistic stance on economics.
This is a mistake politicians in Europe should not and cannot afford to repeat in the coming elections. They must find answers for the – actual or imagined – losers of globalization and digitalization.
These answers, however, cannot be limited to wringing out more debt-financed transfer income from the already overtaxed national budgets.
The answers must lie in developing a new growth dynamic, creating the infrastructural prerequisites for the digital economy, and educating and training people whose knowledge and skills are not yet sufficient for being able to find work in tomorrow’s digital world.
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