Reducing inequality: put the brakes on globalization?

Trade, outward foreign investment (movement of plants and services abroad), and immigration very likely have contributed to the growth of U.S. earnings inequality over the past several decades. Reducing any or all of them might well help to boost wages among Americans in the lower half of the distribution.

But in my view this shouldn’t be even a minor part of a strategy for inequality reduction, much less its chief focus. Trade, investment abroad, and immigration tend to benefit citizens in and from poor countries, which includes the bulk of the world’s population. Most of these people are substantially poorer than even the poorest Americans.

Yes, globalization enriches some rapacious corporations and despotic rulers, and vulnerable workers are exploited. But access to the American market and to employment by U.S.-based transnational firms has helped improve the lives of hundreds of millions of Chinese, Indians, and others in recent decades. And moving to the United States almost invariably enhances the living standards of immigrants from poor nations. It would be a bitter irony if American progressives succeeded in making a real dent in our inequality problem at the expense of the world’s poorest and most needy. We should look elsewhere for solutions.

I’m not suggesting we should sit idly by and let globalization have its way with the Americans who lose their jobs or experience falling wages. But rather than try to slow or block globalization, we should instead do what we can to enhance their flexibility and adaptability and to provide adequate cushions and supports. Among the things we Americans can learn from the Danes, Swedes, and Dutch, one of the most valuable is that it’s possible to embrace globalization (and other sources of economic change and disruption) and still have a high-opportunity, low-inequality, low-poverty society. The following chart offers one indication of this. It shows earnings inequality by imports as of the mid-2000s. Import-heavy countries are by no means doomed to high inequality.

Most of us want policies like wage insurance, better unemployment compensation, portable health insurance and pensions, support for retraining, and assistance with job placement not just because they can help to blunt the adverse consequences of globalization, but because they do so for economic change in general — whether it’s a product of technological progress, geographical shifts of industries and firms within the United States, or what have you. Arguing for limits on globalization directs attention away from these policies, making their adoption less likely. Paradoxically, then, we end up with the worst of both worlds: marginal trade limits, half-hearted steps to curtail investment abroad, confused and ineffective immigration policy, and too little of the supports and cushions needed for successful adjustment.

If you don’t like my take on this, consider what the following have to say before you make up your mind: Alan Blinder, Paul Collier (ch. 10), Brad DeLong, James Galbraith, Nicholas Kristof, Paul Krugman, Dani Rodrik (ch. 9), Amartya Sen (ch. 4), Gene Sperling, Joseph Stiglitz (ch. 3).

15 thoughts on “Reducing inequality: put the brakes on globalization?

  1. «But access to the American market and to employment by U.S.-based transnational firms has helped improve the lives of hundreds of millions of Chinese, Indians, and others in recent decades. [ … ] the Americans who lose their jobs or experience falling wages.»

    So the cost of unrestricted global competition is here now and happens already.

    «But rather than try to slow or block globalization, we should instead do what we can to enhance their flexibility and adaptability and to provide adequate cushions and supports.»

    So the “cushions and supports” are not here now: they are jam tomorrow.

    So your argument is that USA workers should continue to suffer large losses now, and hope that at some point somewhere they get something to compensate for that? Isn’t that selling snake oil?

    If your proposal were intellectually honest, you would have no difficult to invert the process: one the “cushions and supports” are already available, then let globalization pauperize USA workers.

    Or to change its flow: to protect the jobs and salary levels of USA workers and thereafter to give “cushion and support” to the poor and unemployed third world ones, instead of increasing the jobs and salary levels of third world workers and thereafter offer “cushion and support” to USA workers.

    Some numerical example.

    #1 Suppose a job creates a product selling for 100, of which 20 are inputs, 60 is USA worker income, and 20 is profit, and a third world worker is unemployed.

    #2 The third world worker offers to replace the USA worker for 30,

    #3 The job continues to create a product selling for 100, of which 20 for inputs, 30 for the third world workers, 50 for profit, and the USA worker is unemployed.

    Your proposal is to let #3 happen, and then tax somebody (other USA workers of course) and give the USA worker “cushion and support” worth say 20, one day, when the blue birds sing and the reign of peace of peace and justice has arrived on Earth.

    My proposals are:

    * Allow #2 to happen only if “cushion support” worth 20 is already guaranteed for the USA worker, At the end this means that inputs cost 20, third world worker gets 30, profit gets 50, and the USA worker gets 20 in “cushion and support”.

    * Do not allow #2, and tax somebody (the USA worker of course) to send #20 as “cushion and support” to the third world worker. At the end inputs cost 20, USA worker gets 60-20 => 40, profits gets 20, and third world worker get 20 in “cushion and support”.

    Which one do you prefer?

  2. My previous post is a bit sarcastic and elliptical, and I should be blunter. While I appreciate LaneK’s general approach, on the subject of labor arbitrage he seems to me to be like many others thoroughly intellectually dishonest, because he asks people to transfer their jobs and half or their income to third world workers, and half of that income to their employers, in exchange for “cushion and support” that has not happened once in the past 30 years and that he knows very well will never happen.

    The blunt story is that unrestricted labor arbitrage in a world in which the global labor/capital ratio has effectively doubled has zero chances of resulting in anything but the pauperization of the first world workers resulting in a big boost to third world workers and first world employers.

    He knows as well as I do that giving the “cushion and support” to unemployed first work workers is an even greater political absurdity than giving “cushion and support” to third world workers instead, or to make transferring the job of first world workers to third world workers conditional on “cushion and support” being already guaranteed for the former.

    The reality is that having a good salary is a lot better than having the illusion of “cushion and support”, and only a moron would trade the good salary would make the trade. Ask the third world worker: would you have “cushion and support” one day perhaps or a good job working for Microsoft or Sony today in Bangalore or Shenzen?

    LaneK seems to be making the very reasonable argument that transferring a much larger share of value added to employers as a way to ensure that more desperately poor third worlders get a small part too generates much greater global welfare than keeping USA workers employed at good salaries.

    That argument is most likely true; but to coat it in the laughable snake oil of the jam-tomorrow mirage of maybe-one-day “cushion and support” seems to me to be just awful intellectual dishonesty, even if for a good cause.

  3. On rereading again I must admit that in one way LaneK’s argument has a serious element of intellectual honesty: the admission that labor arbitrage does result in less jobs and lower salaries for USA workers.

    Most other cheerleaders of labor arbitrage either entirely omit this small detail, or claim that the opposite will happen, as USA workers will use their PhDs and MBAs to charge huge intellectual property and investment banking fees to those third world workers, as China and India cannot do PhDs or investment banking on their own…

  4. Dr. Kenworth,

    I agree with you (for the most part) that on a theoretical level, trade, outward FDI, and immigration in particular are not evil and have the potential to benefit some of the poorest workers in the world without destroying the living standards of American workers. However, it’s vitally important to realize that economic theory and the reality of the American debate on trade and immigration are highly different.

    Let’s start with immigration. Wages in say, El Salvador, are far lower than American wages, so of course, Salvadorans benefit from higher incomes when they migrate to the U.S. to work. According to standard economics, Salvadorans back home also ought to benefit from this process because out-migration shrinks the domestic labor force, pushing wages in El Salvador upwards. Immigrant workers also often send home remittances, another plus for El Salvador. A downside to this process, economists acknowledge, is that migration expands the labor supply in the United States, thus putting downward pressure on American wages. However, the downward pressure on wages can be mitigated against by putting a floor under wages– ie establishing a humane minimum wage– and ensuring that Salvadoran workers in the USA enjoy the same rights as their “native American” counterparts.

    If policymakers follow the above guidelines, it’s clearly possible to design immigration reform to benefit Salvadoran workers without causing significant harm to those already in the USA. The reality, unfortunately, is the exact opposite. When folks in Washington talk about immigration reform, for the most part they’re referring to the 2005 McCain-Kennedy immigration reform bill. While there are some good aspects of the bill, several vital aspects of it are quite disturbing. In particular, the bill would allow employers to recruit 400,000 guest workers every year. The problem with guest worker programs is that they literally give rise to a large group of second class citizens. Guest workers don’t enjoy the same rights as legal aliens or citizens and their status in the country is tied to their employment. It’s immoral to put immigrants in this position. Thousands of people are already employed in the U.S. as guest workers under the h2-B visa program and if you ask them what they feel about it, most report that they would rather be undocumented workers than guest workers. Guest worker programs lead to exploitation, plain and simple. In addition, they force American workers to compete on an uneven playing field. If you were a business owner concerned about your bottom line, who would you prefer to hire, a temporary, captive worker or a worker with full legal rights?

    The right thing to do, if you want to expand opportunities for workers in the third world to come to the United States, is expand the supply of green cards. This is basically what Sheila Jackson Lee (D-TX) proposed in her alternative immigration reform bill. Didn’t know Representative Jackson Lee offered an alternative immigration reform proposal? Neither did I, until I read “Illegal People” by David Bacon a couple months ago.

  5. As for trade, standard econ models show that under free trade, labor abundant countries (ie the third world) will enjoy increased exports to Capital abundant countries (ie rich nations like ours). Exports in these models include everything from manufactures to agricultural products to professional services from lawyers and accountants. This process, theoretically, ought to raise wages in the exporting countries and decrease wages in the importing countries.

    In Washington, the reality is quite different. When folks in DC (and by folks I mean elites, not your average Joe on Georgia Ave) talk about increasing international trade, they’re generally speaking of “Free Trade Agreements” or FTAs, either of the bilateral/regional nature (ie NAFTA or the US-Peru FTA) or multilateral nature (ie agreements negotiated at the WTO). If we’re being intellectually honest, we should acknowledge that calling such treaties Free Trade Agreements is disingenuous. A more accurate name for these treaties would be “investor rights agreements,” a term coined by Chomsky I believe. Under FTAs, Washington-style, capitalists (generally located in the US) enjoy extraordinary new rights. For instance, under NAFTA or its Central American twin, CAFTA, companies can sue governments for “indirect expropriation” if they enact new social or environmental legislation which threatens their profits. So if, for example, Costa Rica wants to impose a new law restricting the use of chemical pesticides in agriculture, Del Monte or Chiquita literally have the right to sue them and have the legislation overturned. Owners of intellectual property (also generally based in the USA) enjoy ridiculous privileges as well. Under CAFTA, Central American nations are required to recognize 30-year patents on American-designed pharmaceuticals. This policy, which has nothing to do with free trade or the free market, forces poor Central Americans to pay prices far above the cost of production for vital, potentially life-saving drugs.

    Whole classes of people are also excluded from competition under these agreements, contrary to economic theory. The most glaring and often-discussed example is agriculture, where third world nations are barred from imposing tariffs or using subsidies to protect domestic food producers but American agribusinesses are allowed to keep their billion-dollar subsidies and other protections. Such policies, not surprisingly, have catastrophic results for small farmers in the third world. Mexico is a clear example, where more than a million small corn producers, in the nation which first domesticated the crop, have gone out of business thanks to competition with subsidized corn giants based in Iowa. American professionals like lawyers, accountants, and physicians are also protected from competition with their far cheaper competitors in the third world under these agreements. As such, they are able to maintain wages which far exceed most of the world (Doctors in Europe, for instance, earn approximately half of what they earn in the US).

    One group of American workers is not shielded from competition with the third world under FTA’s, however, and that group is American manufacturing workers. The impact on their lives of such competition is obvious. Given that blue collar industrial workers are particularly victimized by such agreements, it’s not too much of a stretch to argue, as Dean Baker does, that FTAs are explicitly designed for this purpose.

    Indeed, industrial and even some service sector workers in India and China have benefited from expanded trade with the first world in recent years, but the policies followed by these nations bear no resemblance to to the “free market” policies which are advocated and/or imposed by the United States. Both nations maintain extensive protections for local industry and the Indian and Chinese government have played hugely important roles in helping their respective nations achieve success in recent years through a variety of statist, protectionist policies. The experience of “free market” poster-child Mexico over the past two decades has been miserable, however. Mexican economic growth has been far below the third world average and Mexican wages, even in manufacturing, have stagnated or declined since the passage of NAFTA.

  6. In conclusion, I should note that I am not accusing Dr. Kenworth of supporting any of the above disastrous, misguided policies which have come out of Washington, DC. I’m sure that when you’re talking about trade, investment, and immigration, Dr. Kenworth, you’re talking about how these policies ought to be designed, according to theoretical models, and not how they are designed in practice. However, it is vitally important to note the wide gap between rhetoric and theory on the one hand and reality on the other. Just saying that trade and immigration benefit third world workers, so we shouldn’t be Lou Dobbs-esque protectionists and try to put the breaks on globalization, is highly dangerous and potentially misleading in the current political climate in Washington. The devil, as always, is in the details. FTAs and immigration reform as they are currently designed are highly protectionist, but the beneficiaries of the protection provided by these policies are first world (and some third world) capitalists, owners of intellectual property, and first world professionals. Advocates of these policies, such as the Wash Post, NY Times, and most of the DC establishment, must either be blinded by free trade rhetoric or think government protections for the wealthy are a good thing. Such people, not incidentally, also go crazy whenever folks discuss the idea of protectionism for the working class. We need to be honest about this.

    So please, Dr. Kenworth, be careful when you throw around highly loaded and often misused language with such ease.

  7. I think we’ll have a better chance to persist in the social functioning of survival imperatives of our society if we develop a social cost/benefit accounting for corporations. Are they helping to address the needs of society or are they causing it harm?

    If they are causing it harm they need to be regulated by society. If they won’t be regulated than they have to be contained by other means.

    For instance, when Wal-Mart wanted to open it’s stores in Germany its government said that unless you raise your wages you’ll cause our society more harm than good. Wal-Mart refused, and Germany banished Wal-Mart.

    On a more parochial scale, we did the same banishing thing in my NYC borough when Wal-Mart wanted to open a store here.

    The Wal-Martization of the world is causing the political economies of developed countries to become disfunctional.

  8. “It would be a bitter irony if American progressives succeeded in making a real dent in our inequality problem at the expense of the world’s poorest and most needy.”

    WRONG

    It would be a real SHAME if the GREEDHEADS in the US killed off all support for trade by blocking all attempts to FAIRLY distribute the gains from trade and help those who are adversely affected. It is the wealthy who refuse to redistribute the gains that are killing free trade, NOT progressives.

    NO REDISTRIBUTION- NO FREE TRADE.

  9. Why should a trade agreement necessarily benefit one country over another? Isn’t it possible a well designed, practical trade agreement could benefit both sides?

    Warren Buffett is not an economist, but I believe he is a practical man. He’s proposed an import certificate program that would, by definition, balance trade.

    Who cares if one nation wants to protect a particular industry from competition? There can still be products from that nation useful to others that can be imported.

    I’m also with Jimbo on this, in that Washington is captured by a thousand strings from every imagineable industry. Our current trade posture is hurting many ordinary Americans, and I’m more than a little skeptical that a continuation of our current policies will benefit our country.

  10. I overstated my case.

    I tried to find where I read that Wal-Mart left Germany because of wages–they weren’t banished–they left volunteerly. Wal-Mart Watch says they couldn’t adjust to the German way of doing business.

    They did sell all their stores and left Germany. Wal-Mart says they left because they were loosing money. I’m skeptical of anything Wal-Mart says. They were losing money, but Wal-Mart has deep pockets. My guess is they left because their business model didn’t fit the German environment.

    Here is the closest I can find to my way of seeing the pull out. I can’t find any independent collaboration. But then again, if this is the real reason Wal-Mart left Germany, I doubt they would say so.

    “The final barrier to
    Wal-Mart is the law concerning the German workforce. Article 2 of Convention 87 states that
    German workers have the right to organize. About 25 percent of Wal-Mart’s 18,000 workers in
    Germany are organized in the union called the Uni Commerce affiliate ver.di (Vereinte
    Dienstleistungsgesellschaft). Wal-Mart traditionally rejects trade unions so they could keep wages
    and labor costs down. If however the company signs the collective agreement, stating that Wal-
    Mart workers can unionized, it will show the company cares about the improvement of the
    relationship with their workforce, equal opportunity, and non-discrimination.”

    I take it Wal-Mart wouldn’t sign that collective agreement or if it did, wouldn’t live up to it. Their history is to close down stores before letting unions in. I should say those unions who are free of state interference.

    That said, I overstated my case. But it still doesn’t change my general charge about allowing corporations to destroy the persistance of a functional environment.

    When I was looking for a reference I notice that the Huffington Post has an article about the Chinese workers union getting a pay increase from Wal-Mart. I don’t believe that they got their pay increase for any other reason than the Chinese government allowed it.

    A lot of what is put our for public consumption isn’t what it seems to be. As far as I know there are no independent unions in China. They are all, one way or another, state authorized.

  11. I assume Dr. Kenworthy will be giving up his secure job so an Indian or Chinese professor can move up the economic ladder?

    Not!

  12. The problem with redistribution, retraining, very substantial social safety nets, on the scale Kenworthy is proposing, is that there is nothing in the American character or in our history that supports it. I don’t think it’s what the American people want: they want jobs, not social welfare policies or supports.

    When I was young I experienced food stamps, transient hotels, etc. I was poor. I know that our social welfare system is loaded with contempt for those who use it.

    Yes it is a cultural and social problem that we treat the bottom 25% of our country like trash. In the Nordic countries, they don’t do that. But, we do. You can’t change that by wishing.

    The bottom line is that we know how to work, as a country, and, as a country, we don’t know how to implement or to receive this kind of extensive social welfare. There is no realistic way to get Nordic from here.

  13. Blissex – nice comments.

    It is preposterous to imply that the promoters of “globalization” in the U.S. do so because it can and has improved the living standards of some Third Worlders. That some improvement can be effected – at the expense of First World workers – may serendipitously supply a useful if dishonest talking point in support of maintaining and expanding the current trade regime. But if such an improvement depended on even modest reductions in the current flow of wealth up the socioeconomic ladder, that is to say was not concomitant and compatible with making the rich richer, we would hear no more of it. The whole point of the exercise is to transfer wealth from the now disintegrating working and middle-classes to the wealthy classes. It is beyond absurd to expect that the people who have the money and power to make sure that the trade, immigration, etc., policies that benefit them immensely are kept in place, are going to turn around and permit any of that assiduously channeled wealth stream to be diverted back into the pockets of the people they lobbied, and lobby, so hard to remove it from in the first place.

    I do not accuse the blogger of disingenuousness, merely of naivete. (The really irritating naivete, it is true, of the kind that still can be earnestly invoking “retraining” at this late hour, but well-intentioned nonetheless.) Also, there is no need to wring one’s hands about maintaining support for “globalization”. As it is now practiced, it is structurally unsustainable, and will collapse no matter what heights of nobility our economists can yet reach in sacrificing the jobs, welfare, and security of somebody else’s First World family, to help the Third World. Broke people with no jobs simply cannot consume at the necessary pace and volume, regardless how many disapproving lips are pursed, and disapproving glares glared, at angry populists.

  14. Regarding the issue of job creation, there is an opportunity for accredited foreign investors to come to America. Through the eb5 visa program investors obtain green cards for themselves and their families. The investment is made through an eb5 regional center and results in the creation of 10 new American jobs. After two years if the jobs still exist, the investors and their family receive permanent visas.

  15. A quick amendment to my previous post…After two years, if the jobs still exist, the visa will be lifted and the investor (and their family) given unconditional residency. After 5 years of accrued residency, they will be able to apply for full United States citizenship.

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