The West is losing faith in its own future

FT.com

What defines the West? American and European politicians like to talk about values and institutions. But for billions of people around the world, the crucial point is simpler and easier to grasp. The West is the part of the world where even ordinary people live comfortably. That is the dream that makes illegal immigrants risk their lives, trying to get into Europe or the United States.

Yet, even though the lure of the West remains intense, the Western world itself is losing faith in its future. Last week Barack Obama gave one of the bleakest speeches of his presidency. In unsparing terms, the US president chronicled the increasing inequality and declining social mobility that, he says, “pose a fundamental threat to the American dream, our way of life and what we stand for around the world”.

A Pew Research Center opinion survey, conducted in 39 countries this spring, asked: “Will children in your country be better off than their parents?” Only 33 per cent of Americans believed their children would live better, while 62 per cent said they would live worse. Europeans were even gloomier. Just 28 per cent of Germans, 17 per cent of Brits, 14 per cent of Italians and 9 per cent of French thought their children would be better off than previous generations. This Western pessimism contrasts strongly with optimism in the developing world: 82 per cent of Chinese, 59 per cent of Indians and 65 per cent of Nigerians believe in a more prosperous future.

It would be nice to believe that talk of a decline in Western living standards is simply hype. But, unfortunately, the numbers suggest that the public is onto something. According to researchers at the Brookings Institution, the wages of working-age men in the US – adjusted for inflation – have fallen by 19 per cent since 1970. Joe Average – once the epitome of the American dream – has fallen back, even as gains for the top 5 per cent of incomes have soared. Even conservative politicians are worried. Senator Marco Rubio, a contender for the Republican presidential nomination in 2016, points out that his parents were able to “make it into the middle class” from relatively humble jobs, as a bartender and a maid. These days, he acknowledges, that would no longer be possible.

The sense of gloom and insecurity in Europe is also grounded in reality – in particular the knowledge that welfare and retirement benefits are likely to be less generous in future. The pressure on prosperity is most intense in countries that have suffered worst in the debt-crisis – places such as Greece and Portugal have seen actual cuts in wages and pensions (The EU’s financial pinch has turned to poverty, December 9).

But living standards are even under pressure in European countries that have done relatively well. Research by the Financial Times has shown that Britons born in 1985 are the first cohort for 100 years not to be experiencing better living standards than those born 10 years previously.

Even in Germany, often lauded as the most successful big economy in the Western world, the benefits of the ‘Merkel miracle’ have been felt mainly at the top end of the wage scale. The economic reforms that laid the basis for Germany’s current export boom involved holding down wages, cutting social benefits and employing many more temporary workers.

There is a connection between the rising optimism in the developing world and the rising pessimism in the West. In his speech last week, Obama remarked that “starting in the late 1970s, the social contract began to unravel”. Perhaps not coincidentally, it was also in the late 1970s that China began to open up.

Even defenders of globalisation now usually acknowledge that the emergence of a global labour force has helped hold down wages in the West. Some European friends of mine daydream that protectionism – or even a war in Asia – could send more well-paid jobs back to the West. But in reality, globalisation seems unlikely ever really to go into reverse, given the technological, economic and political forces pushing it forwards. It would certainly be morally dubious to attempt to bolster Western living standards by undermining an economic trend that has dragged hundreds of millions of people out of poverty in the developing world.

Even if the Western nations did close their markets, Western employees – including white-collar workers – would increasingly find that many jobs could be done cheaper by computers or robots. Indeed the march of the robots will also soon pose a threat to assembly-line workers in China (Terminating jobs: the rise of the machines, December 4).

If the erosion of living standards continues, how will Western voters react? There are already signs of political radicalisation – with the populist right on the rise in both the US and Europe. But, as yet, there is no real sign that the Tea Party in America or nationalist movements in Europe have a realistic shot at controlling the central government in a large nation. The consensus around globalisation also seems to be holding. Indeed this weekend the World Trade Organisation apparently made a breakthrough in the search for a new global trade deal.

But while new political movements are not yet ready to smash the established parties in the West, mainstream politicians are having to react to the new economic climate. Rising inequality is increasing the pressure for more redistributive taxes and higher minimum wages on both sides of the Atlantic. Another decade of Western economic malaise – or, God forbid, another financial crisis – is likely to see more radical solutions and politicians emerging.

Copyright The Financial Times Limited 2013.