Should middle class incomes rise, or shall we pursue globalization?

In the preceding post, I quoted a 1933 John Maynard Keynes lecture in which he discussed some of the underappreciated domestic costs of too much globalization. In our era, we've found that a cost of globalization is that it causes real incomes for a majority of Americans to stagnate or shrink. In a dialog with The Buggy Professor in this thread on Mark Thoma's blog, I posted the following comment about why I think "inequality" is the wrong way to think about stagnating middle class incomes. We have a calculated bipartisan policy of preferring globalization over middle class income growth.

Buggy:

Thanks for all the information, which I took time to take in and consider. Your observation that "the erosion of incomes in the middle relative to the top and bottom" may be due to the middle's particular vulnerability to automation and offshoring rings true. The second bullet under SECOND may have a typo, but seems to say all increases in productivity of all workers were captured by the top 10% of the population, which is consistent with other analyses I've seen.

However, I think the conventional way of discussing "inequality" and the thrust of your NBER paper encourage unproductive discussions that tend to deteriorate into emotional attacks on either the "undeserving, rent-seeking, predatory plutocrats" or the "undeserving, ungrateful, jealous workers" and an argument about whether "redistribution" is or is not Constitutional, moral, and appropriate. I think it's better to focus on the stagnation and decline of middle incomes: If real middle class hourly incomes, which grew at an average annual rate of 2.2% per year from 1947 to 1973, had continued on that trend line, hardly anybody would care if real incomes in the top 1% had grown at twice that rate.

The widespread, steady growth in real incomes in the post-WWII period supported the two-part American Dream: That folks in each generation would, at equivalent life stages, have approximately twice as much income as their parents, and that there was widespread opportunity for individuals to acquire the educations and skills necessary to move upward from the income and class status into which they were born. Neither of those depended upon there being a small gap between themselves and the plutocrats of the day—the key fact was income growth versus stagnation or decline.

Now that the wage growth era is over, except for the last half of the 1990s, the American Dream is dead or dying, and the stagnation is necessarily spreading upward and outward. Strictly domestic businesses (and most are not multinationals) cannot grow their revenues faster than population growth in their market areas because their customers' stagnant money incomes mean stagnant demand. Infrastructure and other public goods cannot be of high quality and well-maintained because people with stagnant real money incomes can't/won't pay the necessary taxes. Subsidies must be withdrawn from education, blocking the upward mobility of those in lower economic and other disadvantaged classes. Government budgets rob Peter to pay Paul. Solemn contractual commitments made in times of growth cannot be met. The number of jobs in the real economy increases more slowly or shrinks. Multitudes stop trying. A shrinking fraction of working people must support the entire population. Talent and investment are diverted to the financial sector or faster-growing foreign markets. Large and increasing parts of the economy don't grow, or they shrink. The economy as a whole does not attain its growth potential, and maybe we have a Japanese-type lost decade or even a long, slow, agonizing downward spiral. In contrast, full employment and steadily increasing real incomes would solve almost all these problems.

Your paper and your comments do not address this fundamental problem of an underperforming domestic economy. To the contrary, the paper is an apology for the status quo. In effect, it says middle class Americans should not complain because they are better off than Swedes and almost as well off as upper income Americans when we understand they have to pay much higher prices for everything. Everything's fine. Most people are getting what they "deserve." No policy changes needed.

Lurking in the background here is a powerful resistance to having real American wage levels rise. Obviously, rising wages put pressure on profits, which could be more than offset by rising demand but that requires a degree of faith that is absent and may be imprudent. Also, being "competitive" in a globalizing economy means competing on price, which means US wages have to go down, not up. [Update: See addendum for how much wages might need to go down.]  A choice has to be made, and the GOP and "business Democrats" both continue to choose globalization (and to deny a choice was made). So, as Krugman is saying in this post today, it's been a political decision and not mysterious forces in the universe that ended the American Dream.

Update on Wednesday, May 26, 2010 at 08:35PM by Skeptic

Edward Hadas, Martin Hutchinson, and Anthony Currie say, "American workers are overpaid, relative to equally productive employees elsewhere doing the same work. If the global economy is to get into balance, that gap must close. . . .  It’s possible to run the numbers to show that American manufacturing workers should take average real wage cuts of as much as 20 percent to get into global balance." 

Comments

[Christine]

Interesting that the quote doesn't point out that American executives are also radically overpaid in relation to executives in the rest of the world!!!