The Price of Inequality: How Today's Divided Society Endangers Our Future (12 page)

Bankruptcy laws provide an example. Later, in chapter 7, I describe how “reforms” in our bankruptcy laws are creating partially indentured servants. That reform, together with the law prohibiting the discharge of student debt in bankruptcy,
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is causing immiseration for large parts of America. Like the effects on distribution, the effects on efficiency have been adverse. The bankruptcy “reform” reduced the incentives of creditors to assess creditworthiness, or to ascertain whether the individual is likely to get a return from the education commensurate with its costs. It increased the incentives for predatory lending, since lenders could be more certain of recovering the loans, no matter how onerous the terms and how unproductive the uses to which the money was put.
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In later chapters, we’ll also see other examples of how government helps shape market forces—in ways that help some, at the expense of others. And too often, the ones who are helped are those at the top.

It is, of course, not just laws that have large distributive effects, but also policies. We’ve considered several policies in the previous chapter—for example, on the enforcement of laws against anticompetitive practices. In chapter 9 we’ll look at monetary policies, which affect the level of employment and the stability of the economy. We’ll see how they have been set in ways that weakened the income of workers and enhanced that of capital.

Finally, public policy affects the direction of innovation. It is not inevitable that innovation be skill biased. Innovation could, for instance, be biased toward the saving of natural resources. Later in this book, we’ll describe alternative policies that might succeed in redirecting innovation.

G
LOBALIZATION

One aspect of the “market forces” theory has been the center of attention now for more than a decade: globalization, or the closer integration of the economies of the world. Nowhere do politics shape market forces more than in the globalization arena. Much as the lowering of transportation and communication costs has promoted globalization, changes in the rules of the game have been equally important: these include reducing impediments to the flow of capital across borders and trade barriers (for instance, reducing tariffs on imported Chinese goods that allow them to compete with American ones on an almost even playing field).

Both trade globalization (the movement of goods and services) and capital markets globalization (international financial market integration) have contributed to growing inequality, but in different ways.

Financial liberalization

Over the past three decades, U.S. financial institutions have argued strongly for the free mobility of capital. Indeed, they have become the champions of the rights of capital—over the rights of workers or even political rights.
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Rights simply specify what various economic players are entitled to: the rights workers have sought include, for instance, the right to band together, to unionize, to engage in collective bargaining, and to strike. Many nondemocratic governments severely restrict these rights, but even democratic governments circumscribe them. So too, the owners of capital may have rights. The most fundamental right of the owners of capital is that they not be deprived of their property. But again, even in a democratic society, these rights are restricted; under the right of eminent domain, the state can take away somebody’s property for public purpose, but there must be “due process” and appropriate compensation. In recent years, the owners of capital have demanded more rights, like the right to move freely into or out of countries. Simultaneously, they’ve argued
against
laws that might make them more accountable for human rights abuses in other countries, such as the Alien Torts Statute, which enables victims of those abuses to bring suit in the United States.

As a matter of simple economics, the efficiency gains for world output from the free mobility of labor are much, much larger than the efficiency gains from the free mobility of capital. The differences in the return to capital are minuscule compared with those on the return to labor.
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But the financial markets have been driving globalization, and while those who work in financial markets constantly talk about efficiency gains, what they really have in mind is something else—a set of rules that benefits them and increases their advantage over workers. The threat of capital outflow, should workers get too demanding about rights and wages, keeps workers’ wages low.
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Competition across countries for investment takes on many forms—not just lowering wages and weakening worker protections. There is a broader “race to the bottom,” trying to ensure that business regulations are weak and taxes are low. In one arena, finance, this has proven especially costly and especially critical to the growth in inequality. Countries raced to have the least-regulated financial system for fear that financial firms might decamp for other markets. Some in the U.S. Congress worried about the consequences of this deregulation, but they felt helpless: America would lose jobs and a major industry if it didn’t comply. In retrospect, however, this was a mistake. The loss to the country from the crisis that resulted from inadequate regulation was orders of magnitude larger than the number of jobs in finance that were saved.

Not surprisingly, whereas a decade ago it was part of conventional wisdom that everyone would benefit from free capital movements, in the aftermath of the Great Recession many observers have their doubts. These concerns are coming not just from those in developing countries but also from some of globalization’s strongest advocates. Indeed, even the IMF (the International Monetary Fund, the international agency responsible for ensuring global financial stability) has now recognized the dangers of unencumbered and excessive financial integration:
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a problem in one country can rapidly spread to another. In fact, fears of contagion have motivated bailouts of banks in the magnitude of tens and hundreds of billions of dollars. The response to contagious diseases is “quarantine,” and finally, in the spring of 2011, the IMF recognized the desirability of the analogous response in the financial markets. This takes the form of capital controls, or limiting the volatile movement of capital across borders, especially during a crisis.
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The irony is that in the crises that finance brings about, workers and small businesses bear the brunt of the costs. Crises are accompanied by high unemployment that drives down wages, so workers are hurt doubly. In earlier crises, not only did the IMF (typically with the support of the U.S. Treasury) insist on huge budget cuts from troubled nations, converting downturns into recessions and depressions, but it also demanded the fire sales of assets, and the financiers then swooped in to make a killing. In my earlier book
Globalization and Its Discontents,
I described how Goldman Sachs was one of the winners in the 1997 East Asia crisis, as it was in the 2008 crisis. When we wonder how it is that the financiers get so much wealth, part of the answer is simple: they’ve helped write a set of rules that allows them to do well, even in the crises that they help create.
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Trade globalization

The effects of trade globalization have not been as dramatic as those of the crises associated with capital and financial market liberalization, but they have nonetheless been operating slowly and steadily. The basic idea is simple: the movement of goods is a substitute for the movement of people. If the United States imports goods that require unskilled workers, it reduces the demand for unskilled workers to make those goods in the United States, and that drives down unskilled workers’ wages. American workers can compete by accepting lower and lower wages—or by getting more and more skilled.
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This effect would arise no matter how we managed globalization, so long as it led to more trade.

The way globalization has been managed, however, has itself led to still lower wages because workers’ bargaining power has been eviscerated. With capital highly mobile—and with tariffs low—firms can simply tell workers that if they don’t accept lower wages and worse working conditions, the company will move elsewhere. To see how asymmetric globalization can affect bargaining power, imagine, for a moment, what the world would be like if there was free mobility of labor, but no mobility of capital.
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Countries would compete to attract workers. They would promise good schools and a good environment, as well as low taxes on workers. This could be financed by high taxes on capital. But that’s not the world we live in, and that’s partly because the 1 percent doesn’t want it to be that way.

Having succeeded in getting governments to set the rules of globalization in ways that enhance their bargaining power vis-à-vis labor, corporations can then work the political levers and demand lower taxation. They threaten the country: unless you lower our taxes, we will go elsewhere, where we are taxed at lower rates. As corporations have pushed a political agenda that shapes market forces to work for them, they have not, of course, revealed their hand. They don’t argue for globalization—for free capital mobility and investment protections—saying that doing so will enrich them at the expense of the rest of society. Rather, they make specious arguments about how
all
will benefit.

There are two critical aspects to this contention. The first is that globalization will increase the country’s overall output as measured, for instance, by GDP. The second is that if GDP is increased, trickle-down economics will ensure that all will benefit. Neither argument is correct. It is true that when markets work perfectly, free trade allows people to move from protected sectors to more efficient unprotected export sectors. There
can
be, as a result, an increase in GDP. But markets often don’t work so nicely. For example, workers displaced by imports often can’t find another job. They become unemployed. Moving from a low-productivity job in a protected sector to unemployment lowers national output. This is what has been happening in the United States. It happens when there is bad macroeconomic management, so the economy faces a high unemployment rate, and it happens when financial sectors don’t do their jobs, so new businesses aren’t created to replace the old businesses that are destroyed.

There is another reason why globalization may lower overall output; it typically increases the risks that countries face.
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Opening up a country can expose it to all kinds of risks, from the volatility of capital markets to that of commodity markets. Greater volatility will induce firms to move to less risky activities, and these safer activities often have a lower return. In some cases, the risk-avoidance effect can be so large that everyone is made worse-off.
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But even if trade liberalization leads to a higher overall output for a given economy, large groups in the population can still be worse off. Consider for a moment what a fully integrated global economy (with both knowledge and capital moving freely around the world) would entail: all workers (of a given skill) would get the same wage everywhere in the world. America’s unskilled workers would get the same wage that an unskilled worker gets in China. And that would mean, in turn, that America’s workers’ wages would fall precipitously. The prevailing wage would be the average of that of America and the rest of the world and, unfortunately, much closer to the lower wage prevailing elsewhere. Not surprisingly, advocates of full liberalization, who typically believe that markets function well, don’t advertise this outcome. In fact, unskilled workers in the United States have already taken a beating. As globalization proceeds, there will be further downward pressures on their wages. I don’t think markets work so well that wages will be fully equalized, but they will move in that direction, and far enough to be of serious concern.
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The problem is particularly severe today in the United States and Europe: at the same time that labor-saving technological change has reduced the demand for many of the “good” middle-class blue-collar jobs, globalization has created a global marketplace, putting the same workers in direct competition with comparable workers abroad. Both factors depress wages.

How, then, can globalization’s advocates claim that everybody will be better-off? What the theory says is that everybody
could
be better off. That is, the winners could compensate the losers. But it doesn’t say that they will—and they usually don’t. In fact, globalization’s advocates often claim that globalization means that they can’t and shouldn’t do this. The taxes that would have to be levied to help the losers would, they claim, make the country less competitive, and in our highly competitive globalized world countries simply can’t afford that. In effect, globalization hurts those at the bottom not only directly but also indirectly, because of the induced cutbacks in social expenditures and progressive taxation.

The result is that in many countries, including the United States, globalization is almost surely contributing significantly to our growing inequality. I have emphasized that the problems concern
globalization as it has been managed.
Countries in Asia benefited enormously through export-led growth, and some (such as China) took measures to ensure that significant portions of that increased output went to the poor, some went to provide for public education, and much was reinvested in the economy, to provide more jobs. In other countries, there have been big losers as well as winners—poor corn farmers in Mexico have seen their incomes decline as subsidized American corn drives down prices on world markets.

In many countries, poorly functioning macroeconomies have meant that the pace of job destruction has exceeded that of job creation. And that’s been the case in the United States and Europe since the financial crisis.

Among the winners from globalization in the United States and some European countries, as it’s been managed, are the people at the top. Among the losers are those at the bottom, and increasingly even those in the middle.