One of those little things we hope not to see in a newspaper column:
That story is recounted in Hell to Pay, a brilliant new book by Michael Lind about how the suppression of wages is driving economic, social and political crises in America. The idea that we are paid what we deserve – and that the decline in mid-skilled, mid-paid jobs simply reflects the high-tech, globalised economy in which we live – derives from free market theory. But it is, Lind argues, utter nonsense.
Lind and “brilliant” isn’t quite how we’d put it. For we always recall Paul Kurgman’s comments upon the economic commentary of Michael Lind:
One of America's new intellectual stars is a young writer named Michael Lind, whose contrarian essays on politics have given him a reputation as a brilliant enfant terrible. In 1994 Lind published an article in Harper's about international trade, which contained the following remarkable passage:
"Many advocates of free trade claim that higher productivity growth in the United States will offset pressure on wages caused by the global sweatshop economy, but the appealing theory falls victim to an unpleasant fact. Productivity has been going up, without resulting wage gains for American workers. Between 1977 and 1992, the average productivity of American workers increased by more than 30 percent, while the average real wage fell by 13 percent. The logic is inescapable. No matter how much productivity increases, wages will fall if there is an abundance of workers competing for a scarcity of jobs -- an abundance of the sort created by the globalization of the labor pool for US-based corporations." (Lind 1994: )
What is so remarkable about this passage? It is certainly a very abrupt, confident rejection of the case for free trade; it is also noticeable that the passage could almost have come out of a campaign speech by Patrick Buchanan. But the really striking thing, if you are an economist with any familiarity with this area, is that when Lind writes about how the beautiful theory of free trade is refuted by an unpleasant fact, the fact he cites is completely untrue.
More specifically: the 30 percent productivity increase he cites was achieved only in the manufacturing sector; in the business sector as a whole the increase was only 13 percent. The 13 percent decline in real wages was true only for production workers, and ignores the increase in their benefits: total compensation of the average worker actually rose 2 percent. And even that remaining gap turns out to be a statistical quirk: it is entirely due to a difference in the price indexes used to deflate business output and consumption (probably reflecting overstatement of both productivity growth and consumer price inflation). When the same price index is used, the increases in productivity and compensation have been almost exactly equal. But then how could it be otherwise? Any difference in the rates of growth of productivity and compensation would necessarily show up as a fall in labor's share of national income -- and as everyone who is even slightly familiar with the numbers knows, the share of compensation in U.S. national income has been quite stable in recent decades, and actually rose slightly over the period Lind describes.
The question here is not why Lind got these numbers wrong. It takes considerable experience to know where to look and what to worry about in economic statistics, and one should not expect someone who does not work in the field to be able to get it right without some guidance. The question is, instead, why Mr. Lind felt that it was a good idea to make sweeping pronouncements about this subject, when he clearly was unwilling to invest time and energy in actually understanding it. The short answer in this case is surely that Mr. Lind, who is always looking for ways to enhance his enfant terrible status, saw this as a perfect opportunity. Free trade is a sacred cow of economists, who are well-known to be boring, stuffy types; what could be a better way to reinforce one's credentials as a radical, innovative thinker than to skewer their most beloved doctrine? (It seems not to have occurred to him that there might be a reason other than ideological rigidity that the striking fact he thought he knew has not been noticed by economists).
Matters have not improved over the decades.
The most important point of ignorance here is though that no one really did go out and design or even build globalisation. Yes, obviously, there were spouting from politicians but when, and of what, isn’t that true? Tariffs came down a bit.
But the real drivers were cheap transport, cheap telecoms and cheap travel. Barriers to trade are not just the tariffs or quotas imposed by governments. They’re also the barriers imposed by the physical cost of trading. All of which have collapsed in these past few decades.
We saw this before in history too - after the Civil War the US raised tariffs considerably. The ocean going steamship lowered physical costs by more than the rise in tariffs - total trade costs fell and we can prove this by noting the falling differences in prices of tradeable goods between the US and Europe over this period.
Everyone loves the gravity model of trade these days and very few note that it talks about economic distance, not geographic. Those plummeting transport, travel and telecoms costs meant that economic distance also plummeted over the past 50 years. Therefore everywhere was becoming closer in that economic distance and so trade should increase. QED.
In order to stop this - if anyone wanted to be that stupid - tariffs would have to be raised, viciously and violently, to cover the reduction in those other costs.
It isn’t true that anyone went out and designed globalisation - they just didn’t stop it. And thank the Lord Above for that one, eh?
Oh, and, obviously, don’t take Michael Lind seriously on the subject of trade.