In two recent speeches, the Governor of the Bank of England, Mark Carney, and the Bank’s Chief Economist, Andy Haldane, have reflected on the growing inequality in the UK and other countries. They have also answered criticisms that monetary policy has exacerbated the problem. As, Andy Haldane puts it:
It is clear monetary policy has played a material role in lifting all boats since the financial crisis broke. …[But] even if monetary policy has lifted all boats, and could plausibly do so again if needed, that does not mean it has done so equally. In particular, concerns have been expressed about the potential distributional effects of monetary policy.
Jan Vlieghe [member of the Monetary Policy Committee] has recently looked at how monetary policy may have affected the fortunes of, among others, savers, pension funds and pensioners. The empirical evidence does not suggest these cohorts have been disadvantaged to any significant degree by the monetary policy stance. For most members in each cohort, the boost to their asset portfolios and the improved wages and profits due to a stronger economy more than offset the direct loss of income from lower rates [of interest on savings accounts].
Andy Haldane’s speech focused largely on regional inequality. He argued that productivity has grown much more rapidly in the more prosperous regions, such as London and the South East. This has resulted in rising inequality in wages between different parts of the UK. Policies that focus on raising productivity in the less prosperous regions could play a major role in reducing income inequality.
Mark Carney’s speech echoed a lot of what Andy Haldane was saying. He argued that expansionary monetary policy has, according to Bank of England modelling, “raised the level of GDP by around 8% relative to trend and lowered unemployment by 4 percentage points at their peak”. And the benefits have been felt by virtually everyone. Even savers have generally gained:
That’s in part because, to a large extent, the thrifty saver and the rich asset holder are often one and the same. Just 2% of households have deposit holdings in excess of £5000, few other financial assets and don’t own a home.
But some people still gained more from monetary policy than others – enough to contribute to widening inequality.
Losers from the lost decade
Mark Carney looked beyond monetary policy and argued that the UK has experienced a ‘lost decade’, where real incomes today are little higher than 10 years ago – the first time this has happened for 150 years. This stalling of average real incomes has been accompanied by widening inequality between various groups, where a few have got a lot richer, especially the top 1%, and many have got poorer. Although the Gini coefficient has remained relatively constant in recent years, there has been a widening gap between the generations.
For both income and wealth, some of the most significant shifts have happened across generations. A typical millennial earned £8000 less during their twenties than their predecessors. Since 2007, those over 60 have seen their incomes rise at five times the rate of the population as a whole. Moreover, rising real house prices between the mid-1990s and the late 2000s have created a growing disparity between older home owners and younger renters.
This pattern has been repeated around the developed world and has led to disillusionment with globalisation and a rise in populism. 
Globalisation has been “associated with low wages, insecure employment, stateless corporations and striking inequalities”. (Click here for a PowerPoint of the chart.)
And populism has been reflected in the crisis in Greece, the Brexit vote, Donald Trump’s election, the rise of the National Front in France, the No vote in the Italian referendum on reforming the constitution and the rise in anti-establishment parties and sentiment generally. Mainstream parties are beginning to realise that concerns over globalisation, inequality and a sense of disempowerment must be addressed.
Solutions to inequality
As far as solutions are concerned, central must be a rise in general productivity that increases potential real income.
Boosting the determinants of long-run prosperity is the job of government’s structural, or supply-side policies. These government policies influence the economy’s investment in education and skills; its capacity for research and development; the quality of its core institutions, such as the rule of law; the effectiveness of its regulatory environment; the flexibility of its labour market; the intensity of competition; and its openness to trade and investment.
But will this supply-side approach be enough to bring both greater prosperity and greater equality? Will an openness to trade be accepted by populist politicians who blame globalisation and the unequal gains from international trade for the plight of the poor? Carney recognises the problem and argues that:
For the societies of free-trading, networked countries to prosper, they must first re-distribute some of the gains from trade and technology, and then re-skill and reconnect all of their citizens. By doing so, they can put individuals back in control.
For free trade to benefit all requires some redistribution. There are limits, of course, because of fiscal constraints at the macro level and the need to maintain incentives at the micro level. Fostering dependency on the state is no way to increase human agency, even though a safety net is needed to cushion shocks and smooth adjustment.
Redistribution and fairness also means turning back the tide of stateless corporations.
… Because technology and trade are constantly evolving and can lead to rapid shifts in production, the commitment to reskilling all workers must be continual.
In a job market subject to frequent, radical changes, people’s prospects depend on direct and creative engagement with global markets. Lifelong learning, ever-greening skills and cooperative training will become more important than ever.
But whether these prescriptions will be accepted by people across the developed world who feel that the capitalist system has failed them and who look to more radical solutions, whether from the left or the right, remains to be seen. And whether they will be adopted by governments is another question!
Webcast
Roscoe Lecture Bank of England on YouTube, Mark Carney (5/12/16)
Speeches
One Car, Two Car, Red Car, Blue Car Bank of England, Andrew Haldane (2/12/16)
The Spectre of Monetarism: Roscoe Lecture, Liverpool John Moores University Bank of England, Mark Carney (5/12/16)
Articles: Andrew Haldane speech
Bank of England chief economist says monetary stimulus stopped ‘left behind’ from drowning Independent, Ben Chu (2/12/16)
BoE’s Andrew Haldane warns of regional growth inequality BBC News (2/12/16)
‘Regions would have faced contraction’ without rate cuts and money printing Belfast Telegraph (2/12/16)
Bank of England chief: UK can be transformed if it copies progress on Teesside Gazette Live, Mike Hughes (2/12/16)
Articles: Mark Carney speech
Governor’s ‘dynamite’ warning on wages and globalisation Sky News, Ed Conway (6/12/16)
Mark Carney warns Britain is suffering first lost decade since 1860 as people across Europe lose trust in globalisation The Telegraph, Szu Ping Chan and Peter Foster (5/12/16)
Mark Carney: we must tackle isolation and detachment caused by globalisation The Guardian, Katie Allen (6/12/16)
Bank of England’s Carney warns of strains from globalization Reuters, William Schomberg and David Milliken (6/12/16)
CARNEY: Britain is in ‘the first lost decade since the 1860s’ Business Insider UK, Oscar Williams-Grut (7/12/16)
Carney warns about popular disillusion with capitalism BBC News (5/12/16)
Some fresh ideas to tackle social insecurity Guardian letters (7/12/16)
Report
Monitoring poverty and social exclusion 2016 (MPSE) Joseph Rowntree Foundation, Adam Tinson, Carla Ayrton, Karen Barker, Theo Barry Born, Hannah Aldridge and Peter Kenway (7/12/16)
Data
OECD Income Distribution Database (IDD): Gini, poverty, income, Methods and Concepts OECD
The effects of taxes and benefits on household income Statistical bulletins ONS
Questions
- Has monetary policy aggravated the problem of inequality? Explain.
- Comment on Charts 11a and 11b on page 19 of the Haldane speech.
- Does the process of globalisation help to reduce inequality or does it make it worse?
- If countries specialise in the production of goods in which they have a comparative advantage, does this encourage them to use more or less of relatively cheap factors of production? How does this impact on factor prices? How does this affect income distribution?
- How might smaller-scale firms “by-pass big corporates and engage in a form of artisanal globalisation; a revolution that could bring cottage industry full circle”?
- Why has regional inequality increased in the UK?
- What types of supply-side policy would help to reduce inequality?
- Explain the following statement from Mark Carney’s speech: “For free trade to benefit all requires some redistribution. There are limits, of course, because of fiscal constraints at the macro level and the need to maintain incentives at the micro level”.
- Mark Carney stated that “redistribution and fairness also means turning back the tide of stateless corporations”. How might this be done?
In his 2016 Autumn Statement, the new Chancellor of the Exchequer, Philip Hammond, announced that he was abandoning his predecessor’s target of achieving a budget surplus in 2019/20 and beyond. This was partly in recognition that tax revenues were likely to be down as economic growth forecasts were downgraded by the Office for Budget Responsibility. But it was partly to give himself more room to boost the economy in response to lower economic growth. In other words, he was moving from a strictly rules-based fiscal policy to one that is more interventionist.
Although he still has the broad target of reducing government borrowing over the longer term, this new flexibility allowed him to announce increased government spending on infrastructure.
The new approach is outlined in the updated version of the Charter for Budget
Responsibility, published alongside the Autumn Statement. The government’s fiscal mandate would now include the following:
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a target to reduce cyclically-adjusted public-sector net borrowing to below 2% of GDP by 2020/21; |
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a target for public-sector net debt as a percentage of GDP to be falling in 2020/21. |
It also states that:
In the event of a significant negative shock to the UK economy, the Treasury will review the appropriateness of the fiscal mandate and supplementary targets as a means of returning the public finances to balance as early as possible in the next Parliament.
In the Autumn Statement, the new approach to fiscal policy is summarised as follows:
This new fiscal framework ensures the public finances continue on the path to sustainability, while providing the flexibility needed to support the economy in the near term.
With his new found freedom, the Chancellor was able to announce spending increases, despite deteriorating public finances, of £36bn by 2021/22 (see Table 1 in the Autumn Statement).
Most of the additional expenditure will be on infrastructure. To facilitate this, the government will set up a new National Productivity Investment Fund (NPIF) 
to channel government spending to various infrastructure projects in the fields of housing, transport, telecoms and research and development. The NPIF will provide £23bn to such projects between 2017/18 and 2021/22.
But much of the additional flexibility in the new Fiscal Mandate will be to allow automatic fiscal stabilisers to operate. The OBR forecasts an increase in borrowing of £122bn over the 2017/18 to 2021/22 period compared with its forecasts made in March this year. Apart from the additional £23bn spending on infrastructure, most of the rest will be as a result of lower tax receipts from lower economic growth. This, in turn, is forecast to be the result of lower investment caused by Brexit uncertainties and lower real consumer spending because of the fall in the pound and the consequent rise in prices.
But rather than having to tighten fiscal policy to meet the previous borrowing target, the new Fiscal Mandate will permit this rise in borrowing. The lower tax payments will help to reduce the dampening effect on the economy.
So are we entering a new era of fiscal policy? Is the government now using discretionary fiscal policy to boost aggregate demand, while also attempting to increase productivity? Or is the relaxation of the Fiscal Mandate just a redrawing of the rules to give a bit more flexibility over the level of stimulus the government can give the economy?
Videos
Autumn Statement 2016: Philip Hammond’s speech (in full) GOV.UK (23/11/16)
Philip Hammond’s autumn statement – video highlights The Guardian (23/11/16)
Key points from the chancellor’s first Autumn Statement BBC News, Andrew Neil (23/11/16)
Autumn Statement: higher borrowing, lower growth Channel 4 News, Helia Ebrahimi (23/11/16)
Autumn Statement: Chancellor’s growth and borrowing figures BBC News (23/11/16)
Markets react to Autumn Statement Financial Times on YouTube, Roger Blitz (23/11/16)
Hammond’s Autumn Statement unpicked Financial Times on YouTube, Gemma Tetlow (23/11/16)
Autumn Statement 2016: The charts that show the cost of Brexit Sjy News, Ed Conway (24/11/16)
BBC economics editor Kamal Ahmed on the Autumn Statement. BBC News (23/11/16)
Autumn statement: debate Channel 4 News, Financial Secretary to the Treasury, Jane Ellison, and Labour’s Shadow Business Secretary, Clive Lewis (23/11/16)
Autumn Statement: Workers’ pay growth prospects dreadful, says IFS BBC News, Kevin Peachey and Paul Johnson (24/11/16)
Articles
Autumn Statement 2016: Expert comment on fiscal policy Grant Thornton, Adam Jackson (23/11/16)
Philip Hammond loosens George Osborne’s fiscal rules to give himself more elbow room as Brexit unfolds CityA.M., Jasper Jolly (23/11/16)
Britain’s New Fiscal Mandate Opens Way To Invest For Economic Growth Forbes, Linda Yueh (23/11/16)
Autumn Statement 2016: experts respond The Conversation (23/11/16)
Chancellor’s ‘Reset’ Leaves UK Economy Exposed And Vulnerable Huffington Post, Alfie Stirling (23/11/16)
Britain’s Autumn Statement hints at how painful Brexit is going to be The Economist (26/11/16)
Chancellor’s looser finance targets highlight weaker UK economy The Guardian, Phillip Inman (24/11/16)
Hammond’s less-than-meets-the-eye plan that hints at the future Financial Times, Martin Sandbu (23/11/16)
Economists’ views on Philip Hammond’s debut Financial Times, Paul Johnson, Bronwyn Curtis and Gerard Lyons (24/11/16)
Government Publications
Autumn Statement 2016 HM Treasury (23/11/16)
Charter for Budget Responsibility: autumn 2016 update HM Treasury
Reports, forecasts and analysis
Economic and fiscal outlook – November 2016 Office for Budget Responsibility (23/11/16)
Autumn Statement 2016 analysis Institute for Fiscal Studies (November 2016)
Questions
- Distinguish between discretionary fiscal policy and rules-based fiscal policy.
- Why have forecasts of the public finances worsened since last March?
- What is meant by automatic fiscal stabilisers? How do they work when the economic growth slows?
- What determines the size of the multiplier from public-sector infrastructure projects?
- What dangers are there in relaxing the borrowing rules in the Fiscal Mandate?
- Examine the arguments for relaxing the borrowing rules more than they have been?
- If the economy slows more than has been forecast and public-sector borrowing rises faster, does the Chancellor have any more discretion in giving a further fiscal boost to the economy?
- Does the adjustment of borrowing targets as the economic situation changes make such a policy a discretionary one rather than a rules-based one?
A paper by three University of Sussex academics has just been published by the university’s UK Trade Policy Observatory (UKTPO). It looks at possible trade relations between the UK and the EU post Brexit. It identifies four key government objectives or constraints – what the authors call ‘red lines’ – and five possible types of trade arrangement with the EU.
The four red lines the authors identify are:
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Limitations on the movement of people/labour; |
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An independent trade policy; |
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No compulsory budgetary contribution to the EU; |
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Legal oversight by UK courts only and not by the European Court of Justice. |
Just how tight each of these four constraints should be is a matter for debate and political decision. For example, how extensive the limitations on the movement of labour should be and whether or not there should be any ‘voluntary’ budgetary contributions to the EU are issues where there is scope for negotiation.
Alongside these constraints is the objective of continuing to have as much access to and influence over the Single Market as possible.
The five possible types of trade arrangement with the EU identified in the paper are as follows:
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Full Customs Union (CU) with the EU-27 |
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Partial Customs Union with EU (based on EU-Turkey CU) |
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Free Trade Area (FTA) with access to the Single Market (European Economic Area) |
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Free Trade Area without automatic access to Single Market |
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Reversion to World Trade Organisation (WTO) Most Favoured Nation (MFN) terms |
To clarify the terminology: a free trade area (FTA) is simply an agreement whereby member countries have no tariff barriers between themselves but individually can choose the tariffs they impose on imports from non-member countries; a customs union is a free trade area where all members impose common tariffs on imports from non-member countries and individual members are thus prevented from negotiating separate trade deals with non-member countries; 
membership of the European Economic Area requires accepting freedom of movement of labour and compulsory contributions to the EU budget; WTO Most Favoured Nation rules would involve the UK trading with the EU but with tariffs equal to the most favourable ones granted to other countries outside the EU and EEA.
The red lines would rule out the UK being part of the customs union or the EEA. Although WTO membership would not breach any of the red lines, the imposition of tariffs against UK exports would be damaging. So the option that seems most appealing to many ‘Brexiteers’ is to have a free trade area agreement with the EU and negotiate separate trade deals with other countries.
But even if a tariff-free arrangement were negotiated with the EU, there would still be constraints imposed on UK companies exporting to the EU: goods exported to the EU would have to meet various standards. But this would constrain the UK’s ability to negotiate trade deals with other countries, which might demand separate standards.
The paper and The Economist article explore these constraints and policy alternatives and come to the conclusion that there is no easy solution. The option that looks the best “from the UK government’s point of view and given its red lines, would be an FTA with a variety of special sectoral arrangements”.
Article
Brexit means…a lot of complex trade decisions The Economist, Buttonwood’s notebook (15/11/16)
Paper
UK–EU Trade Relations post Brexit: Too Many Red Lines? UK Trade Policy observatory (UKTPO), Briefing Paper No. 5, Michael Gasiorek, Peter Holmes and Jim Rollo (November 2016)
Questions
- Explain the difference between a free trade area, a customs union and a single market.
- Go through each of the four red lines identified in the paper and consider what flexibility there might be in meeting them.
- What problems would there be in operating a free trade agreement with the EU while separately pursuing trade deals with other countries?
- What is meant by ‘mutual recognition’ and what is its significance in setting common standards in the Single Market?
- What problems are likely to arise in protecting the interests of the UK’s service-sector exports in a post-Brexit environment?
- What does the EU mean by ‘cherry picking’ in terms of trade arrangements? How might the EU’s attitudes in this regard constrain UK policy?
- Does the paper’s analysis suggest that a ‘hard Brexit’ is inevitable?
We have frequently looked at patterns in lending by financial institutions in our blogs given that many economies, like the UK, display cycles in credit. Central banks now pay considerable attention to the possibility of such cycles destabilising economies and causing financial distress to people and businesses. There is also increased interest here in the UK in bank lending data in light of Brexit. Patterns in credit flows may indicate whether it is affecting the lending choices of financial institutions and borrowing choices of people and businesses.
Data from the Bank of England’s Money and Credit – September 2016 statistical release shows net lending (lending net of repayments) by monetary financial institutions (MFIs) to individuals in September 2016 was £4.65 billion. This compares with £8.89 billion back in March 2016 which then was the highest monthly total since August 2007. However, the March figure was something of a spike in lending and this September’s figure is actually very slightly above the monthly average over the last 12 months, excluding March, of £4.5 billion. In other words, as yet, there is no discernible change in the pattern of credit flows post-Brexit.
Leaving aside the question of the economic impact of Brexit, we still need to consider what the credit data mean for financial stability and for our financial well-being. Chart 1 shows the annual flows of lending by banks and building societies since the mid 1990s. The chart evidences the cycles in secured lending and in consumer credit (unsecured lending) with its consequent implications for economic and financial-welling being.(Click here to download a PowerPoint of Chart 1.)
After the financial crisis, as Chart 1 shows, net lending to individuals collapsed. More recently, net lending has been on the rise both through secured lending and in consumer credit. The latest data show that annual flows have begun to plateau. Nonetheless, the total flow of credit in the 12 months to September of £58 billion compares with £33 billion and £41 billion in the 12 months to September 2014 and 2015 respectively. Having said this, in the 12 months to September 2007 the figure was £112 billion! £58 billion is currently equivalent to around about 3 per cent of GDP.
To more readily see the effect of the credit flows on debts stocks, Chart 2 shows the annual growth rate of net lending by MFIs. In essence, this mirrors the growth rate in the stocks of debt which is an important metric of financial well-being. The chart nicely captures the pick up in the growth of lending from around the start of 2013. What is particularly noticeable is the very strong rates of growth in net unsecured lending from MFIs. The growth of unsecured lending remains above 10 per cent, comparable with rates in the mid 2000s. (Click here to download a PowerPoint of Chart 2.)
The growth in debt stocks arising from lending continues to demonstrate the need for individuals to be mindful of their financial well-being. This caution is perhaps more important given the current economics uncertainties. The role of the Financial Policy Committee in the UK is to monitor the financial well-being of economic agents in the context of ensuring the resilience of the financial system. It therefore analyses the data on credit flows and debt stocks referred to in this blog along with other relevant metrics. At this moment its stance is not to apply any additional buffer – known as the Countercyclical Capital Buffer – on a financial institution’s exposures in the UK over and above internationally agreed standards. Regardless, the fact that it explicitly monitors financial well-being and risk shows just how significant the relationship between the financial system and economic outcomes is now regarded.
Articles
Higher inflation and rising debt threaten millions in UK The Guardian, Angela Monaghan (5/11/16)
Consumer spending has saved the economy in the past – but we cannot bet on it forever Sunday Express, Geff Ho (13/11/16)
Warning as household debts rise to top £1.5 trillion BBC News, Hannah Richardson (7/11/16)
Household debt hits record high – How to get back on track if you’re in the red Mirror, Graham Hiscott (7/12/16)
Data
Money and Credit – September 2016 Bank of England
Bankstats (Monetary and Financial Statistics) – Latest Tables Bank of England
Statistical Interactive Database Bank of England
Questions
- Explain the difference between secured debt and unsecured debt.
- What does it mean if individuals are financially distressed?
- How would we measure the financial well-being of individuals and households?
- What actions might individuals take it they are financially distressed? What might the economic consequences be?
- How might uncertainty, such as that following the UK vote to leave the European Union, affect spending and savings’ decisions by households?
- What measures can institutions, like the UK’s Financial Policy Committee, take to reduce the likelihood that flows of credit become too excessive?
President-elect Donald Trump has blamed free trade for much of America’s economic problems. He argues that cheap imports from China, partly from an undervalued yuan, have led to a loss of jobs and to large-scale income flows from the USA to China. “They have taken our jobs; they have taken our money; and on top of that they have loaned the money to us and we actually pay them interest now on money,” he claimed to The Economist.
And it’s not just trade with China that he criticises. He sees cheap imports from developing countries generally as undermining US jobs. The solution he advocates is the imposition of tariffs on imports that threaten US jobs and scrapping, or fundamentally renegotiating, trade deals.
He refers to NAFTA – the North American Free Trade Agreement with Canada and Mexico – as the worst trade deal in US history and blames it for the loss of thousands of US manufacturing jobs. He has said that he will demand better terms from Mexico and Canada. If they don’t agree to them, he’d pull the USA out of NAFTA altogether.
A more recent trade agreement is the Trans-Pacific Partnership (TPP) with 11 other Pacific rim countries (but not including China). The agreement was signed on 4 February 2016, but is awaiting ratification from member countries. Amongst other things, the agreement cuts over 18,000 tariffs. Donald Trump has said that he would block the deal, even though it would lead to the elimination of tariffs on most US manufactured and agricultural products exported to the other countries. He argues that it would lead to a large-scale loss of US jobs from cheap imports.
Another major trade deal criticised by Trump is that being negotiated between the USA and the EU – the Transatlantic Trade and Investment Partnership (TTIP). It has already faced fierce opposition in Europe, with many fearing that it would give too much power to US corporations in their operations in Europe. With the opposition from Trump, it looks unlikely that the agreement will be signed, even in an amended form.
So is this more protectionist stance by Donald Trump in America’s interests? The main argument against restricting imports is that people generally in the USA would be poorer. This is the prediction from the law of comparative advantage. Trade allows a country to consume beyond its production possibility curve by specialising in the production of goods with relatively low opportunity costs and importing goods which would have had a higher opportunity cost if they were produced domestically (see, for example, Economics, 9th edition, pages 711–4). By imposing tariffs or other restrictions on cheap imports, consumers would end up paying more for such goods if they now have to be produced domestically. Cheap Chinese t-shirts would be replaced by expensive US ones. Real US incomes would be lower.
Another danger of pursuing protectionist policies is that other countries might retaliate. Trade wars might result, with the world ending up poorer.
Then there is a problem of locating products. It is not a simple question of saying a product is made in the USA or elsewhere. With complex modern supply chains, many products use components and services, such as design and logistics, from many different countries. Imposing restrictions on imports may lead to damage to products which are seen as US products.
An open trade policy, by contrast, not only leads to higher consumption, it stimulates economic growth and the extra competition it creates improves domestic productivity. As the pro-free trade article by Graeme Leach, linked below, argues:
There is overwhelming evidence that free trade improves economic performance by increasing competition in the domestic market. Trade disciplines domestic firms with market power, and simultaneously promotes productivity growth. Research also shows that a 10 per cent increase in trade leads to a 5 per cent increase in per capita income. More open trade policies are associated with higher per capita incomes.
And as the article by Clark Packard argues:
There is no question that America’s middle and lower classes have benefited from our trade liberalization. Through the widely accepted principle of comparative advantage in our trade policies, productivity has surged and prices have declined. Lower prices save the average American family thousands of dollars a year on goods they consume, raising the standard of living through enhanced purchasing power.
Despite these arguments, there is one crucial problem with free trade. Although overall levels of consumption may be higher, trade may make some people poorer. If workers in the US steel or garment industries lose their jobs because of cheap imports, they will certainly feel worse off, especially if there is no prospect of them getting another job elsewhere. They may lack transferable skills or have too many family or personal ties to move elsewhere in the country.
The government could help to ameliorate the problems of those made unemployed by providing retraining or resettlement grants or by investing in infrastructure projects that require relatively low skilled, but local, construction workers. But, as the Forbes article states:
It is in helping displaced workers of all types that US government, as well as the leaders of other rich countries, have largely failed. Little has been done to assist laid-off workers whose industries simply cannot compete in developed countries anymore.
What is more, inequality has been growing in the USA, and in most other developed countries too. 
International trade and investment and the growing concentration of power in large corporations has meant that most of the gains from trade have gone to the richest people. Many of the poor blame trade for their plight and the argument that they have still made some gains is either not believed or is not enough to appease them.
An interesting insight into why people may have voted for Trump and his policy of protectionism is provided by the Ultimatum Game (see also). As the final article below explains:
The game itself involves two players. The first player receives a sum of money, and gets to propose how to divide it between the two players. The second player can do only one thing: accept or reject the proposal. If the second player accepts, then the money is divided between the two players as proposed. But if the second player rejects the proposal, then neither player gets anything.
It might seem that the rational thing for the second person to do is to accept whatever the first person proposes, however little it gives to the second person providing it is something – after all, even a little is better than nothing. But experiments show that people playing the second person do not behave in that way. They seek a fair distribution. If the proposed distribution is perceived as unfair, they would prefer to reject the proposal, with both players getting nothing.
This may help to explain the psychology of poor blue-collar workers. They would rather punish the rich a lot, and possibly themselves a little, than let the rich continue getting richer while they are stuck on low wages with little prospect for improvement. But, of course, they may also believe Trump’s rhetoric that they will indeed be better off from protectionist policies that help save their jobs.
What precisely Donald Trump will do about trade agreements and protection, we will have to wait and see. Often what is pledged in an election campaign is not carried out in office or is substantially watered down.
Articles
How Donald Trump thinks about trade The Economist (9/11/16)
What President Trump’s victory means for the most important trade deal in the world Independent, James Moore (9/11/16)
Trump and trade: A radical agenda? BBC News, Ben Morris (9/11/16)
Trump could change trade stance, says former Bush adviser BBC News, Tom Espiner (11/11/16)
3 Ways President-Elect Trump May Shake Up Trade Policy NPR, Marilyn Geewax (9/11/16)
Donald Trump Win to Upend Trade Policy Nasdaq, William Mauldin and John Lyons (9/11/16)
Stiglitz Grades Donald Trump an F on Economics Bloomberg, Enda Curran and Angie Lau (19/9/16)
Trump can kill trade deals but he can’t kill globalisation The Conversation, Remy Davison (10/11/16)
Anti-free trader Donald Trump is on a collision course with economic reality City A.M., Graeme Leach (9/11/16)
What Trump And Clinton Both Get Wrong On Trade Forbes, Simon Constable (4/11/16)
The Rabble Understands Trade Pretty Well Huffington Post, Brad Miller (4/11/16)
Contrary to Donald Trump’s claims, free trade benefits the poorest Americans U.S.News, Clark Packard (27/10/16)
The Meaning of Open Trade and Open Borders The New Yorker, Bernard Avishai (17/10/16)
We just saw what voters do when they feel screwed. Here’s the economic theory of why they do it. Quartz, James Allworth (9/11/16)
Questions
- Use a simple two-product production possibility diagram to demonstrate the possible consumption gains to a country from trading with another country and specialising in exporting the good in which it has a comparative advantage.
- Search Donald Trump’s speeches to identify statements he has made about the trade policies he will pursue as president.
- Explain why some people may gain more from free trade than others. Why do the people who have gained the most tend to be the richest people?
- What are the arguments for and against the free movement of labour (a) within countries; (b) between countries?
- Compare the relative benefits and costs of tariffs and various forms of administrative constraints on trade.
- If the second player in the ultimatum game rejects an ‘unfair’ offer, should this behaviour be described as ‘irrational? Explain.
- Find out the details of the Trans-Pacific Partnership agreement. In what ways, other than through increased trade, would the agreement benefit the residents of the member countries?
- Does free trade threaten employment in the long term? Explain.
