The squeezed middle class and the threat to free trade

Business, Company Strategy, Economics, European economy, Olefins, Polyolefins, US

By John Richardson

IF THE US had the same income distribution it had in 1979, the bottom 80% of the population would have $1 trillion -or $11,000 per family – more. The top 1% $1 trillion – $750,000 tonnes – less, according to this FT article by Lawrence Summers. 

From a dollars and cents perspective you might think, “So what? I accept this is very unfair, but it has no implications for how a I run my petrochemicals company, and, anyway, we’ve enjoyed periods of fantastic profitability since 1979. The last four years in particular have been great.”

But the squeezed middle class across the West in general does have major consequences for your company because discontent over lost economic opportunities has, in my opinion, led to a rise in populist politics.

It is populist politics that threaten the free flow of petrochemicals across all borders. Continuation of completely open borders is the rationale for many billions of dollars of petrochemicals investment, including all the money that has been spent in the US on new cracker-to-PE plants.

“Across the OECD area, except for a few countries, middle incomes are barely higher today than they were ten years ago, increasing by just 0.3% per year, a third less than the average income of the richest 10%,’ writes the OECD in its new study, Under Pressure: The Squeezed Middle Classes.

Underlining the role that the retirement of the Babyboomers is playing in lost opportunities, the study adds: While almost 70% of Babyboomers were part of middle-income households in their twenties, only 60% of millennials are today.”

The OECD also rightly identifies asset bubbles and the loss of jobs to automation, which can only get worse with the advance of artificial intelligence, as other factors behind the stagnation of middle class wealth.

“Housing makes up the largest single spending item for middle-income households, at around one third of disposable income, up from a quarter in the 1990s. House prices have been growing three times faster than household median income over the last two decades,” says the study.

The OECD solutions are as follows:

  • Governments should improve access to high-quality public services and ensure better social protection coverage.
  • To tackle cost of living issues, policies should encourage the supply of affordable housing. Targeted grants, financial support for loans and tax relief for home buyers would help lower middle-income households. In countries with acute levels of housing-related debt, mortgage relief would help overburdened households get back on track.
  • As temporary or unstable jobs – often offering lower wages and job security – increasingly replace traditional middle-class jobs, more investment is needed in vocational education and training systems. Social insurance and collective bargaining coverage for non-standard workers, such as part-time or temporary employees or self-employed, should be extended.
  • To foster fairness of the socio-economic system, policies need to consider shifting the tax burden from labour income to income from capital and capital gains, property and inheritance, as well as making income taxes more progressive and fair.

Hear, hear.

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