San Francisco from Abovee Berkeley

Globalization and Inequality

J. Bradford DeLong :: U.C. Berkeley, WCEG, and NBER @delong

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Globalization and Inequality

  • Moderator: Naoyuki Haraoka
  • Brad DeLong
  • Francis Fukuyama
  • Yoriko Kawaguchi
  • Hideichi Okada

Growth Strategies of the US and Japan

  • Moderator: Takeo Hoshi
  • Nick Bloom
  • Takatoshi Ito
  • Keiichiro Kobayashi
  • Kathryn Shaw

Is Technology the Answer? (or Will Silicon Valley Save the World?)

  • Moderator: Ken Singleton
  • Shai Bernstein
  • Kenji Kushida
  • Masaaki Tanaka
  • Tsunehiko Yanagihara

Proceed with Caution: What can we say about globalization and inequality?

First, we must say that we have to proceed with caution. We face truly grave problems of measurement—at measuring the extent of globalization, at measuring the prosperity and rate of economic growth of the world, and at measuring inequality.

The problems of measuring growth become insuperable unless we largely neglect the fact that we produce and consume not just more of the same commodities than we did in 1800, but new commodities and new kinds of commodities that give us, as John Maynard Keynes wrote a hundred years ago, “conveniences, comforts, and amenities beyond the compass of the richest and most powerful monarchs of other ages”. The problems of measuring inequality become insuperable unless we largely neglect the implications of fact that an income one-third of the geometric average two hundred years ago meant that you starved to death unless someone took explicit pity on you personally, while an income one-third the geometric average today leaves you poor relative to your neighbors, but still rich relative to your ancestors. But if you wanted deep thoughts about these issues, you would have called for a philosopher rather than an economist.

B. Our Rough Guesses: Thus: neglecting these issues, the world’s prosperity center-of-gravity—the geometric average level of production—was up from perhaps $1000 of today’s real-value international dollars per capita per annum to $4000 , and the world’s life expectancy was up from 28 to 65 years over the period 1800-1976. And in the past forty years prosperity has jumped from $4000 to $9000, and life expectancy from from 65 to 75.

But look at the spread. The spread was roughly a factor of 8 in 1800: few countries then had average income levels less than $500 or more than $4000 per capita per annum. The spread rose to a factor of 32 as of 1976: few countries then had average income levels less than $500 or more than $16000 per capita per annum. The spread remains a factor or 32 today: few countries now have average income levels less than $1000 or more than $32000 per capita per annum.

While the story across nations is one of growing inequality from 1800-1976 followed by a stable level of inequality, the story across people is considerably different. The relative spread of people’s incomes today is substantially, gratifyingly, and fortunately much smaller than it was in 1976. Russia has regressed, not absolutely—fortunately—but relatively toward the global geometric mean.

C. China and India: China and India have grown at stupendous rates so that they now are within close shouting distance above and below the global geometric mean, and few countries and only one large country—Japan—already rich has grown rapidly and so pulled, relatively, significantly further ahead of the global geometric mean. Russia and Japan offset each other. So the “convergence” of relatively income levels across the globe that we have seen over the past forty years that has, in combination with underlying economic growth, made it the best forty year period for human economic material progress ever in global history is 100% a China-India phenomenon.

That is is only two countries makes this “convergence” difficult to interpret as we try to assess the likely future. Have we seen good governance institutions spread to another 30% of the human race, leaving less than 40% of the world with severely sub-par institutions as far as economic growth is concerned? In that case, we would expect good governance institutions for economic growth to continue to spread over the next two generations, and we would be hopeful. Or did just good luck bring good leaders to power in two countries—albeit the two countries that together amount to 30% of the human race—in which case normal luck would see the next two countries to get good governance institutions be small ones, and would perhaps see institutional backsliding, perhaps severe institutional backsliding, in China and India? On such questions as this does our optimism or pessimism about the human global future depend.

D. Branko Milanovic’s Elephant Diagram: The pattern of global growth over the past generation or so in terms of the incomes accruing to different percentile slots in the global income distribution are well-captured in what has come to be called Branko Milanovic’s “Elephant Diagram”: the tail of the elephant are the global poorest, whose lives were and remain virtually indistinguishable from those of our pre-industrial agrarian age ancestors under the curse of Malthus. The back of the elephant is the global prosperous working and middle class—primarily but far from exclusively in China. The upward-lifted tip of the trunk is the global overclass, the elite. the downward-pointing base of the trunk is Russia. And the first upward curve is the middle class of the North Atlantic economies, for whom—especially for the native-born males among whom—the past generation or so has been the worst period since 1850.

E. Globalization, Technology, Education, Institutions as Causes and as Scapegoats: In what sense is “globalization” the cause of this distressing recent generation plus for the North Atlantic middle classes? Or, alternatively, in what sense is “globalization” the scapegoat to which the North Atlantic middle classes resort on their own out of ignorance or are led to resort in an attempt to distract them from the true causes—or, in many cases, simply because if you scare mostly-elderly people about foreigners you can keep their eyeballs glued to the TV and so collect money from advertisers as they try to sell them overpriced gold funds and fake diabetes cures?

The overwhelming part of the story is: technology and educational failure as cause, and globalization as scapegoat.

In brief:

  • In the United States, manufacturing employment has gone from 30% to 12% because of technology.
    • Japan has seen analogous but much smaller technological trends—in large part because technological forces have been hobbled, if that is the word, by institutions in important sectors like food processing
    • The decline in manufacturing employment has been made a much bigger deal for distribution in the United States because the U.S. lost the race between education and technology.
    • Has it been made a bigger deal because of the rise of the overclass?
      • At U. Chicago, it is conventional to bow to Sherwin Rosen’s “superstar economy” ideas and view the rise of the overclass as an unmixed blessing.
      • Not so at Berkeley.
  • In the United States, manufacturing employment has gone from 12% to 9% because of an ill-managed savings-investment balance.
    • Not so in Japan: if the Japan savings-investment balance has been ill-managed, it has been so in the opposite direction.
    • The catastrophic mistake of the Reagan and Bush deficits—starving the country of savings in order to overincentivize the nascent overclass.
      • Japan and Germany offer a different road
      • Globalization provided an important safety valve: allowed a low savings country to continue to invest, albeit at an inadequate pace.
    • Here globalization is not the cause but the scapegoat—and a partial cure.
  • “Bad trade deals!”
    • Manufacturing employment from 9% to 8.7% because of the China shock
    • Manufacturing employment from 8.7% to 8.6% because of NAFTA
      • Trump’s economic policy team appears to have two ideas for how to renegotiate NAFTA
        • Require year-by-year bilateral balance everywhere.
        • Force Canada and Mexico to accept the provisions of the TPP
    • No effect of TPP

E. Globalization, Job Instability, and Job Quality in America: Manufacturing and other goods value-chain jobs become unstable because of the post-1980 dollar cycles the sharp up from the inauguration of Ronald Reagan to the Plaza, the sharp down from the Plaza to the Louvre, the sharp up during the dot-com boom, the down of the 2000s, and now—perhaps—the start of a Trump dollar cycle. These very large exchange rate fluctuations are side effects of improper governance and policy non-coordination. But since the end of Bretton Woods governments in the Global North appear to have decided that they would much rather let currencies float as shock absorbers than commit themselves to policy coordination to damp such fluctuations. The consequence has been to make export and import-competing manufacturing sectors very unstable—and thus very risky, especially for workers but also for investors and managers.

What role has this instability played in undermining the institutional job ladders that used to exist for blue-collar workers in the U.S., and still exist in Japan. And what role have this and other sources of instability started to play since the mid-2000s in undermining the institutional white-collar job ladder stability as well? One powerful possibility is that manufacturing and other goods value-chain jobs are good jobs only as long as they are union jobs. And dollar-cycle instability has meant maintaining a strong union movement in affected industries nearly impossible—even if firms do not prioritize union destruction.

These issues are still very unsettled. I would point people to the arguments raised by and the forthcoming debate around Richard Baldwin’s new The Great Convergence: Information Technology and the New Globalization

I would also say that we are next to nowheresville in terms of understanding the sources of the rise of the overclass in America. There are lots of very good but speculative theories and ideas. But there is little consensus. I find “winner take all economy” explanations completely inadequate. But what is adequate? I would point out that increasing investigation of tax avoidance and tax evasion strongly suggests that the rise of the overclass has been much stronger than one gets from the Piketty-Saez tax data. But I would also point out that, here in the U.S., pre-1987, large amounts of soft-dollar compensation and the use of recapitalizations to create ownership interests then passed on at death or committed to foundations means that we have less insight into historical trends than we would wish.

We do know that the situation is not stable. We can see, ahead, the possible transformation of the American overclass into one in which inheritance has played a much greater role a la Piketty. Has globalization played a large role in its rise? If so, it is a role that Japan—and much of continental Europe—have been largely able to neutralize. English-speaking countries, resource exporters like the Middle East and Russia, and emerging market economies able to find a place in global value chains appear to be in the domain of the rising global overclass in a way that Japan and continental western Europe.

F. Polanyian Perplexes and Fukuyamian Foresight: I have two more slides—with a long quote from Keynes, a brief attempt to apply insights from Karl Polanyi’s The Great Transformation, and a bow to Fukuyama-sensei’s 1989 “The End of History?”—note the question mark at the end—in the shadow of which we have all now lived for a generation.

But I am much more interested in hearing Fukuyama-sensei discuss these issues than I am interested in hearing me so far out of my proper confidence, and the same is almost surely true of you as well…

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