Opinion: Lessons from America

Donald Trump attracted the votes of Americans angry because of disappearing manufacturing jobs, wages that have not kept pace with inflation and increasing levels of debt.

By Professor Christoph Schumacher, Mark Werman and Audrey Moss.

In November last year, the American public chose Donald Trump as their president. This can really only be explained as a protest vote. A large part of the American population  – especially the working and middle class – is disillusioned with the American political system and feels disenfranchised by a system that they believe has passed them by. So how did it come to this and can it happen in New Zealand?

For the past three decades we have witnessed the destruction of the middle class in the United States. Throughout most of its history, the United States consisted of a working class, a lower middle class, an upper middle class and an upper class. The working class has now dropped closer to the poverty line, while the middle class has also moved. The lower end of the middle class has become the working class and the lucky few from the upper end of the middle class have become the super rich. It’s almost as if the predictions of Karl Marx have come true – the working class will get relatively poorer as all they have to offer is their labour while the capitalists get richer as they absorb the benefits from cheap labour.

What economic factors are driving this disattachment from the governing system? For starters, American wages have not kept up with inflation. Consequently while you are working just as much – if not longer and harder – there is less money in your back pocket because the gains from your productivity are going entirely to the top few percent. As the economists Gordon and Dew-Becker found: “The portion of the nation’s economy that went to workers’ pay and benefits, which had held remarkably steady from 1947 through 1973 at 66 percent or 67 percent,  in 2013 fell to a record low of 58 percent, while profits reached a post war high.”

Adding to the problem is the disappearance of large portions of the manufacturing sector due to globalisation; the change in direction of investments that have moved away from creating jobs to creating wealth (over 75% of daily investment is placed in derivatives markets); rising levels of student debt – partially due to universities losing state and federal investment, which forced them to adopt a profit driven model; and finally the global financial crisis resulted in a large portion of the middle class losing their homes – their largest asset.

Despite the lowest mortgage rate in the United States in 70 years, home ownership is at its lowest percentage in 51 years because real wages are falling to levels that make home ownership unaffordable now or in the near future. Adding fuel to their frustration is the appearance of a new super-rich class. Are we really surprised that people are buying into ideas of nationalism, racism and anti-immigration and that they vote for the most unlikely person to send a message?

Professor Christoph Schumacher.

“Only in America”,  it would never happen in New Zealand, right?

Think again. Real wages of our middle class haven’t kept up with the cost of living. Today’s average Kiwi works longer hours but can’t afford as much. Living in Auckland? Purported to be one of the most livable cities in the world, it is also one of the most unaffordable.  

What about our manufacturing sector? While our primary sector is doing well, we have seen a loss of manufacturing jobs in New Zealand in recent years. Funding for the education sector has also been tightened and most of the universities struggle to be financially viable especially in the areas of art and humanities. Once known for our free tertiary education, it is now user pays and student debt has been rising yearly. We often hear that our youngest and brightest are going overseas to earn a higher wage in order to pay their student bills.

What about affordable housing and rising house prices in New Zealand? The house price-to-income multiple is a simplified, yet internationally recognised measure of housing affordability. It is the ratio between median house price and median annual household income, otherwise known as the median multiple. The World Bank thinks that this ratio is "possibly the most important summary measure of housing market performance, indicating not only the degree to which housing is affordable by the population, but also the presence of market distortions". A median multiple of 3.0 times or less is considered a very good marker for housing affordability. In New Zealand this number is currently 5.66 and in Auckland 8.92 (according to interest.co.nz).

Based on the oft-cited Legatum Index, New Zealand has been the most prosperous country in six out of the past 10 years and our economy and society is doing well. But there are some alarming signs of things to come. The government, and we as a society, need to learn from the mistakes of the United States to make sure we don’t disenfranchise a large portion of our population – and end up with our own populist demagogue.

Professor Christoph Schumacher is an economics professor at Massey University; Mark Werman is a retired lecturer in law and finance, previously from Massey University; and Audrey Moss is a retired lawyer.

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