Toward greater inequality

In his column in the New York Times, Anthony Lewis wrote, "Since World War II, the world has experienced extraordinary growth." Meanwhile, at a meeting in Quito, Ecuador, Juan de Dias Parra, the head of the Latin American Association for Human Rights, said, "In Latin America today, there are 7 million more hungry people, 30 million more illiterate people, 10 million more families without homes, 40 million more unemployed persons than there were 20 years ago. There are 240 million human beings in Latin America without the necessities of life, and this when the region is richer and more stable than ever, according to the way the world sees it." How do you reconcile those two statements?

It just depends on which people you're talking about. The World Bank came out with a study on Latin America which warned that Latin America was facing chaos because of the extraordinarily high level of inequality, which is the highest in the world (and that's after a period of substantial growth). Even the things the World Bank cares about are threatened.

The inequality didn't just come from the heavens. There was a struggle over the course of Latin American development back in the mid-1940s, when the new world order of that day was being crafted.

The State Department documents on this are quite interesting. They said that Latin America was swept by what they called the "philosophy of the new nationalism," which called for increasing production for domestic needs and reducing inequality. The basic principle of this new nationalism was that the people of the country should be the prime beneficiary of the country's resources.

The US was sharply opposed to that and came out with an economic charter for the Americas that called for eliminating economic nationalism (as it's also called) in all of its forms and insisting that Latin American development be "complementary" to US development. That means we'll have the advanced industry and the technology and the peons in Latin America will produce export crops and do some simple operations that they can manage. But they won't develop economically the way we did.

Given the distribution of power, the US of course won. In countries like Brazil, we just took over -- Brazil has been almost completely directed by American technocrats for about fifty years. Its enormous resources should make it one of the richest countries in the world, and it's had one of the highest growth rates. But thanks to our influence on Brazil's social and economic system, it's ranked around Albania and Paraguay in quality of life measures, infant mortality and so on.

It's true, as Lewis says, that there's been very substantial growth in the world. At the same time, there's incredible poverty and misery, and that's increased even more.

If you compare the percentage of world income held by the richest 20% and the poorest 20%, the gap has dramatically increased over the past thirty years. Comparing rich countries to poor countries, it's about doubled. Comparing rich people to poor people within countries, it's increased far more and is much sharper. That's the consequence of a particular kind of growth.

Do you think this trend of growth rates and poverty rates increasing simultaneously will continue?

Actually, growth rates have been slowing down a lot; in the past twenty years, they've been roughly half of what they were in the preceding twenty years. This tendency toward lower growth will probably continue.

One cause is the enormous increase in the amount of unregulated, speculative capital. The figures are really astonishing. John Eatwell, one of the leading specialists in finance at Cambridge University, estimates that, in 1970, about 90% of international capital was used for trade and long-term investment --more or less productive things -- and 10% for speculation. By 1990, those figures had reversed: 90% for speculation and 10% for trade and long-term investment.

Not only has there been radical change in the nature of unregulated financial capital, but the quantity has grown enormously. According to a recent World Bank estimate, $14 trillion is now moving around the world, about $1 trillion or so of which moves every day.

This huge amount of mostly speculative capital creates pressures for deflationary policies, because what speculative capital wants is low growth and low inflation. It's driving much of the world into a low-growth, low-wage equilibrium.

This is a tremendous attack against government efforts to stimulate the economy. Even in the richer societies, it's very difficult; in the poorer societies, it's hopeless. What happened with Clinton's trivial stimulus package was a good indication. It amounted to nothing -- $19 billion, but it was shot down instantly.

In the fall of 1993, the Financial Times [of London] trumpeted, "the public sector is in retreat everywhere." Is that true?

It's largely true, but major parts of the public sector are alive and well -- in particular those parts that cater to the interests of the wealthy and the powerful. They're declining somewhat, but they're still very lively, and they're not going to disappear.

These developments have been going on for about twenty years now. They had to do with major changes in the international economy that became more or less crystallized by the early 1970s.

For one thing, US economic hegemony over the world had pretty much ended by then, and Europe and Japan had reemerged as major economic and political powers. The costs of the Vietnam War were very significant for the US economy, and extremely beneficial for its rivals. That tended to shift the world balance.

In any event, by the early 1970s, the US felt that it could no longer sustain its traditional role as -- essentially -- international banker. (This role was codified in the Bretton Woods agreements at the end of the Second World War, in which currencies were regulated relative to one another, and in which the de facto international currency, the US dollar, was fixed to gold.)

Nixon dismantled the Bretton Woods system around 1970. That led to tremendous growth in unregulated financial capital. That growth was rapidly accelerated by the short-term rise in the price of commodities like oil, which led to a huge flow of petrodollars into the international system. Furthermore, the telecommunications revolution made it extremely easy to transfer capital --or, rather, the electronic equivalent of capital -- from one place to another.

There's also been a very substantial growth in the internationalization of production. It's now a lot easier than it was to shift production to foreign countries -- generally highly repressive ones -- where you get much cheaper labor. So a corporate executive who lives in Greenwich, Connecticut and whose corporate and bank headquarters are in New York City can have a factory somewhere in the Third World. The actual banking operations can take place in various offshore regions where you don't have to worry about supervision --you can launder drug money or whatever you feel like doing. This has led to a totally different economy.

With the pressure on corporate profits that began in the early 1970s, a big attack was launched on the whole social contract that had developed through a century of struggle and that had been more or less codified around the end of the Second World War with the New Deal and the European social welfare states. The attack was led by the US and England, and by now has reached continental Europe.

It's led to a serious decline in unionization, which carries with it a decline in wages and other forms of protection, and to a very sharp polarization of the society, primarily in the US and Britain (but it's spreading).

Driving in to work this morning, I was listening to the BBC [the British Broadcasting Company, Britain's national broadcasting service]. They reported a new study that found that children living in workhouses a century ago had better nutritional standards than millions of poor children in Britain today.

That's one of the grand achievements of [former British Prime Minister Margaret] Thatcher's revolution. She succeeded in devastating British society and destroying large parts of British manufacturing capacity. England is now one of the poorest countries in Europe -- not much above Spain and Portugal, and well below Italy.

The American achievement was rather similar. We're a much richer, more powerful country, so it isn't possible to achieve quite what Britain achieved. But the Reaganites succeeded in driving US wages down so far that we're now the second lowest of the major industrial countries, barely above Britain. Labor costs in Italy are about 20% higher than in the US, and in Germany they're maybe 60% higher.

Along with that goes a deterioration of the general social contract and a breakdown of the kind of public spending that benefits the less privileged. Needless to say, the kind of public spending that benefits the wealthy and the privileged -- which is enormous -- remains fairly stable.

"Free trade"

My local newspaper, the Boulder [Colorado] Daily Camera, which is part of the Knight-Ridder chain, ran a series of questions and answers about GATT [the General Agreement on Tariffs and Trade]. They answered the question, Who would benefit from a GATT agreement? by writing, "Consumers would be the big winners." Does that track with your understanding?

If they mean rich consumers -- yes, they'll gain. But much of the population will see a decline in wages, both in rich countries and poor ones. Take a look at NAFTA [the North American Free Trade Agreement], where the analyses have already been done. The day after NAFTA passed, the New York Times had its first article on its expected impact in the New York region. (Its conclusions apply to GATT too.)

It was a very upbeat article. They talked about how wonderful NAFTA was going to be. They said that finance and services will be particularly big winners. Banks, investment firms, PR firms, corporate law firms will do just great. Some manufacturers will also benefit -- for example, publishing and the chemical industry, which is highly capital-intensive, with not many workers to worry about.

Then they said, Well, there'll be some losers too: women, Hispanics, other minorities, and semi-skilled workers -- in other words, about two-thirds of the work force. But everyone else will do fine.

Just as anyone who was paying attention knew, the purpose of NAFTA was to create an even smaller sector of highly privileged people -- investors, professionals, managerial classes. (Bear in mind that this is a rich country, so this privileged sector, although smaller, still isn't tiny.) It will work fine for them, and the general population will suffer.

The prediction for Mexico is exactly the same. The leading financial journal in Mexico, which is very pro-NAFTA, estimated that Mexico would lose about 25% of its manufacturing capacity in the first few years and about 15% of its manufacturing labor force. In addition, cheap US agricultural exports are expected to drive several million people off the land. That's going to mean a substantial increase in the unemployed workforce in Mexico, which of course will drive down wages.

On top of that, union organizing is essentially impossible. Corporations can operate internationally, but unions can't -- so there's no way for the work force to fight back against the internationalization of production. The net effect is expected to be a decline in wealth and income for most people in Mexico and for most people in the US.

The strongest NAFTA advocates point that out in the small print. My colleague at MIT, Paul Krugman, is a specialist in international trade and, interestingly, one of the economists who's done some of the theoretical work showing why free trade doesn't work. He was nevertheless an enthusiastic advocate of NAFTA -- which is, I should stress, not a free trade agreement.

He agreed with the Times that unskilled workers -- about 70% of the work force -- would lose. The Clinton administration has various fantasies about retraining workers, but that would probably have very little impact. In any case, they're doing nothing about it.

The same thing is true of skilled white-collar workers. You can get software programmers in India who are very well trained at a fraction of the cost of Americans. Somebody involved in this business recently told me that Indian programmers are actually being brought to the US and put into what are kind of like slave labor camps and kept at Indian salaries -- a fraction of American salaries -- doing software development. So that kind of work can be farmed out just as easily.

The search for profit, when it's unconstrained and free from public control, will naturally try to repress people's lives as much as possible. The executives wouldn't be doing their jobs otherwise.

What accounted for all the opposition to NAFTA?

The original expectation was that NAFTA would just sail through. Nobody would even know what it was. So it was signed in secret. It was put on a fast track in Congress, meaning essentially no discussion. There was virtually no media coverage. Who was going to know about a complex trade agreement?

That didn't work, and there are a number of reasons why it didn't. For one thing, the labor movement got organized for once and made an issue of it. Then there was this sort of maverick third-party candidate, Ross Perot, who managed to make it a public issue. And it turned out that as soon as the public learned anything about NAFTA, they were pretty much opposed.

I followed the media coverage on this, which was extremely interesting. Usually the media try to keep their class loyalties more or less in the background -- they try to pretend they don't have them. But on this issue, the bars were down. They went berserk, and toward the end, when it looked like NAFTA might not pass, they just turned into raving maniacs.

But despite this enormous media barrage and the government attack and huge amounts of corporate lobbying (which totally dwarfed all the other lobbying, of course), the level of opposition remained pretty stable. Roughly 60% or so of those who had an opinion remained opposed.

The same sort of media barrage influenced the Gore-Perot television debate. I didn't watch it, but friends who did thought Perot just wiped Gore off the map. But the media proclaimed that Gore won a massive victory.

In polls the next day, people were asked what they thought about the debate. The percentage who thought that Perot had been smashed was far higher than the percentage who'd seen the debate, which means that most people were being told what to think by the media, not coming to their own conclusions.

Incidentally, what was planned for NAFTA worked for GATT -- there was virtually no public opposition to it, or even awareness of it. It was rammed through in secret, as intended.

What about the position people like us find ourselves in of being "against," of being "anti-," reactive rather than pro-active?

NAFTA's a good case, because very few NAFTA critics were opposed to any agreement. Virtually everyone -- the labor movement, the Congressional Office of Technology Assessment (a major report that was suppressed) and other critics (including me) -- was saying there'd be nothing wrong with a North American Free Trade Agreement, but not this one. It should be different, and here are the ways in which it should be different -- in some detail. Even Perot had constructive proposals. But all that was suppressed.

What's left is the picture that, say, Anthony Lewis portrayed in the Times: jingoist fanatics screaming about NAFTA. Incidentally, what's called the left played the same game. James Galbraith is an economist at the University of Texas. He had an article in a sort of left-liberal journal, World Policy Review, in which he discussed an article in which I said the opposite of what he attributed to me (of course -- but that's typical).

Galbraith said there's this jingoist left -- nationalist fanatics -- who don't want Mexican workers to improve their lives. Then he went on about how the Mexicans are in favor of NAFTA. (True, if by "Mexicans" you mean Mexican industrialists and executives and corporate lawyers, not Mexican workers and peasants.)

All the way from people like James Galbraith and Anthony Lewis to way over to the right, you had this very useful fabrication -- that critics of NAFTA were reactive and negative and jingoist and against progress and just wanted to go back to old-time protectionism. When you have essentially total control of the information system, it's rather easy to convey that image. But it simply isn't true.

Anthony Lewis also wrote, "The engine for [the world's] growth has been...vastly increased...international trade." Do you agree?

His use of the word "trade," while conventional, is misleading. The latest figures available (from about ten years ago -- they're probably higher now) show that about 30% or 40% of what's called "world trade" is actually internal transfers within a corporation. I believe that about 70% of Japanese exports to the US are intrafirm transfers of this sort.

So, for example, Ford Motor Company will have components manufactured here in the US and then ship them for assembly to a plant in Mexico where the workers get much lower wages and where Ford doesn't have to worry about pollution, unions and all that nonsense. Then they ship the assembled part back here.

About half of what are called US exports to Mexico are intrafirm transfers of this sort. They don't enter the Mexican market, and there's no meaningful sense in which they're exports to Mexico. Still, that's called "trade."

The corporations that do this are huge totalitarian institutions, and they aren't governed by market principles -- in fact, they promote severe market distortions. For example, a US corporation that has an outlet in Puerto Rico may decide to take its profits in Puerto Rico, because of tax rebates. It shifts its prices around, using what's called "transfer pricing," so it doesn't seem to be making a profit here.

There are estimates of the scale of governmental operations that interfere with trade, but I know of no estimates of internal corporate interferences with market processes. They're no doubt vast in scale, and are sure to be extended by the trade agreements.

GATT and NAFTA ought to be called "investor rights agreements," not "free trade agreements." One of their main purposes is to extend the ability of corporations to carry out market-distorting operations internally.

So when people like [Clinton's National Security Advisor] Anthony Lake talk about enlarging market democracy, he's enlarging something, but it's not markets and it's not democracy.

Date: 2015-12-24; view: 676