What’s the one thing that high-growth companies like Amazon, Microsoft, and Apple have in common? All of these companies started out with just their founders toiling at their idea in their humble garages, only to grow their market-cap past the trillion-dollar range in only a few decades. While each of these unicorn’s business trajectories is unique, their common secret sauce is building products and services that scale.
According to data from the Bureau of Labor Statistics, almost half of all businesses fail during their first year. And there are a lot of reasons why a company can go under, including poor management, insufficient capital, or not a large enough market. One often-overlooked reason for failure though is overexpansion. That’s because scaling is hard. Really hard.
And it’s not just companies that can get into big trouble. Like many governments, research institutes, and charities are painfully aware, a policy, study, or campaign that performs brilliantly in a particular market or demographic can fail miserably when attempting to replicate the same success at scale. The COVID pandemic, for instance, is a living testament to this, evidenced by the widely successful vaccine rollout that saw over 10 billion shots delivered across the world lighting-fast by industry standards, as well as the disappointingly botched contact tracing program done by many countries.
That’s because the road from local to worldwide is paved with many pitfalls. Unless you mind your step, you might get sorely bruised. But what are these pitfalls?
“The Voltage Effect: How to Make Good Ideas Great and Great Ideas Scale” John A. List Currency, 288 pages | Buy on Amazon
In his latest book, The Voltage Effect: How to Make Good Ideas Great and Great Ideas Scale, John A. List, the Kenneth C. Griffin Distinguished Service Professor in Economics at the University of Chicago, not only gives a rundown of the leading but often underestimated factors that can make or break the scaling of an idea, but also outlines ways to supercharge it. This also explains the book name, the analogy being that ideas that scale — be they a new government policy meant to improve learning outcomes, a wildlife conservation program to help repopulate an endangered species, or a new restaurant chain — experience “voltage gain” as they scale, meaning it becomes increasingly easier as you expand. Meanwhile, ideas that fail at scaling experience “voltage drops”, with operations becoming increasingly inefficient to the point of reaching an inevitable collapse.
Professor List should know a thing or two about scaling. He served in the White House on the Council of Economic Advisers in the early 2000s under the Bush Administration, where he designed policies that would produce the greatest positive impact on the largest number of American citizens at a fair cost, but also as the chief economist of Uber and, later, at Lyft — two startups that have scaling almost down to an art form. That’s in addition to the over 200 studies List published as a behavioral economist, studying what drives people to make the decisions that they do, from Florida to Costa Rica or from Asia to Africa.
Many think that scalable ideas have a “silver bullet” quality to them that makes them a sure shot, but as Professor List skillfully explains, this thinking is wrong. In the first part of the book, the author outlines and expands on the most important pitfalls that cause voltage drops as an idea is scaled, called the The Five Vital Signs. These are: false positives, misjudging the representativeness of an initial population or situation, spillovers, and prohibitive costs. Along the way, you’ll learn, for instance, how celebrity chef Jamie Oliver did all the right things to expand his restaurant chain to over a dozen countries and why it all came crashing down when he changed his scaling recipe.
The second part tackles the winning concepts that, when applied well, can drive voltage gain like a particle accelerator, including using the right incentives (any behavioral economist’s bread and butter), marginal thinking, scaling culture, and knowing when it’s time to quit on a losing idea. This is the how to make good ideas great part.
All of it is skillfully done thanks to List’s sense for compelling prose and storytelling. While reading this comprehensive book, I found myself turning page after page, as I went through numerous excellent research and case studies, many of which Professor List was personally involved with.
Careful, comprehensive, and fun, The Voltage Effect excels in turning a seemingly boring niche topic into a fascinating book that’s relevant to all, from CEOs and policymakers to naturally curious people with a taste for learning how economics shapes our lives in the real world.
When it comes to environmental justice in the US, there’s still a long way to go — things are moving in the right direction, but slowly.
Air pollution is linked to a number of health problems, from lung and cardiovascular diseases to cognitive impairment. But not everyone is exposed to pollution equally. In the US, for instance, previous research has suggested that race plays a significant role in exposure to pollution, with Black people being more exposed to pollution. Now, a new study reinforces that idea.
University of Washington researchers investigated disparities in exposure to six major air pollutants in 1990, 2000, and 2010: carbon monoxide (CO), ozone (O3), sulfur dioxide (SO2), nitrogen dioxide (NO2), and particulate matter (PM10, PM 2.5). They compared models of air pollution with census data that included people’s racial or ethnic background, their address, and income status. Specifically, they used the Center for Air, Climate, and Energy Solutions (CACES) data.
Even when they accounted for income (poorer neighborhoods tend to be associated with more pollution), the researchers found significant racial disparities. There’s been important progress over the past few decades, but the disparities still remain.
“We studied racial-ethnic and income disparities at multiple geographic levels (contiguous US; state; urban/rural areas), using the CACES air pollution models and demographic data from three decadal censuses,” lead author Jiawen Liu, UW doctoral student in civil and environmental engineering, told ZME Science. “This is the first comprehensive and consistent national decades-long study for six criteria pollutants, over time and space. In our study, we found air pollution levels and exposure disparities generally declined during 1990 to 2010. Absolute racial-ethnic exposure disparities decreased more than relative racial-ethnic exposure disparities. In 2010, the most-exposed racial-ethnic group was always a minority group for all pollutants.”
“There have been so many improvements,” the researcher also says. “But we still see these disparities persist, even after two decades.”
Racial-ethnic disparities were found in all US states, for multiple pollutants, and they remain distinct and larger than income disparities.
For communities, this is probably a bigger problem than they realize, affecting them in multiple impactful, but subtle ways. This is an environmental justice problem that should be addressed, the researchers say. Environmental justice refers to the fair treatment and meaningful involvement of all people regardless of race, color, national origin, or income, in regards to the implementation and enforcement of environmental laws, regulations, and policies.
“Communities are impacted by air pollution for a long time and we want to make more people realize Environmental Justice is an ongoing issue no matter where they are. As previous literature has documented, racial/ethnic minority populations and lower-income populations in the US often experience higher-than-average burdens of air pollution and its associated health impacts. The disparities vary by pollutant, location, and time. “
It’s not entirely clear why these differences persist. Although there is a lot of previous scientific information about so-called environmental racism and its causes (which include lack of affordable land, lack of political power, lack of mobility, and poverty), this particular study stops short of explaining the causes for the disparities.
“The underlying reasons for exposure disparity is a large and complicated topic. Our study aims on “what”, not “why”. The underlying reasons include where people live and segregation patterns, and where pollution sources are located. Recent studies about systemic racism and racial segregation can help explain exposure disparity we seen in our study.”
However, the fact that the racial disparities aren’t restricted to income suggests a complex interplay of social aspects. This warrants more study policy intervention, Liu concludes — because in the meantime, communities are suffering.
“While these results are new to the scholarly literature, they are not new to communities suffering the disproportionate health risks from air pollution. We hope the information in our study will help motivate positive change, namely, improving air quality while reducing and eliminating exposure disparities. “
Student loans are big business. Some 43 million Americans currently have student loans, totaling a whopping $1.57 trillion in student loans. Despite President Biden canceling some $2 billion in student loans already, progressives in the Democratic party are increasingly frustrated. This is just a drop in the bucket, they argue, and far more action is required.
A coalition of over 80 progressive House and Senate Democrats wants Biden to cancel up to $50,000 in federal student loan debt per person. But can this actually work, and is it even a good idea?
The case for cancellation
The Democratic group argues that the loan cancellation will relieve economic stress that affects low-income borrowers in particular. This fits with what some economists are saying — it’s not the rich that are most affected by student loans, it’s the poorer borrowers, especially those of Black and Hispanic descent. These are also the borrowers that have the biggest trouble repaying back the loan. In addition, borrowers in low-income brackets often end up paying more than their better-off peers, creating a financially problematic loop that can last decades.
A 2021 data request by Sen. Warren, who spearheads the progressive group, revealed that 4.4 million borrowers are still repaying two decades into their student loan. In a public letter to Biden and Education Secretary Miguel Cardona, the group urged:
“We urge you to use every tool at your disposal to deliver relief to the millions of families inspired by your proposal to make a debt-free college degree within their reach by eliminating up to $50,000 in federal student loan debt for all families before payments resume.”
Economists have somewhat mixed opinions about this, but many seem to regard this type of loan cancellation as a positive effect on the overall US economy. William Chittenden, from the University of Texas, argued the net gains would be “positive but modest.”
According to a report quoted by Chittenden, Warren’s group overestimates the positive impact that loan forgiveness would have. Instead, Chittenden estimates a GDP increase “between $86 billion and $108 billion per year”. Adding $100 billion into the GDP seems like a lot, but it’s only 0.43% of the total US GDP.
In the grand scheme of things, it may not make a big difference, but alleviating the financial burden of millions of struggling loaners at at a small cost to the economy sounds like a win-win plan. Nevertheless, experts warn students not to rely on this, and instead focus on more pragmatic options.
Meanwhile, some economists say it’s a good time to refinance
In an editorial published in Forbes, personal finance expert James Brewer calls for refinancing student loans. In many cases, he argues, it can save money on total interests and help make lower monthly payments. Refinancing a student loan is much like refinancing a mortgage, and if you’re able to refinance your loans at a lower rate, there’s a good chance you can end up saving money in the long run.
The devil is in the details and, as Brewer goes on to explain, the rules may change — and have changed recently. So many loaners may find themselves in a situation where refinancing could be useful. It’s important to note, however, that federal loans often have different options than private loans, and the loan cancellation discussed by Democrats only covers federal loans.
Student loan experts talking to MarketWatch explained that you should always proceed with care when considering refinancing and consider all the possible avenues, including the moratorium currently in place (through May 2022). Furthermore, any refinancing on federal loans may affect potential future loan forgiveness programs, and this is something that should be included in the calculation.
Nevertheless, the experts seem to have little confidence in a major forgiveness program, and suggest that at least in some instances, it may be right to refinance rather than wait (again, if this is favorable).
The bottom line
The possibility of student loan cancellation is enticing, and it seems to make some economic sense. However, it’s a polarizing issue that’s just as political as it is economic. If you’re a loaner, you shouldn’t really rely on it. There are so many different types of loans, and conditions can vary so substantially, that it’s hard to give general advice. Nevertheless, it can’t hurt to keep an eye out for any announcements and see if refinancing would be useful in a particular case.
Biden says he wants student loan payments to resume in May 2022, but with mounting pressure from his own party, it’s hard to say what could happen. Ultimately, the US student loan woes are far from over — so buckle up.
From Imperial Rome to the Crusades, to modern North Korea or the treatment of Rohingya in Myanmar, religious persecution has been a tool of state control for millennia.
While its immediate violence and human consequences are obvious, less obvious is whether it leaves scars centuries after it ends.
In a new study, we have attempted to examine the present-day consequences of one of the longest-running and most meticulously documented persecutions of them all – the trials of the Spanish Inquisition between 1478 to 1834.
The records of 67,521 trials still exist, along with indicators of their locations and places of birth and residence of the people they tried.
We find that today – two hundred years after its abolition – the locations in which the inquisition was strong have markedly lower levels of economic activity, trust and educational attainment than those in which it was weak.
Charged with combating heresy, defined as deviation from Catholic doctrine, the Inquisition extended into every strata of Spain’s society and almost every corner of its global empire.
Trials originated with secret denunciations and lasted years. Penalties ranged from mild admonishments to burning at the stake. Sentences were usually handed down in large public ceremonies – ensuring widespread publicity.
The geographical distribution of inquisitorial intensity shows widespread variation over relatively small areas, but no broad geographical patterns.
We set the geographical distribution of inquisitorial intensity against a modern-day measure of gross domestic product per capita constructed using nighttime luminosity captured by satellite photography.
In Spain, estimating GDP at the municipal level from administrative data is fraught with data availability and compliance problems.
Night light is highly correlated with per capita income and widely used as a proxy for economic performance in the development literature.
We find municipalities with no recorded inquisitorial activity as well those with inquisitorial activity in the lowest third have the highest GDP per capita today.
Those with persecution in the middle third have markedly lower incomes.
In those where the inquisition struck with the highest intensity (in the top third) the level of economic activity is sharply lower.
The magnitudes are large. In places with no persecution, the median GDP per capita was €19,450 (A$30,100). In places where the inquisition was most active, it is below €18,000 (A$28,670).
Our estimates imply that had Spain not suffered from the inquisition, its annual production today would be 4.1% higher – €811 (A$1,290) for each man, woman, and child.
More persecution, less education
To get an idea of why the inquisition continues to cast such a dark economic shadow centuries after it ended, we used data from the barometer surveys conducted by the Spanish Centre for Sociological Research.
Since the inquisition was particularly suspicious of the educated, literate middle class, its impact on Spain’s cultural, scientific, and intellectual climate was severe. (As was the impact of the Stasi, or secret police, in East Germany.)
Once we control for other variables, we find that going from a region which had no exposure to the inquisition to one which had mid-range exposure cuts the share of the population receiving higher education today by 5.6%.
More persecution, less trust
The inquisition also changed the way civil society functioned. The prospect of secret denunciations by acquaintances made it harder for residents to cooperate. It diminished trust.
A standard trust question asked in the Spanish surveys is:
In general, would you say people on average can be trusted, or would you say that one can never be too careful?
We analysed responses from more than 26,000 Spaniards interviewed between 2006 and 2015 and (after adjusting for time-specific effects) found that greater inquisitorial activity is still associated with somewhat less trust today. Although small, the effect is robust to different methods of calculation.
We also measured the frequency of church attendance and found a related effect on religiosity. The greater the persecution in a location, the greater the level of church attendance today.
More persecution, less income
An objection that could be raised to our findings is that the inquisition might have been more active in poorer areas.
Standard histories suggest this is unlikely. The inquisition was self-financing. It had to confiscate property and impose fines to pay for its expenses.
Its mission was to persecute heresy, but it had strong incentives to look for it in richer places. Its early focus on persecuting Jews and later Protestants led it to target populations with higher levels of education.
The inquisition’s persecution of perceived heretics is only one example of authoritarian intervention in people’s private lives. Other institutions, such as Stalin’s People’s Commissariat for Internal Affairs and Hitler’s Gestapo, instituted similarly intrusive regimes of thought-control.
While the suffering of the accused and convicted was the single most important result of persecution, our findings suggest its effects live on.
Even now, 200 years on from the Spanish Inquisition, the locations affected appear to be poorer, more religious, less educated, and less trusting.
With cryptocurrencies having one of the most impressive bull runs in the history of financial assets, it’s easy to see why people are no longer impressed by traditional investments. However, if you’re not the kind of person that can handle the heart-racing, wild volatility of the crypto market, you may be interested in another unusual way of investing that can be both highly profitable and not that all that risky. That would be collecting toys, believe it or not.
According to a study published this week in the journal Research in International Business and Finance, some rare toys like retired LEGO sets can grow in value at a rate as high as 11% per year. That’s much faster than gold, stocks, and bonds — the go-to financial instruments preferred by retail and institutional investors for decades.
Collectible toys are in the same investment class as rare wines, vintage cars, jewelry, art, and antiques. Collectibles are items that are worth far more than their original sale price and are considered alternative investments—vehicles that don’t fall into any other category like stocks, bonds, cash, or real estate.
Most wealthy people are aware of the importance of diversifying their portfolios by adding collectibles to their baskets. About 10% of their net worth is comprised of works of art, jewelry, and other collectibles whose value tends to rise in time, providing a cushion during periods when the stock market crashes.
But while traditional collectibles have been widely studied by economists, toy collectibles like discontinued model cars and Barbie dolls have been largely ignored.
In just two to three years after a LEGO set is retired, the secondary market prices typically start growing, although there was a great deal of variation ranging from -50% to +600% annually. That’s because the value of the sets depends on numerous factors, the best indicators for swing trading being the number of sets of the edition and the interest in special editions such as those dedicated to iconic films, books, or historic events.
The medium-sized sets saw the least returns, while very large and, conversely, very small sets grew the fastest. Smaller LEGO sets tend to have unique parts or figurines that never show up in other releases, while very big sets tend to be produced in small quantities and are more attractive to adults.
Concerning thematic sets, some of the most expensive were those dedicated to the Millennium Falcon, Cafe on the Corner, Taja Mahal, Death Star II, and the Imperial Star Destroyer.
For instance, the Financial Times reports that the largest set the Danish toymaker ever produced — a version of the Star Wars Millenium Falcon, which consisted of nearly 6,000 pieces — was released in 2007 at a price of around $400. In 2014, an unopened set sold at an auction in Las Vegas for $15,000. This particular sale marks the world’s most expensive Lego set, so it’s definitely an outlier, but elsewhere similar unopened sets regularly fetch $6,000.
Keeping the set unopened and in pristine condition is key to having a collectible toy item that grows in value with time. Once opened, collectible toys decline in value automatically by at least 25%, Gerben van IJken, toy expert, Lego valuer and auctioneer for the site Catawiki.
The prices of LEGO collectibles on secondary markets were not tied to the stock market, making them a good store of value and hedging against market swings. Artworks and antiques play a similar role, but the entry barrier of a collectible LEGO set is usually lower. On the other hand, LEGO sets are only worthwhile as an investment vehicle when playing the long game. You have to hold a set for at least three years after the set is discontinued in order to experience a positive yield. An initial transactional cost is also higher than in stocks or bonds due to factors like delivery and storage.
“Investors in LEGO generate high returns from reselling unpacked sets, particularly rare ones, which were produced in limited editions or a long time ago. Sets produced 20-30 years ago make LEGO fans nostalgic, and prices for them go through the roof. But despite the high profitability of LEGO sets on the secondary market in general, not all sets are equally successful, and one must be a real LEGO fan to sort out the market nuances and see the investment potential in a particular set,” said Victoria Dobrynskaya, study co-author and Associate Professor at the Faculty of Economic Sciences at Moscow University.
You’d think that when it comes to auctions, the more the merrier — having more people fight for whatever you’re auctioning can only work in your favor, right? Well, researchers in Australia are challenging conventional wisdom about auctions in a new study that found that as the number of participants increase, people actually start bidding less than they would in an auction with less competition.
“This is a counterintuitive finding because usually, auctioneers would assume that the more bidders there are in an auction, the more money they will make — the logic being that the more bidders there are, the more likely it is that there is a bidder with a high willingness to pay for the good,” said co-author Associate Professor Agnieszka Tymula from the University of Sydney’s School of Economics.
“However, it turns out that there is also a downside to having more bidders — most people bid less.”
In their study, the economists recruited nearly 100 adults who had to bid on various items, some more expensive than others, including clothing, movie tickets, Bluetooth speakers, and more.
The bidders participated in a number of auctions where the number of participants varied. On average, the participants changed their bids as the number of rivals increased. For instance, when the number of bidders increased from 3 to 12, the average bid declined by nearly 7%.
According to the authors, this effect can be explained by the psychology of “loss aversion” — the notion that the negative emotional impact of incurring a loss is greater than the positive impact of an equal-sized gain. As the number of participants for an auction increases, people intuitively recognize that their chance of winning decreases and treat this experience as a loss. Therefore, they are less willing to bid a high price even if the action of bidding itself doesn’t cost them a cent.
These findings may have widespread implications for real-life auctions, from online auctions on sites like eBay to in-person property market auctions. However, the sample size was relatively small and further research may help establish what’s the threshold over which increases the number of bidders becomes counter-productive. For now, this is a good start that may help auctioneers design more profitable auctions.
“In real-life, the auctions that attract many bidders are usually those auctions for better properties — and they will therefore generate higher bids just because the property is of higher quality,” Tymula said.
“Many real estate agents infer from this that more people at an auction, the higher the final bid is going to be, so they try to get as many people as possible to their auction. However, our results suggest that this actually plays against them because seeing many competitors at an auction makes bidders submit lower bids on average.”
When the scale of the COVID-19 pandemic became clear, one of the first places that reacted was the stock market. All around the world, stocks collapsed — and according to a new study, they did so before it was clear just how much the markets would suffer.
The famous economist John Maynard Keynes once said “the markets can remain irrational longer than you can remain solvent.” In the very long run, stock markets do follow the economic reality, but in the short term (and the short term can be up to a few years), they often behave irrationally.
The pandemic offered a unique opportunity to study markets, and market volatility in particular. In a new study, a team of researchers based at the University of Limerick in Ireland looked at how stock prices correlated with stock changes. They found that the growth in COVID-19 cases largely explained changes in stock prices, but surprisingly did not have the same impact in China or on the global index (MSCI World).
But the pandemic itself couldn’t really explain all the changes. Instead, lead author Niall O’Donnell suspects that the volatility of markets (which often revolves around investor sentiment) played a greater role in explaining market prices than COVID-19 growth.
“Our findings indicate that investors began to act before any realised financial damage was observed, highlighting again the significance of investor sentiment and the expectation of returns, rather than real revisions in financial returns. We additionally find that changes in the Chinese SSE 180 index and the MSCI World index prices were not significantly explained by COVID-19 growth.”
“Instead, these indices were largely influenced by conventional market drivers linked to economic growth such as crude oil, bond yield spreads and implied volatility. We theorise based on these results, that among these factors, early interventions by China may have played a role in index price fluctuations also,” added O’Donnell.
When the pandemic took hold and fears of a worldwide recession kicked off, $16 trillion were wiped from the global stock market in less than a month. Everyone took a hit. From big pharma to 5G penny stocks and from oil companies to food makers, everyone felt the effects. A part of this was perfectly rational — the pandemic was bound to cause big economic woes. But just how big was not yet clear. This initial uncertainty translated into a plummeting stock market.
In Spain, Italy, the UK, and the USA, markets went down as COVID-19 cases rose early during the pandemic — the correlation was present even when controlling for other market drivers. But in two other markets (China and the WCSI), the correlation was less present.
“Our results suggest that early interventions (China) and the spatiotemporal nature of pandemic epicentres (World) should be considered by governments, regulators and relevant stakeholders in the event of future COVID-19 ‘waves’ or further extreme societal disruptions,” the researchers write in the study.
Dr. Darren Shannon, another researcher involved with the study, says it’s important to draw lessons on how pandemics affect the stock market — and how different measures taken against the pandemic can also affect markets.
“COVID-19 cases did not significantly influence the sharp fall and subsequent rise of the Chinese SSE 180 index. Instead, fluctuations in market prices were explained by trading volumes, Brent crude oil price, implied market volatility, among other factors. Similarly, COVID-19 cases did not significantly influence the MSCI World index,” he added.
Ultimately though, stock markets rebounded and reached record levels — even as the economy is still struggling to catch up. Although the current economic crisis is not as pronounced as many experts feared, we’re still in very precarious territory.
The study was published in the Journal of Behavioral and Experimental Finance.
Today, mentioning ‘globalization’ is a bittersweet experience. On the one hand, we all intuitively understand that we wouldn’t have access to cheap consumer goods, varied and exotic cultural items, or faraway vacation spots without it. On the other, we’ve all heard of, or seen, the economic hardship it can bring on communities as jobs and opportunities are exported to the lowest bidder.
But one thing most people will agree on is that globalization is a new thing, relatively speaking. Something that’s really only started taking root in the last couple of decades or so. Granted, some of the most visible elements of globalization (such as job outsourcing or the abundance of international trade) have been creeping up since the 1990s after the collapse of the Soviet bloc and its internal market. And, credit where credit is due: the process of globalization definitely did pick up steam all over the world in the last two to three decades.
The earliest steps of this process, however, have been around for much longer — thousands of years already. And, lucky you, we’re going to go through all of it here.
‘Globalization’, in general, refers to the process of individual groups, countries, or companies becoming integrated into a global whole, with all the upsides and downsides that entails. The term is most commonly used to refer to economic globalization, i.e. the integration of local markets or economies into the global one. However, one can argue that the process is in no way limited to money or jobs; the flow of data and information around the world is a major facet of globalization. As a non-American, I can also attest to how efficient entities like Coca-Cola and Hollywood were (and sometimes still are) in globalizing American culture, as well.
Still, the concept is closely intertwined with that of trade. One way to define trade is as an exchange of goods, services, or money between two or more parties. Another way to define it, one that’s a bit more useful for us right now, is that trade involves a good or service being produced in one place and consumed or used in another.
Demand — for raw materials, consumer goods, experiences, or services — is what fuels globalization. Practically speaking, not everything is available, can be produced, or can be produced for an affordable price in a single place. But everyone, everywhere, wants as high a standard of living as possible — so things need to be moved around, sometimes across the world.
And here we see what opposes globalization, the force that acts as its brakes: technology. Or rather, the lack of it. Our ability to quickly and reliably take one item from one place to another, whether it’s consumer goods, information, or whatever else is desired, acts as a hard cap on the process of globalization. Arguably, this is what kept trade local for most of human history, and what prevented globalization processes for the most part until the industrial era.
Now that we have a basic idea of what it is and why it appears, let’s take a look at how.
The stages of globalization
In general, the process of globalization is separated into individual ‘stages’ to make it easier to conceptualize. Now, do be advised that while there is actual science being done on globalization, the stages we’ll be discussing right now are more ‘teaching aides’ than ‘rigorously defined concepts’. They can and will vary depending on your source, and where the focus of the discussion falls. Typically, however, most models include 3 to 5 stages of globalization.
One approach analyzes it through the relationship between where a given good (or service, etc, you know the drill) is produced, and where it is consumed. In this model, there are four distinct phases of globalization:
Phase 1 is what we’d consider hunter-gatherer societies. Here, demand or consumption (people that need to eat) follow production (natural resources of food that can be exploited).
Phase 2 are early agrarian societies. Here, production (farming) follows demand (people), but trade remains confined to relatively narrow areas due to difficulties in moving goods around.
Phase 3 started with the early industrialization of the 19th century. Mechanical energy made it economically viable to transport goods over large distances, so it became economically viable to consume items produced far away.
Phase 4, in which we currently live, involves the fracturing of the production process across different areas of the world to reduce costs. This only became possible due to very reliable shipping technology and safe trade lanes, as well as computers to keep everything delivered on time.
This 4-step model is the most commonly used, but I personally prefer the 5-step model, with a ‘Phase 2.5’ thrown in — more on that in a bit.
For now, however, these models provide an important tidbit of wisdom. While the particular ways societies or individual actors react to globalization can have good or bad outcomes for us personally, our communities, or our countries, the process itself isn’t willingly driven by any one of us. No government or cabal of central banks came together and decided the world was going to globalize. The process is the natural and quite obvious product of human nature and human ability: we all want stuff, and while we’re over here, some of the stuff we want is over there. Once we become able to go and carry it back, we’ll start trading with the people there in order to satisfy our needs.
Eventually, if you scale this process up, trade networks become global. Given enough time and reliability, new industries spring up that are completely dependent on these trade networks to survive (either by importing necessities such as raw materials and knowledge or for exporting their product).
Most of us here today, probably all of us, live in societies that are more or less integrated into the global markets. That’s why you’re reading this article (written in Europe) on a device whose code was written in the US, with chipsets manufactured in Vietnam or some other South-Asian country using rare minerals mined in Africa, while wearing “made in China” clothing, and drinking or eating something likely from South America, such as a steak, coffee, or avocado toast.
In theory, the process of globalization is, quite ironically, not limited to the globe. Taken to its logical conclusion, the process of globalization could one day mean that someone on Earth can be telecommuting to a job in the Andromeda galaxy while listening to music made in some far-off system. The limitations to this integration process for any one item is whether we can reliably transport it, cheaply, over the distances required, and in the quantities needed.
But that’s talking about the far future. Let’s instead look at the past and see how globalization evolved throughout time.
The early days
Stone-age societies were very limited in their ability to change the environment to suit their needs. They didn’t have modern engines, they didn’t have modern materials, and very little finesse in their processing techniques. Another very important factor to keep in mind here is that they also lacked the numbers. We estimate that stone-age groups typically had 20 to 25 members.
Faced with these limitations, it simply made more sense for them to move demand (the people) to production (wild food). Even just tilling soil for crops is backbreaking labor if all you have are simple tools. What’s more, natural resources such as herds of prey or berry bushes tend to be quite limited up-front, but regenerate over time — so it made complete sense for groups to exploit one area then move to greener pastures.
At this time demand was quite modest, in both size and scope. Local resources were enough to keep these groups fed, and whenever the going got tough, they could just move away. Technology was still very limited, and for the most part, relied on raw materials that are present pretty much everywhere, like bones, wood, stones, pelts, special plants. The combination of small-scale demand that could be satisfied with local materials, the very poor technological background of the time, and the absence of money, meant that different groups wouldn’t need to engage in large-scale trade — and that they pretty much couldn’t, even if they did.
We also have pretty reliable evidence that early people had a different concept of ‘wealth’ than we do. They didn’t really accumulate it, or passed it down to their children. For hunter-gatherers, inheritance usually meant a sturdy, quality tool, and some skills. Possessions weren’t that common beyond practical items.
That being said, we do have evidence that trade did happen, even during this time, although quite limited in scope by today’s standards. Early traders seem to have dealt in technological goods such as grindstones and other tools, and it’s easy to see why all communities of the day would consider these valuable possessions. Whether or not they also traded in perishables we don’t know, as these wouldn’t really stand the test of time. Ideas were also very likely carried across these early stone-age trade networks, kind of like a very slow internet. It’s possible that people also took advantage of traders to move in-between groups.
An interesting idea is that these early traders served to unite different groups culturally through the ideas and people they carried along their routes. This can be seen as a very early, small-scale globalization of the disparate groups living in the same region.
Over time, populations grew and hardier tools were developed. The advent of metals such as copper for use in tools and weapons, in particular, had a profound effect on humanity. Crucially, it made cutting down trees, clearing out boulders, rocks, and digging, much easier and more reliable. Which was very handy since agriculture was putting its roots down, and people needed to clear land for it.
A particularly striking change for people living during these times was the transition from a nomadic to a sedentary lifestyle. Hunter-gatherers need to move around because they eventually exhaust the resources of any particular area. Farmers, in contrast, need to stay put. In fact, the more they stay put, the more food / wealth / stuff they can gain, since agriculture relies on fields being cleared, granaries being constructed, and infrastructure such as irrigation ditches — all of which take time to build. At the same time, food could be produced exactly where it was needed. For the first time in human history, production would follow demand, not the other way around.
Yet, we know trade was picking up even during the very early days of the copper age. Our ability to transport goods over long distances didn’t massively improve compared to the stone age. So why were people trading more if farming was so great? Well, behind it was the proliferation of goods in this period to a much wider degree than previously seen.
Stone-age groups didn’t have access to many items. There was food, clothing, and medicine that everyone typically just produced for themselves. More advanced products, like tools, would be traded for — but they were generally also produced by the ones who would use them, if possible. By the copper age, however, agriculture allowed for food surpluses, which then freed up some people to specialize in professions other than ‘getting food’. Craftsmen, priests, scribes, and varied services would become available as a result.
Unlike before, it was not feasible to produce all of this in a single place any longer. Some natural resources like metals, silk, incense, and livestock were quite rare. The know-how and infrastructure required to process various resources weren’t necessarily available (even firing pottery is a complicated process that can easily fail), or there simply weren’t enough people available to do the work. So different groups and individuals within those groups would produce what they could and then trade for whatever else they needed or wanted. This turned communities that were previously cut off into intertwined (although, not yet interdependent) economies — a ‘localization’ process, similar to globalization on a more reduced scale.
The majority of transactions occurring worldwide at this time likely still took the form of barter. Coinage was an emerging concept, allowing for more complex and complicated trading networks to form where available. We have archeological evidence of pretty sophisticated trade mechanisms being used as early as three millennia ago. The infamous complaint letter to Ea-nasir is one example, mentioning contract-like agreements settling on a deal of copper “of good quality” to be carried out through middlemen at a later date, and people being dispatched “to collect the bag with my money (deposited with you [Ea-Nasir])” when the copper proved of poorer quality.
That’s not to say foreign trade wasn’t taking place. The Harappans — an ancient civilization that flourished around the Indus river (today’s Afghanistan) between 5000 and 3000 years ago — were already building roads (for their newly-invented wheel), canals, and trade ports. Their wares were found as far as the Arabian Gulf, Mesopotamia (today’s Iraq-Kuwait-Syria area), and Central Asia. Interestingly, they managed this despite functioning as a barter economy entirely, although they did have fancy “standardized” weights.
Despite the limitations of the day, trade networks could grow to impressive sizes. But this relied on having a little luck or paying a spicy extra for your goods. This is that “Phase 2.5” I mentioned earlier: an in-between phase where mechanical solutions were not yet available, but some trade networks grew to sizes comparable to those of today.
The main reason our modern lives are so comfortable and goods so abundant is that we can use a lot of energy to alter the world around us. In essence, because we can perform a lot of physical work, quickly. Physical work is defined as the use of energy to apply a force to a particle over a certain distance — physics-speak for “moving things”, or for “doing something”. But for the majority of history, people were mostly limited to muscle power (theirs or their animals’) to do work.
In order to make a bagel, you need to clear a field, till it, plant and harvest the grain, mill it, sieve the dirt out, cut firewood, get water, mix the dough, and bake it. Every step requires physical work — the removal of trees and stumps, the grinding of grain, pumping water through pipes. Today we have machines totaling millions in horsepower doing that for us. In the Copper Age, it was just Ea-nasir, his ox, and a few slaves, at best, doing all of that.
Trade suffered from the same limitation. You can’t sell something to those strange barbarians in the north if you can’t take it to them in the first place. You could take it there in small amounts or very slowly, but that’s not very good business. Especially when you can get robbed on the way.
One workaround for this, one which made people living along the Mediterranean coast very wealthy, was to trade by sea. Large cargo can be more easily and reliably transported over long distances on a ship, and sails can harvest the wind for free power. Not everybody could take advantage of the seas, however, as technology at this time was still limited and navigation, as well as the ships’ structural integrity, limited how much they could carry, where, and when. But the Mediterranean is pretty, relatively calm, and easily navigable. Peoples inhabiting its shores would be connected in one of the largest and most complex trading networks of antiquity, and the area remains a hotbed of trade to this day.
This area would eventually spawn the closest thing to interdependent markets ever seen until the modern age: at one point, the city of Rome, capital of the Roman empire, was completely dependent on imported grain to feed its population. The whole empire simply couldn’t produce and transport enough food to its capital, not until they annexed Egypt, which later served the city of Rome specifically as a breadbasket. This is a great example of why trade is such an important part of economies even to this day. Apart, Rome and Egypt suffered: one couldn’t feed itself, the other had too much grain and nowhere to put it. Together, however, they worked splendidly.
Rivers could serve the same purpose. Ancient Egypt is a great example. The civilization was quite literally dependent on the Nile for their food and water, and could not have existed without it. But the Nile also represented a reliable and safe trade route that connected the whole of Egypt. Blocks of stone, food, travelers, ideas, the Nile bore them all, on wicker ships. Their empire lasted thousands of years, and the Nile was what gave it cultural, political, and economic unity.
But the best example of globalized trade in ancient history is the Silk Road. This was a trade route including both overland and sea routes, which connected the ancient empires of China (Han) to Europe (Rome). Silk was one of the main items being traded along the route, hence its name. Due to its sheer length, trade over the Silk Road was done in steps. Each merchant would buy their items and take them part of the way, sell them in trade cities, and return. From there, a new trader would take them over another stretch of the road, and so on. Naturally, each one would slap their own premium on the price, so only luxury goods meant for very rich people were traded along the route.
We have evidence of silk being known to Romans since the first century BC, which they were exposed to by Parthian soldiers (that Roman soldiers killed and looted). This suggests that the Silk Road was already well established by this time, since only China really had the ability to produce meaningful quantities of silk back in the day. However, it never led to the Chinese and Roman empires actually meeting. Despite both making an effort to do so, the Parthians meddled with the whole affair, spreading disinformation to both — they wanted to keep acting like middlemen between the two, making bank in the process.
Trade along the Silk Road really picked up, ironically, under the Mongols. Despite being infamous as conquerors and bloodthirsty raiders, the Mongol empire was actually a pretty well-run place. Traders along the Silk Road were given seals that assured their protection across the route — for a fee, of course. Somewhat unbelievably for that time, the seals really did ensure that a merchant could travel as long as they pleased across the route and never have to fear bandits or thieves.
The Age of Discovery (between the 15th to the 18th century) was the closest we’ve got to globalization before the Industrial Revolution. During this time, ships would sail, laden with goods, between Europe, Asia, Africa, and the Americas. It also saw the Colombian Exchange, the single largest transfer of people, animals, and plant species in history. Since transporting goods over long distances was still quite hard and took a long time, it was still expensive. Spices and other luxury commodities were still the most traded items by this time, but bulk commodities such as beer or raw materials were also being shipped around the world.
The Steam Engine
The Industrial Revolution truly opened the way for globalization as we know it today to begin. The steam engine allowed for physical work to be done reliably, cheaply, and in large quantities. This made trade easier and faster, and allowed for factories to grow in size and output. At the same time, similar to what happened when agriculture first came around, there was an increase in the number and variety of commodities available for purchase — which also meant an increase in demand for raw materials.
During this time, trade was still seen as a zero-sum game. The whole point of it was to buy raw resources cheaply, process them, and sell the finished goods for a profit. Economies were still shackled by the use of the gold standard, which meant that every country tried its best to gain as much gold from others as possible, in order to expand their own economies.
The economics of the Industrial Revolution is a treat, if you’re into that sort of thing, and this period of time had a profound effect on globalization. You could argue that this was the era of its birth. Areas like China, Sub-Saharan Africa, and the Pacific Islands, which had been quite isolated before, increasingly became part of the world economy during this time.
But a lot of the elements that would eventually culminate in the process of globalization were already around, so we won’t dwell too much on this time. What the Industrial Revolution really brought to the table was, at long last, a way to unshackle ourselves from muscle power. The engine made the world smaller. People now had a much easier time in bringing goods from faraway lands to their markets, so they did.
Globalization, in the way we understand the term now, needed one or two more ingredients to be added in the mix. That would happen around the 1990s.
What really gave globalization wings was the digital revolution. Sure, our ships are more reliable and we have GPS and other fancy tech to help us move things along, but the computer is the single most influential element in regards to globalization of the last century.
It’s much easier to move money around now — they’re numbers in an electronic account. You can buy or sell certain currencies instantly. You can transfer money overseas, instantly. This makes international trading and investments hilariously easy compared to any other time in human history.
Data transfer is also lightning-fast today. For starters, this facilitates trade. I have whole websites with millions of products made half the world away that I can browse and order from at any time . The sheer ease with which I can find, purchase, and have something delivered to me from another hemisphere is borderline magical.
Back in the 50s most jobs weren’t outsourced, because how could a company reliably keep tabs on them? There was no internet, no underwater telephone cables linking different continents (there are, now). And having your middle management commute to South-East Asia wasn’t feasible, or acceptable.
Computers and the internet, however, make it possible to have the production process of a certain good distributed across several locations around the globe, without any hiccups in supply and with no surprise delay. Every step of the process can be monitored by a single person, any issues ironed out with a few clicks and an email. On the other end of the spectrum, any producer can know the price of raw materials and commodities instantly around the world and pick the best outlets and supply sources for their business.
The digital revolution was so profoundly important for globalization because it cuts through the main enemy of trade: uncertainty. Traders of yore would make their journey hoping they would make a profit — today, they don’t need to hope, they can simply know. You don’t need to spend a few days finding the best deal on a t-shirt in your city, you can find the best price on your continent instantly, and have it delivered to you within days.
Why it’s happening
We tend to think of globalization as a single force that’s reshaping society. But the truth is that it has been shaping our societies for a very long time now. It’s also not a monolith; it is legion. It’s a global process that is, fundamentally, the product of billions of individual choices. Today, we have the ability to purchase something made across the world from the comfort of our own home. Today, we can outsource a job to Vietnam to cut down on costs. We can watch a movie made by a whole different culture with a single click.
“Globalization” exists not because we have these options — it exists because we overwhelmingly, as individuals, choose them over other options. And we pick them because they make economic sense.
The harm sometimes caused by globalization is, sadly, part and parcel of the process. The simple fact is that when the world becomes a single, great market, everybody is suddenly in competition with everybody else. The dearth of manufacturing jobs is, ironically, exactly why we have cheaper goods. Lower prices are, ironically, the reason why more and more of us are struggling to make ends meet.
Anyone here who lived in the former communist bloc will know the immense economic shock their countries experienced after the transition to capitalism. Communist economies are top-down, command economies — someone makes the decision of where, how, and how much of anything gets produced. They don’t take feedback from consumers in the same way a free market does. An unprofitable enterprise, in communism, can simply be subsidized by profits from another. Under a capitalist model, enterprises have to adapt to their customers’ desires or get off the market. Needless to say, most of those communist-era enterprises didn’t make the cut during the transition, leading to massive losses of jobs and economic security for a while. Eventually, economies recovered, and new enterprises were established that could compete in these brave new markets.
Our gripes with globalization come from a similar process. It’s the same issue of the economic systems that were previously in place struggling once exposed to wider markets.
Sixty or seventy years ago, for example, an American factory would be in competition (for customers) with other American factories in the same field. An American employee would be in competition (for jobs and wages) with other American employees. This created a certain balance. Globalization broke that balance because now, the factory is in competition with all other factories producing the same goods worldwide. An employee in America is in competition with all those of similar skill and ability all over the world. The ill effects globalization can have are a transitional period, until a new balance is established.
On a personal level, that thought may not be much comfort, but globalization seems to be here for good. The pandemic did also show some of the flaws in our current interconnected system, mostly that it can be quite vulnerable to shocks. But judging from history, as long as we have the ability to trade with people all over the world, we will. And, as long as we do that, our economies will continue to inch ever closer together, becoming more intertwined and, at the end of the day, more dependent on one another.
At the end of March, Biden unveiled a $2.25 trillion proposal called the “American Jobs Plan” focused on infrastructure. This bill would include updating roads, bridges, and public transit and having items outside of classic infrastructure, including semiconductor manufacturing and funding to fight climate change, as well as additional relief for American families.
What is the Issue?
The infrastructure bill is moving forward in both the House of Representatives and the Senate. Both the Democrats and the Republicans are moving forward with their accounts, with Republicans claiming that the Biden Administration is overstepping its boundaries by adding non-conventional infrastructure to the Bill.
The Bill plans to put $621 billion into transportation infrastructures such as bridges, roads, public transit, ports, airports, and electric vehicle development. The White House wants to inject more than $300 billion into improving drinking-water infrastructure, expanding broadband access, and upgrading electric grids.
These dollars are what many republicans believe is classic infrastructure. The Biden Administration also wants to add $400 billion to care for elderly and disabled Americans. It also wants more than $300 billion to build and retrofit affordable housing and construct and upgrade schools. The White House also said it intends to invest $580 billion in American manufacturing, research and development, and job training efforts.
How Will the Infrastructure Bill be Paid?
In 2020, the Trump Administration pushed through 3 COVID relief bills, and the American public did not seem to care much how the borrowed money be returned. Since the outlays were for relief, the overwhelming popularity of the measures made officials focus less on a plan to pay for the stimulus — the stimulus required to fight the recession that occurred in the wake of the pandemic was understandably a top priority.
The Biden Administration also pushed through a relief bill, but this received pushback from Republicans concerned that additional stimulus would be challenging to pay back and wanted to wait and see how the economy faired before voting on a new bill. The Democrats moved on their own and pushed through the Bill.
In mid-April, the Commerce Department reported Retail Sales that were much better than expected, primarily based on the most recent stimulus bill’s passing. Advance retail sales rose 9.8% for the month, according to the U.S. Commerce Department. That compared to a forecast of a 6.1% gain. What is clear is that Americans are spending their stimulus checks and that the need to expand the U.S. economy is working.
The White House is now trying to keep the economy growing and accelerate this growth. To do this, they propose a $1.9-trillion infrastructure bill. To pay for the bill, the president proposed raising the corporate tax , a measure that both Republicans and moderate Democrats regard with concern.
Biden plans to fund the spending by raising the corporate tax rate to 28%, which would not be unprecedented — the corporate tax used to be even bigger, but Republicans slashed the corporate rate to 21% from 35% as part of their 2017 tax law.
If the corporate tax rate was moved up to 28% from 21%, it would make the U.S. country with the highest corporate tax in the developed world, according to CNBC. Even a 25% rate would place it at the high end of the OECD spectrum. There could also be changes to the income tax rate, but for now, the administration also wants to boost the global minimum tax for multinational corporations and ensure they pay at least 21% in taxes in any country.
Republicans were working on their own infrastructure proposal and said there could be bipartisan support for a package of $600 billion to $800 billion, far smaller than what Biden has in mind. Republicans say the Administration plan is dominated by spending unrelated to traditional infrastructure, and they reject a proposal to finance the initiative by raising taxes on U.S. corporations.
How Will The Infrastructure Plan Impact the U.S. Economy
An Infrasture Bill will help the U.S. economy over the long-term but raising the corporate tax rate to pay for it will hurt it but only mildly. Fiscal policy will help generate economic growth and increase jobs, which will offset by higher taxes that will impact online trading of stocks and the bottom line. The effective tax rate will not be as high as the corporate tax rate as companies are very adept at sheltering their taxable income. In the long run, a infrastuture bill will help the U.S. economy gain traction and accelerate to the poin that it can be self sustaining.
Here’s a crazy idea: let’s give tax cuts for wealthy people and companies and that will benefit the poor. According to a recent study, this approach (recently advocated by the Trump administration, among others) is just that: a crazy idea that doesn’t work — all it does is increase inequality.
In 2017, President Trump sold his tax cuts as “rocket fuel” for the economy. The idea is that tax cuts on the wealthy would free up money that would allow companies to hire more people, ultimately helping those in need. Trump is far from the only one to propose this approach. Several leading US politicians (typically on the Republican side) have advocated measures along this line.
It seems counterintuitive, but economics isn’t always intuitive. It seemed to work during the Reagan years, and the supporters of trickle down economics (initially used as a pejorative term) saw it as a win. Like a pyramid of champagne glasses, they said, you just need to fill the top glass, and then it will flow naturally to the others. But the top glasses have been getting bigger and bigger, and next to nothing is flowing to the glasses below.
Simply put, economic inequality is steadily on the rise in the US. The poorer 80% of the country only own 7% of its wealth. Productivity has increased constantly for US workers and for a time, the median income increased with it — but after the measures in the late 80s, things changed.
In the late 1980s, multiple countries implemented tax cuts for the well-off. The latest study analyzed data from 18 developed countries, including the US, looking at the connection between trickle-down tax cuts and economic growth. Their conclusions leave little to interpretation:
“The results also show that economic performance, as measured by real GDP per capita and the unemployment rate, is not significantly affected by major tax cuts for the rich. The estimated effects for these variables are statistically indistinguishable from zero,” the study reads.
This is far from the first study to come to these conclusions. A 2017 working paper found that the effects of tax cuts are “heterogeneous” — tax cuts on the poor do help the poor. Tax cuts on the rich do little for the poor. A 2015 analysis from the International Monetary Fund also concluded that the benefits don’t really trickle down, and a recent analysis also found the same thing.
The recent study shows that trickle down tax cuts aren’t just useless, they can be harmful. Economic inequality isn’t just a moral problem — it’s a practical one. A number of studies have highlighted the negative effects of inequality, from higher crime and lower social cohesion to health problems and political instability.
So where does this leave us? Tax cuts on the rich, believe it or not, benefit the rich — not the rest. In theory, trickle down economics works; in practice, it doesn’t. David Hope, one of the study authors and Visiting Fellow at the London School of Economics sums it up:
“Our research shows that the economic case for keeping taxes on the rich low is weak. Major tax cuts for the rich since the 1980s have increased income inequality, with all the problems that brings, without any offsetting gains in economic performance.”
For governments looking to genuinely improve the economy, this should be very helpful: it shows what doesn’t work, and suggests what does. Julian Limberg, the other study author, comments:
“Our results might be welcome news for governments as they seek to repair the public finances after the COVID-19 crisis, as they imply that they should not be unduly concerned about the economic consequences of higher taxes on the rich.”
Few topics are as polarizing as wealth. Everyone has an idea of how it should be spread and what’s not right in society, how some people have too much money and some have too little. But regardless of where you stand on the debate, one thing seems clear: wealth begets wealth. It’s not just a myth: a new study finds that the rich really do get richer, and they stay rich.
Welcome to the machine
The rich get richer. It’s a fact of life. Or is it? Is it really true, or is it just one of those things people say? Existing studies seem to suggest that despite income rises, the wealth gap is only getting wider, and the pandemic is likely not helping. Detailed data on wealth, however, remains extremely rare. But one particular Norwegian law helped.
In a new study, economists from the IMF and other institutions analyzed 12 years of tax records from Norway, offering an unprecedented look at how wealth evolves in time. The data was available because Norway has a wealth tax that requires assets to be reported to third parties to prevent errors. The data is made public under certain conditions, and researchers were able to analyze stats from 2004 to 2015.
The data shows that the rich really do get richer, and it’s in large part because they get higher returns on their investments.
Norway is one of the richest countries in the world, so most people are pretty well-off. But the richer people were in the first place, the richer they tended to be down the line. If someone who’s in the poorest 25% of the spectrum would have invested $1 in 2004, they would have, on average, $1.5 by 2015. That’s a return of 50%, and it’s not bad for 11 years. But someone in the top 0.1% would have $2.4 — a return of 140%.
There was another important finding: even when researchers controlled for each, background, and other factors, people in the top of the wealth scale don’t really seem to drop from this top. In other words, it’s also difficult to reach the top of the wealth scale if you’re not there in the first place.
Risk, moolah, and a wealth tax
So why does this difference in return emerge? Conventional wisdom dictates that richer people can afford risks and they make more money from this, but this doesn’t really seem to be the case. Instead, researchers found that richer people may be exposed to unique investment opportunities or afford wealth managers. Financial education, information, and relationships are also important — and that’s exactly what high status offers you.
The wealthy status appears to be persistent in time, even across generations, researchers note. However, while the children of rich people stay rich, they don’t typically have as high a return on their money as their parents did. Turns out, wealth is inheritable, but skill and talent are less so.
There are, of course, important caveats to this study. It was carried out in Norway so results may not be representative for other parts of the world, but here’s the remarkable thing: Norway is one of the most progressive countries in the world, in regards to taxation. The country even levies a 0.85% net wealth tax on a person’s global wealth (all the assets they own, regardless of where they are situated). The tax is levied on net wealth over $170,000.
In other words, if Jeff Bezos and his $182 billion would be Norwegian, he’d have to pay $1.5 billion in tax every year — just on his wealth. The 2020 United States presidential candidate Elizabeth Warren also supported a wealth tax on the ultra-rich which was deemed outrageous in the US, but here’s the thing: despite this wealth tax in Norway, the rich still got richer. This is surprisingly in line with what economists who backed Warren claimed: that a wealth tax wouldn’t stop the rich from getting richer, but they would do so at a slower rate and in a way that would help the rest of the population, instead of producing extreme economic inequality. In the form it is most often discussed, the idea of a wealth tax in the US would apply to billionaires.
Despite its limitations, this study is in line with other research. Studies on income inequality are surprisingly scant, but they seem to show that whenever wealth is created, the vast majority of it flows into the pockets of the 1%.
Economic inequality, which is booming in many parts of the world, is more than just a moral problem. It has been associated with a higher crime rate, lower overall economic growth, and a tendency of the market to go “from bubble to bubble”. A recent study found that economic inequality also leads to higher unrest and even terrorism.
How does a small retail company that sells video games, worth less than US$400 million in the middle of 2020, become a US$10 billion company in less than six months? How does its share price climb from about US$20 on January 12 2021 to US$347 on January 27 – then fall back to US$193 the very next day?
How is this happening? The simple answer is it’s a power play, magnified by social media, between small retail investors who want some share prices to rise and larger hedge funds who have made big bets that those same prices will fall.
Revenge of the little fish
Melvin Capital is a hedge fund (worth US$12.5 billion until recently) with a “short position” on GameStop. A short position means Melvin was betting GameStop’s share price would fall (a reasonable bet, as the outlook for bricks-and-mortar video game stores is a bit like what happened to Blockbuster and other video rental outlets). This in itself is not at all unusual.
What made the past two weeks so unique was the heavy involvement of small individual investors in driving the action. Through platforms like Reddit (specifically the Wall Street Bets forum, which describes itself as “like 4Chan found a Bloomberg terminal”), these retail investors have worked to together to drive prices so high that hedge funds have had to abandon their short positions.
As a result, the short sellers have lost a lot of money and the retail investors (and anybody else with GameStop shares) have made huge profits. Normally on the stock market, the shark swallows the little fish. Now the little fish are eating the shark.
This increase has become a surge in recent days. GameStop surged in value by 92% on January 26 (US time), leapt another 134% on January 27, and has traded more than 178 million shares. The average volume typically traded for GameStop is roughly 10 million shares per day. This is not normal.
How long can redditors remain irrational?
How is it possible that small retail investors can drive the value of a company up like this?
Two important factors have led to the situation. The first is structural. Investors seized on the fact that Melvin, and another fund called Citron Capital, had significant short positions in GameStop.
When a stock price surges, short sellers must either put in more money to sustain their position or liquidate it. Melvin tried to sustain its short position, because the hedge fund’s managers believe the stock is overvalued, and has suffered massive losses as a result (last week, Melvin announced it was already down 30% on the year). This is a case of the well-known idea that “the market can remain irrational longer than you can remain solvent”.
Melvin may ultimately be right, and GameStop’s price will eventually fall, but retail investors who knew about Melvin’s bet forced it into an untenable position. With the price continually pushed up, Melvin was left with a stark choice: continue to go short, or else realise its losses.
How buying creates more buying
This leads to the second factor, which is mechanical. The retail investors driving the price surge are much smaller than the hedge funds they are battling. By buying the stock and call options (which are effectively rights to buy the stock in future at a certain price), retail investors are causing market makers to also buy shares in GameStop.
Market makers are companies that facilitate share trades by owning stocks and making them available for sale. Market makers don’t care about whether stock prices rise or fall; they just want a cut when people buy or sell.
So when an investor buys a call option from a market maker, the market maker will immediately hedge the position by buying the stock. This way, they are covered whether the price rises or falls.
If there is a big enough surge in speculators buying call options, as we have seen with GameStop, it will be accompanied by a lot of stock buying.
This is a cascading effect, which leads to price runs. In this case, it’s running the price up, but we are just as likely to see the same effect running the price down as well. (This is what happened on a larger scale on October 19, 1987, triggering the Black Monday stock market crash.)
After the surge
These two factors – short sellers getting squeezed and market makers hedging their bets – have led to this situation. You need both for what we are witnessing: an investor with an exposed position (Melvin) and a flurry of investors targeting that position (Redditors and others).
Soon this will be all over. Late on January 27 (US time), Melvin Capital announced it had abandoned its short position. It’s unclear how much money Melvin lost, but it has taken on almost US$3 billion in investment from the Citadel and Point72 funds to cover its losses.
The next morning, GameStop’s price actually continued to rise, reaching almost US$500 for a brief moment. However, at that point several popular retail stockbrokers – including Robinhood, Interactive Brokers and E*Trade – intervened to limit trading in several highly active stocks including GameStop. The price quickly plummeted before rallying and ending the day at $US193.60.
What’s next? With the short sellers removed from the game, the reality of the company’s business prospects may reassert themselves.
The past two weeks have been exciting times for market watchers. But we cannot ignore the apparent ease with which these stocks have been manipulated, and the possibility of more market manipulation in the future.
Few metals throughout history can boast the same desirability as gold. It has served as a hard currency for virtually every civilization that had access to it, fueled exploration and exploitation, and directly underpinned the dominant economic policy (mercantilism) for at least two centuries.
It is, by and large, one of the most valuable and impactful metals humanity has ever used, despite it being quite soft and very shiny. So what exactly made gold so valuable and expensive, and why did various peoples show such interest in beating it into coins? Surprisingly, it’s not so much the properties that gold has, it’s what other elements don’t have. The fact that it’s pretty and shiny also helps, too. So let’s get into it.
Most transactions today involve either a swap of pieces of paper and plastic, or moving some virtual bits from one account to another. It’s quite a fast and convenient way of buying and selling. On the surface, it’s a very simple process: you give me what I want, I give you these colorful squares in exchange, then we both ride off into the sunset.
But if we delve a bit deeper, this transaction is only made possible by a huge and unseen net of systems and institutions working in concert. For starters, both parties in our hypothetical transaction recognize that the currency involved is desirable and holds value — this is guaranteed by the governments that be. Secondly, money is easy to carry around (portability), either physically in our pocket or on a card, and to count. Thirdly, we know, through various means, that the money swapping hands isn’t fake (it has validity) that it is a finite, often limited, resource (scarcity), and that it won’t rot over time (longevity). Finally, we both know that touching the money won’t kill us — it is safe.
Ultimately, what you want in a coin is for it to be a small but dense repository of value so you can carry a lot of purchasing power easily, long-lasting so you can store it and it won’t just waste away, distinctive (so it’s easy to tell it’s the real deal), in limited supply to some extent (either through natural or policy constraints), and safe to handle.
Which brings us neatly to gold. There are around 118 elements on the periodic table, most of them natural, some of them only seen in the lab for fractions of a second at a time. Not many of them are usable for coinage, because not many of them share in those traits listed above. We’ll look at each of the properties above to understand why certain elements just don’t work as money. However, we’ll leave value out for right now, as it’s a very complex concept that we should look at in a later article.
Portability: elements that are gaseous or liquid at room temperature just don’t make for very convenient money. They’re not very portable, as you need a vessel to carry them in; such vessels can break, in which case your life savings might easily go ‘poof’ or literally down the drain. Around 13 chemical elements take the form of a gas (nitrogen, oxygen, the halogen group, and the noble gases) or liquid (bromine and mercury) natively, so we can cross these off the list.
Denominations would also be a bit hard to pull off with fluid currencies. Let’s say that the units of choice in our make-believe economy are flasks of mercury and flasks of chlorine gas to serve as subdivisions. What if I need to pay someone three-and-a-half bottles of mercury and don’t have any change on hand — do I pour some out? How do I measure it accurately? How do I know you didn’t dilute the ‘coin’ with some other compound? This problem only gets worse with gases.
Finally, all materials react to changes in temperature and pressure — but fluids react the most. Any such currency would probably require special storage conditions, to avoid both physical damage to their containers, as well as any possible losses that would be incurred by changes in temperatures. Carrying coins on your person over long distances would be much more difficult in this case.
In regards to validity, gold has the benefit of being, well, golden. It’s the only elemental metal bearing this color, which means that it’s quite hard to fake. Alloys and minerals like bronze, brass, and pyrite can pass for it, to an extent, but other properties can be used to check whether a coin is made of gold or not. Pure gold is very soft for a metal, so much so that people used to bite coins to check for gold — human teeth enamel has a Mohs hardness of 5, while gold has only 2.5, so your teeth can put a dent in a piece of gold, but not in a gold-plated coin. Most other metals in the periodic table, with some noteworthy exceptions such as copper, are silvery-gray in appearance, so they can, to an extent, be substituted for one another in a coin.
Its longevity is the product of gold’s very, very limited chemical reactivity. Noble metals and noble gases aren’t called ‘noble’ because they’re expensive (although, they are), they’re called that because, like nobles of old, they don’t mingle with the great masses, chemically speaking. Even runner-ups silver and copper get degraded over time — silver tarnishes due to reactions with sulphur compounds in our sweat or other sources, and copper develops patina due to oxygen. Gold doesn’t rust, it doesn’t tarnish, and doesn’t get splotches on it because gold will react with almost nothing. It doesn’t get degraded by virtually any acid, or bacteria, or alkaline solution. To sum it up, there’s not much you can do to damage gold short of throwing it into some King’s Water (aqua regia), which is a mixture of several strong acids.
Scarcity and safety are pretty straightforward: gold is very rare, so people can’t get the raw materials to make their own coins and ruin the economy. Because it’s so chemically inert, touching gold won’t kill you. You can even swallow some up and still be OK, as fancy pastry-shops are happy to remind you. For comparison, think of sodium, which literally explodes on contact with water.
An ideal mix of qualities and faults
So far, so good — but we’ve yet to answer ‘why gold?’. Sure, it’s portable and distinctive, but arguably so is copper. Mercury is very distinctive, even if harder to carry around safely, and lead is very dense even if somewhat silvery. Carbon is safe to handle; platinum or uranium is much rarer. What gives?
Well, here we get to the meat of it: gold (and silver to an extent) is uniquely suited to making coins because it has the right proportions of each trait for the time it was used. It’s rare, but not impossible to find and extract. It is supremely long-lasting and safe, easy to verify and carry, easy to work into sanctioned shapes (coins).
Is uranium rarer? Probably — but it’s so rare that we simply didn’t know it existed for the longest time, and it will probably slowly kill you, which is not ideal. Platinum is just as if not less reactive than gold, but it’s way scarcer on Earth, and requires much, much higher temperatures (read: advanced tech and know-how) to extract and process. Carbon is just as safe, but it’s lying around quite literally everywhere, so it’s worthless as coinage. And so on.
Gold imposed itself because it had just the right amount of each of these traits to make it an attractive option. It’s really pretty to look at and shiny, which can only help, as does gold’s softness — allowing for official, state-guaranteed coins to be minted with the proper markings. Silver and copper have established themselves as the runner-up metals for coinage throughout history as they share some of the properties of gold, but not enough to put them on equal footing: silver degrades somewhat and is much less distinctive, while copper degrades and is too abundant to be properly controlled by authorities.
Still, as history has shown, gold is a workable but not ideal medium for an economy. It’s durable and rare enough to be used as a placeholder for value but there’s only a limited amount of gold that’s practically accessible to humanity on Earth. Things will go swimmingly while your economy is small, but, eventually, you mine all the gold out. After that you can’t make more money to accommodate demand, you get deflation (prices drop), the economy grinds to a halt and then there’s riots. Not good.
The reverse of the coin is that you can also have too much gold. It’s a real problem, I assure you, as Spain can attest. After discovering the Americas, Spain set to work becoming ridiculously rich in the 15th and 16th through a combination of exploiting the locals and treasure fleets. These were not named in jest — they were, to the fullest extent of the word, fleets of ships, all laden with treasures, all coming to Spain.
“A single galleon might carry 2 million pesos [1 peso = ~25 grams of silver]. The modern approximate value of the estimated 4 billion pesos produced during the [300-year] period would come to $530 billion or €470 billion (based on silver bullion prices of May 2015),” Wikipedia explains about these fleets.
Part of these treasures were goods including spices, lumber, skins, and all manner of nice, exotic things from the Americas; but a large part was represented by silver and gold, mined for cheap. Europe’s economies at the time were still using gold (and silver to an extent) as their standard currency. This means that prices all over the continent were directly determined by how much each country had in store. Mercantilism, the idea that a country becomes richer by exporting more than it imports and gaining gold (and silver) from its partners would form out of this relationship.
But when you have a metal underpinning your currency, keeping a balance between how much of it you hoard and how productive your economy is becomes vital. To give you an idea of just how important this relationship is, know that Spain quickly became one of the, if not the, richest country in Europe at the time. It had so much money by the end of it that the Spanish crown had been throwing it away with both arms for almost two centuries — paying off their national debt, funding religious wars or naval wars with England, colonization of other continents, expensive building projects, fine imports — and they still couldn’t spend it fast enough.
Spain saw massive levels of inflation by the 17th century, to such an incredible extent that the crown had declared bankruptcy (they were the first royal rulers to ever do so) repeatedly, and there is cause to believe that these levels of high inflation affected the rest of Europe, at least Western Europe. It had so much gold relative to goods and services in its economy that it wasn’t really scarce anymore. Coins lost value, prices went right up, the economy stalled because nobody could afford to buy anything, and merchants couldn’t lower prices without incurring a loss. Then the economy ground to a halt and there were riots. Again — not good.
A word of ending
Gold is, to this day, seen as a solid repository of value. But the inability to control its supply (to either increase or decrease it) when needed shackled governments and rulers in regards to their fiscal policy. Once you link your coinage to gold and silver, your economy is at the mercy of how much of them is available in your area.
In olden, golden times, this wasn’t much of an issue; economies were pretty small, local things that moved quite slowly, had low output, and limited technological ability. Gold’s longevity, scarcity, portability, the fact that it was verifiable and safe to use made it an ideal tender, despite its limited supply. There wasn’t a technological base to design artificial money that had those traits, so we used a naturally occurring substance instead.
Today, although its properties haven’t changed and there’s more gold around than ever, it simply is too restrictive; economies are fast, dynamic, with massive outputs and impressive technical possibilities. In this world, being portable, safe, and long-lasting is not enough to keep up with economic reality — so we switched to something that’s all of that, but only artificially scarce.
Gold’s properties made it ideal for the minting of coins, and I hope you gained a better understanding of just what makes a good coin. I’ve done my best to try and discuss this topic without touching on concepts of market value or price, as they’re a whole different kettle of fish that we may open up soon. But as is always the case, gold has value because people say it has value — for its uses, its looks, or its association with status, wealth, and power.
The much-discussed social woes in Japan don’t seem to be going away anytime soon. According to a new study, 1 in 4 women and 1 in 3 men in their 30s are single, and half of these singles aren’t interested in heterosexual relationships.
Dating, it seems, is slowly falling out of fashion in Japan.
Japan’s overall population is aging and declining. It’s not just the very high life expectancy (though that does play a big role), the country’s low fertility rates are also to blame. Japanese media has long speculated about a purported decrease in interest for dating and sex and an increase in virginity, something they call “herbivore-ization”, unmarried adults disinterested in romantic partners are sometimes called “herbivores” in Japan.
But until now, it wasn’t clear that this phenomenon truly exists.
“This herbivore phenomenon, both its definition and even does it really exist, has been hotly debated for a decade in Japan, but nationally representative data have been lacking,” said Dr. Peter Ueda, an expert in epidemiology and last author of the research published in the journal PLOS ONE.
The new analysis draws on data collected by the National Fertility Survey of Japan, a questionnaire designed and implemented approximately every five years between 1987 and 2015 and shows that indeed, a large number of millennial adults are uninterested in romance — with the caveat that the study only tracks heterosexual relationships, so the approximately 10% of Japan’s population who identify has LGBT is excluded from this data.
Researchers explain the gap between single men and single women years can be explained by women being more likely to date older men, but the overall figures are high and seem to be growing. In 1992, 27.4% of women and 40.4% of men in Japan aged 18 to 39 were single. By 2015, 40.7% of women and 50.8% of men of the same age range were single.
Culture is an important factor in shaping romantic relationships. The peer pressure pushing towards marriage is strong in Japan, but it seems to be working counterproductively.
“After age 30, either you’re married or you’re single. Very few people in the older age groups are unmarried and in a relationship. It could be speculated that promoting marriage as the most socially acceptable form of relationship between adults has built a barrier to forming romantic relationships in Japan,” said Ueda.
The disinterest in romantic relationships does seem to be growing in younger people. Around one-third of women (37.4%) and men (36.6%) aged 18 to 24 said they were not interested in a relationship, compared to just 1 in 7 (14.4%) women and 1 in 5 men (19.5%) aged 30 to 34 who describe themselves as single and disinterested.
But it’s not just culture that’s shaping these social trends — it’s also economic status. Simply put, the trend seems to be more pronounced in poorer people and less pronounced in those who are better off. It’s unclear what the causality is here (or even if there is any), but it at least gives authorities an indication of where to act if they want to address this.
“Among men, lower income was strongly associated with being single, although this does not necessarily represent causality. If we transferred a million dollars into their bank account right now, it is not clear if single people would increase their interest in changing their relationship status. However, it would not be too far-fetched to expect that lower income and precarious employment constitute disadvantages in the Japanese dating market,” said Ueda.
“The herbivore phenomenon may be partly socioeconomic adversity. If government policies directly addressed the situation of low-income, low-education populations, I think some people with a lack of job security or financial resources may have new interest in dating,” said Dr. Haruka Sakamoto, an expert in public health and co-author of the research publication.
This isn’t exactly surprising. In Europe and the US, marriage has been shown to be associated with higher status and education, but it’s not well known how these factors affect single people. But if low socioeconomic status is indeed one of the causes, Japan’s infamously poor work–life balance can’t be helping. The country’s decline in wages and lifetime employment along with a high gender pay gap (estimated around 24%, one of the largest in the world), small living spaces, and the high cost of raising a child are all potential causes contributing to the fall of relationship-seeking in Japan.
The COVID-19 pandemic is expected to have also contributed to a decline in romantic relationships, not just in Japan but elsewhere in the world as well.
A stellar group of economists has penned a letter backing Joe Biden, noting that while their views are different, they all think Biden’s policies “will result in economic growth that is faster, more robust, and more equitable.”
The leading economists (which stem from sub-fields ranging from behavioral economics to climate economy to social policy) point to Biden’s science-based approach and suggest that his economic policy is demonstrably better.
“Throughout the coronavirus crisis, Biden has recognized that science-based, public health solutions are critical not only to saving lives, but to any viable strategy to restore economic confidence, recovery, and jobs,” they continued. “Similarly, on issue after issue, Biden’s economic agenda will do far more than Donald Trump’s to increase the economic strength and well-being of our nation and its people.”
As Axios points out, when economists endorse a high-level political candidate, it can often be seen as “veiled job applications from academics hoping for a Fed or White House position” — but when we’re dealing with established researchers who have accomplished anything there is, it’s hard to see it as more than a letter of genuine support, or an attempt to go on record saying ‘this candidate is better than that one economy-wise’.
The letter is particularly striking as these economists have had different views and approaches when it comes to the economy, they all reached the same conclusion for this particular election. For instance, George Akerlof’s work on identity economics and the social impact of abortion was widely cited by conservative and Republican-leaning analysts and commentators. Joseph Stiglitz, who received the 2001 Nobel Prize in Economics along with Akerlof has advised American president Barack Obama, but has criticized Obama’s financial-industry rescue plan, saying that whoever designed it is “either in the pocket of the banks or they’re incompetent.”
Richard Thaler’s Nobel-winning work focused on behavioral economics, while William Nordhaus was awarded the prize for his work on the economy of climate change. The letter’s full signatory lists features the following economists: George Akerlof, Peter Diamond, Oliver Hart, Eric Maskin, Daniel McFadden, Roger Myerson, William Nordhaus, Edmund Phelps, Paul Romer, Robert Solow, Michael Spence, Joseph Stiglitz, and Richard Thaler.
This isn’t the first letter of support from the sciences that made waves in this election. Last week, Scientific American endorsed Joe Biden — the first endorsement in the publication’s 175-hear-old-history. The publication cited Donald Trump’s rejection of science and evidence as the main reason.
How did we get from subsistence farming to living long, prosperous, and entertaining lives — but wanting more? Is our current economic paradigm of an always-increasing GDP a viable option for the future, given issues such as climate change, social unrest, growing inequality? Why do we want it so much in the first place, and can we afford to keep yearning for it?
The Infinite Desire for Growth tackles these very questions in a light, accessible way, while still managing to provide surprising breadth on the topic.
“The Infinite Desire for Growth” By Daniel Cohen Princeton University Press, 165 pages | Buy on Amazon
Economic growth always has a spot in our headlines these days — be it to celebrate good news, or report on a bad year. It’s not hard to see why: economic growth, more than any other metric, is used by officials to showcase their achievements to the public. It is, in effect, the chief indicator that we check to see if everything is alright in our countries.
Which, when you think about it, doesn’t really add up. More wealth is nice, sure, but wouldn’t happiness levels be a better indicator of how well our lives are going? Wouldn’t net worth be a better indicator of how rich we are?
Why are we looking to the growth of the economy when life expectancy, access to goods and services, and the amount of useful free time we have are much more impactful on our lives? Especially when you consider that economic growth doesn’t mean everyone gets to enjoy more wealth, due to income inequality. This growth is also responsible for more and more environmental damage — we are knowingly hurting the planet and all life on it in our pursuit. So what gives?
Daniel Cohen, a French economist, chips away at this question in his very-aptly named The Infinite Desire For Growth. And you might be surprised to hear that, in his eyes, what lies at the root of this tendency isn’t want of riches or greed — it’s hope, and a search of meaning.
Economic growth, Cohen argues, has taken the place of religion. We may not pray to the Big Dollar in the Sky, but the hope of a good afterlife in Heaven as reward for a good life has been replaced by the hope of a good life on Earth, as reward for working hard.
Growth offers the promise of a better life to all of us. Despite rarely delivering on it (due mostly to a growing inequality gap), the promise in itself is enough to keep us happy. This transition is surprisingly new, made possible mostly by secularization and industrialization.
The Infinite Desire for Growth is a very unusual book about economics, in my eyes, because I actually enjoyed reading it. Cohen doesn’t start his analysis from those tropes economists so easily fall into — such as the idea that people are always rational actors when it comes to money. His book doesn’t look for the best way to maximize wealth, offers no tips and tricks on how to increase your company’s bottom line. It looks at how culture, society, politics, science, and geography influenced the birth and development of economies.
But most fascinating to me is that he describes these through the lens of individual desires, how they compound to create supply and demand, and dictate how they’re handled.
He examines how we’ve come to virtually worship the idea of economic growth, to take for granted that there will always be more wealth to share, that we will be enjoying a better quality of life than our parents if we’re willing to work for it. And then, of course, Cohen asks what this means for today, when economic growth is stuttering, sometimes absent, and humanity is damaging the very planet that keeps it alive.
It takes a very wide look at economies and the people who create them. The cost of this is that Cohen doesn’t always go into deep detail about the concepts he discusses, but he does supply us with ample references to support his claims.
The Infinite Desire for Growth asks how we’ll contend with a simple fact: working hard no longer guarantees social inclusion or income. Automation is increasingly encroaching in the workforce, lowering the price of work (wages), and making the wealthy wealthier. Ecological degradation is threatening all of us, but the poorest will suffer the most.
Cohen ends his book by arguing that today’s selfish economic model isn’t sustainable in the future. There simply isn’t enough Earth for all of us to always be wealthier than we were yesterday. Our obsession with economic growth, he argues, has run its course. In the 21st century, humanity will have to wean itself off material gain, and rethink what “progress” actually means.
Here’s an encouraging thought: extreme poverty has been largely alleviated. In 1820, 94% of the world’s population lived in extreme poverty (the equivalent purchasing power of under US $1.9/day). In 1990, the figure had dropped to 34.8%, which is already a big improvement. But since 1990, in just 30 years, the figure has dropped to 9.6%. The world’s poorest are taking strides towards escaping extreme poverty.
Not only is the proportion of people living in extreme poverty at a record low — but despite adding 2 billion people to the planet’s population in the past few decades, the overall number of people living in extreme poverty has still fallen. In the last 25 years alone, 1.25 billion people escaped extreme poverty — a whopping 138,000 people every day. This is an enormous achievement that
But we shouldn’t pat ourselves on the back just yet. In between extreme income inequality, climate change and pollution, and decreased social freedom, there has been a great price to pay for this progress — and many economists believe we could have done even more.
Poor, but not extremely poor
It’s always hard to define poverty. The extreme poverty threshold was updated in 2015 to the equivalent of $1.9 — which, most people would agree, is an extremely low figure.
Extreme poverty is meant to be, well, extreme. Conceptually, it is meant to be the limit at which you have problems satisfying even the most basic of human needs.
But that doesn’t mean that once you’re out of it, all is fine and dandy. People living at $2 and $5 per day also face severe hardships.
We should also be paying attention to what happens to other low-income brackets, and things are less encouraging there.
The majority of the world is still living at under $10 per day — 2 out of 3 people worldwide are under this threshold. The proportion of “rich” people, who can afford to spend more than $10 per day has increased from approximately 25% to 35% in the past 40 years.
That’s positive, but less encouraging –especially since $10 per day is not exactly a very high standard. Overall, however, the world is taking important steps towards reducing and eliminating poverty.
The poverty gap, another common measure of global poverty, has also steadily decreased in recent years.
However, one macroeconomic area is still greatly lagging behind.
Poverty has changed dramatically everywhere in the world — except Africa
In 2013, there were 746 million people living in extreme poverty. Out of these, 380 million resided in Africa, and 327 million resided in Asia. That means that around 95% of people in extreme poverty live in Asia and Africa. However, Asia and Africa aren’t exactly similar in this regard.
The world’s most populous country, China, has only 25 million people living in extreme poverty — an impressive improvement from just 20-30 years ago. In fact, 218/327 of Asia’s poorest people live in India.
Meanwhile, aside from North Africa, the entire continent seems to struggle with extreme poverty.
Indeed, much of the progress with global poverty has come from East Asia and the Pacific area, where poverty rates went from 81% four decades ago to 2.3% in 2015.
Meanwhile, in sub-Saharan Africa, the number of people (note: the total number of people, not the percentage) has increased since 1990. In sub-Saharan Africa, there is also a correlation between the incidence of poverty and the intensity of poverty — in other words, it’s not just that the people are more likely to live in extreme poverty, but this is also the region where people tend to fall furthest below the line.
Poverty was not concentrated in Africa until very recently. Even in 1990, more than a billion people in extreme poverty lived in India and China. However, the rapid progress in these areas has left Africa behind.
Population growth is also most accelerated in African areas. According to the World Bank, 87% of the world’s poorest are expected to live in sub-Saharan Africa by 2030.
This being said, the percentage of people in Sub-Saharan Africa is also decreasing — it’s just decreasing
No doubt, alleviating global poverty is one of the loftiest achievements mankind can pursue. There’s no denying that. However, whether the end justifies all means is a completely different question.
The strongest example of this is China. China embraced the free market, but it also embraced authoritarianism; they prioritized economic development at the cost of social freedom. China ranks 153/167 in the Global Democracy Rank, being as democratic as countries such as Eritrea, Burundi, and Iran. A quarter of a century later, China’s transformation is shocking, and human rights are little more than an afterthought for the Asian giant.
It’s not just democracy that was sacrificed in some cases — the environment also had to suffer. Much of this economic growth was powered by coal and other fossil fuels, rising atmospheric greenhouse gas emissions to unprecedented levels. Per capita, developed countries still heavily outweigh developing areas, but China has become the world’s largest emitter. If economic growth is to become sustainable, it must decouple from greenhouse gas emissions. Currently, carbon emissions and prosperity seem to be linked, but we are are seeing some progress in the area.
The rich get (much) richer
Income inequality is also a burning topic. After all, the entire world is getting richer, so the proverbial pie is getting bigger — are impoverished areas getting substantial portions of that, or is it just scraps?
Income inequality is a complex process to analyze, and it’s not uniform. An income over $14,500 in 2013 was sufficient to put you in the global top 10% richest — and yet, in the world’s richest countries, that would be considered a very low figure.
However, income inequality estimates are not fully comparable across countries in different world regions. Even with these differences
Global income inequality is currently high, but as mentioned, there are both similarities and major differences across different countries. In the first part of the 20th century, inequality decreased in most of the developed world. But in the second part of the century, global inequality started to increase, and this is especially prevalent in English speaking countries, whereas in countries like France, Germany, or Japan, inequality has remained more stable.
The long-term increase in income inequality raises social and political concerns, as well as economic ones, tending to make it more difficult for people to escape poverty and bridge the economic gap.
There has been remarkable progress in the past few decades, but there is absolutely no reason to get complacent about poverty.
No matter how you look at it, the share of people living in extreme poverty has decreased — and if things go as planned (which is likely, but not guaranteed), the share will continue to decrease throughout the next decades.
However, if people are simply moving from ‘extreme poverty’ to ‘poverty’, that’s not sufficient. The world has gathered tremendous wealth in the past few decades, and the free market has created a tremendous opportunity to escape poverty — but if this opportunity is not backed by responsible social policy, we will continue to see income inequality rise while the poorest struggle.
Furthermore, tackling poverty in a way that’s sustainable, equitable, and democratic remains as challenging as ever. We have our work cut out for us the future.
The pandemic has caused a Germany-sized hole in the global economy. It’s also caused a dip in global emissions… but not a very big one.
The bad, the bad, and the ugly
Using data collected up to May 22, a new report published by an international team of researchers reports staggering implications of the coronavirus pandemic. In addition to the immense cost in human lives and health, the pandemic has caused global consumption to drop by $3.8 trillion — that’s roughly the size of the GDP of Germany. Essentially, the pandemic wiped off the equivalent of Germany from the global economy.
But there’s much, much more. Over 147 million jobs were lost — 4.2% of the global workforce, lost in months. Over $2 trillion in wages and salaries just evaporated.
Corresponding author Dr. Arunima Malik, from Integrated Sustainability Analysis (ISA) and University of Sydney Business School says that this is an economic challenge without precedent in the past century.
“We are experiencing the worst economic shock since the Great Depression, while at the same time we have experienced the greatest drop in greenhouse gas emissions since the burning of fossil fuels began,” Dr. Malik said.
So we have the bad in health, the bad in economy, but the environment should look good, right? Right…
As numerous outlets reported, pollution massively dropped during the lockdown stage of the pandemic. Fine particulate matter, NOx emissions, and CO2 emissions all fell during the months of the pandemic. This drop in emissions was doubly beneficial as it also saved many lives, in addition to aiding our ongoing fight against global heating. But if you think the pandemic will help us solve our climate woes, you’re badly mistaked.
For starters, the decline in emissions has come at the expense of economic development. Realistically, the entire world will be grappling to recover the economy as quickly as possible, and without systemic change, we’ll end up in the same situation we were before the pandemic.
But even worse, the drop just isn’t that big. Here’s a chart showing the trajectory to keep global heating at 1.5 C before preindustrial levels. Even with the pandemic, with the economy shrinking so much, with billions of people staying home, we’re just barely on the trajectory.
What does this mean? For starters, it shows that personal action isn’t enough by itself to tackle climate heating. We need systemic change if we’re serious about addressing emissions. It also shows that the environment is still at odds with the economy — at least partially. Economic growth is starting to decouple from emissions, and it is possible to increase our economy while lowering our emissions, at least to a point. However, in practice, the economy and the environment still collide, and if our priority is always the economy, we may end up paying more than we earn.
“The contrast between the socio-economic and the environmental variables reveals the dilemma of the global socio-economic system—our study highlights the interconnected nature of international supply chains, with observable global spillover effects across a range of industry sectors, such as manufacturing, tourism and transport.”
Climate impacts are expected to cost the world $7.9 trillion by 2050, and far more after that, once irreversible feedback loops are triggered. According to some analyses, climate is already costing us hundreds of billions every year, in addition to killing hundreds of thousands of people every year.
COVID-19 is a dreadful pandemic. But in a way, climate change is just like a pandemic, except the incubation period is a few decades, and the effects are far more long-lasting.
As the US is bracing for what seems to be a worst-case coronavirus scenario, a trio of world bank economists report that early lockdowns are the best way to protect the economy against the pandemic.
The coronavirus pandemic has taken a huge toll in terms of human lives, health, and the economy. But while much has been written about the theory of pandemic economics, not that much has been discussed about the practical situation — because many official economic indicators haven’t yet been published. This is why this analysis comes in handy.
Many politicians have used the economy as a justification for not implementing interventions such as lockdowns or stay-at-home orders. But the idea that lockdowns end up damaging the economy (more than it would be damaged without a lockdown) is far from proven.
Take the 1918 Spanish Flu, pandemic. Non-pharmaceutical interventions such as lockdowns did not depress the economy. Pandemics depress the economy, public health interventions do not, the authors of a 2020 study write.
It is very likely that the same thing is happening with the COVID-19 pandemic. Clearly, the pandemic will be a hammer on global economy, with severe and long-lasting consequences. But there’s little proof to suggest that lockdowns will accentuate this economic damage.
In fact, the opposite might be true.
In a new study, three World Bank economists estimate the economic impact of the pandemic by tracking proxies of economic activities (such as electricity consumption, NO2 emissions, and personal mobility) across much of Europe and Asia. Here is an example:
Overall, the researchers find that lockdowns led to a decline of about 10% in economic activity across the studied areas; on average, the countries that implemented lockdowns earliest had better short-term economic recoveries and lower cumulative mortality.
“Countries that implemented a lockdown at earlier stages of the pandemic have seen lower overall drops in electricity consumption and so far, also lower mortality rates. Hence, the combined human and economic costs seem to have been lower for countries that acted faster. Further, we show in the paper that countries that acted faster were also able to control the pandemic with less strict interventions,” the authors write.
The economic problem with social distancing measures is that they reduce both supply and demand: supply by forcing workers to stay home (or work less), and demand by negatively affecting the consumption of services (particularly those that involve interpersonal contact). The pandemic also affects labor supply by reducing the number of people capable or willing to work, and generates fears and uncertainties.
It’s been argued that these interventions, while useful to “flatten the curve”, may come at high economic costs. But researchers found that the spread of the disease itself comes at an economic impact of approximately 11%. Therefore, if the lockdown is useful in keeping the disease under control, it can actually have a positive economic impact. So the whole discussion then becomes a matter of when the lockdown intervention is implemented.
Even a few days can make a big difference. Countries that implemented a lockdown one week before the first fatality reported an economic decrease that was 2% smaller than a country that implemented a lockdown on the same day of the first fatality. Overall, the authors associate a 0.3% decrease in activity for each day of delay.
“In this sense, our results suggest that the sooner non-pharmaceutical interventions are implemented, the better are both the economic and the health outcomes of a country, the authors write”.
The authors also suggest caution when reopening the economy. The drop in economic activity is not only caused by the lockdown itself, but also by the behavioral response to the spread of the disease.
“A fast reopening that generates a rebound in the spread of the disease can be damaging not only in human terms but also in economic ones. An unexpected increase in the infection rates or the number of deaths after opening up might slow down or even reverse positive economic trends.”
We’re in a truly unprecedented situation. It’s not the first pandemic mankind has been faced with, but it’s by far the most acute one in modern history. In addition to the health crisis, the pandemic also brings an economic and social crisis — and if we’re being perfectly honest, no one really knows how this will all shape the future. But perhaps, past events can give us a few lessons for what can work and what doesn’t.
Trickle-down fuels inequality, oil is vulnerable, and “safe” industries aren’t safe
In the post-WWII period, life gradually improved in many parts of the world. For Americans, the period from the late 1940s to the 1970s was a booming economic period.
But the boom didn’t last forever.
The 1970s were rattled by not one but two oil crises. Economic growth started wavering, and people were faced with the reality that accelerated growth isn’t always sustainable. Some traditional industries, even ones once thought to be rock-solid, went into decline. Many never recovered.
The US government reacted, and the most notable shift was brought in by Ronald Reagan. Reagan implemented a series of reforms that would put the US on a decisive course for decades to come.
Reagan pushed for deregulation, getting rid of state-owned companies and moving to cut back taxes for higher incomes. This decision was based on the belief that the money would be reinvested and then “trickle down” to everybody.
The effects of this trickle-down economy are widely felt to this day: on one hand, the practice was successful in creating a culture of entrepreneurship and overall, the country’s GDP continued to grow, but unemployment and inflation also steadily grew.
Here’s a problem: much of that growth went into the pockets of the few. In fact, if you look at the poorest group, their cumulative incomes have actually decreased compared to the 1980s — which is crazy considering how much the richest group’s earnings increased.
There are many ways to look at how the trickle-down economy fuels inequality, but here’s a very simple and clear graph, illustrated by Mirko Lorenz, co-founder of Datawrapper: people’s productivity continued to increase, but their income remained stable.
There are of course other factors at play here, such as automation. But automation and industry changes alone cannot explain this — especially as the trend was not nearly as extreme in other countries.
Even before the pandemic, the current US administration had granted tax cuts for the country’s richest, so the trend is expected to exacerbate. If we’re looking at relief programs that will only help the top of the economic pyramid in the hope of it trickling down, we can expect rising inequality.
As for industries traditionally considered stable and reliable, we’ve already seen that this is not nearly a guarantee. For the first time in history, oil prices turned negative, and the economic forecasts project that this is only the first in a number of shakeouts that the oil industry will face. The rise of renewables is also expected to accelerate the decline of oil companies, though this is far from a guarantee. Another mainstay industry that has been heavily affected by the pandemic is the meat industry, where thousands of infections have been detected.
With the distancing measures likely to remain active in the future, it’s hard to say which industries will suffer the most and which will require the most support.
More workers, more debt
When wages stagnate (which has happened following Reaganomics and is likely to happen in the following years), more women go into the workforce — especially mothers. That’s good on one hand because it favors equality and independence, but on the other hand, the US is the only OECD country without a national statutory paid maternity, and many of the working mothers have small children without anyone to care for them.
Another issue to consider is that despite more people going into the workforce, household debt has increased dramatically. Ironically, it was the 2008 crisis that ultimately brought the debt levels to sustainable levels.
Lessons from the Spanish Flu: You save the economy by saving lives
There is only one event in recent history that carries a resemblance to the current situation: the Spanish Flu pandemic.
A recently-published study analyzed the economic effect of the Spanish Flu on American cities. The researchers found that it was the pandemic itself that caused the economic damage, and the public health measures, while disruptive, had a net positive impact by saving lives. In other words, the benefits these measures provide by saving lives is greater than the damage done through disruption.
“Altogether, our evidence implies that it’s the pandemic and the associated spike in mortality that constitute the shock to the economy,” the authors write.
The bottom line
Few things are certain in the coming period, but one of the certainties is that the global economy will be subjected to massive stress — and this stress is very likely to exacerbate what is an already very pressing inequality, both in the US and outside of it. We are already seeing major macroeconomic areas coming up with stimulus plans, and these plans could set a direction for decades to come.
It’s very easy for these plans to chase economic growth and leave behind certain groups, specifically disadvantaged groups. It’s not difficult to envision a post-pandemic world with economic inequality on steroids.
Much of the world is already struggling with inequality — and extreme inequality has been shown to increase health and social problems, crime rate, and increasing political instability.
In our understandable hurry to restart the economy, we must not forget that saving lives is also saving the economy, and leaving people behind can create even more trouble down the line.