A Better Globalization is Possible

I. The Vast Majority

This essay is still in very rough form, but I have uploaded it as it stands in late August 2010 so my Political Economy students can read my most recent thoughts on the subject.

The One Statistic: Global Median Income

Many people don't really get economic statistics. Their minds quickly go numb when economists begin to reel out exotic number after number. Many people also realize that economic statistics often do more to obscure than illuminate real living standards of real people. The conjuring of Wall Street wizards often has little to do with the pocketbooks of ordinary people.

However, there is one statistic I think is crucial to understanding the global economy today—the median income of the people of the planet. Income statistics are usually expressed in averages, for example GDP per capita. GDP per capita takes the total output of an economy and divides it by the number of people in the economy. For example, xxx

However, averages, or GDP per capita, is a deceptive measure. Consider a simple example of three people—a husband who earns $60,000 a year, a wife who works part-time and earns $30,000 a year, and Bill Gates. No one knows what Bill Gates' real annual income is, but for the sake of this example, lets assume it is $1,000,000,000, a billion dollars. The per capita income of our 3 person nation would be roughly $333 million. But of course that tells us nothing useful about the living standard of the husband and wife.

A more useful statistic for this three person nation would be median income. To calculate the median, all the members are ranked from top to bottom. The median is the middle value. In a group of 99 people, the person who ranked 50 would be the median income. In the 3 person example Gates is #1, the husband is #2, and the wife is #3. The husband is the middle case, so the median income would be $60,000. Not a perfect measure, but better than the $333 million average.

$3 a Day

Measuring global income is similar to the example. Divide all the world's production by the entire world population, and the global per capita income measures roughly $5,000 per person. However, the more enlightening measure is the global median, which is somewhere around $1,000 a year or $3 a day. That is the income of the typical person on the planet today.

How do people live on $3 a day? To a well-fed, comfortable westerner surrounded by costly high technology it does not seem possible. There are two different answers to this question. The first is that still today some physically and socially isolated peoples live simply, raising and/or catching their own food, building their own shelter, bartering whatever they have for whatever they need, outside the modern money economy. They live in villages in the jungles or mountains or deserts or pursue a nomadic life, much as their ancestors have for thousands of years.

However, isolated communities of simple people living outside the range of globalization is the exception. Most of the world's poor are enmeshed in the 21st century world. How do they live on meager incomes? The short answer is that they don't—they die from diseases caused by malnutrition or exposure to the elements or pollution. They die in bloody skirmishes over scarce resources. They die when forests, fisheries, or farmland they once worked are taken over by local businessmen or global corporations and they are expelled into a world where they have no useful skills. Think of the history of the Native Americans in the U.S. if you need a model. When Columbus first landed in North America, there were tens of millions of Native Americans living there. Today there are less than a million pureblood Native Americans in the U.S. Some were simply murdered in land-grabs by the white settlers, but more died after they were ejected from their lands from diseases caused by malnutrition and exposure to the elements.

II. Globalizations

Globalization is a term thrown around without much reflection on what it really means. Extravagant claims are made about the “realities” and “requirements” of globalization as if globalization is a fixed, immutable imperative that all of us must bow to. There is a technical sense in which as long as technology continues to improve and progress, easier communication, trade, and travel are shrinking the world, although again, wild claims that time and space are disappearing are so exaggerated as to be ludicrous.

But the dominant concept of globalization as the triumph of the transnational corporation, world-spanning capitalist production and markets, homogenization of world cultures, etc. is only one form of globalization and not inevitable at all. The political and economic form globalization takes is a series of choices, made by people, governments, and institutions. In this more profound sense there is not one globalization, but several globalizations that are possible. One form is dominating now, but that is not predetermined by any fixed set of forces, but rather the outcome of policies and practices chosen by individuals and institutions. A better world is possible if we only choose to pursue it.

The real question is not what do we have to do to adapt and adjust to an immutable, inexorable globalization? Instead, the real question is globalization for whom? So far, the answer has been globalization for the transnational corporations and the tiny minority who own them.

We should be asking not how we have to change to adapt to globalization but how globalization has to change to make it serve the majority of people on this planet. It has been a great ideological triumph for the privileged few that most of us are still asking the wrong question.

Corporate Globalization as Impoverishment: A Few Simple Cases

Resource Exploitation and Exploitation of People

Africa is perhaps the richest continent in natural resources. Yet it is well known that it is the poorest continent in terms of the living standards of its people. Among many African political and economic elites, Africa's vast natural resources are often referred to as a curse rather than a blessing.

For example, take the people of the Niger Delta, site of some of the richest oil resources outside of the Middle East. On paper, as measured by GDP, the oil in the Niger Delta is a major contributor to Nigeria's standing as one of the more well off countries is Africa. Yet the exploitation of this oil has actually worsened the condition of the people of the Niger Delta. Vast tracts of farmland and fisheries have been ruined by pollution due to the lack of environmental standards enforcement of the Nigerian government. The profits from the oil fly away from Nigeria to roost overseas. Much of this wealth goes to the foreign oil companies that exploit the oil, even more goes to the foreign bank accounts of corrupt Nigerian politicians and businessmen who extract their share. Virtually no benefits go to the people of the Niger Delta. In fact, conditions are so bad there that a major insurrection against the horrible conditions has arisen. Armed conflict between the government and the rebels has substantially worsened an already bad situation. This story is repeated over and over across Africa where diamonds, metals, and rare minerals are exploited with little or no benefit to local people as they generate great wealth in the West and for national elites that exploit these resources and the local people. While few in the West know the story, it not exactly as secret either. Even major western motion pictures like Blood Diamonds, Lords of War, and The Constant Gardener tell the story to westerners who want to know. Western governments and pundits scold corrupt African elites for poor governance that wastes these precious natural resources, yet at the same time try to hide western complicity in this corruption.

Ronald McDonald is Burning Down the Rain Forest

Tropical forests are the world's greatest protection against global warming. Trees and plants breathe in carbon dioxide and breathe out oxygen. The evolution of animals along with plants is a vast example of symbiosis, the mutually beneficial relationship between two or more species. The greatest concentrations of tree and plant life on the planet are the rain forests. However, the rain forests are rapidly disappearing to satisfy mindless consumption. Large swathes of rain forests are destroyed every year just to produce the wooden chopsticks for the Japanese who could easily switch to metal utensils like the Koreans and Chinese use.

However, a much greater threat to the rain forest is slash and burn tactics used to create new farmland. Some of the agricultural land created by burning down the rain forest is devoted to local food for poor people. However, much of new land goes to pasture for beef ranchers who primarily export to the United States and other developed nations. Precious, irreplaceable natural protection against global warming is vanishing forever so that McDonald's can meet the American craving for cheap beef.

The misallocation of resources on a global scale can be seen every time a person in an advanced country has a cup of coffee. Virtually all coffee beans are grown in developing nations. Many coffee producing countries are among the poorest nations in the world, with many hungry citizens. Yet prime agricultural land is devoted to growing a product that has no caloric value, to be exported far beyond their borders. A more rational, humane system would devote much of this valuable land to feed the poor in their own nation.

III. Poverty, Insecurity, and the Pursuit of Consumption

While poverty and hunger are the greatest problems for the less developed nations of the world, corporate globalization has had serious negative consequences for the more advanced peoples of the world as well. Economic insecurity has become the reality for most people, even in the richer parts of the world. In the middle of the 20th century even relatively low skilled workers in the factories of the U.S., Japan, and much of Europe enjoyed relatively high wages and lifetime job security. Industrial workers, backed by strong unions, were pretty much guaranteed jobs at good wages and defined-benefit pensions that coupled with government retirement programs would keep them at a prosperous standard of living from the time they entered the workforce until they passed away. But at the beginning of the 21st century workers wages have been essentially frozen for decades, base unemployment rates have climbed, pensions with guaranteed benefits have largely disappeared for all but high executives with golden parachutes, shrinking pension plans are often not honored at all by tactical bankruptcies, merged corporate entities, and sleazy financial shenanigans, and unions are either broken completely or have become mere conduits for management announcements of lay-offs, reductions in wages, shrinking benefits, etc. The typical western worker, especially in the U.S., lives in more economic fear for his or her future than half a century ago.

Women in the western world have won the right to be treated largely as equals in the workforce. Most workers have always been just one lay-off from economic desperation, but having two wage earners was supposed to cushion the blow of unemployment. In an ideal world, two paycheck families should enjoy greater economic security than the woman as homemaker households of the middle of the 20th century. However, despite the fact that most two adult households now have two workers who seek fulltime employment, stagnant wages, frequent lay-offs, and the ever rising number of workers who seek full-time employment but can only find part-time work, many families need two paychecks to consistently live as well as a single earner family in the past. And yet two adult households are no longer the social norm. The rise in divorce, single-parent households, and single individuals living alone mean that more and more families have only a single adult worker in the ever more insecure labor market.

Only a couple generations ago, it was common for men to work at the same job for most of their adult life. Now any of the ever more ubiquitous employment counselors can tell you that a person today can expect to work a half a dozen or more jobs in their lifetime, as the average span of employment continues to shrink. Not just younger workers, but older workers as well spend an ever increasing portion of their lives in the time consuming and the psychologically debilitating process of just looking for work. A Doonesbury cartoon portrays a gaggle of Ph.D.s standing on the corner waiting anxiously for trucks to arrive to take a few of them off for day labor, mimicking the situation typical for many immigrant laborers. While the exaggeration and unusual juxtaposition of seemingly unlike groups is humorous, like much satire there is a deeper truth embedded in the image. What is efficient from the point of view of the company is not necessarily efficient from the point of view of the worker. Few of the hidden costs of workers' time put into the arduous process of job searching are measured by standard economic statistics. Nor are the social costs of unemployment in terms of medical and psychological damage caused by the stress of not having a job, family breakup due to financial problems, suicides attributable to lost self-esteem, etc.

The Unquenchable Hunger for Endless Consumption

The poor we have always had with us, but the continuation of mass poverty into the 21st century when for the first time in human history there is truly enough for everyone to have their basic human needs met is especially glaring. From the advent of capitalism workers have been feared they could not find or keep a decent job, but for workers in advanced nations to be more insecure in the workplace at the beginning of the 21st century than they were in the middle of the 20th century is a serious regression in living standards. Similarly, for thousands of years religions and ethical systems have taught that endless accumulation of material possessions will not bring happiness, yet the futile chase after happiness in ever more elaborate forms of consumption seems ever more entrenched around the world in the 21st century. The omnipresent electronic media drum home the message that buying things will make you happy.

Numerous studies have shown that increased income makes poor people happier as their worries about survival and security are eased. But there is less and less correlation between income and happiness as income levels rise. Once people pass a certain threshold, when they have enough income to live comfortably, more income does not bring greater happiness.

Yet the behavior of most middle and upper income people in the 21st century belies this simple truth. Most of us strive for ever higher prizes in the rat race long after we have reached a comfortable standard of living. We continue to compete to “keep up with the Joneses.” Veblen's observation more than a century ago that above a certain income level consumption ceases to be about meeting basic needs or enjoying life's pleasures but becomes a way of demonstrating social status is even more true today.

We have all been brainwashed from the cumulative effect of a lifetime of commercial messages that happiness and social position comes from ever greater consumption of things. Our lives have become centered around the progressive multiplication of unnecessary “needs.” The need for a phone becomes the need for a cell phone as well which becomes the need for an x-generation smart phone. The need for a typewriter becomes the need for a pc which becomes a need for a hand held device so we can stay online at all times. Simple conveniences become a burden when so much time and effort is put into not only acquiring them but also discovering what are the latest “needs.”

In fact, things are thieves of time. The endless quest for greater income and consumption takes us away from our families and our friends. Past a certain point our time would be better spent enjoying our relationships rather than acquiring more stuff. Moreover, the reduction of the 21st century human being into merely a calculating consumer undermines the capability of people to be citizens, to be concerned about the collective well being of their communities and other people around the world. Every minute spent working or shopping is a minute that is not devoted to family, friends, or community.

The Mindless Pursuit of Growth

Governments around the world are obsessed with pursuing economic growth as measured by GDP. While GDP is a useful summary statistic to analyze and compare economies, it focuses on the quantity of good and services produced, not the quality of lives lived. GDP does not measure the degree of fear and insecurity of workers in an ever more uncertain job market. Economic growth is correlated with the total number of jobs in an economy, but public policy would be better focused on creating jobs and improving the quality of work rather than simply producing low wages jobs with few benefits and few prospects for the future. It is well established now that in advanced societies past a certain point more income or consumption does not bring more happiness. It is also well known that working more hours and spending more time looking for better jobs takes time away from the real things of value--family, friends, and community. The more people pursue consumption, the less they develop as citizens. Simple pursuit of economic growth as measured by GDP is a trap for governments and economies, but it is a trap few recognize and even fewer seem able to avoid.

IV. Global Imbalances: Causes and Effects of the Great Recession

Today anyone who pays attention to the financial news knows that the global economy is out of balance. When the western economies were soaring to new heights on the assets bubble, very few saw these global imbalances and even fewer were aware how sharply they could pop the illusory living standards of the times. Today most analysts see that the U.S. in particular cannot continue to borrow its way to apparent prosperity and mercantilist Asian export-led economies cannot forever prosper solely by exporting to the U.S. and the EU.

Workers Are Consumers: Why We Can't Afford the 21st Century

But there are deeper imbalances in the global economy than the ones seen by conventional analysts—particularly the imbalance between capital and labor. The extraordinary Great Depression economist John Maynard Keynes identified the fundamental imbalance in capitalist economies—the lack of total demand relative to total supply. Keynes argued in advanced capitalism improvements in technology are always increasing productivity and thus the macro supply of goods. However workers' wages do not rise fast enough to meet these increases in supply. Since workers are also the vast majority of consumers, if wages do not keep pace with increasing productivity, total demand will not meet total supply. This is basically a technocratic restatement of Marx's original assertion that capitalists will never pay their workers enough so that they can afford to buy the goods they produce. For half a century this was orthodox economic theory about the cause of the Great Depression. Postwar western governments were determined that fiscal and monetary policy keep up aggregate demand.

However just at the point that new global forces were arising that dampened total demand relative to total supply, Keynesian theory fell into disrepute. The neoconservative restoration that produced Ronald Reagan in the U.S. and Margaret Thatcher in Great Britain also produced a new generation of revisionist free market economists who argued that high wages and government spending were the cause of the economic crisis of the 1970s. Keynesian policies were labeled as the problem, not the solution to the troubles of the global economy. Keynesian theory that the Great Depression was caused by inadequate demand and low wages was challenged by free traders who argued that the Great Depression was really caused by the fall in global trade that followed the protectionist policies states turned to to try to revive sagging economies.

Changes in the Global Economy

The fading of Keynesian theory was untimely because two new factors Keynes could not have foreseen were aggravating the fundamental problem of inadequate demand. The first was the rise of export-led East Asian economies, beginning with Japan and the so-called four tigers but accelerated with the rise of China and ASEAN economies as part of an increasingly integrated East Asian system. These economies prospered for several reasons, but certainly one of the most important was a determined government effort to simultaneously stimulate exports and suppress domestic consumption. A number of tools are used to pursue these mercantilist policies, including government subsidies to corporations, sustained undervaluing of the currency to make exports cheaper and imports more costly, anti-trade union policies to keep wages below the global norm, etc.

When properly done this mercantilism is a form of government enforced savings and investment, garnering capital largely by raising prices to domestic consumers and holding down wages. In the early postwar era when only Japan and a few small Asian economies followed these policies, these economies were only a small percentage of the world economy and their total effect on the global economy was small. But now that these policies have spread throughout East Asia and East Asia has become the third pillar of the world economy, total global supply is significantly boosted and total global demand is significantly suppressed by these policies. On a global level they further exacerbate the pre-existing Keynesian problem of total demand falling significantly short of total supply.

The second factor that has compounded the Keynesian problem on a global scale in recent years is the formation of the Euro. The value of currencies over time is substantially influenced by the mysterious factor of “confidence,” as the Great Recession rally in the dollar as a “safe haven ” currency shows. Many in Europe and around the world were skeptical that a currency issued by as complex a union of nations as the EU could survive, much less hold its value. So from the birth of the Euro every participating nation was required to adhere to a “stability pact” that kept government debt down, primarily by limiting government spending. Furthermore, the European central bank made suppressing inflation its overarching goal, virtually ignoring growth, income, and consumer demand as macroeconomic targets. While many governments learned how to fudge the stability requirements as the case of Greece most obviously demonstrates, Europe-wide the stability pact significantly dampened income growth and thus consumer spending. Moreover, except during the depth of the Great Recession, the European central bank kept the monetary reins tight, further dampening total demand. The effect of the sovereign debt crisis on the value of the Euro is exactly what tight monetary and fiscal policy across the Euro zone was designed to prevent. And despite recent setbacks these policies have been largely successful in establishing and protecting the Euro. Today the Euro is the second most widely traded currency in the world, surpassed only by the dollar. Its value relative to the dollar (and the yen?) is significantly higher today than when it was first issued. But the price has been further exacerbating the imbalance between global demand and global supply.

The Asset Bubble and the Great American Borrowing Spree

The fundamental Keynesian problem and the new contributors to a global scale imbalance between total supply and total demand went largely unrecognized for decades because of two countervailing factors occurring in the U.S. The first was the asset bubble which stimulated unsustainable demand from American consumers and businesses. Americans and American businesses simply appeared much wealthier than they really were, allowing them to make purchases at a rate they could not keep up once the bubble burst. Similarly, as their assets inflated, Americans went on a borrowing spree of unprecedented proportions. If one reads the World Bank's own figures carefully, it becomes apparent that half of all international debt owed by governments, individuals, and corporations to foreign governments, individuals, and corporations is owed by Americans to non-Americans. The American asset bubble coupled with the borrowing spree were the engines of global growth for the past quarter century. It was the solution to the Keynesian problem, artificially boosting global total demand to bring it in rough balance with global demand. However, as the Great Recession demonstrated, it was an illusion that cannot be sustained.

The Triumph of Wall Street, the Hollowing Out of American Manufacturing, and the Process of Financialization

Just as the American asset bubble plus the American borrowing spree overshadowed ominous global trends, so too they hid baleful trends in the American national economy. The triumph of Wall Street in the global economy was been a mixed blessing at best. Although middle class Americans saw the apparent value of their homes and stock portfolios soar, ordinary Americans' wages, adjusted for inflation, have been stagnant for decades. Even as the productivity of companies has been rising, wages, the fundamental source of the vast majority of Americans' living standards, have been static, as globalization exerts immense pressure to push all wages, including American wages, toward the global norm. In the vital area of manufacturing, American based companies increasingly either invest overseas or find they can no longer compete with low wage East Asian corporations.

General Motors was once the strongest corporation in the world, and got the lion's share of its revenue from the American market. Recently General Motors went broke. Until government receivership changed it policies, GM had not invested in a single new plant in the U.S. since the 1970s, although it did invest in Mexico, Brazil, China, South Africa, South Korea, etc. As its American operations grew increasingly unprofitable, GM sold more and more of its autos overseas and got more and more of its profits from overseas operations. However, as GM became less competitive in foreign markets, it eventually shriveled to a shell of its former self.

This hollowing out of American manufacturing has been seen in industry after industry. The United Autoworkers of America once had a million and a half members and could bargain as equals with the American Big Three auto companies. Today it has less than half a million active members and serves mainly as a conduit for the companies to announce their cutbacks and givebacks. United Steel used to be the largest steel producer in the world, producing 340,000 tons of steel in 1943. In 2009, it produced 15,000 tons, ranking 11th in the world.

As American manufacturing hollows out, the American economy become increasingly dependent on big finance, on Wall Street rather than the factory floor. The financialization of the American economy and to a lesser extent other advanced economies, was the second major cause of the Great Recession. Excessive speculation and lack of financial regulation were a major cause of the Great Depression and this pattern was repeated in the Great Recession. The “roaring twenties” brought new levels of financial speculation that produced what today we would call a massive asset bubble. The stock market crash of 1929 was caused by this excessive speculation. The stock market crash was the trigger that set off the Great Depression, and at the same time a major contributor to the depth of the Depression.

Furthermore, financialization allows Wall Street to more easily extract the wealth created by advanced economies and put it in the hands of owners rather than the worker, accelerating the fundamental problem of not paying workers enough to allow them to effectively consume the products of their labor. Financialization is another major contributor to the imbalance between the total supply of goods created and the total demand in the global economy.

Excessive Speculation, Deregulation, and ReRegulation

The problem of excessive speculation was clearly recognized by policymakers by the early 1930s, leading to new regulation of Wall Street, most notably the creation of the SEC to monitor financial practices and the Glass-Steagall Act which separated the functions of retail banking, commercial banking, stock brokering, and insurance and required a company to engage in only one of these activities. These regulations were a major reason why in the postwar economy the economic cycle was leveled out. Recessions could not be prevented, but financial regulation smoothed out the economic cycle so that no major depression occurred in the second half of the 20th century.

However, as the memory of the Depression faded, financial institutions increasingly chafed at the restrictions on their activities. With the coming to power of Reagan and Thatcher and the spawning of a new generation of economists and business people who had never known the Great Depression, a new wave of deregulation of financial institutions began. From 1981-2007 financial institutions were progressive “freed” from regulation. Commercial banks were once again allowed to engage in retail banking, stock brokering, insurance writing, etc. A new wave of mergers and acquisitions led to a small number of integrated financial corporations controlling ever larger percentages of national assets. New exotic financial instruments like derivatives and securitization of ordinary assets like home mortgages emerged.

Along with the fundamental Keynesian imbalance between total supply and total demand, financial speculation was a second major cause of the Great Recession. As in the 1930s the costs of excessive speculation were once again recognized and calls for new regulation once again grew louder and louder. This led to the financial reform act of 2010 enacted by Congress at the urging of President Obama. A new consumer protection agency for investors was created. The SEC and the Federal Reserve were given greater authority to regulate financial transactions. Capital requirements for financial corporations were raised, reining in the leverage of financial institutions. Most derivatives will now have to be traded through exchanges which will make these transactions more transparent.

However, the new regulation was a shadow of previous financial regulation. The integration of massive financial conglomerates was left untouched. There was nothing comparable to the Glass-Steagall Act of the Depression which separated the functions of commercial banking, retail banking, stock brokering, and insurance. The greater authority given to the SEC and the Federal Reserve is essentially meaningless because these institutions see their primary purpose as promoting financial institutions rather than regulating them. There is little real check on the continuing proliferation of exotic financial instruments like derivatives that benefit mainly the corporations that sell them yet add greater volatility to markets. In short, the financial reform of 2010 lacks the teeth of the regulation of the 1930s. It will curb abusive practices around the margins, but it will do little to truly rein in the excessive speculation that will eventually bring the economy crashing down again.

Why is the new regulation so weak? First, the ideology of the unfettered free market is still strong. Policymakers fear killing the goose they think has been laying the golden egg. The complete collapse of economic activity during the Great Depression largely destroyed'' the ideology of the unfettered market, allowing the New Dealers to reshape the fundamental workings of the economy. The Great Recession of the early 21st century was not as deep and did not last as long, so policymakers are more reluctant to make deep changes in the way financial institutions operate. Furthermore, individual members of Congress are much more dependent these days on campaign contributions from lobbyists to help them hold on to their seats. And no interest group has deeper pockets than the financial institutions.

However, perhaps the most important check on serious regulation of financial corporations is our old friend globalization. In today's connected world vast sums of money move around the world at the speed of light. Nations fear that if their regulation of financial corporations is tougher than other nations' wealth will fly away to more permissive venue. This is especially true in nations that are already centers of finance. Wall Street, London, and Frankfurt have effectively argued that their current advantage in accumulating wealth through financialization will be lost if serious regulation is imposed.