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Globalization Is Great—Except When It Isn’t

Irwin M. Stelzer

Barack Obama might be on to something. He has brought class warfare to American politics. Well, revived it anyway, after Al Gore rode it to a loss in the 2000 presidential election. In fact, America has seen such outbreaks from time to time, most notably when William Jennings Bryan represented the debtor class by calling for a debased currency in his “You shall not crucify mankind on a cross of gold” presidential campaigns of 1896, 1900, and 1908. He lost all three.

That was then, and this is now. For one thing, Obama’s attack on “fat cat bankers” who, he says, brought on our current troubles, but escaped unscathed after taxpayer bailouts, is falling on the sympathetic ears of the unemployed and underemployed, families who have been converted to renters from homeowners after being dispossessed by those bankers, and parents worried that even their college-graduated children will slide down the living standard scale. As Manhattan Institute economist Diana Furchtgott-Roth points out at RealClearMarkets.com, “The unemployment rate in 2010 for newly graduated men and women with bachelor degrees was 9.2 percent, far higher than the 5.1 percent rate such adults experienced in 2005.” Worse still, she cites new studies that show that “graduating in a recession leads to earnings losses that last for 10 years after graduation.”

For another, the president’s attacks on “millionaires and billionaires” are getting a sympathetic hearing from Americans once immune to such populist rabble-rousing. During the good times—1993-2000 and 2001-2007—the real incomes of the top 1 percent of earners grew at rates of over 10 percent, while those of 99 percent of earners increased at rates of only 2.7 percent and 1.3 percent in those periods, respectively. Much-publicized bankers’ bonuses, often in the tens of millions of dollars, challenged the long-held quintessentially American view that income is related to performance. Failed bankers and CEOs who were cashiered for unsatisfactory performance rode off into the sunset with millions in their pockets, and free time in which to lower their golf scores.

So goes the populist version. Right on many of the facts, wrong on the diagnosis and prescription. There is no denying that income inequality has increased in recent years. Or that it is tempting for politicians to equate inequality with inequity, or unfairness, and to propose to solve the problem by taxing the rich, defined by candidate Obama as those millionaires and billionaires, and by legislation-proposing Obama as families with annual incomes of more than $250,000. Just how taking money from these people will put any cash into the pockets of those who have not done well of late is unexplained.

As any thoughtful leftist knows, the culprit is globalization, the very same phenomenon that has done more to end poverty in the world than all the well-intentioned aid programs have ever done. Millions of Chinese and Indian workers have ridden the production of stuff for world markets to a level of affluence undreamt of only a decade or so ago. Millions of Russians and residents of former satellite nations are increasingly prosperous and free to travel and spend.

So far, so good. But globalization has also exacerbated inequality in many Western countries, including most especially America. Managerial skills can now be marketed internationally, and fetch higher prices. The dealmaker who could make his tens of thousands merging one U.S. company with another can now make tens of millions putting together larger, cross-border mergers. The wealth manager who could cater to clients in New York, Chicago, and Los Angeles can now add rich Indians to her client list. In short, the talented are now writing on bigger slates, and their rewards have risen commensurately.

The news is less good for the woman sewing t-shirts or making trainers. She is the collateral damage of globalization. She did all that was asked of her: worked hard, paid her taxes, saw her children off to school every day. Not her fault that millions of $1-per-day Chinese were more than willing to compete with her, and that Walmart snapped up their products, triggering a massive shift of wealth from the U.S. to China, and from producers to consumers.

Equally disadvantaged, but somewhat less entitled to our sympathy, are the unionized workers in the manufacturing sector who in a closed economy could extract high wages from employers willing and able to pass on the higher costs. The extent to which globalization put an end to that ride on the backs of consumers is shown by the recent settlement agreed to by the United Auto Workers union and the car makers. New hires are to receive about half the hourly wage of old timers, gradually bringing the costs of American manufacturers down to those of Japanese and other auto makers—and now lower-cost China is dipping its toe into the U.S. auto market.

The only group not directly affected by globalization is public sector workers. Policemen, firemen, clerks in the office that issues drivers’ licenses have no fear of foreign competition. Because their unions are also large contributors to the campaigns of the politicians who sit across the table from them in wage negotiations, they pretty much could get the wage and pension packages they sought.

But that party, too, is coming to an end, an indirect effect of globalization. Hard-pressed voters, their real incomes stuck at years-ago levels, are no longer willing to pay the taxes needed to support the life styles and large pensions of public sector workers. In Wisconsin, Republican governor Scott Walker faced down his Democratic opposition and massed demonstrations to reform the public sector bargaining process and start to get public sector compensation under control. Ohio Republican governor John Kasich did the same, and Democratic governors Andrew Cuomo (New York) and Jerry Brown (California) are moving in that direction. These moves will help relieve the burden on taxpayers, but they will also reduce the number of relatively high-paying jobs in America, and the compensation of those who survive the staffing cuts.

Nothing the president is proposing can do anything about these trends. He could, of course, reduce inequality by raising taxes on “the rich:” his Democratic colleagues in the Senate are proposing a 5 percent surtax on incomes in excess of $1 million, a move most voters favor. But that won’t pass a Republican House of Representatives, and anyhow might discourage job-creating entrepreneurs. Longer-term solutions such as massive retraining programs and growth-inducing tax reform would help. But those wouldn’t have much noticeable effect until after next year’s elections, and so at best receive only passing mention from politicians-on-the-make. Better to concentrate on attacking those evil bankers and greedy millionaires and billionaires.

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