Working the Supply Side

A response to Andrew Glyn's "Egalitarianism in a Global Economy"

Thomas I. Palley

Andrew Glyn concludes that "we should be wary of blaming the narrow scope for egalitarian programs mainly, let alone exclusively, on internationalization." I agree. But I am less convinced that he has told the whole story, particularly with regard to the US economy. Glyn identifies five internal constraints on an egalitarian economic policy: sluggish private capital accumulation; conflicting claims; government deficits; financial markets; taxation and the costs of expansion. These constraints are familiar--in varying degrees, each was present in the early 1970s. Glyn writes as though the economy's structure has not changed in any fundamental way since then, and implies that the only barrier against returning to the relatively more egalitarian economic outcomes of that period is the changed political climate. I cannot agree with this conclusion.

Though globalization is not the key factor in the deterioration of economic equality, it has contributed to the problem. Moreover, the forces driving globalization are part and parcel of the forces that are the cause of increased inequality. For this reason, it is worth briefly examining the characteristics of globalization.

Globalization has created a "leaky" economic environment in which it is difficult to conduct effective economic policy. Three different types of leaks can be identified:

1. Macroeconomic leaks, due to increased international trade. In the United States, between 1966 and 1995, exports and imports as a share of GDP increased from 7.4 percent to 18.7 percent; in the United Kingdom, they increased from 29.0 percent to 45.9 percent; in Canada, they increased from 33.6 percent to 63.7 percent; and for the G-7, the country-weighted share increased from 18.3 percent to 28.3 percent. If a country now expands its level of economic activity, consumer demand leaks out through imports, potentially creating an unsustainable balance-of-payments deficit. This has afflicted almost all the industrialized countries except the United States, which has been protected by the fact that the dollar is the international reserve currency and by foreigners, desire to build up their portfolio holdings of US assets.

2. Microeconomic leaks, due to new conditions of production. Jobs leak overseas if labor market conditions aren't sufficiently favorable. In the current climate, business is able to intimidate labor and government by threatening to move unless granted concessions on wages and taxes. Thus the burden of taxation has increasingly been shifted from corporations to households.

3. Financial leaks, due to increased integration of financial markets. Financial capital now flees those countries pursuing expansionary monetary policies that lower interest rates, in favor of countries with more attractive rates. Financial capital is also resistant to any hint of inflation. As a result, it can veto expansionary policy by threatening to "vote with its feet."

The increase in these types of "leakiness" is the result both of policy and of the market itself. On one hand, policy makers have systematically liberalized trade, encouraged export-led growth and multinational corporations, promoted foreign direct investment, and abolished or suspended capital controls. On the other, technological and organizational change have increased the mobility of both physical and financial capital. The multinational corporate form is now common place, and a new corporate form predicated upon global subcontracting is emerging. Meanwhile, national financial markets are more closely integrated owing to multinational banking firms, real-time electronic communication, and improved money-transfer technology.

These developments are the natural outgrowth of market forces, and represent the systemic workings of a dynamic capitalist economy. Business seeks to maximize and grow profits, and it does this through innovation in three areas. First, firms can gain a competitive advantage over rival firms by capturing a greater share of the existing market or creating a new market that destroys the old. Second, they can innovate in a way that redistributes income from labor to capital--in effect, cutting different slices of the economic pie rather than making it grow. Third, business engages in political innovation whereby corporations capture government policy and change existing laws and regulation so as to gain an advantage over competitors and over labor.

Globalization shows clear signs of organizational, technological, and political innovation. (Take for example the passage of NAFTA and the Uruguay round of the GATT, and business's advocacy for the renewal of presidential "fast-track" negotiating authority and passage of the Multilateral Agreement on Investment.) But such innovation has been operating longer and more forcefully within the domestic economy.

In the United States, the increased mobility of capital and the new organizational forms that facilitate globalization have long been evident in the competition between the "Rust Belt" and the "Sun Belt": firms have repeatedly either moved or threatened to move from the high-wage, unionized Rust Belt to the low-wage, nonunionized Sun Belt in order to bust unions and increase profits at the expense of wages. The same tactic of either moving or threatening to move has also been used to win tax concessions from state governments.

With regard to political innovation, it is no accident that the real value of the minimum wage and the real value of welfare payments have been allowed to fall, as these measures contribute to establishing a "wage floor" that underpins market wages. It also explains why uninsurance benefit coverage rates have declined. Workers' rights to reorganize have been de facto denied by laws that are inadequate to the task of protecting against corporate intimidation during unionization drives. (The National Labor Relations Board has been increasingly understaffed, with dispute settlement times lengthening.) Right-to-work legislation has also spread at the state level, undermining the possibility for effective unions.

Globalization is being driven by the same forces that produce these domestic outcomes, and in fact aggravates these tendencies. But more importantly, globalization is a harbinger of worse things to come if we don't fix the underlying problem of an unequal balance of power. It also threatens to engender institutional "lock-in," whereby fixing the problem will become increasingly difficult as new systems of production and patterns of trade become entrenched. Unfortunately, Glyn's paper makes little mention of microeconomic structural constraints on achieving a more egalitarian economic outcome. Though these constraints are domestic in origin--thus seeming to confirm Glyn's contention that globalization is not the source of our difficulties--globalization is extending them to the international economy.

Andrew Glyn was an early critic of mainstream liberal Keynesian economics; thus it is ironic that his analysis here could easily have been written by a liberal Keynesian. Liberal Keynesianism, which dominated economic thought in the 25 years after World War II, believed it had solved capitalism's economic problems through the policy of demand management. Glyn's focus is on domestic constraints on aggregate demand, and how globalization is aggravating them. His one structural concern is the possibility of inflation from competing claims should we ever get to full employment.

I suggest that given the current imbalance of power between labor and capital, expanding aggregate demand and lowering unemployment will not solve economic inequality, nor will it produce conflicting-claims inflation. The current US economic expansion has seen the unemployment rate fall to a 23-year low of 4.8 percent without a whisper of increased inflation. Indeed, inflation has actually been falling. Meanwhile, real hourly wages of workers in production and nonsupervisory jobs (i.e., the 80 percent of the workforce who are nonmanagerial) remain below the level of the last business-cycle peak in 1989.

There is no doubt that Keynesian demand management is a necessary part of the solution. However, the real constraint on a successful egalitarian economic program is structure, and demand management can only work effectively if supplemented by policies that get the structure right--policies, that is, that can regulate business conduct, international money markets, and labor markets. These policies must preserve the incentive to enterprise while preventing capital from adopting a "low-road" strategy that generates inequality of income and economic insecurity for working families.

The US economy needs rules for international trade designed to prevent a race to the bottom; regulation to prevent tax competition between states that shifts the burden of taxes from corporations to households; and appropriate labor market and welfare laws that deliver on workers' rights to organize, protect wages from dog-eat-dog competition, and ensure effective countervailing power to that of business. In the realm of fiscal policy, taxation must be progressive and contain built-in stabilizers that help mitigate the swings of the business cycle, while government must invest in the nation through infrastructure and education spending. Finally, monetary policy must be conditioned on the economic interests of working families rather than those of Wall Street, which means breaking with the notion of a natural rate of unemployment and the policy goal of zero inflation. All of the above apply to some degree to Europe, and Europe also needs measures to control financial capital from vetoing economic policy by voting with its feet.

If we manage to implement these policies, the problem of aggregate demand will automatically diminish of its own accord. Moreover, when a need for aggregate demand stimulus does emerge, the constraints on such a stimulus will also have largely disappeared. It is worth noting that except during the OPEC oil shocks, the US economy has never really had conflicting-claims inflation. Even in European countries, where there is more evidence of this phenomenon, its extent has been significantly reduced by learning from the past, by the modernization of the European trade union movement, and by the denationalization of large chunks of industry with its accompanying removal of soft budget constraints for these industries.

Finally, the increased product market competition generated by globalization may actually mitigate conflicting-claims inflation. Now when unemployment falls and workers push for higher wages, firms can simply pass those costs on as higher prices. This is an instance where globalization may loosen a previous constraint on egalitarian policy.