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Plutocracy, not global competition, harms the middle class.



Mural by Banksy, Boston, Massachusetts. Photograph: Chris Devers

In a short column last January on the most important economic chart of the year, Paul Krugman chose what has been dubbed the “elephant curve.” Drawn from a paper by Branko Milanović and Christoph Lakner, and explored at length in Milanović’s new book Global Inequality, it portrays large income gains for the global middle class between 1988 and 2011 alongside stagnant incomes for the middle class in rich countries—and, as we all know by now, huge gains for the global top 1 percent.

What explains the pattern? Some have taken the Milanović-Lakner data as evidence for what might be called the “globalization tradeoff”: the thesis that economic development in poor countries has come at the cost of economic stagnation for the middle class in developed nations. According to this view, the growth of the global middle class is a zero-sum game; to put it provocatively, you must rob from the relatively rich middle class to give to the middle class in poor countries.

In response, a raft of recent articles has come to the defense of globalization, but not on the grounds that we might expect—namely, that the tradeoff thesis is wrong. These include works by Zack Beauchamp, Brian Doherty, Jordan Weissmann, Noah Smith, James Pethokoukis, Annie Lowrey, and Charles Kenny. Globalization may indeed be a zero-sum game, these writers say, but it is one we are morally compelled to play—by perpetuating current trade policy—in order to help the global poor. Milanović himself has strenuously protested reading his work in this way.

Defending global trade by its success abroad is doomed to failure.

The timing of these articles is obviously tied to the U.S. presidential primary, but also more obliquely to a recent research paper by David Autor, David Dorn, and Gordon Hanson documenting the devastating effect that opening up trade with China had on the labor markets where competition with Chinese imports was fiercest. The work of Autor, Dorn, and Hanson only amplifies disappointment at globalization’s failed promise to improve the domestic economy, even if—so the story was supposed to have gone—it cost some jobs at home in the short run. In this sense, their research lags the politics: dissatisfaction with trade and with globalization more generally has driven a populist upsurge—perhaps most concretely in the rise of both Donald Trump and Bernie Sanders, foreshadowed by the Occupy movement. The many elite pundits who scorned the dire predictions of trade liberalization’s opponents in the 1990s have to admit globalization has failed to produce the promised prosperity at home.

But the answer is not to justify globalization by looking to gains made elsewhere. The tradeoff thesis does not stand up to scrutiny, and defending globalization by its success abroad seems doomed to failure. Indeed, it is important to note what a profound rhetorical retreat it amounts to. For decades, the policy-making establishment assured the public that the gains from globalization at home would outweigh the losses, and the winners would compensate the losers. It is hard to make that case now. Hence the retreat to grounding the argument for free capital mobility in the gains to the world’s poor.

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There are numerous problems with the tradeoff thesis. First, the causal mechanism underlying it is by no means clear. Dean Baker addresses the point that trade agreements between rich and poor countries have sought to maximize trade imbalance rather than trade in order to serve the gospel of “export-led development” that became conventional wisdom following the East Asian financial crisis of 1998. Running a trade surplus to accumulate foreign reserves became imperative for elites in poor countries to prevent financial crisis in a world of perfect capital mobility. At the same time, it became lucrative for elites in rich countries as a means to sharpen the threat of outsourcing that they wield against their domestic workforce.

To take one example, the Trans-Pacific Partnership arises from a moment in geostrategic politics that favors the United States with a strong negotiating position: would-be trading partners in Southeast Asia would rather be in our economic orbit than China’s. What did our negotiators do with this advantage? They imposed intellectual property protections and an “Investor-State Dispute Resolution” mechanism that supersedes our trading partners’ domestic law, both of which are the top demands of would-be outsourcing industries in order to reduce the danger they would face if their intellectual property fell off the back of a truck in Southeast Asia or if they were ensnared in some sort of domestic political or regulatory controversy there. And those guarantees, in turn, make the threat to take jobs overseas more credible. What we did not use our negotiating power to achieve is international labor or environmental standards that might have put the muscle of access to America’s domestic consumers behind our ostensible foreign policy priorities, because a trade agreement with those elements would do the opposite of what U.S. elites want out of trade policy: maximizing trade imbalances.

Turning to trade more generally, the research agenda in economics known as New Trade Theory grew up in response to the fact that most of the world’s trade is accounted for by flows between similar countries trading similar goods. This stands in stark contrast with the classical view of trade as taking place between countries with different endowments of labor and capital specializing in different industries—an antiquated view that is nonetheless well-represented in the clutch of recent articles declaring that anti-globalization policies threaten the world’s poor. Instead, in New Trade Theory, countries that are geographically close foster an industrial network in which one country’s firms can serve as suppliers or customers for the other’s. In other words, the economic literature on international trade does not ascribe a major role to trade between the developing and developed world, nor does it locate the gains from trade, such as they are, in the expansion of flows between rich and poor.

In 2006, Milanovic himself published a compelling disproof of the globalization tradeoff from a historical perspective. He noted that between the two world wars—a notorious period of retrenchment and retreat from economic integration—inter-country inequality actually narrowed. But in the Gilded Age just before that, a period of “high globalization” featuring the highest international trade flows as a percentage of global output in history, inter-country inequality was either stable or increased slightly.

A further argument against the tradeoff thesis is that it is democratization, not openness to trade, that explains the high rates of income growth in the developing world over the last three decades. Daron Acemoglu, Suresh Naidu, James Restrepo, and James Robinson argue that there is a major income-growth effect for post–Cold War democratization events, which often in turn cause trade liberalizations in those countries. Extending this argument to China—where democracy has not taken hold—the mechanism is taken to be the threat of democratization, which has induced the Communist Party leadership to buy off a challenge to their power with middle-class income growth.

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If the tradeoff thesis is wrong, what’s the real reason middle class incomes in rich countries have stagnated? The inequality trend that most significantly unites the developed and developing worlds is the growth of the global plutocracy and its imperviousness to the national forces that once tamed plutocratic wealth. Income and wealth taxes, collective bargaining, social insurance, public health and education, counter-cyclical macroeconomic policy—all these things, except perhaps the last, have only ever operated at the national level. But by facilitating global capital mobility in the name of economic development, globalization insulates accumulated wealth from predation by national politics. Just consider the proliferation of international tax evasion and avoidance recently illustrated by the Panama Papers. Capital mobility—not competition with the world’s poor—is the greatest threat to the working class in rich countries.

Capital mobility—not competition with the world’s poor—is the greatest threat to the working class in rich countries.

Therefore, although there is considerable evidence against the tradeoff thesis, the most compelling case against it may not be empirical but rather moral and practical. Playing the domestic working class against the global poor—in fact, openly siding with the latter—is a recipe for instability and populist reaction. It signals to domestic voters that their economic interests are not and should not be the priority in national policy. Instead, they should be sacrificed to the international elite, on the one hand, and to those even worse off, on the other. As Milanović writes:

Two political camps are thus formed, not only in the United States but in practically all rich countries: the camp of ideologically cosmopolitan rich whose incomes keep on increasing and the camp of nativist lower-middle classes who feel that nobody is defending their interests. [This] produces political polarization with clear dangers of transforming democracy into either a plutocracy that would continue with current policies, or alternatively a populist regime that would give way to the frustration of the middle classes by reimposing tariff rates, exchange controls and tighter migration rules.

Politicians responsible to the public cannot sell the idea that the domestic middle class must suffer, to the benefit of foreigners. The tradeoff idea instead serves the folk mythology of an elite class of economic policy consensus–enforcers, who push policies that enrich the already wealthy. Democracy is supposed to operate as a natural check to bring the elite policy-making consensus in line with popular opinion and interest; playing the domestic middle class against a foreign one is one of many ways to keep that from happening. Asking which ought to suffer to benefit the other distracts attention from the real issue: their joint exploitation at the hands of globally mobile capital.