The U.N.’s recently released 2013 Human Development Report summarizes strikingly good news about the decline in global poverty over the last two decades (whereas once 43 percent of humans lived in extreme poverty, that figure has now fallen to 21 percent) and predicted the rise of a global middle class.
Over this same period, reports on the experience of the U.S. middle class show continuing stagnation in incomes if not a bit of decline. Yet these stagnating incomes and unemployment since the recession come amid the backdrop of a stock market that has fully rebounded to its pre-recession highs.
While the stories have been reported separately by the media, they can be seen as two parts of a single story—and all a function of globalization.
Why would globalization negatively impact the American middle class while having a hugely positive impact on the middle class in less-developed countries? And why would the U.S. stock market continue to climb in the midst of sustained unemployment and a seemingly stagnant economy?
One answer comes from the “Stolper–Samuelson” theorem in economics. The basic idea is this: When two (or more) countries’ markets join together to form a single market, the returns on the factors of production like labor and capital fall for factors that are relatively scarce and increase for factors that are relatively abundant. Importantly, however, a factor that is relatively abundant in one country can be relatively scarce in another country, so the same event—trade liberalization—can affect the same groups differently in different countries.
In the U.S. labor is relatively scarce (particularly low-wage labor) and capital is relatively abundant. In poorer countries, labor is relatively abundant (particularly low-wage labor) and capital is relatively scarce. Integrating markets with poorer nations thus results in lower wages for U.S. workers and increased returns to U.S. capital holders. (We should note in passing that many American workers also own capital.) So in the U.S., globalization means that the value of the stock market increases while wages stagnate or decrease.
But this describes only the effect of globalization in our nation. In countries with an abundance of labor relative to capital—which is the case in most poor countries—the opposite outcome occurs: Globalization means that wages increase, and can increase significantly. This is what the U.N. report describes. (The other outcome would be stagnation or decline in returns to domestic capital in poorer nations. This provides a potential reason for opposition to globalization among economic elites in less-developed countries.)
Put the two predicted effects together for labor, and we get the seeming paradox of the middle class rising throughout most of the less-developed world, while the middle class stagnates or declines in the U.S.
So who gets hurt if globalization is successfully opposed?
First, this explanation, if correct, complicates the story of increasing economic inequality in the U.S. Increasing inequality has not resulted from a simple transfer from employees to employers. Rather, with globalization, the returns to labor in the U.S. decrease because of the increased pool of labor available for work, and the returns to capital increase because of its relative abundance. Recall that the news for capital holders is as mixed as it is for labor: good news for capital owners in some countries, bad news for capital owners in others.
But the source of increasing inequality in the U.S. also can be a source of decreasing inequality in less-developed countries as workers earn more and capital earns less. This complicates the morality of policies that seek to resist the effects of globalization. Protecting some American workers can mean impoverishing some overseas workers. And indeed, gains overseas in the form of decreased poverty seem greater than the losses in the U.S., which appear mainly in the form of stagnating incomes.
The issue raises the question of the morality of preferring the neighbor whom you know to the neighbor whom you do not know. Globalization moves someone overseas out of grinding poverty, while moving someone domestically into struggle and stagnation.
If this were simply a one-to-one exchange, I don’t think that there would be anything morally compelling about the process. But it is not a one-to-one exchange. Cheaper production means that everyone gets the same product, but now with a bit more left over to save or to spend or to give away. We cannot be oblivious to the promise this holds out to less affluent folk both domestically and abroad. Markets socialize the benefits of production through a lower price.
The problem, however, is that the negative impacts of globalization on the domestic economy—job losses and downward wage pressures—are more concentrated on relatively few workers, and the domestic benefits of globalization—less expensive products for all of us—are distributed much more diffusely.
The process of creative destruction, as Shumpeter put it, is one that we actually want to occur if we care about alleviating poverty. The U.N. report provides dramatic evidence of that. Yet this doesn’t require that societies toss away the workers who lose in this process. The maintenance of a social safety net makes the process livable. Tariffs and protectionism not only “beggar thy neighbor” overseas, they also “beggar thy neighbor” across the street. Nonetheless, the different trends are all connected, and that’s important to recognize.
If I’m correct, then the opposition to globalization seen in movements like “Occupy Wall Street” isn’t simply about protecting what Americans already have, it also means continuing the poverty of less-developed countries. This doesn’t mean that we should accept globalization uncritically, but it does mean that domestic responses will need to be as complicated as its effects.
James R. Rogers is department head and associate professor of political science at Texas A&M University. He leads the “New Man” prison ministry at the Hamilton Unit in Bryan, Texas, and serves on the Board of Directors for the Texas District of the Lutheran Church-Missouri Synod. His previous “On the Square” articles can be found here.