Dan Altman and Dan Gross, two of the wisest economics commentators writing today, had an interesting back-and-forth email exchange about globalization posted on Slate more than two years ago. I just read it the other day and it's still relevant and they do a great job at distilling some of the core issues. It's not too long and worth reading the whole thing.
Globalization is inevitably a political issue, although it no longer breaks down so neatly along the lines of right and left. (The recent Republican presidential debate featured plenty of tough talk on trade.) There are, however, two poles: On the right, there are the unabashedly happy globalists, who see only benefits to all involved from globalization (rising standards of living in the developing world, cheap goods in the developed world) and are indifferent to the plight of those harmed. On the left, there are those who see only gloom, would like to halt the globalization process, and are not all that concerned about the impact doing so would have on those who have yet to benefit.
On the sometimes invisible benefits of trade and interconnectedness:
…Much of the rhetoric surrounding globalization—tend to paint the process as a zero-sum game, in which there is one loser for every winner. This frustrates a (somewhat) committed and enthusiastic globalist like me. And it must really annoy a much more committed and enthusiastic globalist like you. After all, the losses for Americans are so easy to tally—factories closed, jobs lost, pensions terminated. But the gains are more difficult to detect, in part because they're embedded in our supply chains, our manufacturing processes, and our consumer culture. Every time one of my kids has a birthday party, the basement is stuffed with an embarrassment of toys, games, kits, instruments, doodads, and gadgets—or, as I like to refer to it, "plastic from China." In America, we now regard cheap toys and clothes and electronics as something akin to a birthright. But we don't—at least most of us don't—wake up every morning and think of these things as gains from globalization.
People might not tell the truth about how much they enjoy their cheap Chinese goods. I know many Americans who publicly bemoan a dying manufacturing sector in the U.S., but continue to buy the cheapest products they can find:
How could I prove exactly how much those cheap Chinese toys are worth to you, i.e., how much your well-being is enhanced by having access to those cheap products? It wouldn't necessarily be the same boost that I get from the same opportunity. Also, if anyone did ask, you'd have every incentive to lie and say that you weren't better off at all. For these reasons, I think we're going to find ourselves in a second-best world; hence my observation that people need to look out for themselves.
And how does globalization affect income equality?
I'm starting to form the view that globalization is a driver of income inequality within countries, but a driver of income equality between countries. Within countries, globalization tends to result in big income gains for the people who can take advantage of its opportunities—the ones with money and ideas—while depressing incomes for people who face more international competition. At the very least, the income distribution stretches at the top.
The one common thread I see that runs thro the entire gamut of opponents of G-word is that they wish to continue their unaffordable lifestyle supported by production of mediocre muck and palming it off to unsuspecting countrymen branding it as quality. Globalization just called their bluff and now they are stripped naked and are clueless what to do next.
Why didn’t IBM / Microsoft/ Accenture / HP that adapted so well to global delivery models of third world vendors complain? (Now they have their R&D divisions housed in Bangalore and Hyderabad).
What will happen to jobs provided to thousands of first world workers by corporations like Boeing / Airbus that sells more airplanes in the emerging markets today even as their home grown airlines reel under record losses?
Globalization yields this poser. When you want to sell a few airplanes, you’d better buy some toys (you can’t compete with them on pricing not because you don’t have the ability to innovate, but because you have under some kind of unwritten oath to sustain your employees’ hyper lifestyles that are no longer affordable). Not so much of a zero sum game in the aggregate, I think.
While it seems intuitive that globalization is a driver of income inequality within countries (assuming you’re talking about rich countries…) I’m not so sure this is really so true. It seems so intuitive because there is a lot of visible loss from globalization, such as manufacturing jobs, and, as described, a vast amount of not-so-visible gains. This doesn’t mean that those small gains don’t add up tremendously though.
As an example, I just returned from Australia, a country with far less “income inequality” than the U.S. A $5 bottle of sunscreen from WalMart costs over $15 in OZ. Fast food is 2-3x the cost. These are local prices, not tourist prices. I’ve experience this in many other places around the world. So, while in dollars Australia may have a smaller “inequality gap”, more of their income is eaten up by essentials that we take for granted. Thus, even though their gap between rich and poor may appear smaller in terms of dollars, it appears from my own experience that our gap between rich and poor is smaller because our poor standard of living is much closer to our rich standard of living. Goods are so cheap in the U.S. that the poor can afford to live, in many respects, nearly as well as the rich.
This is a great quote,
“Globalization is a driver of income inequality within countries, but a driver of income equality between countries.”
Purchasing power-wise, we are all better off with inexpensive goods but that only matters to people who still have jobs. There are huge opportunities for people with the right skills, but that doesn’t help the decimated manufacturing sector much.
Anecdotally your case is solid.
However, as an Australian im taking this with a huge grain of salt. A crappy bottle of sunscreen certainly isn’t going to cost you $15. I imagine you could pick up a big tub of crap (similar to what im imagining the Walmart product to be) for about the same price locally, maybe cheaper. Especially as AU is the skin cancer capital of the world…
Also, doing a quick google of major take away franchises(dominos, McD’s) in AU and US shows similar pricing levels.
There actually is a case for products being cheaper in the US (economies of scale), but it’s not as extreme as you make it out to be. Maybe 5% to 20% on items which are not made locally. Like electronics, and cars. But is mostly compensated for how cheaply we can make other things.
But that’s beside the point you try to make. The width and depth of the social divide in Australia is nothing compared to the US, simple because of the massive difference in social safety net and the individualistic nature of the US culture. This gap however, has the advantage of scaring the shit out of the middle(and upper lower?) class to work so they dont become part of the lower class.
… to diverge from the topic!
Correct me if I am wrong or am not looking at the bigger picture, but, from what i understand, there are many consumer goods in the United States (fast food, sunscreen(?) that are manufacture/produced using cheap government subsidized commodities (corn, etc). Would this be the reason for the price differences you stated above?
It’s interesting that you imagine that the product I’d buy at Wal-Mart is crap. This is actually the point I’m trying to make. The “crap” that Wal-Mart sells at unbelievably low prices (to anyone from any other country on the planet) is of, for the most part, extremely high quality. You can get premium, name brand stuff (ie stuff that rich people use) at ridiculous prices. This was the crux of my point. While in dollar terms, inequality in this country is high, in purchasing power, it is not. Our poor people have air conditioning, a car, and a flat-screen tv.
Also, I was on the sunset coast, obviously not the cheapest place in Australia, but in my 2 months of shopping around, a decent bottle of sunscreen was almost $15, and fast food was literally 2x as much as it is in the U.S.
I think you misunderstand what government subsidized commodities do. In almost every respect, they raise rather than lower the price of goods. We use disgusting corn syrup rather than sugar cane in this country because the corn lobby was able to get congress to pass a ludicrous tariff on sugar cane. This doesn’t make corn cheaper, it makes it more expensive by limiting competetion. It’s also why Coke in the rest of the world tastes so much better.
Likewise, we actually pay farmers in this country to either destroy food they’ve produced, or to leave land fallow and not produce food at all. You read that ridiculous statement correctly. This certainly doesn’t lower the price of anything.
Most of the goods we consume are so much cheaper because, compared to someplace like Oz, our tariffs are very low. Almost everything that is “Made in the USA” is very expensive, compared to what we import.
Agreed.
Right – and the question is what should we do about that sector. The Slate piece addresses job re-training programs…
I agree wholeheartedly when Daniel Gross writes:
“For my part, the way in which global competition is tilting the scales in favor of capital and against labor, and creating pressure to slash the retirement and health benefits provided by both the private and public sector, certainly makes me think twice about the sustainability of the trends we’re seeing.”
I cheer when he admits:
“I’m not sure American consumers will continue to believe that the benefits they receive from cheap imports and low inflation outweigh the pressures on their wages and benefits.”
However, it did seem a bit presumptuous of him to toss off this:
“We’ve exported the make-it-quick-and-cheap, consequences-be-damned mentality to China…”
(As if there had been no mercantile spirit latent in the Chinese people before Kissinger and Nixon went there.)
I’m glad Daniel Altman says he doesn’t think the United States exported those practices, but I find my own irony in the very symbolism of the word globalization having been co-opted by technocrats at the World Bank and functionaries of the Carlyle Group.
Not for nothing did we erstwhile Trotskyites fly the Whole Planet flag in ’68 and wear our rose-tinted spectacles.
Altman wisely decides to take “a practical approach, rather than a polemical one” to our transition to a more globalized world, but then he advises us:
“You have to look out for yourself…if you have money to invest, you might look more carefully at options outside the United States”,
I’m amazed that in 2007, and actually in the context of China’s connected economy, he would suggest investing outside the US– with no mention of China.
Weren’t American manufacturing companies already moving operations there, “positioning themselves nearer to the rising goliath of global industrial demand,” to put it in the perceptive words of Christopher Barker?
Gross says that the gains of globalization for our society “are embedded in our supply chains, our manufacturing processes, and our consumer culture.”
Then he equivocates: “…there are times when it’s hard not to think that some measure of our wealth and comfort comes at the expense of China’s workers.”
So to be rich is glorious, until the invisible hand of the marketplace becomes the iron fist of oppression?
Now urbanized China is building new infrastructure at a dizzying pace, and its manufacturing sector is retooling with the latest technology.
Meanwhile in the US Obama gets flayed by the jesters of corporate media, the Becks and Limbaughs, for wanting to invest in our country’s infrastructure.
Then Gross surprises again:
“The way in which the forces of globalization are wreaking havoc on American-style welfare capitalism calls for more of a safety net, not less; more health insurance, not less; a stronger Social Security system, not a weaker one.”
Well said, and bravo.
Not to be outdone, Altman saves his most astonishing observation for last:
“For me, the most important question is not who’s getting more money. The key is to see who’s actually happier. After all, that’s what economists are supposed to care about, right?”
Yes, but if we all really want to be happier, I would suggest a coordinated simultaneous dump of several kilos of LSD into the water supplies of Washington and Beijing.
They don’t make our acid in China now, do they?
All kidding aside, Deng Xiaoping was most prescient when he prophesied:
“When our thousands of Chinese students abroad return home, you will see how China will transform itself.”
That’s the sort of globalization I can really get behind.
We can decide the worth of it, it depends on many things mate.