A Bigger Global Middle Class
I was reading an article in The Economist Magazine about India's Middle Class. It says that Big companies are disappointed at the size and consumption habits of this Indian middle class. It seems over there, inequality is on the rise, and therefore most of the gains are going to the top so-called one percenters. Hence not much is trickling down to the middle class which in turn can't afford to consume as much as the world's large companies expect of them.
Inequality has been a significant topic in recent years. It has been given more impetus with Economists like Thomas Piketty, Paul Krugman, Joseph Stiglitz and Robert Gordon. And the statistics seem to prove them right. When we look at the world's global Gross Domestic Product, this figure is about 78 trillion US dollars. If divided equally among people this translates to 10,000 USD per person. However, nearly a half of the global population lives on 2.5 dollars a day. These people living on less than a thousand dollars a year can't be global consumers for iPhones, cars or even steak. They lead a subsistence level existence.
What if we were to have the following experiment? What if we were to run a computer simulation where we divide the global GDP so that everyone is earning 10,000 USD a year. What can be the consequences of that?
First of all, in rich countries where a salary of 1,000 USD can't afford you a home, prices of real estates will go down. In countries where rent is 100 dollars prices will go up. So we would have an equalization of real estate prices and the real estate rentier class that has grown over the years will be devastated by lower rents.
The second consequence would be that people with their new found wealth will start consuming more goods and services. From consumer goods to better foods to electronics.
In the 1930s, John Maynard Keynes showed that an increase in spending could have a multiplier effect that increases total GDP. I assume that when this multiplier kicks in, the world will end up with a higher global GDP than 78 trillion. Which is despite the loss of rental income which is usually not accounted for in GDP calculations.
GDP is one measure of wealth, but it is a crude measure that takes into account the flows of money in an economy in a given year. Global wealth as estimated by Thomas Piketty is about six times GDP in rich countries. This wealth is the world's capital. It is locked in real estate assets, commodities, corporate stocks, and corporate and government bonds. In theory, the salary distribution scheme should not harm any intrinsic value that exists there (although as we saw real estate prices would get decimated in some places, and increased in others).
Of course, Taxing people and redistributing wealth is not a solution to global poverty. Least of which because subsistence level farmers in China India or Africa would, in essence, be disincentivized from seeking better opportunities for their talents. The more profound truth that I am getting at here is that the global economy is working below its optimal potential. Much of this potential, the Human capital of this planet wastes away due to malnutrition, poor water sanitation, and corrupt governments.
In the era of America First and Trump, people in the Rich World tend to forget the lesson of Henry Ford, who would pay his employees more so they can afford to buy his cars. There is a need for the Rich and Developed World to invest more in fixing the problems that lead the Developing World into the path of poverty and isolation. The three billion subsistence level Global Poor are entirely out of the system. They are not consumers nor are they contributors to global wealth. Every human being's tremendous potential for work and production is an asset in of itself. If more of these people are lifted out of poverty, the World Economy would be better. The Developed World would be better as it would gain more consumers for its products.
Inequality has been a significant topic in recent years. It has been given more impetus with Economists like Thomas Piketty, Paul Krugman, Joseph Stiglitz and Robert Gordon. And the statistics seem to prove them right. When we look at the world's global Gross Domestic Product, this figure is about 78 trillion US dollars. If divided equally among people this translates to 10,000 USD per person. However, nearly a half of the global population lives on 2.5 dollars a day. These people living on less than a thousand dollars a year can't be global consumers for iPhones, cars or even steak. They lead a subsistence level existence.
What if we were to have the following experiment? What if we were to run a computer simulation where we divide the global GDP so that everyone is earning 10,000 USD a year. What can be the consequences of that?
First of all, in rich countries where a salary of 1,000 USD can't afford you a home, prices of real estates will go down. In countries where rent is 100 dollars prices will go up. So we would have an equalization of real estate prices and the real estate rentier class that has grown over the years will be devastated by lower rents.
The second consequence would be that people with their new found wealth will start consuming more goods and services. From consumer goods to better foods to electronics.
In the 1930s, John Maynard Keynes showed that an increase in spending could have a multiplier effect that increases total GDP. I assume that when this multiplier kicks in, the world will end up with a higher global GDP than 78 trillion. Which is despite the loss of rental income which is usually not accounted for in GDP calculations.
GDP is one measure of wealth, but it is a crude measure that takes into account the flows of money in an economy in a given year. Global wealth as estimated by Thomas Piketty is about six times GDP in rich countries. This wealth is the world's capital. It is locked in real estate assets, commodities, corporate stocks, and corporate and government bonds. In theory, the salary distribution scheme should not harm any intrinsic value that exists there (although as we saw real estate prices would get decimated in some places, and increased in others).
Of course, Taxing people and redistributing wealth is not a solution to global poverty. Least of which because subsistence level farmers in China India or Africa would, in essence, be disincentivized from seeking better opportunities for their talents. The more profound truth that I am getting at here is that the global economy is working below its optimal potential. Much of this potential, the Human capital of this planet wastes away due to malnutrition, poor water sanitation, and corrupt governments.
In the era of America First and Trump, people in the Rich World tend to forget the lesson of Henry Ford, who would pay his employees more so they can afford to buy his cars. There is a need for the Rich and Developed World to invest more in fixing the problems that lead the Developing World into the path of poverty and isolation. The three billion subsistence level Global Poor are entirely out of the system. They are not consumers nor are they contributors to global wealth. Every human being's tremendous potential for work and production is an asset in of itself. If more of these people are lifted out of poverty, the World Economy would be better. The Developed World would be better as it would gain more consumers for its products.
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