Inequality and productivity, trade, and the national accounts.
The Productivity-Inclusiveness Nexus was published by the OECD in June, reversing the orthodox assumption that there is an inevitable trade-off between efficiency and equity. The report followed on the heels of the now famous IMF working paper of February 2014 by Jonathan Ostry, Andrew Berg and Charalambos Tsangarides, Redistribution, Inequality, and Growth, and the OECD’s report of May 2015, In it together: why less inequality benefits all.
The Productivity-Inclusiveness Nexus is a brute of a report, and much of the research is in early stages, but the OECD is to be applauded for going over this barbwire fence. To quote from the executive summary:
The main message of this report is a call for policy makers to adopt a broader, more inclusive approach to productivity growth that considers how to expand the productive assets of an economy by investing in the skills of its people and providing an environment where all firms have a fair chance to succeed, including in lagging regions. The overriding aim behind this is to broaden the productive base of the economy to generate strong and sustainable future productivity gains that everyone is empowered to contribute to, whilst also ensuring that productivity growth benefits all parts of society, in terms of improved living standards and opportunities. Achieving this will require a comprehensive policy framework to account for the multiple interactions between inequalities and productivity and how these interactions play out across countries, regions, forms and between individuals.
The main emphasis is placed on education, skills, income support and labour market policies, but the full list is long, and includes what is described as ‘key’ policies at the regional and urban level.
Incidentally, as shown below, the summary chart recorded excellent productivity growth for Australia by international standards over the decade 2004-2014, a period that included the ‘Great Recession’ and, mostly, a federal Labor government.
World seaborne trade volumes surpassed 10 billion tons in 2015, the greatest volume in history, but the value’s growth rate slowed to 1.5 per cent, a full percentage point lower than world output. In its annual Trade and Development Report, the United Nations Conference on Trade and Development (UNCTAD) considered the reasons for the sixth straight year of sluggish growth, the longest since the early 1980s.
Is it due to increased protectionism? No, average tariff figures have been declining since the establishment of the World Trade Organization and are currently at historic lows (see chart below). Neither the current level of average tariffs nor their trend in recent years can be seen as an explanation for slow growth of global trade nor an obstacle to recovery.
Is it due to the changing structure of demand? No. China reduced the import dependence of its manufacturing exports substantially between 2002 and 2008, but this period saw very rapid growth in trade. There has been no appreciable change in the import component of Chinese exports in recent years (see chart).
Rather, the main culprit is increasing inequality, the long-term decline in the wage share of income (see chart), which is reducing aggregate world demand. UNCTAD concludes that the real puzzle is how global trade showed dynamism over the period 2002-07, despite the sharp decline in the wage share. Over this period, the suppression of wage incomes was compensated for by the increase in household debt, enabled by financial deregulation and relatively low interest rates. This generated a debt spiral among households, as well as a boom in asset markets such as housing and stock markets, which in turn had positive effects on consumption and investment. Such credit-driven bubbles are not sustainable and eventually end, often with a hard landing, as in 2008-09.
Under current conditions and policy stances, trade growth will continue to be sluggish as the global wage share continues to decline. Even though measures to increase competitiveness have contributed to, or at least preceded, the global trade slowdown, policy makers in many countries continue to see them as the route to recovery. Unless policy makers make inclusive growth the axis of increasing demand, UNCTAD warns of the emergence of a real protectionist threat.
In a major development (typically unreported by the Australian press), on December 6, leading economists Thomas Piketty, Emmanuel Saez and Gabriel Zucman published a paper that holds out the promise of fully integrating distributional measures in national accounts.
The current disconnect between national accounts and inequality data makes it difficult to know what fraction of economic growth accrues to the bottom 50 per cent and the top 10 per cent, and the relative importance of income that goes to workers and owners. Nor do policy makers have a comprehensive view of how government programs designed to ameliorate the worst effects of inequality succeed.
In their paper, the three economists create inequality statistics for the United States that overcome the limitations of the existing data, combining tax, survey and national accounts statistics to build a new series of the distribution of national income. The authors aim to extend the method to as many countries as possible in the coming years.
The conceptual advances are major, and so are the findings in this initial paper. The data shows that the bottom half of the income distribution in the United States has been completely shut off from economic growth since the 1970s, while income skyrocketed at the top of the distribution. They debunk the claim that the stagnation has anything due to population ageing. On the contrary, for the bottom half of the working-age population, income has actually fallen (only the incomes of the elderly have risen at all). As shown in the remarkable figure below, the gains made by the top 1% are large enough to fully compensate for the losses of the bottom 50%, a group 50 times larger.
Policies advocated by the authors include: improved education and access to skills, labour market reforms to boost workers’ bargaining power and raise the minimum wage, corporate governance reforms and worker co-determination of the distribution of profits, and steeply progressive taxation. The paper is essential reading for everyone who wants to stay abreast of the inequality debate.