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2020-06-21T10:16:16.000000Z
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No time for the party line
HONG KONG
A ballot-box victory for pro-democracy politicians compounds officials’ woes
①After six months of unrest in nearly Hong Kong, involving increasingly violent protests, vandalism and transport chaos, the government had reason to hope that public opinion might have turned against the demonstrators. No such luck. Instead, voters handed a stunning victory to pro-democracy candidates in district elections on November th. The message was plain: for all the recent mayhem, Hong Kongers strongly dislike their government and its backers in Beijing. The result was a strong endorsement of the protesters' campaign for political freedoms.
Ostensibly the election was merely about picking -odd representatives to district councils - bodies that recommend policies relating to humdrum local problems. This time, however, the turnout was huge - a record, indeed, for any kind of election in Hong Kong that involves a public vote. Nearly 3m voters - more than of those registered - took part, up from four years ago (some are pictured queuing). After casting her own ballot, Hong Kong's chief executive, Carrie Lam, dismissed the idea that this was a vote of confidence in her leadership. Perhaps she had sensed the approaching electoral avalanche. Pro-democracy politicians won almost of the seats and took control of of the councils. Previously they had dominated none of them.
Mrs Lam has promised to "seriously reflect" on the results. Many people will expect her to do more than that - at a minimum, by reshuffling her cabinet and advisory boards to include voices from outside the establishment, and by launching independent judge-led inquiries into the causes of the protests and police handling of them. Since the elections, however, Mrs Lam has given no hint that she will agree.
That will surprise few of the protesters. Mrs Lam - probably at the urging of officials in Beijing - has shown little inclination to make further concessions after her decision early on to abandon the draft extradition bill that triggered the unrest (it would have allowed suspects to be tried by courts in mainland China). But democrats will take heart nonetheless. They hope the outcome of the elections will help their side gain strength in other, more important, bodies.
One of these is the Legislative Council (Legco), to which elections will be held next September. Only half of Legco's members are directly elected, using a system of proportional representation that allows pro-establishment candidates to gain seats despite not having pluralities, let alone majorities. Other seats are mostly filled by so-called "functional constituencies", in which the electorate is limited to people working in certain jobs. Pro-government candidates do well in these. But six of the seats are reserved for district councillors. The pro-democracy camp can now expect to capture them as well as more of the others. They may even be able to gain a majority of Legco's seats.
Opposition politicians also hope to increase their hitherto minuscule influence over the selection of chief executives. This is done by an “election committee” comprising people chosen by methods designed to marginalise democrats, who
have previously made up less than 30% of
the membership. But nearly 10% of the
seats are reserved for district councillors.
That bloc will now be controlled by supporters of greater democracy. Democrats will
still fall well short of a majority, and there
is no chance that a critic of the Communist
Party could become a candidate for chief
executive. But it is now more possible that
democrats could play a king-making role if
they align with other factions to back a certain contender.
Leaders in Beijing should be worried.
Unlike the mayhem of the past few
months, the orderly voting and the clear
verdict it delivered cannot easily be spun to
the Communist Party’s advantage. The
mainland’s media have avoided highlighting the results. Instead they have tried to
portray the elections as unfair, with
pro-establishment candidates unable to
campaign properly because of a “black terror” unleashed by Western-backed protesters, who have adopted that colour as their
symbol. On November 27th President Donald Trump’s signing of laws supporting
democracy in Hong Kong gave added impetus to China’s denunciations of Western
plots. The election results are likely to confirm Chinese officials’ belief that Hong
Kong needs to be ruled with a firmer hand.
Mrs Lam appears safe, for now. She says
the central government does not blame her
for the results. But she will find it tough to
keep her grip amid widespread grumbling
in the pro-establishment camp that her
failings—including her handling of the extradition bill—caused the electoral rout.
Her term is due to end in 2022. Some of the
government’s supporters privately say they
want her gone before then.
A few democrats would like to reopen
discussion about a proposal in 2014 by the
Chinese government that would allow the
public to vote for the next chief executive,
but only from a list of candidates approved
by the election committee. This was voted
down by pro-democracy legislators in 2015,
because they felt it would allow the Communist Party to control the outcome. Some
now see merit in such a reform, given the
party’s resolute refusal to allow full democracy. But Benny Tai, a lawyer and prominent pro-democracy activist, says that
even if the proposal were to be revived, the
public would not accept it.
The elections have shown that in spite
of the Communist Party’s obduracy and the
economic harm that the protests have
caused, Hong Kongers still have a strong
appetite for democracy. When The Economist went to press, a week had passed without large protests on the streets. But activists say the lull is temporary. Unless Mrs
Lam makes a convincing move to satisfy
their demands, they will soon be back.
Free exchange
The economy continues to shape elections - just not in the way that most people think
①"The economy, stupid," was the slogan of a strategist in Bill Clinton's campaign for the presidency in . It was a pithy encapsulation of time-honoured spin-doctoring wisdom: that a strong economy helps the incumbent and a weak one helps the challenger. When Mr Clinton took on George H.W. Bush in , real wages were stagnant. Unemployment peaked just months before the poll - and, sure enough, Mr Bush failed to win a second term. The -odd studies on the "economic vote" since then have turned the pollsters' hunch into political gospel. A cross-country analysis by Larry Bartels of Vanderbilt University, looking at -, found that each extra percentage point of GDP growth in the four quarters before an election was associated with a rise of in the incumbent party's vote share.
②But politics has changed. Today's most heated debates concern issues of identity and culture - openness to immigrants or free trade; attitudes to abortion or transgender bathrooms. Has the economy stopped mattering to voters?
③Often it seems so. An analysis by The Economist earlier this year, for example, found that in America the correlation between consumer confidence and the public's approval of the president had broken down. There are signs of the same trend in other rich countries, too. Boris Johnson, Britain's Conservative prime minister, has tried to make the general election on December th a matter of identity by appealing to Brexit voters who want to "take back control" from a distant elite. In Dudley North, a marginal constituency in the Midlands, your columnist was struck by the Conservative Party's confidence that it would take the seat from the opposition Labour Party. In a poor, Leave-voting area, voters support the privileged Mr Johnson because he has promised to get Brexit done. No one is talking about the country's recent brush with recession.
④The state of the economy must still matter in extremis: would President Donald Trump's approval rating really hold up if unemployment went from to, say, ? But the old rules of thumb about the business cycle and voting patterns are being replaced by a new narrative. This holds that ups and downs in gdp or wages matter less in elections than they used to. Instead, economic factors that shape people's sense of identity matter more—and could help explain the shift towards populism in many places. Two are particularly important. The first is the sense of insecurity that accompanies globalisation. The second is frustration about sky-high housing costs.
⑤The rapid growth of global trade during the 1990s and 2000s
brought wide economic benefits, but also unnerved some voters,
who now want to slow down the pace of change. Italo Colantone
and Piero Stanig, both of Bocconi University in Milan, study election results in 15 European countries. They find that areas facing
greater competition from Chinese imports were more likely to
vote for nationalist parties.
Robots also make many people uneasy. A paper in 2018 by Carl
Benedikt Frey, Thor Berger and Chinchih Chen, all of Oxford University, focuses on anxiety about technological change in America.
⑥⑦The authors calculate the share of the workforce in industries that
have seen increasing automation. Even after accounting for a
range of other factors (including education levels and exposure to
Chinese imports), areas more affected by the use of robots were
more likely to vote for Mr Trump, the outsider candidate in 2016. In
a flight of reasoning that only an economist could dream up, the
paper suggests that if the pace of automation had been slower in
the years before the 2016 contest, Michigan, Pennsylvania and
Wisconsin would have plumped for Hillary Clinton.
A raft of new research, meanwhile, has drawn attention to the
political consequences of the housing market. A house is most
people’s biggest investment, so changes in its value determine satisfaction with the status quo. Homeowners in areas where the
property market is buoyant feel richer than those where it is flat.
The housing market also affects people’s perceptions of personal
freedom. Those living in an area with low house prices may feel
trapped, since they would struggle to afford a move to somewhere
more vibrant. Such effects may well have strengthened in recent
decades, since in many developed countries the gap between
house prices in the richest areas and the poorest has widened.
Ben Ansell of Oxford University and David Adler of the European University Institute analysed data from the Brexit referendum of 2016 and the French presidential election the next year.
After controlling for factors such as demography and pay, they
found that in an area where house prices had tripled in nominal
terms, the Remain vote share was 16 percentage points higher than
in one with no change. Similarly, areas of France with strong house
prices were inclined to choose Emmanuel Macron over the farright Marine Le Pen. Further work by Mr Ansell and others has
found that areas with falling house prices tend to see rising support for populists, such as the Danish People’s Party, the Finns
Party and the Sweden Democrats. Simply put, a home-owner on a
nice street in Notting Hill, Saint-Germain-des-Prés or Östermalm
is very likely to support candidates of “the establishment”.
I feel the earth move
The old straightforward relationship between the economic cycle
and elections could yet return. But the implication of the new research is that support for populism is a deeper-rooted feature of
Western economies. People’s perception of the threat from cheap
imports or robots, or of being trapped by high house prices, will
not change overnight. Governments will need to find ways to compensate those who lose out from wrenching economic change, and
to make housing more affordable. Voters care less than they used
to about the economy’s immediate impact on their wallets. But
they care more than ever about how the economy shapes their
identity—their sense of security, and their freedom. 7
Chinese bonds
SHANGHAI
Rising defaults may be a sign of a healthier market
On november th China National Radio launched a mini-series to laud President Xi Jinping's stewardship of the economy. For a state broadcaster, that might sound perfectly normal. But the theme of its first report was neither China's stellar growth nor its sparkling innovations. Rather than such standard fare for propagandists, it focused on creditor committees, which aim to restructure companies that have run into financial difficulties. It was the latest sign of China's rapid shift from denying that it had a debt problem just a few years ago to grappling with it publicly.
The bond market bears out the change. It was only in that China experienced its first default on a domestically traded bond. In defaults hit bn yuan (bn), triple the previous high. This year defaults are on track to reach roughly the same value. About of all issuers defaulted in the first three quarters of this year, just a little below the global level, according to Fitch, a ratings agency. Bond defaults, says s&p Global, another ratings company, are "becoming a norm".
China's central bank has tried to convey the message that this new norm is healthy. In its annual financial-stability report, published on November th, it said that the rise in defaults reflected the market's maturation. As investors become more sensitive to risk, it added, they will steer capital towards more deserving firms, making for a stronger economy.
The central bank is right-up to a point. Defaults are part of any efficient bond market. The problem for China is that the broader trend masks a chasm between state-owned and private companies. Of the firms that have missed payments on bonds this year, have come from the private sector, according to Fitch. s&p Global calculates that of private issuers since have defaulted, compared with just of state firms. Over the past two years, private Chinese companies have been more likely than global issuers of junk-rated bonds to default.
This has only reinforced investors' tendency to prefer state firms, in the belief that the government will usually act as a backstop. State firms have issued the vast majority of bonds in China this year; private firms have been all but shut out. In other words, it is not necessarily the most deserving firms that are attracting capital, as the central bank would like, but rather the best-connected firms.
The simplest way for China to change this is to allow more state-owned companies to default. The few that have missed bond payments in recent years have not been enough to persuade investors that government is cutting them loose.
So it was notable on November nd when Tewoo Group, a commodities trader owned by the city of Tianjin, asked creditors to take haircuts of up to on their principal. Although its bonds were sold offshore, the impact will be felt domestically, because many creditors were Chinese. An eventual default would be the biggest on overseas bonds issued by a Chinese state firm since the late s. But it is also only one step. Propaganda will serve as a good test: when the state broadcaster starts loudly reporting on the woes of stateowned firms, it will be clear that China has truly turned a corner.
Shopping habits
E A ST RU T H E R F O R D , N E W J E R S E Y
The American Dream mall is open for business. Sort of
①The SHELLRAISER is the world's steepest rollercoaster. It is not to be found in a big theme park, but indoors at the new American Dream mall in New Jersey. Passengers can see out of floor-to-ceiling windows over the Meadowlands swamp across the Hudson River to the New York City skyline. After the car climbs vertically, it pauses for a few moments before plunging and spiralling in what, if the venture flops, will provide an easy metaphor for hard-pressed reporters.
②After multiple delays, a creditcrunch, a recession, new owners and a name change, the first phase of American Dream, formerly known as Xanadu, opened on October th. Unlike conventional malls, which have department stores, such as Macy's, as an anchor, American Dream has a number of non-retail anchors, including the Nickelodeon amusement park, a water park, an indoor ski slope, a National Hockey League-size ice-skating rink, Legoland and a Ferris wheel as well as restaurants, a cinema and, eventually, an aquarium. Indeed, Triple Five, the company behind the mega-mall, would rather it be called an entertainment complex.
Whatever the bn thing is called, it is vast: m square feet ( square metres), second in size only to Minnesota's Mall of America, which is also backed by Triple Five. Malls are suffering because of the shift towards online shopping. Rents and occupancy are expected to decline at all but the top malls in America, according to Green Street Advisors, a real-estate research firm. Triple Five points out that only of the space will be taken up by shops. Even so, it seems a strange time to open a mall, even a huge one with an indoor ski slope.
Tyler Batory, an analyst who covers theme parks at Janney Montgomery Scott, a brokerage, is sceptical. There has not been a successful launch of a theme park in a couple of decades. Theme parks and leisure centres are struggling to compete for families' time and dollars. “When you combine one business that's struggling with another that has its own challenges, that doesn't really seem like a recipe for success,” he says. The biggest problem may be an archaic local law banning shopping on Sundays. Still, proving the doubters and naysayers wrong while pursuing a buck is part of the American dream too.
LVMH
PARIS
Bernard Arnault, Europe's richest man, tests the limits of the luxury-conglomerate model
① What do you buy the luxury group that has everything? More diamonds, apparently. On November th LVMH, already the biggest beast in global luxury, announced it was taking over Tiffany & Co, where Wall Street bond traders sink a few bucks to improve their chances of turning girlfriends into fiancées. The American marque will become the th maison of the Parisian group, joining Louis Vuitton, Dior and Veuve Clicquot champagne. How many more can fit under the corporate umbrella of Bernard Arnault, LVMH's boss and biggest shareholder?
② The deal is as richly priced as a flawless gem. LVMH will pay bn including net debt, equivalent to nearly four years' sales at Tiffany. Nonetheless, the takeover was greeted with the enthusiasm befitting a suitable engagement. Luxury, once little more than a cottage industry dominated by family firms in Europe, has become the preserve of a few giant conglomerates. In recent decades there has been a sense of inevitability when another well-known company has fallen into the clutches of LVMH or its rivals, Kering (home of Gucci and Balenciaga among others) and Richemont (which owns Cartier and Montblanc).
③ The acquisition cements the place of LVMH at the peak of the luxury world. Its rise has been nothing short of dazzling since Mr Arnault took it over three decades ago. Its shares have risen threefold in the past five years, including a run since January. Worth around bn (bn), LVMH now vies with Royal Dutch Shell as the most valuable firm based in the EU.
④ Mr Arnault, whose family owns nearly half of LVMH (and a solid majority of voting rights), is said to be Europe's richest man. From the gritty town of Roubaix in northern France, he turned a family construction firm to property, then luxury. He snapped up Dior as part of a package of distressed textile assets in the s, then seized control at LVMH. The "wolf in cashmere" has all the trappings of a bn fortune, from a public art collection housed in a Parisian museum designed by Frank Gehry to his impeccably tailored Christian Dior suits and a couple of newspapers.
⑤ "LVMH dominates a structurally favoured sector, buoyed by globalisation and income inequality," says Luca Solca of Bernstein, a research firm. Its success is the result of being the right size-big-in the right business at the right time.
⑥ Start with the industry. Sales of luxury goods, such as handbags, posh watches and Hermès scarves, have grown by about a year since according to Bain, a consultancy. It estimates the industry will be worth bn this year. Chinese shoppers, who barely featured in but now account for a third of all sales, have added much of the fizz.
⑦ Size has brought more rewards. In an industry with high fixed costs—spent on marketing, but also on eye-watering rents for shops on flashy thoroughfares—selling more translates into better margins. LVMH has achieved nearly double the industry's growth rate in the past two decades, and last year sold over bn-worth of extravagance (see chart on next page). That is more than three times the figure for Kering and Richemont, its nearest rivals.
⑧ Mr Arnault emerged as the most obvious buyer for Tiffany in part because scale begets advantages not available to smaller bauble-peddlers. That might seem odd at first. Compared with lesser industries, mergers in the luxury world kick up few opportunities for cost-cutting or synergies.
⑨
Nuclear weapons
Turkey's incursion in Syria has put the spotlight on the continued presence of America's tactical nuclear arsenal in Europe
① Germany owns no nuclear weapons. It renounced the very idea when it reunified in . But if war were to break out in Europe today, German pilots could clamber into German planes, take off from Büchel Air Base in Rhineland-Palatinate and drop nuclear bombs on Russian troops.
② The Luftwaffe can do that thanks to NATO's nuclear-sharing scheme, under which America quietly stations nuclear bombs across five countries in Europe. The arrangement is decades old. But it has raised questions for some time - and clashes involving one of those nuclear hosts, Turkey, are making matters worse. As nato leaders gather in London for a summit next week, Turkey's bombs will be on many minds.
③ In America moved its first bombs to Britain. In the subsequent decades it stashed a vast trove of nuclear weapons across Europe, numbering over at their peak in . Many were small devices known as tactical, or non-strategic, nuclear weapons. They were capable of exploding with yields of as little as a fraction of a kiloton - far smaller than the -kilotonne bomb dropped on Hiroshima. The smallest of them could fit into a backpack.
④ Today only about remain. These are free-fall bombs whose yield can be set anywhere from a third of a kilotonne to more than . They remain in American custody in peacetime and could be released only by a presidential order - but European pilots still train to drop them. Italy and Turkey are thought to have the most, perhaps to each, with smaller numbers in Belgium, Germany and the Netherlands.
⑤ The bombs that most worry American officials are stored in vaults at Incirlik air base in southern Turkey, a few hours by road from the Syrian border. During a military coup in and a diplomatic spat in , America considered removing the bombs. During the failed coup against President Recep Tayyip Erdogan in , Incirlik hosted the refuelling tankers that allowed renegade fighter planes to threaten Istanbul and Ankara. Mr Erdogan's regime responded by cutting power to the base and arresting its commander.
⑥ That prompted alarm in Washington about the security of its weapons and the risk that they could become hostages in the strained relationship with Turkey. Senior officers were sent to Incirlik, only to conclude that the bombs did not need to be removed. The warheads can be armed only by a code, and the vaults are automatically sealed if power is cut off, giving American forces time to fight their way onto the base if required. Nevertheless, in recent years America has considered spiriting away the bombs and replacing them with dummies.
⑦ Nukes were taken out of Greece in and from Ramstein air base in Germany in . Pulling bombs out of Incirlik would remove vulnerable targets and implicit leverage. But if done clumsily it could worsen the diplomatic crisis and even prompt Mr Erdogan to pursue a nuclear-weapons programme of his own, something he hinted at in September. It would also restart a fraught debate over the presence of b61s elsewhere in Europe.
⑧ Opposition to nuclear-sharing has been simmering in Germany, in particular. Although Angela Merkel, Germany's chancellor, has defended the practice, her coalition partners over the past decade have repeatedly asked for the bombs to be withdrawn. Keeping them is tricky for technical reasons, too. Europe's current dual-capable aircraft (DCA) - those wired up to carry nukes as well as ordinary bombs - are approaching the ends of their lives. Belgium, Italy and the Netherlands are all buying America's as a replacement, but Germany ruled this out in January.
⑨ That was partly in deference to France, which wants to build its own next-generation warplane with Germany. The Luftwaffe could instead buy the , an older American dca. Or it could retrofit the European-built Typhoon to accommodate . But as well as being expensive and timeconsuming, that would expose European technology to American eyes. And neither plane is especially stealthy.
Nor is Incirlik the only cause for security concerns. In an American air-force review concluded that most European bases hosting weapons did not meet its standards. Support buildings, fencing, lighting and security systems were all deemed in need of repair. Two years later, peace activists entered a base in Belgium and roamed near its vaults for an hour.
Timebombs
If the bombs are politically troublesome and vulnerable, why keep them in Europe at all? Some nato planners fear that if Russia attacked an ally like Estonia and then conducted a limited nuclear strike to stave off a Western counter-attack, it would not make sense for the alliance to respond with "strategic" weapons-those on longerrange missiles and aircraft that have much higher, city-destroying yields. Smaller bombs like the b61s are thought to allow a proportional response.
It is not entirely clear that the enemy
would appreciate the distinction, however.
And the military case for b61s is dubious for
other reasons. The planes—if not destroyed on the ground—would struggle to
get through Russian air defences. So America would probably use stealth bombers
dispatched from across the Atlantic or submarine-launched missiles armed with a
new low-yield warhead built under the
Trump administration. nato acknowledges that its “supreme guarantee” is provided by American, British and French strategic forces in this way, rather than by the
Europe-based b61s.
In truth, the purpose of the nuclearsharing scheme is more political than practical. The aim is to create a tangible and
symbolic link between America and Europe. Allies who enjoy American nuclear
protection must share the moral burden of
nuclear use—and the cost of potential retaliation. At the same time, Europeans get a
larger (if still modest) say in how American
nukes might be used. That is thought to assuage their fear of abandonment.
That reassurance comes at a price. President Barack Obama toyed with the idea of
bringing the bombs home, but ultimately
deferred the decision. Instead, he authorised a 25bn between 2017 and 2046,
about $1bn a year. And if Turkey’s relationship with allies continues to crumble,
Europeans may feel less soothed than
alarmed by the several megatonnes of
weaponry sitting at Incirlik.
Climate change and energy
Clean energy grids will not thrive unless the world gets better at storing power
① Solar and wind power are the glamorous twins of the clean-electricity revolution. It is thrilling to see a field of glistening panels absorbing the sun's energy or a vast turbine twirling above the ocean. Stationary power storage does not have quite the same allure - think of a large metal shed stuffed with piles of big batteries. Nonetheless, the ability to stockpile energy on a massive scale will be of supreme importance if the world is to wean itself off filthy fossil-fuel power plants. The technology is gradually getting cheaper and attracting investment (see Business section). But more needs to be done to ensure that it sparks.
② To see why storage is important, work backwards from the most common strategy to limit climate change. Plans typically reduce emissions from electricity generation by switching it away from fossil fuels, then electrify other carbon-belching activities, such as driving cars and heating buildings. Abundant, reliable, clean electricity is the foundation on which many green investments and policies rest. And to work well, clean electricity in turn depends on storage.
③ Nuclear plants could supply steady clean power, but they attract fierce opposition and are beset by cost overruns. Solar and wind are the fastest-growing alternatives. Today they account for of global generation, twice the share in . But the sun does not always shine and the wind may not blow. As the share of intermittent sources rises, so will demand for energy to offset swings in supply. In the short run, dirty coal and gas will have to provide flexibility. Eventually, however, storage must play that role, and the sooner the better. The aim is to capture solar and wind power when it is plentiful and release it as needed.
④ Today pumped hydropower is the most common way to store energy. When it is sunny or windy any excess electricity from solar and wind farms can be used to pump water uphill into reservoirs, to be released later to generate hydropower. But lots of places lack mountains, rain and room. Batteries are an alternative. They can smooth jumps and drops in supply and store renewable energy when it is abundant, as in California on a sunny afternoon, and then release it in the evening, when demand rises. They could transform big emerging markets that still plan to expand their use of fossil fuels. The International Energy Agency reckons that, excluding coal projects already planned, batteries have the potential to cut the number of coal plants built in India after 2030 by three-quarters.
⑤ If batteries are to realise their potential, they need to become cheaper and better. Progress is being made. Lithium-ion batteries have become less expensive since , as firms have poured capital into factories to mass-produce batteries for electric vehicles. Investment in storage capacity will hit about bn next year, predicts Bloombergnef, a data firm, four times the level in . But technical problems persist. For example, lithium-ion batteries are bad at storing energy for long periods, which is important in countries with rainy seasons. Happily, firms are experimenting (see Science section). Tycoons, including Jack Ma of Alibaba and Jeff Bezos of Amazon, have invested in startups that are pursuing energy storage using
everything from novel battery designs to molten
salt to pressurised water pumped underground.
For firms and capital markets to work their
magic, a policy is needed—if only because, more
than in other industries, the state sets the rules in power. Vested
interests and out-of-date thinking lead to a bias against batteries. Last year America’s energy department granted 150m the country spent on a tax break for coal royalties.
Many places offer subsidies or mandates for wind and solar power, but not for the storage it will depend on to work at its best.
All too often storage technologies do not enjoy the same access to power grids and customers as dirtier sources of power do.
Last year America’s federal electricity regulator ordered the
country’s regional power markets to be opened up to storage, but
implementation has been sluggish. The shift to clean energy will
not happen unless it can be more easily stored. It is time for a
high-voltage jolt to help an essential technology thrive.
Gaps in wealth and income could be lower than you think. But there is still plenty to do to make economies fairer
① Even in a world of polarisation, fake central news and social media, some beliefs remain universal, and central to today's politics. None is more influential than the idea that inequality has risen in the rich world. People read about it in newspapers, hear about it from their politicians and feel it in their daily lives. This belief motivates populists, who say selfish metropolitan elites have pulled the ladder of opportunity away from ordinary people. It has given succour to the left, who propose ever more radical ways to redistribute wealth (see Books & arts section). And it has caused alarm among business people, many of whom now claim to pursue a higher social purpose, lest they be seen to subscribe to a model of capitalism that everyone knows has failed.
② In many ways the failure is real. Opportunities are restricted. The cost of university education in America has spiralled beyond the reach of many families. Across the rich world, as rents and house prices have soared, it has become harder to afford to live in the successful cities which contain the most jobs (see Free exchange). Meanwhile, the rusting away of old industries has concentrated poverty in particular cities and towns, creating highly visible pockets of deprivation. By some measures inequalities in health and life expectancy are getting worse.
③Yet precisely because the idea of soaring inequality has become an almost universally held belief, it receives too little scrutiny. That is a mistake, because the four empirical pillars upon which the temple rests - which are not about housing or geography, but income and wealth - are not as firm as you might think. As our briefing this week explains, these four pillars are being shaken by new research.
④ Consider, first, the claim that the top of earners have become detached from everyone else in recent decades, which took hold after the "Occupy Wall Street" movement in . This was always hard to prove outside America. In Britain the share of income of the top is no higher than in the mid-s, after adjusting for taxes and government transfers. And even in America, official data suggest that the same measure rose until and since then has been volatile around a flat trend. It is easily forgotten that America has put in place several policies in recent decades that have cut inequality, such as the expansion of Medicaid, government-funded health insurance for the poor, in .
⑤⑥⑦⑧⑨ Now some economists have re-crunched the numbers and concluded that the income share of the top in America may have been little changed since as long ago as 1960. They argue that earlier researchers mishandled the tax-return data that yield estimates of inequality. Previous results may also have failed to account for falling marriage rates among the poor, which divide income around more households - but not more people. And a bigger chunk of corporate profits may flow to middle-class people than previously realised, because they own shares through pension funds. In retirement accounts owned just of American shares; by the figure was .
The second wobbly pillar is the related claim that household incomes and wages have stagnated in the long term. Estimates of inflation-adjusted median-income growth in America in - range from a fall of to an increase of , and partisans tend to cherry-pick a figure that tells a convenient story. The huge variation reflects differences in how you treat inflation, government transfers and the definition of a household, but the
lowest figures are hard to believe. If you argue that income has
shrunk you also have to claim that four decades’ worth of innovation in goods and services, from mobile phones and video
streaming to cholesterol-lowering statins, have not improved
middle-earners’ lives. That is simply not credible.
Third is the notion that capital has triumphed over labour as
ruthless businesses, owned by the rich, have exploited their
workers, moved jobs offshore and automated factories. The
claim that inequality is being driven by the rich accumulating
capital was a central thesis of Thomas Piketty’s book, “Capital in
the Twenty-First Century”, which in 2014 made him the first
rock-star economist since Milton Friedman improbably filled
auditoriums in the 1980s. Not all Mr Piketty’s theories caught on
among economists, but it is widely assumed that a falling share
of the rich world’s gdp has been going to workers and a rising
share to investors. After a decade of soaring stock prices, this has
some resonance with the public.
Recent research, however, suggests that the decline in labour’s fortunes is explained in most rich countries by exorbitant
returns to homeowners, not tycoons. Strip out
housing and the earnings of the self-employed
(which are hard to divide between capital and labour income), and in most countries labour
shares have not fallen. America since 2000 is an
exception. But that reflects a failure of regulation, not a fundamental flaw in capitalism.
American antitrust regulators and courts have
been unforgivably lax, allowing some industries to become too concentrated. This has enabled some firms to
gouge their customers and book abnormally high profits.
The last pillar is that inequalities of wealth—the assets people
own, minus their liabilities—have been soaring. Again, this has
always been harder to prove in Europe than America. In Denmark, one of the few places with detailed data, the wealth share
of the top 1% has not risen for three decades. By contrast, few
deny that the richest Americans have sprinted ahead. But even
here, wealth is fiendishly difficult to estimate.
Not so rich pickings
The campaign of Elizabeth Warren, a Democratic presidential
contender, reckons that the share of wealth owned by the richest
0.1% of Americans rose from 7% in 1978 to 22% in 2012. But a
plausible recent estimate suggests that the rise is only half as big
as this. (For connoisseurs, the difference rests on the factor by
which you scale up investors’ wealth from the capital income
they report to the taxman.) This imprecision is a problem for politicians, including Ms Warren and Bernie Sanders, who want
wealth taxes, since they may raise less revenue than they expect.
The fact that dubious claims are made about inequality does
not reduce the urgency of tackling economic injustice. But it
does call for ensuring that the assumptions on which policies
Inequality illusions
Gaps in wealth and income could be lower than you think. But there is still plenty to do to make economies fairer
Leaders
are based are accurate. Those, like Britain’s Labour Party, who favour the radical redistribution of income and wealth ought to be
sure that inequality is as high as they think it is—especially
when their policies bring knock-on costs such as deterring risktaking and investment. By one estimate, Ms Warren’s wealth tax
would leave America’s economy 2% smaller after a decade.
Until these debates are resolved, it would be better for policymakers to stick to more solid ground. The rich world’s housing
markets are starving young workers of cash and opportunity;
more building is needed in the places that offer attractive jobs.
America’s economy needs a revolution in antitrust enforcement
to reinvigorate competition. And regardless of trends in inequality, too many high-income workers, including doctors, lawyers
and bankers, are protected from competition by needless regulation and licensing, and senseless restrictions on high-skilled
immigration, both of which should be loosened.
Such an agenda would require governments to take on nimbys and corporate lobbies. But it would reduce inequality and
boost growth. And its benefits do not depend on a set of beliefs
about income and wealth that could yet turn out to be wrong. 7
2
It is the end of the World…
W A S H I N G T O N , D C
…Trade Organisation as we know it, and America feels fine
①“Winter is coming,” warned a Norwegian representative on November nd, at a meeting of the World Trade Organisation (WTO). The multilateral trading system that the WTO has overseen since is about to freeze up. On December th two of the judges on its appellate body, which hears appeals in trade disputes and authorises sanctions against rule-breakers, will retire-and an American block on new appointments means they will not be replaced. With just one judge remaining, it will no longer be able to hear new cases.
②The WTO underpins of global trade. By one recent estimate, membership of the WTO or General Agreement on Tariffs and Trade (GATT), its predecessor, has boosted trade among members by . When iPhones move from China to America, or bottles of Scotch whisky from the European Union to India, it is the WTO's rules that keep tariff and non-tariff barriers low and give companies the certainty they need to plan and invest.
③The system is supposed to be self-reinforcing. Mostly, countries follow the WTO's rules. But if one feels another has transgressed, then instead of starting a one-onone trade spat it can file a formal dispute. If the WTO's ruling displeases either party, it can appeal. The appellate body's judgments pack a punch. If the loser fails to bring its trade rules into compliance, the winner can impose tariffs up to the amount the judges think the rule-breaking cost it. It is that punishment that deters rule breaking in the first place.
④It is no surprise that President Donald Trump has axed these foreign arbiters, given his general distaste for internationally agreed rules. On November th he declared himself "very tentative" on the wto. But the problems run far deeper than dislike of multilateral institutions. They stem from a breakdown in trust over the way international law should work, and the more general failure of the WTO's negotiating arm. Had the Americans felt that they could negotiate away their grievances, resentment towards the appellate body might not have built up. But with so many members reluctant to liberalise, including smaller countries fearful of opening up to China, that has been impossible.
⑤America has had some wins at the WTO: against the European Union for subsidies to Airbus, an aircraft-maker; and against China for its domestic subsidies; theft of intellectual property; controls on the export of rare earths, which are used to make mobile phones; and even its tariffs on American chicken feet. But it has also been dragged before the appellate body repeatedly, in particular by countries objecting to its heavy-handed use of "trade remedies": tariffs supposed to defend its producers from unfair imports. Time after time, it has lost. In such cases, it has generally sought to become compliant with the rules rather than buy the complainant off.
⑥Though previous administrations had grumbled, and occasionally intervened in judges' appointments, the Trump administration went further. Its officials complained that disputes often dragged on much longer than the supposed maximum of days, and - more seriously - that the appellate body made rulings that went beyond what wto members had signed up to. They made it clear that unless such concerns were dealt with, no new judges would be confirmed.
⑦Judicial overreach is in the eye of the beholder. Losers will always feel hard done by, and America has been quick to celebrate the WTO's rulings when it wins. But plenty of others think that the appellate body had overstepped its remit. A recent survey of individuals engaged with the WTO, including national representatives, found that agreed with that verdict.
⑧Getting so many countries to sign up to the wto was a remarkable achievement. One way negotiators managed this was by leaving the rules vague, and papering over their differences with ambiguous language. Take "zeroing", for example: using dubious mathematics to calculate defensive tariffs on unfairly traded imports. The Americans claim that the rules do not say they cannot do it. But others counter that the rules do not say they can. It is such long-running differences that have set the scene for the latest showdown.
Offer me solutions
⑨The American trade lawyers happy to kill the appellate body see a fundamental difference between their attitude to international law, and that of Europeans. Their position is that only clear contractual terms can be enforced, and they see Europeans as more comfortable with resolving ambiguities by going beyond what is written. Essentially, they regard the appellate body as too European. Moreover, in its eagerness to rule where terms are unclear, and in the American government's willingness to change its laws in response, they feel an affront to America’s sovereignty.
Under the gatt, which lacked a proper enforcement system, ambiguities were hashed out in smoke-filled rooms. But the wto was supposed to make naked power politics over trade obsolete. Had it worked as intended, there would have been a balance between settling disputes and writing new rules. Policy is best made with a vibrant judiciary interpreting the law, and a functioning legislative arm to fix any mistakes. Whenever the appellate body made
decisions that annoyed members, they
could have resolved their differences at the
negotiating table. Perhaps America could
have got others to agree to higher tariffs on
imported steel, or been granted some flexibility in its defensive duties.
But the wto’s negotiating arm has been
broken for years. With the current count of
members at 164, it has become more inclusive, but is unable to get much agreed. Each
member has a veto over any further multilateral trade liberalisation. And without
new negotiations, resentment towards the
appellate body has built up.
Had the multilateral system been more
effective at dealing with the rise of China,
perhaps the single biggest issue of its
times, then calls to save it might be louder
in Washington. Although various American administrations pursued and won several cases, the process was slow and occasionally frustrating. America can justly
claim that, when it tried to hold China to
account for its breaches of trade rules, it got
little support. America has been responsible for more than half of all complaints
against China. And other wto members’
complaints were generally copycat, filed in
America’s wake.
Now that the Trump administration has
bypassed the wto and taken the fight
straight to China, there is nothing remaining that it particularly wants from the wto.
And so the chances that it will relent and allow nominations to the appellate body by
December 10th are slim to none. In response to proposals from other members
to change the body’s rules, an American
representative said that they were not persuaded that the rules would be stuck to.
On November 26th the Trump administration suggested slashing the pay of members of the appellate body. In October
Chuck Grassley and Ron Wyden, the top Republican and Democrat politicians on the
Senate Finance Committee, published an
editorial saying that while they saw the value of an appellate body, it “needs to operate
as the members agreed”.
Of the wto’s 163 other members, 117 have
signed a joint letter calling upon America
to end the impasse. Although America has
been the heaviest user of the dispute-settlement system, others will miss it too (see
chart). Some have already begun preparing,
for example by agreeing at the start of any
disputes to forgo the right to appeal. The
eu, Canada and Norway have agreed on an
interim arbitration mechanism that will
use retired members of the appellate body
as judges. And the eu is considering beefing up its own enforcement mechanism to
fill the hole left by the appellate body,
though it would probably cleave more
closely to the outcomes of first-stage rulings in wto disputes.
But some members are likely to shun
such alternatives—especially those that
expect to be sued a lot. And it is unclear
how robust they will be if disputes turn
nasty. Some wto members may try to
choose their dispute-settlement mechanism case by case. An organisation as ambitious as the wto, for all its faults, will be
easier to break than replace.
All this means that global trade is about
to become a lot less predictable and a lot
more contentious. Without the appellate
body to act as honest broker, disputes between the biggest members may escalate.
Under the gatt America acted as global
trade sheriff, launching investigations at
will and bullying disputatious countries
into submission. It is not impossible that it
will resume this role. On November 27th
the Trump administration announced that
it had nearly finished an investigation into
a French tax on digital services, which
America reckons discriminates against its
tech giants. That could lead to tariffs.
You’ll miss it when it’s gone
In the 1980s American unilateralism was
no fun for countries on the receiving end.
But at least back then Uncle Sam could
point to the lack of any other power even
theoretically capable of doing the job. Now
the absence of independent referees is
America’s own doing. And of all Mr
Trump’s trade policies, it may prove the
hardest to reverse and have the longestlasting effects.