To improve the living standards of Western countries’ citizens in this new equilibrium, and reduce their debilitatingly high unemployment, new policies are necessary. Increasing mass immigration increases the pressure on domestic living standards, especially at the bottom; it should thus be avoided. Education, so often touted as the panacea for facing the increase in international competition, is clearly no such thing, because it is of mediocre quality and excessive cost. In any case at all but the most exclusive levels it can easily be copied overseas (as the recent Indian successes in the software business have demonstrated). Instead, interest rates must be raised to levels that rebuild the capital base in rich countries, rather than decimating it as has been the case with the Greenspan/Bernanke polices. By increasing the incentives to saving, and the returns from it, policymakers can increase the rich countries’ natural advantage in capital availability, and reduce their pension and medical expenses by providing citizens with higher investment returns.
The other need is for policymakers to reduce the level of waste in the public sector, most of which produces “output” that is laughably overvalued in GDP statistics. Especially in Europe, living standards, already under threat, have been reduced further by the exactions of oversized and unproductive public sectors. Cutting this waste will leave more money in citizens’ pockets, and improve their living standards thereby.
Wage differentials between rich and poor countries are natural, caused by differentials in those countries’ capital endowments, infrastructure and institutional effectiveness. Their natural level has been reduced by the Internet, and will doubtless be reduced further by future technological advances. But as far as possible, responsible Western policymakers should work to ensure that this reduction in differentials produces only improvements in emerging markets’ living standards, without allowing it to immiserate their own people.