Wednesday, May 18, 2016

Globalization, the Worker Glut, and Stagnant Wages

The impact of globalization on the distribution of income has never been more clearly demonstrated than by a couple of graphs produced by Marko Milanovic in his book Global Inequality: A New Approach for theAge of Globalization.  The first has received some notoriety as “the elephant curve.”

This chart plots the percentage gain in real income (2005 international dollars) over the period 1988 to 2008.  The horizontal axis is the percentile of the global income distribution.  One can conclude that the incomes of low to moderate income people have increased over this period by what appears to be a significant amount.  There is a dip in income growth to approximately zero at 80%, followed by a steep rise at higher income levels. Globalization has helped the low income people of the world and it has benefited the wealthy of the world.  Who are those left behind as indicated by Milanovic’s point B?

“They are almost all from the rich economies of the OECD (Organization for Economic Cooperation and Development).  If we disregard those among them who are from the relatively recent OECD members (several Eastern European countries, Chili, and Mexico), about three-quarters of the people in this group are citizens of the ‘old-rich’ countries of Western Europe, North America, Oceania….and Japan….People at point B generally belong to the lower halves of their countries’ income distributions.”

“In short: the great winners have been the Asian poor and middle classes; the great losers, the lower middle classes of the rich world.”

Milannovic’s conclusions are about what one might expect if one lives in one of the “old-rich” countries and has observed how fellow citizens have fared under globalization.  Some might even applaud these developments as a way of distributing wealth from rich countries to poor countries.  Milanovic provides another way of looking at the data that produces a critical insight.  The previous chart evaluated relative changes in income; the next converts those gains into absolute changes by providing a monetary value.

If globalization distributed income gain uniformly then every group would gain 5%.  In fact, most of the gain goes to those already wealthy: 19% to the top 1%, 44% to the top 5%, and 60% to the top 10%.  As a means of distributing income, globalization is extremely inefficient.  It seems best able to provide income to the already wealthy in both rich and poor countries.

Globalization and the addition of enormous numbers of low-wage workers to the global economy have had significant impacts on the prospects for job creation in the rich countries.  The way in which economies function has also been altered.  Traditional economic thinking would suggest that all will be solved when wages become substantially equalized across the globe.  There are numerous reasons why that will never happen, not the least of which is the pain that would be endured in the advanced economies.  So what might the rich countries do in response to this situation?

Daniel Alpert argues that we have entered a new economic era which is poorly understood. He provides an analysis of our current situation and recommendations for the future in GLUT: The U.S. Economy and the American Worker in the Age of Oversupply

Alpert begins by noting Ben Bernanke’s 2005 observation that there existed a “global savings glut.”  To an economist, a savings glut means that there is a lot of money possessed by corporations that is not being productively used, either as reinvestment or as redistribution via wages or dividends.

“A substantial amount of global capital was remaining unutilized or underutilized and not recycled into investment or used for consumption. By 2008, I had concluded that—if anything—Bernanke had understated the import and dimensions of his observations, and that the global economy was experiencing something that centuries of academic discourse would have thought impossible. There was, and remains, a global oversupply of labor, productive capacity, production, and capital, all (except, at times, labor) being things that were classically thought to be ever-scarce relative to the demand therefore.  Something, indeed, had happened, and it was, I concluded, substantially related to the rather sudden emergence of the post-socialist, or semi-socialist nations (China, Russia, Brazil, India and others), into full-blown economic competition with the developed nations.”

In a very short period, billions of low-wage workers were added to the available work force.  The dynamics of what followed in the rich countries are familiar.  Manufacturing was moved to places (mostly China) where this labor force could be utilized, both to sell products more cheaply in the home country, and to produce products more efficiently for the local economy.  Both contributed to the elimination of jobs and the partial replacement of higher-paying positions with lower-paying positions in the home country.  People benefited from the cheaper goods imported from the low-wage countries, but the loss in income was of greater effect.

“The suddenness and extent of the integration of over 3 billion people into a global capitalist market, that really only hitherto consisted of about 800 million in the advanced economies, produced not only the imbalances and glut conditions that have been written about extensively since the Great Recession, but have echoed in the many crises since then. We continue to experience a low interest rate and disinflationary environment and a slew of other economic phenomena that might not typically be thought of as being associated with—but are actually triggered by— the oversupply itself.”

There was an inevitable development that followed from this scenario.  By eliminating jobs and forcing wages to stagnate in the rich countries, demand for products was lowered in the rich countries.  Wages that would have been paid in the United States were now being paid in China, limiting the feedback into the domestic economy.  As Milanovic’s data shows, wages did rise in places like China and benefited its workers, but did not produce a level of income that could generate the level of demand that the same amount of money received by higher income domestic workers would have. 

“Let’s also take a moment to define global demand, because that is a subject that all too often proves confusing. The layperson might say, “Well, surely, there are many of our own poor and many more people in less developed countries who certainly desire a far higher standard of living—don’t they comprise a source of virtually unlimited demand for the products and services produced by the rest of us?” Economic demand is, however, measured in dollars and other currencies, not desire or desperation. To obtain a higher living standard, those less fortunate must obtain the money to do so, and, short of robbing banks, that happens principally via gainful employment.”

Traditionally one views an economy as functioning in what Alpert refers to as a “virtuous cycle.”  Consumption produces profit.  Profit earned from sales is reinvested in greater production capability which increases jobs and wages and leads to greater consumption and so on.  Globalization has “blocked up” this virtuous cycle.

“First, that the classically virtuous cycle (or circle) of expanded growth, spending, savings and investment has been essentially blocked up in the U.S. by the age of oversupply. Capital is being hoarded and not reinvested in additional employment-producing assets (plants, equipment, etc.) by much of the U.S. private sector, simply because there is already an excess of global capacity relative to global demand for production. Second, that this is not a short-term phenomenon. The failure of the developed economies to recover robustly ever since the Great Recession is, in this writer’s opinion, proof positive that oversupply is not something that will be absorbed by conventional business cycle dynamics. And absent the recognition of this fact in the form of targeted policy to counter its effects, the developed economies will remain in a low-growth demi-slump for a lengthy period of time.”

Alpert analyses what corporations have been doing in a period of stagnant demand.

“As a general matter, technological advances should serve to increase productivity and, therefore, economic growth, all other things being equal. But in an age of oversupply—featuring an exogenous, low-cost labor force and insufficient global demand relative to supply—all other things are anything but equal. U.S. capital spending, adjusted for inflation, has been relatively flat for the past 15 years, rising only 13% from 2000 through 2104 despite a 29% growth in real U.S. GDP. The slowdown in expansionary investment, however, is just the headline. The components of that capital spending have changed as well, with spending on information processing equipment and intellectual property products growing by 63% during that same period, while all other capital spending actually fell by 0.1%.”

Corporations have not been motivated to create new jobs.  The seemingly healthy unemployment rate has been attained not by recreating lost jobs, but by discouraging workers from bothering to continue to look for work.

“Quite a bit of the technology that is being invested in is, unfortunately, often not of the type that increases aggregate output but, rather, is employed to reduce labor costs in a slow-growth era in which profitability is more often increased through expense reduction rather than hard-to-generate top-line expansion.”

The lack of investment in the domestic economy has led to a number of unfortunate outcomes.

“We continue to experience a low interest rate and disinflationary environment and a slew of other economic phenomena that might not typically be thought of as being associated with—but are actually triggered by— the oversupply itself. These include, among other things, declining productivity and falling labor force participation; inflation in real estate and stock markets, the value of the U.S. dollar, and even stock buybacks; swollen executive compensation; and increasing income and wealth polarization since the recession, to say nothing of the global financial crisis itself.”

What is to be done about all this?  The private sector has not and cannot address it.  Alpert tells us we must increase domestic demand if we are to break out of this period of stagnation and restart that “virtuous cycle.”   The only way to increase domestic demand is for the public sector to take actions to increase the number of jobs and bring people back into the workforce.

“The underutilization of labor, the lack of growth, the continued falling share of labor as a percent of GDP—all of these issues and more—are the result not of depressed wages or insufficient job formation counts; they are the result of an insufficient amount of work relative to the body of labor willing to work. Increase the demand for labor, and all other issues—wage levels, price reflation, productivity and the reswitching dilemma, capital spending, and even zero interest rates—take care of themselves … it really is that simple.”

“….I am proposing that the U.S. government use its credit (either directly or through a newly constituted infrastructure bank) to borrow the excess capital necessary to make such investment from the overstuffed pool of excess capital sloshing around the globe and available to the U.S. at interest rates that make borrowing and investing it wisely an economic imperative, if not actually a moral one.”

“….a five-year $1.2 trillion public investment program in transportation, energy, communications, and water infrastructure would create an additional 5.5 million jobs or more in each year of the program—directly, through the projects themselves, and indirectly, through the multiplier effect on other sectors of the economy. With the American Society of Civil Engineers telling us that our present infrastructure backlog is nearly $2.5 trillion, projects will not be hard to find. And neither will labor. Adding 5.5 million workers (assuming all were new/returning entrants to the labor force) would barely restore the labor force participation rate back to the levels of 2010, still well below levels prior to the recession.”

The global capitalist order seems to have maneuvered itself into a dead end from which it cannot escape.  Alpert makes an excellent argument that it is time for the public sector to come to the rescue—once again.

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