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Wages, Walmart and the debate about the Global Economy -

by Brad Setser
August 29, 2006

Both the Financial Times (Krishna Guha) and the Wall Street Journal (Greg Ip) ran articles summarizing the papers presented at Jackson Hole.   I liked Guha’s summary more than Ip’s summary, largely because Ip's summary seems to put too much emphasis on the positive.   Ip writes:

Globalization, the conventional wisdom goes, has downsides: It hurts the wages of the lesser skilled. It leads to large and possibly dangerous trade imbalances. It can threaten economic stability through financial-market volatility … But academics, investment bankers and government officials at the Federal Reserve's annual symposium here heard a much more upbeat vision of a globally integrated world.

I’ll set Rajan, Prasad and Subramanian’s paper on foreign capital and economic growth aside for now.  It argues capital inflows help growth in rich countries and hurt in poor countries, so the flow of capital from poor to rich may not be such a bad thing. Instead, I will consider some of the issues raised in Gene Grossman and Esteban Rossi-Hansberg’s paper arguing that the offshoring of many of the tasks associated with the production of goods and services hasn't been a bad thing for unskilled American workers …  

I have only skimmed the Grossman paper.   But it hardly paints a wonderful picture of that state of working America. Real wages of the least skilled manufacturing workers increased by 3.7% since 1997, while total factor productivity is up by 11.8%.    Real wage growth for low skilled blue-collar manufacturing workers has been flat 1998 (Figure 5, p. 24) — most of the 3.7% growth came in 1997.  Real wage growth for average blue-collar workers has been flat since 2002 (Figure 6, p. 25).

Why aren’t wages rising in line with total factor productivity?  Because the price of the goods produced by low-skilled workers is falling.  Grossman and his co-author’s don’t claim that things are good, only that without the higher productivity from offshoring, things would be worse:

“Real wage growth for low-skilled workers in the US has been far from exceptional (and some might say “far from acceptable”), the experience has not been as bad as one might have expected based on the sharp improvement in the United States terms of trade.”

Not as bad as might be expected isn’t exactly an upbeat account, at least in my book — even if cheap imported goods are good for those in sectors insulated from global competition. 

Consequently, it isn’t hard to figure out why many aren’t thrilled with the Walmart economy, where efficient big-box retailers distribute (mostly) Chinese goods at very low prices, allowing Americans to do more productive things with their time than make things.

Mallaby’s defense of Walmart (and critique of Democrats criticizing Walmart) seems to me to pose a similar problem:  if Walmart’s cheap goods are so good for the living standards of American workers, why are median real wages — in all sectors, not just sectors exposed to global competition — going up so slowly?

It is certainly true, as Mallaby notes, that Walmart’s efficient distribution of imported goods has lowered the retail price of many manufactured goods.  Auto workers in the Mid-west may not have a job anymore, but the dollars they get from borrowing against their accumulated home equity go further than ever before.

Ok, that remark is a bit over the top.  But I think it goes to the issue – if nominal wages were constant and prices were falling, the Walmart economy would be consistent with higher real wages across the board.   Workers released from manufacturing would find other jobs – in construction, perhaps, or in the services sector.   The composition of the economy would change.   I would still worry about taking on external debt to support a boom in investment in non-tradables.    But living standards for the median worker would be rising as the changing composition of the economy increased its overall productivity.

That obviously hasn’t happened.   At least not recently.  Cheap Chinese assembly, global supply chains and efficient big box retailing haven’t been associated with much of a rise in the real purchasing power of the median worker.  Indeed Leonhardt and Greenhouse note in New York Times that real compensation (counting benefits as well as wages) fell over the past year.

Looking only at the falling (until recently) price of Chinese assembly looks only at half the ledger.   China’s export and investment led boom has also put pressure on commodity prices.   Cheap Chinese financing may have put upward pressure on housing prices, and eventually on rents.  On balance, prices are going up rather than down.   For the median worker, prices have been rising faster than wages.

Mark Thoma is right.  Dissatisfaction with the Walmart economy reflects concerns that the gains from globalization haven’t been widely shared.   The US is more productive, but the gains of that increase in productivity have been captured by the few, not the many …

Guha does a better job capturing this debate than Ip, in part by picking up on those parts of Grossman’s argument that Ip didn’t emphasize …

“Even in Jackson Hole, a favoured retreat of America’s super-rich where the likes of Dick Cheney, US vice-president, and actor Harrison Ford own lodges, it was impossible to ignore popular anxiety that the effective doubling of the world’s labour force would lead to downward pressure on low-skilled wages in the west. “Economists have to confront these fears not in a way that dismisses them but in a way that addresses them,” Doug Irwin, a professor at Dartmouth, told the symposium.

Gene Grossman, a professor at Princeton, offered the central bankers a new way of thinking about the problem, which paints offshoring in a more positive light. He argued that we should think about trade not as an exchange of goods but an “exchange of tasks”. If some tasks that used to be performed onshore are offshored to lower-cost locations, the result will be an increase in the productivity and wages of workers who perform related tasks that cannot easily be offshored.

Analysis of the US from 1997 to 2004 suggests this positive productivity effect could outweigh the negative labour supply effect on wages in sectors where there had been a lot of offshoring. But it still does not appear large enough to offset the broader negative effect on low-skilled wages arising from the ongoing fall in the relative price of labour-intensive goods.

Another way lower skilled workers could avoid wage depression, policymakers noted, is to shift from tradable to non-tradable sectors.”

US workers certainly have shifted into the non-tradable sector.  But that hasn't been enough to keep median wage growth in line with productivity growth.

Walmart isn’t responsible for the recent slump in real median wages, but it is a powerful symbol of the new new economy, and the impact of a host of changes – including increased global competition — on the US labor market.

That isn’t my specialty, to put it mildly.   But I was a bit surprised that DeLong left global economic forces off his list of potential causes of the recent increases in wage inequality.   

It may be right to leave globalization off the list.  The correlation between the increased global integration of the US economy and real wage stagnation is not perfect.  The late 1990s were a period of dollar strength, rapidly growing imports, rapid productivity growth and strong real wage growth.    Galbraith (via DeLong) injects an import caveat – the stock market surge meant that wealth inequality was still rising.  But real wages still rose across the board.

Something changed after the tech boom ended.

And it isn’t just the US either.  Profits are up and wages down relative to GDP in both Europe and the United States. 

China's integration into global markets certainly has dramatically increased the global supply of low-skilled labor (what Roach causes the new global labor arbitrage).  Part of the issue is Chinese wages are well below those in the US, and other inc.  I also think part of the issue is that China has resisted pressure for the RMB to appreciate, pressure that would bring Chinese wages more closely in line not with US wages but with wages in other low-income countries.   The gap between China’s nominal exchange rate and its PPP exchange rate is unusually large, even relative to other low-income countries.   To me, the issue isn’t just globalization, but the particular form of globalization that we now have.

Most econometric studies do not find that trade is a major reason why median real wage growth in the US stagnated after 1973, let alone a major cause of the current slump in median real wages.   The reason: trade is small relative to US GDP.    And with imports from China only 2% of US GDP, the same logic indicates that China cannot be a major reason for the most recent stagnation of real US wages, or for low US prices (See Steve Kamin’s paper).  

I am a bit suspicious of these studies all around.  They seem to consistently end up downplaying the impact of global economic forces, even as such global forces exert a more and more obvious impact on goods and financial markets.  China’s exports to the world will increase from $300b in 2002 to around $900b this year — a huge surge.   China’s current account surplus will be the global counterpart to about a quarter of the US current account deficit.   Resource exporters growing fat selling to China account for another big chunk of the global current account surplus. 

China is clearly having a far bigger impact on the world economy, and the US economy, than they once did.

At the same time, China’s impact on the US economy is complex.   Chinese competition is pushing down prices of manufactured goods – and wages in the manufacturing sector.  It consequently has contributed, I would guess, to the diminished bargaining power of unions in some sectors of the US economy.   Chinese financing has pushed down interest rates.  That pushed up housing prices – and demand for construction workers (at least until recently).   Chinese demand is pushing up prices for many commodities.  Sorting it all out isn’t easy.

51 Comments

  • Posted by Gcs

    superb post brad
    u really keep your eye on the ball

    i’ll shut up for once and digest
    this banquet

  • Posted by Guest

    “Once you have identified the real issue as being about the top 1% of the income distribution, I’d think you have pretty much ruled out unionization (or the lack of it) as a dominant driver of the major trends in who gets what.” http://macroblog.typepad.com/macroblog/2006/08/more_confusion_.html

  • Posted by Guest

    I believe that the idea of exchanging more and more tasks globally is very rude and a good recipe for a global failure. It can only work temporarily.

  • Posted by Movie Guy

    Brad – “I am a bit suspicious of these studies all around. They seem to consistently end up downplaying the impact of global economic forces, even as such global forces exert a more and more obvious impact on goods and financial markets.”

    Good observation. Keen eye.

    Let’s wipe the lipstick off of the pig and see what we really have.

    Take the case of the Grossman and Rossi-Hansberg pitch at Jackson Hole, for example. The base study from which the 25 August presentation was derived deserves considerable critical review. Here is that August 2006 paper:

    Trading Tasks: A Simple Theory of Offshoring
    by Gene M. Grossman and Esteban Rossi-Hansberg
    August 2006

    Notice that the paper is nothing more than a stripped down trade model loaded up with zeroed data fields and conditions, further absent any real data. Zip. None. Notice how many parameters of consideration that they zero out. There simply isn’t any supporting data, as it “is too difficult to locate”.

    I’m not saying that the blank shell model doesn’t have merit, but I am saying that they proved nothing. They never loaded any real world trade data to support their theoretical claims.

    I am confident that we will see many more such papers and studies in the future, all part of the pro-globalization-at-all-costs mantra.

  • Posted by Steve Waldman

    Brad: “To me, the issue isn’t just globalization, but the particular form of globalization that we now have.”

    Brad’s embedded in a one-liner a lot of insight that’s lost in most current commentary on “globalization” or “free trade”. There are a lot of very good reasons to support globalization. But the case for globalization was never a case for this kind of globalization. The economic case for globalization is based on efficiency gains that arise when an integrated world eagerly produces, with nations and individuals everywhere exploiting at their comparative advantages. The kind of globalization we have now is one where large nations underproduce and long-term specialization choices are shaped by temporary, unsustainable credit flows. (Only an economist — no offense to Brad — could fail to see what the US is currently doing as underproducing. “Productivity” is another term and time series whose usefulness has been overtaken by events.) The political case for globalization is based on interdependence and sociocultural integration. But the globalization we have now is one of increasing dependence of self-important “rich nations” on increasingly independent “poor nations”, and sociocultural integration only among a jetsetting elite. The fact that the rich nations are likely to worm there way out of repaying with real goods and services the full value of their debts isn’t likely to contribute to a happy United Colors of Benneton world either. This is not globalization, as globalization has historically been conceived. This is not free trade, as free trade has historically been conceived. Those who defend status quo arrangements under the banner of those noble ideas are either deluding themselves, or trying to delude the rest of us.

  • Posted by touche

    “If some tasks that used to be performed onshore are offshored to lower-cost locations, the result will be an increase in the productivity and wages of workers who perform related tasks that cannot easily be offshored.”

    From my own comments on this blog,

    “I think that productivity growth has been achieved largely by offshoring the most labor intensive tasks. This provides consumers with less expensive goods, but less income to pay for them” and

    “You can achieve higher national labor productivity by simply offshoring tasks that are very labor intensive.”

    In other words, increasing productivity in the US is no panacea, but the simple result of shifting low wage jobs overseas.

  • Posted by dryfly

    Ok, that remark is a bit over the top.

    Not as over the top as you might think.

    Great entry Brad.

    BTW – does Nouriel ever let you go on the tube, if so would you give us a heads up so we can tune in… especially if you plan to create as big a ruckus as he has lately. Nice work & I think you are both right on if only a little early.

    But then who could’ve predicted the world would fund us this much for this long.

  • Posted by dryfly

    Something changed after the tech boom ended.

    We are on the back downward sloping side of a massive innovation boom… the IT boom that started in the 80s and is still with us now but getting long in the teeth. Pre dotcom bust we were on the way up. I’m talking about the kind of innovation wave Schumpeter described – with the final movement the ‘creative destruction’ finale. We are probably not too far off from something like that – ten years max.

    So we got years to go before we work through this thing IF this one is like the others that preceded it – could be different this time. History rhymes, it doesn’t necessarily repeat.

    Regardless it will be a while before the next big thing saves us and even then there is no guarentee it will benefit the US more than say India, China, Europe.

    The combustion engine-automobile boom from say 1900 to 1930ish (peak innovation years were in the teens & 20s) started in Europe with Daimler’s work before 1900… but the automobile rapidly found its sweet spot in the US central Great Lakes region where limestone, coal, iron ore and cheap labor were all abundant… plus the perfect terrain to use a car – think market – flat midwest with growing cities that were close enough to benefit from a car but not so far that you always needed a train.

    Plus an entrepreneurial society looking to make it big and cheap immigrant labor… did I mention cheap labor before?

    There will be another next big thing – might even originate in US labs – question is will it stay here? Will we have the necessary infrastructures & factor advantages that insure we benefit more than say India? Or will it go somewhere else and make the 21st century their century?

    Won’t know ’till it happens. The more we hollow out now the more we will need it then, that’s for sure.

  • Posted by camille roy

    Brad – “I am a bit suspicious of these studies all around. They seem to consistently end up downplaying the impact of global economic forces, even as such global forces exert a more and more obvious impact on goods and financial markets.”

    It turns out that this Administration has actually suppressed studies of outsourcing that show how it is stripping away the core of America’s technology competencies.

    “Quashed report tracks design exodus
    EE Times
    (07/31/2006 9:00 AM EDT)

    Washington — A controversial report suppressed for two years by the Bush administration provides what critics claim is the most exhaustive look yet at the outsourcing of U.S. high-tech jobs. The congressionally mandated report, compiled by the Commerce Department’s Technology Administration, also contains stark predictions about the future of U.S. chip design as many more U.S. engineering jobs emigrate to low-cost locations like India.

    The 356-page report–details of which were first reported last week by the newsletter Manufacturing & Technology News–was written in July 2004. But it was withheld during a presidential election year, after political wrangling between the White House and Democrats on the House Science Committee failed to reach a compromise on terms of its release. A 12-page summary published at the time omitted many of the final report’s controversial findings.”
    link http://www.eetimes.com/news/latest/showArticle.jhtml?articleID=191600058

    “The Commerce study concluded that contrary to U.S. industry claims, design-engineering jobs are being shipped to locations like India, primarily to save on labor costs at home. It found that foreign engineers “are not, for the most part, working on country-specific applications, working for Indian clients, working with clients in the same time zone or engaged in 24/7 design.””
    http://www.eetimes.com/news/semi/showArticle.jhtml?articleID=192300308

    What I see is a country that is stripping itself of valuable assets so CEO’s can make money off of manipulated exchange rates. And the mainstream ideology that holds that free trade is Good is so powerful (or should I say, so good for the Powerful) that there’s no serious discussion of alternatives.

  • Posted by Tom Marney

    Camille,

    Gee, that was two whole years ago. I bet things are a lot better now…

  • Posted by DOR

    Mark Thoma is wrong. The gains from globalization have been VERY widely shared, in Asia.

    Unless we aren’t counting anyone who isn’t American, this matters. A lot.

    .

  • Posted by psh

    Soon cyclical factors will swamp the secular global ones, if Japan’s property bust is any guide. An I/O model shows secular pressures but the lost years really stick out. Capital input declines, and output grows but value added falls. Capital, not labor, pulls you out of the slump. Labor productivity decelerates. Labor input declines for a decade or so.

    Course, that was then and this is now. Input/output relationships will have changed worldwide with time. And Japan is Japan. Construction value added jumped in the depths of their slump — maybe because of all those makework infrastructure projects (you can see allied sectors suck people up and spit them out.) Don’t count on that happening here. What’s more, US housing is more durable, requiring less replacement investment. In Japan, muted price competition let Total Factor Productivity go negative for a while until IT-intensive industries restored TFP growth and labor productivity. That might have slowed layoffs, as in the stricken financial sector, which bled labor with a lag that may reflect its slow restructuring. Weak demand and drastic restructuring seemed to have inhibited the spread of IT in Japan. But maybe we’ll just breeze through our bust. Global insight, using comparable methods, sounds high on our financial sector; bad property loans are not such a big deal. Maybe those twin dwarfs are right.

  • Posted by Movie Guy

    Brad – “Most econometric studies do not find that trade is a major reason why median real wage growth in the US stagnated after 1973, let alone a major cause of the current slump in median real wages. The reason: trade is small relative to US GDP. And with imports from China only 2% of US GDP, the same logic indicates that China cannot be a major reason for the most recent stagnation of real US wages, or for low US prices (See Steve Kamin’s paper). …Chinese competition is pushing down prices of manufactured goods – and wages in the manufacturing sector. It consequently has contributed, I would guess, to the diminished bargaining power of unions in some sectors of the US economy.”

    Those specific econometric studies are wrong. Simply wrong for a number of obvious reasons.

    The corporate lean models being adopted by U.S. corporations and companies are focused on globalization concerns, which boil down to profits and competitive postures. And there is no question that flowover is occurring among other U.S. corporations and companies not immediately impacted by direct global competition.

    There is not a single board member, CEO, COO, and key staff member with whom I have spoken or consulted for during the past six years who has not raised the issue of advanced global trade as a key reason for attempting to cap benefits, holding the line on wage increases, or seeking other alternatives (translation: offshoring) in order to maintain the competitive edge in providing profits and return on investment to shareholders. This is common knowledge in industries across the United States of America. I listen to such comments and forceful observations all the time.

    As I explained to Brad DeLong at his blog on 14 March 2006:

    Advanced global trade is having a much larger effect on the U.S. economy and American workers beyond those workers directly displaced from jobs outsourced or relocated offshore. Such considerations also extend beyond the remaining direct employment by competing companies and corporations.

    The advanced global trade impact zone extends to the shrinking support services base of employment and associated wage levels for those company operations that lose support contracts for corporations and companies that either reduce or eliminate domestic plant and facility operations in the United States. Meanwhile, the remaining American-based employees are facing new pressures directly related to advanced global trade.

    Internal corporate pressures to remain cost competitive in the global economy have resulted in multiple initiatives to suppress wage increases and benefit package increases.

    The evidence of such initiatives is widespread and growing among corporations and companies with operations in the United States. If all else fails, some corporations file for federal bankruptcy to divest themselves of pension plan obligations.

    Similarly, other corporations and companies are capping their health care share responsibilities by using a given year (2006, as an example) as the last corporate supported cost increase supplement for existing worker health plans. Some corporations and companies are simply reducing their health care plan coverage in terms of corporate/company share funding of such plans.

    While not all corporations and companies are fully integrated into the global economy, there is evidence that many of the remaining corporations and companies are using the ‘global corporate lean model’ as a blueprint for also reining in such employee compensation costs.

    Corporations engaged in advanced global trade are pressuring domestic suppliers to rein in costs and trim profit margins to avoid additional offshore sourcing. Some corporations are directly advising their suppliers to move component and parts production offshore.

    Advanced global trade is having a much larger effect on U.S. employee wage levels and total compensation than some are acknowledging or suggesting. Real wages are declining, and now…real total compensation is also in the early stages of a declining trend. Many of the changes can be attributed directly and indirectly to advanced global trade.

    It’s my judgment that the more important issues are the economic effects of real wage and real compensation declines that are impacting a growing proportion of American employees in a wide spectrum of industries.

    The decreasing purchasing power less credit extension for many income groups is not sustainable as measured against existing standards of living. The economic implications of declining real wages and real total compensation for American workers are significant.

    Advanced global trade is most certainly having a major impact on a growing number of American industries and related employment wages and total compensation.

    If economists and analysts intend to have any credibility on the subject of advanced global trade and the impacts on U.S. employment, real wages, and real total compensation, then they need to piece together the entire puzzle. Few appear to be up to the task.

  • Posted by wimpie

    “There will be another next big thing – might even originate in US labs – question is will it stay here? Will we have the necessary infrastructures & factor advantages that insure we benefit more than say India? Or will it go somewhere else and make the 21st century their century?”

    dryfly, US has 2 economies. 1)civilian- consumer 2)govt-military/intelligence
    The next run for the US will be govt/military expansion. History shows that in times of economic turmoil war mongering is always brought to the fore.
    From the US govt perspective China is a military competitor. Further military development in both tech and base placement is a no brainer going forward. Japan was happy to build roads, tunnels and bridges all over their islands to keep citizens/workers placated during their recent 1 1/2 decade long recession”; the US will build warships, bases and bombs during their coming extended recession.(Chalmers Johnson is a good read on US military strategy)

  • Posted by blam

    Great Post. Academia is finally recognizing what J Sixpack has been saying: The trans nat corporations have a de facto pact with Asia and the US government to shift labor and jobs to low income manufacturing sites to increase their margins while at the same time attempting to establish future consumer markets overseas.

    Low wage offshoring + productivity + illegal workers + understated labor pool = no wage growth

    The official civilian unemployment rate has been criticized, and rightly so, as understating the total available workforce. Like the core inflation number, the massaged unemployment figures have lulled economists into understating the large pool of unemployed and chronic unemployment problem, in the US.

    About 5 years ago, the US government and companies simply stopped hiring people (males) over 50 years old, although they will never admit it. The reasoning seem to be higher average wages and potential healthcare costs. Although there is an even more sinister undercurrent. Many of the older unemployed just left the workforce and are not counted.

    You are right There are so many twists and turns to this story that “Sorting it all out isn’t easy.” If one steps back and takes it all in, including the political facts, you have to think to yourself, no, there couldn’t be an arisocratic conspiracy in place at the highest levels to subvert the US democracy.

  • Posted by HZ

    It is impossible to capture the change with one price index. Maybe that is where your difficulty at summarizing the situation comes from. As Mauldin pointed out, it has never been cheaper to be poor or more expensive to be rich.

  • Posted by Stormy

    Movie Guy,

    There never was a Plan B–either from this administration and Congress or from the “American” economists.

    As Camille pointed out, even the studies have been suppressed, but to any idiot who bothers to read the trade journals, the trend is obvious.

    “Tut, tut,” they will say. “Globalilzation will bring winners and losers.”

    What is forgotten is that industry will do everything it can to keep cheap labor cheap, here and abroad. Forget about revaluation. (I notice it has disappeared from the political radar.) There will be talk of protectionist forces. Politicians will run off to China as Schumer did; make some noise; then everyone will be satisfied.)

    We are headed for a lopsided global economy that will have enormous productive capacitive but with no buyers for the goods.

    A while back, in addition to calls for revaluation there were calls for China to consume more. The average wage in China is still not, nor does it have to time to be, in the same ballpark as “living” wages in the U.S. And there are powerful forces to ensure that they will never be.

    Long before the two economies converge in terms of wage scale and consumption power, there is going to be one hell of a mess.

    Profits will erode as business tries to match the flailing purchasing power of the western consumers. This erosion will keep wages down in developing countries, which in turn will make it even more difficult for workers there to consume.

    And, of course, we have Vietnam in the wings…India…Africa?

    Business will chase the Western consumer right down the rabbit hole.

    Maybe we can find an economic model down there.

  • Posted by Steven

    How are Chinese profit margins?
    If they continue to overinvest will competition among Chinese producers become more and more intense? Will this cause profit margins to become razor thin? Where is the point where further factory investment becomes completely unprofitable? Will these businesses require loans and bailouts from the government banks?

    At that point I believe it will become crystal clear that they can no longer export their way to growth, and I think only then will pro consumption policies be enacted large scale. Larger scale Chinese consumption will cause Chinese CPI to rise rapidly and encourage more rapid currency appreciation.

  • Posted by Peter

    It’s nice to see this blog making contact with the debate over inequality.

    I agree entirely with Brad that the econometric studies in this area are as fishy as, oh, the New England Aquarium. The problem is that they recognize (and therefore try to estimate) only the effects authorized by trade theory. If you look at the history of this literature, you will find a kitchen-soup, let’s-crunch-large-data-sets-and-see-what-we-come-up-with approach used by labor economists in the 80s. Then the trade people moved in and said, the only respectable studies are those that are consistent with our theory. It’s all about relative prices, factor shares, Stolper-Samuelson. But trade theory (we’ve already hammered on this) assumes away the stuff that makes labor markets tick, like variable unemployment, bargaining power and human resource strategies. (Incidentally, the old labor econ studies were a bit blinkered. For instance, they measured increased labor supply due to trade as labor embodied in goods, when the supply of labor is obviously much higher than the quantity of labor actually employed in labor surplus countries. This is what we mean when we talk today about a doubling of global labor supply.)

    Anyway, there is little to be learned from the econometric literature. (Dani Rodrik’s nice examination of the effect of trade on the elasticity of demand for labor hasn’t been followed up, to my knowledge.) And, as many point out, the fact that *all* industrialized countries are grappling with similar trends (which they respond to with different institutions and policies) is weighty circumstantial evidence for the globalization thesis.

    But there is a larger conjuncture at work. How do we explain the rise of inequality at every scale in the US economy, at the macro level, within occupations, individual firms, etc.? What we call globalization is a crappy label for a more complex interaction of political, economic, social and institutional factors. It permeates everything, which is why it is so difficult to recognize and measure. We hardly know what the counterfactual is anymore…

    BTW, whether for similar or different reasons, inequality is also exploding in China and India.

  • Posted by Steven

    And is probably a decade+ long process

  • Posted by Guest

    Movie Guy

    Your observations lead me to wonder whether the decline in real wages is caused less by directly observable and measurable economic forces than psychological ones. Central Banks claim to have defeated inflation by reducing the expectations of inflation. Perhaps this process has evolved over time into the expectation of disinflation or deflation as your clients describe even though the hard evidence for such a view is scant. Capitol would of course be more than happy to encourage such a trend.

  • Posted by MTC

    Dr. Setser -

    Put me in the unusual position of not applauding. I am in complete agreement with DOR–a phenomenon observable at most once per calendar year–manufacturing trade has transformed the lives of hundreds of millions on this side of the Pacific for the better.

    Excuse my French, what happened to the appreciation of the exorbitant privileges accruing from the World’s Craziest Vendor Financing Scheme–where the manufacturing countries lend the U.S. the money to buy their wares?

    Opining about the effect trade may have had upon U.S. wages in isolation is perverse.

  • Posted by MTC

    Dr. Setser -

    Put me in the unusual position of not applauding. I am in complete agreement with DOR–a phenomenon observable at most once per calendar year–manufacturing trade has transformed the lives of hundreds of millions on this side of the Pacific for the better.

    Excuse my French, what happened to the appreciation of the exorbitant privileges accruing from the World’s Craziest Vendor Financing Scheme–where the manufacturing countries lend the U.S. the money to buy their wares?

    Opining about the effect trade may have had upon U.S. wages in isolation is perverse.

  • Posted by Cyrus

    Let’s suppose that there’s a hard or soft limit to the rate at which new capital investment can be made in the global economy. Maybe it’s savings, but with the interest rates that have prevailed until recently, probably not. Maybe it’s the supply of managerial acumen.

    Now, if there’s a limit to the rate at which new investments can be made, then as long as investments with large expected returns are available, then investments with lower expected returns will not be made. Or in other words, as long as capital has something better to do than compete on price, there is no driving force to translate corporate profits into lower prices. But when the easy profits that can be made from relocating manufacturing facilities have been made, then capital will start eying firms with supernormal profits, and say, we know how to do what they do.

    Or as a testable hypothesis: there should be a correlation beteween periods of high productivity growth and high profits, because productivity growth transiently reduces competitive pressure.

  • Posted by bsetser

    MTC — re: “Vendor financing” — I did mention the housing boom and associated jobs growth in the residential sector as one reason why sorting out the overall effect isn’t easy.

    DOR and MTC. Are there gains from globalization for wage slaves working in East Asia. Absolutely. Though there might be a few more if those gains weren’t used as extensively to subsidize their consumers … have those gains been widely shared? Sure. Have they been equally shared or fairly shared? Harder question. As Peter notes, inequality has been rising in China. Big time. There are some dicey issues about the allocation of land rents. and then there is the (to me) surprising fact that Chinese wage growth hasn’t kept up with productivity growth either, so profits are rising as a share of Chinese GDP too.

  • Posted by Guest

    well, you had rising inequality in the US too during the industrial revolution, until people started getting killed agitating for an eight hour day

  • Posted by Joseph Wang

    One of my beliefs is that globalization makes it impossible to talk about any one economy in isolation. The inequalities that globalization has created in the United States are merely a manifestation of the fact that the global distribution of income was very unequal to begin with, only now the world is interconnected enough so the fact that people are living in poverty in Uganda is directly affecting incomes in Ohio.

    I think that the challenge before us is to create a “global middle class” and without in middle class in China, India, Mexico, and Iraq, the middle class in the United States is doomed, and I don’t think this fact is sufficiently well understood.

  • Posted by Joseph Wang

    Eight hour day: What’s that?

    Also one thing that is the case is that capital flows freely. Labor doesn’t. There are a lot of rigidities in the system that makes it work very differently from economic models.

  • Posted by Guest

    exactly, until you see people willing to kill or be killed over working conditions, you’re not likely to see inequality (or capital’s share of income) diminish. it’s going to be a (perhaps very long) while before we see a (cosmopolitan) “global middle class”

    re: labor flows, mcculley was hitting that point repeatedly (in 2004?) saying that until there is a free market in passports, most developing countries will continue to act in a mercantilist manner…

  • Posted by Guest

    PM: I believe the burden of proof for tightening goes up, and goes up dramatically, when monetary policy is obviously restrictive, not neutral, as measured by the slope of the yield curve, which is presently inverted.

    This is particularly the case when I observe that corporate profits as a share of GDP are at a half-century high, while real wages are struggling to stay above the zero line. Make no mistake, Morgan, this recovery has been a boom for capital, not for labor!

    In fact, that was the dirty little secret at Jackson Hole that nobody seemed to want to talk about candidly. Yes, it came up, with my pal Bill Dudley actually putting it on the table in one of the formal sessions, to be met by the sound of one hand clapping. There was no serious discussion of the matter of the return to capital versus the return to labor, because, I think, it is too painful for many central bankers to talk about; income distribution issues ain’t their job, they fervently argue.

    And in a narrow sense, I agree. In a broader sense, however, I disagree, because I believe the Fed’s cyclical reaction function should be consistent with a secularly equitable distribution of the fruits of productivity gains.

  • Posted by Guest

    re: capital flows freely. Labor doesn’t.

    “145,000 Germans… fled the fatherland last year amid record postwar unemployment, pushing emigration to its highest level since 1954… Last year was also the first since the late 1960s that emigrants outnumbered Germans returning home from living abroad… The German government makes no attempts to curb emigration and encourages the free movement of labor. In fact, the Federal Labor Agency has a cross-border job placement unit for qualified workers that helped 12,702 Germans find work abroad last year, a 39% jump from 2004. Government officials say the numbers aren’t alarming, because many Germans move to other countries to work for a limited time and return with additional qualifications…”
    http://www.freep.com/apps/pbcs.dll/article?AID=/20060830/NEWS07/608300493/1009

  • Posted by Guest

    “Try the Philippines, the forerunner of tomorrow’s distributed economy, supplying nurses, teachers, techies, and sailors to the global village… During 2001, more than 800,000 people headed out on a commute that makes Rye-Grand Central seem like a milk run to the corner store. They went to Italy, Saudi Arabia, Canada, Singapore, and Uzbekistan. They went to Mongolia and Equatorial Guinea. Unlike Mexicans, who flock primarily to the United States, Filipinos traveled to 162 nations in all… Remittances, the money they electronically send back to their families, account for 8.2 percent of the nation’s gross national product, stabilizing its peso, improving foreign currency reserves, shoring up consumption, and making more than a dent in the unemployment rate (now 11.1 percent). Last year, overseas Filipino workers sent home $6.2 billion…”
    http://www.wired.com/wired/archive/10.06/philippines.html

  • Posted by bsetser

    nice mcculley quote.

    the left coast is getting to the hard-nosed capitalist over there managing america’s pension dollars …

  • Posted by Peter

    On the subject of global inequality, it just happens that Branko Milanovic has made available his latest salvo:

    http://www-wds.worldbank.org/servlet/WDSContentServer/WDSP/IB/2006/03/02/000016406_20060302153355/Rendered/PDF/wps3865.pdf

    (There must be a better URL than this…)

    It is very strong on measurement issues, a bit thinner on analysis.

  • Posted by camille roy

    “One of my beliefs is that globalization makes it impossible to talk about any one economy in isolation…
    I think that the challenge before us is to create a “global middle class” and without in middle class in China, India, Mexico, and Iraq, the middle class in the United States is doomed, and I don’t think this fact is sufficiently well understood. ”

    But how can this possibly work? The magic of the market is more likely to produce environmental and economic devastation than it is to produce middle class paradise on earth. That is the underlying message of rising inequality and our inability to grapple with climate change. That is why the situation is so discouraging.

    If the magic of the market isn’t a magic bullet, but rather an ideology which is not up to the challenges facing us, then the only solutions are political. We are so far from there, and the task is so hopeless, that it’s not even a topic of discussion. What would work? A world government? I don’t see any constituency for it.

    There are also problems of innate fragility of global supply chains and dispersed political accountability. Globalization advocates don’t take these seriously enough, in my view. It is possible that the further progress towards a fully globalized economy will be accompanied not by a rise of a global middle class, but a rise in chaos.

  • Posted by Greg Byshenk

    Re the military economy, there seems to me to be one potential problem: China, Russia, et al seem to be quite happy to loan the US money to buy their stuff — but will they be quite so happy to loan the US money to build weapons?

  • Posted by Movie Guy

    Guest – “Movie Guy, Your observations lead me to wonder whether the decline in real wages is caused less by directly observable and measurable economic forces than psychological ones. Central Banks claim to have defeated inflation by reducing the expectations of inflation. Perhaps this process has evolved over time into the expectation of disinflation or deflation as your clients describe even though the hard evidence for such a view is scant. Capitol would of course be more than happy to encourage such a trend.”

    This is bottom line profit analysis and decisions. It’s called business accounting and market positioning analysis. And the numbers are directly observable and measurable. There is no basis for pretending that the considerations are not in play.

    Business clients are describing the reality of their corporate/company environments. The global corporate lean model is quite real. Economists and analysts who act as though it doesn’t exist do not have a clue. The notion that some economists and others who supposedly can’t see the forest for the trees on such matters as advanced global trade (AGT) impacts on U.S. wage and benefits levels is a disingenuous argument shielded by phony excuses, such as reliance on ill-designed or ill-fed econometric models they design or employ. It’s rubbish.

    The pro-globalization-at-all-costs crowd knows that the push for more global offshoring argument begins to falls apart if there is any formal acknowledgment that advanced global trade is having an impact on U.S. wages, benefits, and income inequality. It’s easier to lie and/or readily dismiss such connections than to give an ounce of credence to such information, all of which is readily available from U.S. corporations and companies – outfits that are directly involved in the economic performance as opposed to sitting on the bleachers or in a cubicle, fully engrossed in an economic religious rant that rivals anything coming out of more classical and spiritual religious sects.

    We’re watching “make believe” analysis and commentary by con artists who are engaging in slight of hand maneuvers to keep selling pro-globalization-at-all-costs. This is the kind of bunk that they can’t market to well run businesses as they would be laughed out of the room.

  • Posted by Cyrus

    Let’s say as a premise that although free trade increases global productivity, the dislocations it produces do create risk of social upheavals, and to ameliorate that risk, we wish to implement free trade slowly.

    But what public policy can allow some free trading, but not other free trading, without creating a class of gatekeepers that, through their ability to determine who may trade freely and what may be traded freely, can by becoming corrupt appropriate the benefits of free trade?

    Is there a public benefit in transferring corporate profits to corrupt civil servants?

  • Posted by DOR

    Brad,
    Are there gains in East Asia from globalization widely spread? Yes. Shoes on the feet. 3 meals a day rather than just 2. A pack of cigarettes, rather than just a couple of sticks. Maybe a beer on a hot Saturday afternoon.

    Life’s good; you can see it on the streets of the second or third tier cities in East Asia: people are doing well, for the first time in over a decade. Are the benefits equally shared or fairly shared? No, we gave up on communism a long time ago. None of that “to each according to his need” for us, thank you. (We would like a five-day work week, however, even if it is still 60 hours.)

    As for rising inequality in China, (a) I don’t trust the data, and neither should you; and (b) when the one who’s getting the short end of the stick is seeing his standard of living double every decade, it doesn’t hurt quite so bad.

    Steve Waldman,

    “Perhaps words like sustainabiliy, debt, default, devaluation, and depreciation are just the bogeymen of permabears.”

    We haven’t forgot the Asian Financial Crisis. We can’t. It only just ended, uh, last week? Maybe the week before.

    * * *

    Off-topic: So much for the investment-led recovery in the US. Real growth in fixed asset investment up 4.05% in the second quarter., rather than the previously reported 5.26%. A bit of an adjustment in residential investments, too: down 1.18% rather than up 3.25%.

    Oops.

    .

  • Posted by Joseph Wang

    DOR: If you look at the data, pretty much all of the income inequity in China is due to differences between provinces. Within a given province, the income distribution isn’t that large. Which raises the question of how or whether transfer payments between provinces (i.e. people sending money from Guangdong to Hunan is counted).

    One rule. Never trust a single number. If you have forty or fifty numbers then you can do cross-checks and try to piece together a story.

    Something that is the case in China is that Hu Jintao was trying to get more political support for more transfers from the coastal to the interior provinces, so it was coming up with all sorts of alarming statistics that supported this policy (which I think is a good one). However, these statistics were then eaten up by the Western media because it fit with their “vision” of the Communist Party being on the verge of collapse. The lack of curiosity at trying to “dig into the numbers” has been a little disheartening.

  • Posted by Guest

    A brief response to DOR:

    1. China is a better case (by far) than India right now.

    2. I’m not an expert on China, but very large numbers of people are not part of the boom, and in some ways they may have been hurt — less security, driven from rural support systems, etc.

    3. The communism-vs-status-quo dichotomy is not helpful. There are many ways to run an economy. Not everyone who favors greater equality is a fan of Mao. I think it’s fair to say that most of us have mixed feelings about what’s happening in China: some of it is great, some not.

    4. I’ve spent a little time in the past with Chinese statistics, and I agree completely that they are dodgy. As a rule, however, their misrepresentations are biased toward covering up unpleasant facts rather than overstating them. On the other hand, income distribution data appear to be fairly reliable. Check out Ravallion and Chen, who use household survey data:

    http://www-wds.worldbank.org/external/default/WDSContentServer/IW3P/IB/2004/10/08/000012009_20041008125921/Rendered/PDF/WPS3408.pdf

    5. There is an inconclusive debate going on about relative vs absolute income — both are important, I think. But it is wrong to say that those who benefit least from Chinese growth are seeing their standard of living double every decade. You’re taking the average growth rate and applying it to the worst off, which implies no inequality at all.

  • Posted by Stormy

    Peter,

    Income disparity will rise in undeveloped nations for the very same reasons it is rising here: Every effort will be made to keep the labor cheap to ensure higher profit margins. China, in some curious way, is often operating just as South America–Brazil, Guatamala, etc–did when the cheap labor benefitted the elite and well-off. Walmart in China has been fighting hard to keep the labor cheap.

    Just wait until that cheap labor is fully leveraged with advanced technology. For a while, brute labor was used; but that is rapidly being replaced with state of the art stuff. Western companies are bringing that techology and know-how into China.

    Anyone in the lower rungs of the corporate ladder know that their days are numbered.

    The problem with most economists is the way they phrase the argument: Either you are for globalization or you are for protectionism. The question should be: How do you control capital that has run amuk, that has simply no regard for labor or for the environment anywhere?

    Entry into the WTO requires no labor regulations or collective bargaining rights or even minimal regard for the environment. Both are allowed to be leveraged to the hilt, if the home country so allows it. Consequently, if a country has weak or non-existant labor standards and pays no attention to the environment, then everything is a-ok as long as all companies share that playing field.

    This approach is madness when played on a global scale. But free-trade, global-eyed economists sanction it.

  • Posted by Cyrus

    Just wait until that cheap labor is fully leveraged with advanced technology. For a while, brute labor was used; but that is rapidly being replaced with state of the art stuff. Western companies are bringing that techology and know-how into China.

    If true, this implies rising wages in China. Capital isn’t free, and it is unprofitable to substitute capital for labor unless capital is becoming cheaper, or labor more expensive.

  • Posted by Anup

    Brad: Great post. I just wanted to say that I really appreciate your blog. Keep up the good work.

  • Posted by ReformerRay

    “The problem with most economists is the way they phrase the argument: Either you are for globalization or you are for protectionism”.

    I agree. That is a genuine problem. But notice that “protectionism” is defined as tariffs applied to a particular import. The interntional trade textbook I use, by Krugman and Obstfield does not admit that tariffs could be applied in any other way.

    True, that is the only way they have been applied in the past. That is because tariffs have historically been applied only when some politically well connected industry raised a fuss.

    There is another option.

    If the objective is to reduce the size of the trade deficit, rather than just to protect a given industry, tariffs would be applied to ALL imports, not just selected ones, from those countries that are creating the existing trade deficit.

    This option has all kinds of advantages, which I cannot get anyone to consider, because they are unwilling to admit the proposed option exists.

  • Posted by bsetser

    DOR — I don’t doubt that the average joe migrating from the provinces to the cities is better off absolutely than 10 yrs ago. I suspect the average urban resident is also better.

    Some average joes who saw their land seized by the party and given over to a property developer might not be so happy about their absolute gains over the past 10 years.

    and, guest said, the Chinese tend to cover up inconvenient facts, and my sense is that relative inequality is rising, as some at the top (often with close ties to the party) are doing very, very, very well. Correct me if I am wrong, but my sense is that the share of national income in china going to the top 1% is rising.

    corp profits are clearly rising v. GDP, and wage income is clearly falling … which usually isn’t a recipe for the most broad based sharing of growth.

    J. WAng — I agree that the world needs a global middle class. Getting their ain’t gonna be easy tho. And if the US middle class slips (absolutely and relative to the US plutocrats) as the East Asian middle class rises, I think that will cause all sorts of problems. There are lots of ways of addressing this issue — some involve more internal redistribution in the US, but some do involve a greater willingness on the part of the East Asians to spend and buy and enjoy the gains of their boom now rather than just running up their savings and holding down their currencies. In that sense, we are both for more rapid convergence of us and chinese living standards …

  • Posted by Stormy

    Cyrus,

    You missed my point: Leveraging technology will be done if it can lower wage costs. Result: Less employment; more pressure to lower wages generally. I am just not blowing smoke here; the facts on the ground support my contention.

    From the China Daily, check out:

    “From 1996 to 2000, for every percentage point of GDP growth, there was a 0.13 point growth in the employment figures, but from 2001 to 2005, the same GDP growth only boosted employment by 0.11 points, the official said.

    The official attributed the phenomenon to numerous factors, including the migration of rural labor forces to urban areas, structural adjustments to the economy, the impact of reforms and the bankruptcy of some state-owned enterprises.

    Over 100 million peasants have migrated into cities to become workers, snapping up job opportunities spawned by fast economic growth, the official said.

    But, as the country optimizes its economic structure, China’s capital and technology-intensive industries are growing faster than labor-intensive industry.

    The economy depends increasingly on technological innovation and capital input for growth. Fewer workers are needed than before, the official said.”

    http://www.chinadaily.com.cn/bizchina/2006-08/29/content_676841.htm

    And from the Rand Corporation, some rather startling observations:

    The problem that is more difficult to resolve springs from a dilemma presented by two economic objectives both of which are of crucial importance for China’s future: sustaining a high rate of economic growth and also generating ample job opportunities for large numbers of unemployed and underemployed workers. For political and social as well as economic reasons achieving a high rate of job creation is no less important than is sustaining a high rate of GDP growth.

    Although the two objectives are usually viewed as compatible and even mutually reinforcing, there is a fundamental tension between them. This tension arises because of the two-sided effects of rising labor productivity.

    And labor’s prospects? Check out

    “China’s prosperous surface masks a rising sea of joblessness that could threaten the country’s stability ”

    http://www.time.com/time/asia/covers/1101020617/cover.html

    While you’re at it, check out China’s new bankruptcy law.

    http://www.businessweek.com/globalbiz/content/aug2006/gb20060830_421789.htm?chan=top+news_top+news+index_global+business

  • Posted by Movie GUy

    Joseph Wang on 2006-08-31 02:03:24

    Stormy on 2006-08-31 03:38:20

    ReformerRay on 2006-08-31 10:05:45

    Important observations worthy of further discussion.

    >

  • Posted by DOR

    Joseph Wang,

    Thanks for the important reminder of media reports of statistics being use for policy purposes.

    Guest,

    “I’m not an expert on China, but very large numbers of people are not part of the boom, and in some ways they may have been hurt — less security, driven from rural support systems, etc.”

    I think you need some support for that assertion, something that says “very large numbers” — which applies to everything in China — means “problematic”. The farm houses I’ve been in are pretty nice; the motorcycle leaning against the side of the building is fairly new; the feet are shod and the belly is full.

    “I’ve spent a little time in the past with Chinese statistics, and I agree completely that they are dodgy. As a rule, however, their misrepresentations are biased toward covering up unpleasant facts rather than overstating them.”

    You’re right, but in the sense that overstating was — not now, but previously — the reason for unreliable data. Today, statistical methodology and coverage are at least as important. As for the income distribution data, I simply do not know why it should be considered any more reliable than prices or production. The household survey data is also subject to methodology and coverage flaws.

    If we want to rely on the data (and apologies for only having these particular numbers immediately to hand), rural wages rose 6.6 times between 1990 and 2003, but spending on food by rural households only tripled. In the 12 western provinces’ rural areas, washing machine ownership went up from 18.5% in 2000 to 23.1% in 2003, color TVs from 36.6% to 55.8%.

    I plead guilty to applying the average for the western rural sector to “the worst off”.

    Brad,

    “Some average joes who saw their land seized by the party and given over to a property developer might not be so happy about their absolute gains over the past 10 years.”

    It has happened, it is a problem and it will continue to happen. But, to consider it representative of Zhou Sixpack is highly misleading.

    “corp profits are clearly rising v. GDP”

    Funny, I read that just after finishing reading an article about yet another revision to the 2005 GDP figures.

    Stormy,

    Apply a very large pinch of salt to the 1996-2000 GDP data and its impact on employment. Even if accurate, 2/100th difference is nothing at all.

    .

  • Posted by Guest

    Have I been wrong in assuming that employment growth NOT profits and high returns on capital is the main goal of the Chinese government? Has that changed? If so, maybe that’s why their stock market has performedn so well as of late…

  • Posted by DOR

    Guest,
    Employment growth in China directly addresses a very wide range of pressing problems. The stock market, on the other hand, is a casino, pure and simple.

    .

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