Neoliberals, JW Mason, on Trade, Wage Share of Labor.

Ryan Avent makes what I think is the boldest, and most honest, defense of where neoliberals see themselves on the justice towards working people sense:

And I think that current neoliberals think of themselves as more honestly egalitarian than traditional leftists, based on their international view of developments in human welfare. The past few decades have witnessed an unprecedented reduction in global poverty thanks to liberal reforms in China and India. Countries containing twice the population of the currently developed world are now hurtling toward middle-income status, thanks to trade, thanks to deregulation, and thanks to the introduction of market reforms. The neoliberals I enjoy reading pride themselves on fighting for access to opportunity for the disadvantaged, through reduced barriers to trade with America, increased opportunities for immigration to America, and (in Matt’s case) reduced obstacles to living, working, and starting businesses in America’s most dynamic urban centers. The neoliberal platform strikes me as much easier to understand, from a progressive viewpoint, when considered at an international level. And the traditional labor left, to the extent that it has supported trade and immigration barriers, is in fact a defender of an unforgivably regressive balance of global income.

Of course, traditional lefty are very concerned about international views of development in human welfare – very much so.  This reminds me of the “trade” that one of the CEO’s in Chrystia Freeland’s Atlantic Monthly  article The Rise of the New Global Elite brings up:  “His point was that if the transformation of the world economy lifts four people in China and India out of poverty and into the middle class, and meanwhile means one American drops out of the middle class, that’s not such a bad trade.”   Here a weaker American labor force is acceptable collateral damage towards the workings of globalization.  I don’t know if Avent believes that, or if he considers that a good trade (or a false choice), but I think that dynamic is what generates a lot of elite opinions on the declining American middle class and our mass unemployment.

But there is an argument that neoliberals have a claim on really being concerned about labor, because they care about labor on a global scale, that the nation-state where you happen to be born isn’t a suitable location to determine boundaries for justice.

That reminds me of something I’ve been meaning to blog.  Last week the Financial Times ran an editorial from someone behind a veil of ignorance a practicing financial neoliberal, Peter Tasker, who warns that the Chinese government needs to sledgehammer the growing power of Chinese labor immediately while it is still in the crib.  As China urbanizes that labor force it is getting dangerously close to getting to a point where it can demand too much,  which will hurt returns on Western capital.   Take it away Tasker:

True, China has continued to register turbo-charged growth while many of the debt-laden economies of the west have struggled….The financial markets, however, have taken a rather different view. The Shanghai market is at less than half its all-time high, significantly underperforming the other three members of the Bric group. More surprising, since the start of the US subprime crisis in August 2007, Shanghai’s total return in dollars has been beaten by the American S&P500, the UK’s FTSE 100, and even the Japanese Topix….

We’ve seen this movie before – 40 years ago, to be exact. In the 1960s Japan…In the mid-1950s, Japanese labour had taken 60 per cent of total value added. In the miracle years this ratio fell to 50 per cent, then started a V-shaped recovery in 1970 as the labour market tightened. Ten years later it had soared to a plateau of 68 per cent. These gains had to be fought for. In the 1970s, Japan’s now dormant union movement was in its heyday. Profit margins were squeezed, and in real terms the stock market went nowhere for a decade.

Can [Chinese] workers grab a bigger share of the economic pie before the urbanisation process is complete? In Japan they did…If China were to follow Japan, the next stage would be labour strife and inflation. The best way to avoid that outcome would be a radical tightening of the current super-easy monetary policy. But that would risk a serious slowdown and probably necessitate a large revaluation of the renminbi – both anathema to Beijing…There is no good way out of the corner into which China has painted itself. Rebalancing the economy is absolutely necessary. It is also a long-term project fraught with risks for China’s rulers – and for investors who have bought the story of inevitable western decline and unstoppable Chinese ascent.

I love reading financial editorials about the developing world because they can just say what they really mean, because when they talk about America they have to do a lot of cartwheels to hide their arguments.  What they say there is what they really think about you.

(I’m just kidding.  If you are in the United States this group spends no time worrying that you are going to be able to demand a higher wage in the next decade.)

I’m going to pass this off to JW Mason’s post on the editorial:

Western Capital to China: Please Keep Wages Down

In today’s issue of the Financial Times, there’s a remarkably blunt warning that “Rising wages will burst China’s bubble.” True, China has enjoyed strong growth while most of the rest of the world has endured deep depressions. But don’t be fooled by such superficial measures. On the question that really counts, China is in trouble: “The Shanghai market is at less than half its all-time high, significantly underperforming the other three members of the Bric group.”

Like Japan in the immediate postwar period, the piece argues, China has so far seen “workers flooding into the cities from the countryside, depressing wages and setting off a virtuous cycle of rising profitability and rising investment. In the mid-1950s, Japanese labour had taken 60 percent of total value added. in the miracle years, this ratio fell to 50 percent.” Miraculous indeed — but alas, it couldn’t last. By 1980, the labor share “had soared to a plateau of 68 percent. These gains had to be fought for. In the 1970s, Japan’s now dormant union movement was in its heyday. Profit margins were squeezed, and in real terms the stock market went nowhere for a decade.” Oh noes! And despite seemingly abundant reserves of cheap labor, the same disaster could befall China. “Can workers grab a larger share of the economic pie before the urbanization process is complete? In Japan they did. … If China were to follow Japan, the next stage would be labour strife and inflation. The best way to avoid that outcome would be a radical tightening of the current super-easy monetary policy. But that would risk a serious slowdown and probably necessitate a large revaluation of the renminbi.”

So there it is. The important question about China’s future is the value of financial assets. And the great threat to asset-owners is the likelihood of rising wages, which will come about through increasing organizing among Chinese workers. The only way to prevent that is pre-emptive tightening, even at the cost of slower growth. The case for austerity is seldom made that bluntly, certainly not for the rich countries, but I don’t think the underlying motivation is much different. It’s also noteworthy that big revaluation of the renminbi is presented here explicitly as part of a program to hold down Chinese wages. In other words, China faces a choice between higher wages and a higher currency. To China-competing firms and workers in the rest of the world, either would be just as welcome. But for masters of the universe with Chinese stocks in their portfolio, they look very different indeed.

(Incidentally, these questions — the relationship between profitability, investment, demand, inflation and the politically-determined division of output between labor and capital — are largely ignored by mainstream macro, saltwater as well as fresh, but are right at the center of structuralist, Marxist, post-Keynesian and other heterodox approaches to macroeconomics. If only there were some economics department interested in supporting those approaches.)

[Comment]Because I agree with the author of the article, that if China’s growth continues on its current trajectory, we’ll see Chinese workers become increasingly assertive, and a rising wage share. The difference is I think that’s a good thing.

Contra Freddie, If you want left economics writing great stuff that is relevant to the current discussion there’s plenty to choose from; I’d recommend adding his blog to your rss feeder.

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16 Responses to Neoliberals, JW Mason, on Trade, Wage Share of Labor.

  1. robk says:

    This is the beauty part of the whole Communist capitalism thing, you can control everything from the top without those pesky civil rights. Roll tanks on those union bitches!

  2. dandelion says:

    And of course the neoliberal advocates can speak so blithely about the one American worker who loses his or her job because they can be certain that they themselves won’t be that one, as Dean Baker has repeatedly pointed out the way that neoliberals who are against protectionist policy of any kind still manage to support and enact policy that protects their particular fields and the fields of their friends. We aren’t importing doctors from the Philippines and we aren’t using legal professionals from India and we aren’t (yet) offshoring college courses taught by tenured economics professors.

  3. lark says:

    “But there is an argument that neoliberals have a claim on really being concerned about labor, because they care about labor on a global scale, that the nation-state where you happen to be born isn’t a suitable location to determine boundaries for justice.”

    This is something deeply peculiar about this argument. It gestures towards grand virtue, on a global scale, as a justification for ignoring virtue on the local scale.

    Trash your neighbors, their kids and even your own, because, hey that’s how to help the poor peasants of China march to their glorious future.

    But it’s worse than that, because it stinks of western self regard and also contains the residue of colonial attitudes. You are assuming you can colonize those Chinese peasants with your superior values. That is what is at the bottom of cheering on their rise, as the expense of your own countrymen and women.

    If you thought those peasants would line you up against the wall and shoot you, all the air would go out of your silly balloon. I’m not saying that’s likely. But I think it is profoundly unlikely that this surge of western jobs exported to the 3rd world will result in the spread of democratic liberal values. China shows no signs of supporting this somewhat masturbatory fantasy of so many neo-liberals. It also seems to me quite likely that the decline of the middle class in the west will hurt democracy and liberal values in the west. Boots on the street are required to enforce order when economic hopes disappear. But of course you won’t have to take any responsibility for that, because your fantasies were global, and such problems are merely local.

    • rootless_e says:

      more to the point, if you have an economic theory that is entirely based on a model of each individual as a selfish profit maximizer and you claim this is not only accurate but good, then needing to justify policies on the basis of greater good seems more than a little dishonest. Somehow it is never billionaires or think tank employees who have to take the hit.

    • Mandrake says:

      I think the assumption that greater prosperity for the Chinese people will lead to increasing social liberalization has some merit as evidenced by the strikes that have resulted in large wage increases, such as at Foxconn. However, to assume that this trajectory necessarily portends political liberalization, that the inevitable result is a democratic uprising with a positive feedback cycle eventually resulting in greater global harmony (et al) is to project Western values where they may not belong. Further, to assume that any of these changes could occur in a reasonable period of time before, for example, climate change changes the course of geopolitical politics or wage disparity creates some populist uprising in the US is irresponsible.

  4. Pingback: The Bellows » Do Neoliberals Believe in Ritual Worker Sacrifice?

  5. excellent point! neoliberalism is really about the mobility of capital and the arbitrage profits that monopsonistic TNCs can squeeze from considerably less mobile / nationally restricted labor.

    grandiose and noble claims, which emanate from the davos crowd about their liberating chinese workers from the shackles of poverty are simply ex post justifications of tactical and rhetorical convenience.

    that being said, i do think left-oriented advocates for american labor ought to think about how their politics might incorporate issues of global income distribution analyzed by liberal economists such as branko milanovic for instance: http://amzn.to/gqj4BB

  6. It’s never addressed how raising U.S. wages would hurt Chinese workers. On the contrary, it would only increase their comparative advantage. Lowering the living standards of U.S. workers will only undercut foreign investment in China and other developing countries.

    In fact, an honest utilitarian should be in favor of social democracy in the West, and incrementally in the East as well.

  7. Magpie says:

    So, at one hand, it’s a good thing to have an American household to fall from middle-class into poverty, as long as four Chinese households move from poverty and into middle-class. Okay, fair enough.

    At the other hand, the Chinese government should crack down on wage increases, so that the four Chinese households in poverty cannot… move up into middle-class??!!

    Is it just me, or there is something sounding like blatant BS here?

    Or, based on The Atlantic piece: if an American, Russian, Australian, French etc. plutonomist can’t feel much sympathy for their own poorer countrymen, then it’s obvious they will feel enormous sympathy for other people’s poorer countrymen?

    I must be missing something here, but that doesn’t make sense to me.

    Maybe these people should give people like me some credit: we’re not that dumb.

  8. rootless_e says:

    As Gene Sperling, who many on the theater-left would call “neoliberal”, these arguments all depend on who is making the sacrifice and something that was billed as improving general welfare at the minor expense of making half of the trade lawyers and journalists in DC unable to afford private school for their kids would not sound so sweet to advocates of “free trade”.

    What this argument leaves out of the equation is who gets to keep the profits of this transaction.

  9. rootless_e says:

    As for Peter Tasker, his interest is in drumming up investment interest in Japan, I don’t think you can draw larger lessons about neoliberal economics from what he writes.

  10. Sometime in the next few years, China will probably shift from manufacturing luxury goods like iPhones and Blackberrys for the US market, retool its coastal factories, and manufacture more practical goods and services for the large underserved rural population in China. This is essentially equivalent to a policy of revaluing the yuan. This would be good thing for most people in China, including the coastal elite who would break free of dependence on the volatile bubble prone US economy.

    Such a shift is likely to hurt the US in the short term. The more dependent the US has in fact become on Chinese manufacturing, the greater the short term pain.

    It would almost certainly be wiser and less painful (less costly to both the US and China) to negotiate a phased revaluation of the yuan/retooling of Chinese industry over a few year period of time rather than experience a sudden unplanned crash, not unlike the collapse of the housing bubble. Many US businesses ranging from WalMart to the self satisfied financial behemoths of Wall Street are probably at risk of going under in a crash of this type.

    Again, depending on how dependent the US economy really is on Chinese manufacturing, the US will experience some decline in the standard of living in the short term during such a crash.

    Sincerely,

    John

  11. JW Mason says:

    It would almost certainly be wiser and less painful (less costly to both the US and China) to negotiate a phased revaluation of the yuan/retooling of Chinese industry over a few year period of time rather than experience a sudden unplanned crash, not unlike the collapse of the housing bubble. Many US businesses ranging from WalMart to the self satisfied financial behemoths of Wall Street are probably at risk of going under in a crash of this type.

    I don’t agree. In the first place, the idea of a sudden, unplanned RMB appreciation doesn’t seem very plausible. First, because there’s an asymmetry in currency movements — rapid movements are much more likely to be downward than upward. Second, because there’s a large number of interventions by the Chinese government — most notably restrictions on private capital outflows and incentives for FDI inward — that tend to push the value of the RMB up, against the more publicized central bank interventions that push it down. So if the currency were to move to floating freely, it’s not at all clear that the result would be an appreciation at all. Depreciation rather than appreciation is especially likely since any kind of financial chaos in China will presumably encourage capital flight, just as in so many other poor countries historically.

    I also don’t agree that an RMB appreciation is better for Chinese workers than the alternatives. Assuming for the moment that trade flows respond to relative costs, there are basically three ways for costs to rise in China relative to the United States: RMB appreciation, higher Chinese inflation, and rising Chinese wages. All three will have the same balancing effect ont rade, but I would argue that appreciation is the least favorable to Chinese workers (and the most favorable to Chinese asset-owners), while rising wages is the reverse, and inflation is in between. So I don’t think there’s anything to fear from maintenance of the peg from that point of view either.

  12. Heather Russell says:

    I often read statements about how economic liberalization in India and China such as:

    “The past few decades have witnessed an unprecedented reduction in global poverty thanks to liberal reforms in China and India. ”

    They are almost always stated as axiomatic, with no data backing them up. If I never found any information to the contrary I would probably not have that shadow of doubt in my mind as to whether they are actually true.
    But then I read things from P Sainath about India such as
    “The net capita daily availability of food grain in India today is less than what it used to be in 1955-58”
    or Hency CK Liu’s (wish he was still at Roosevelt) convincing description of ‘dollar hegemony’ as a net loss for the Chinese.
    Wish I could find a study on this as clear as Elizabeth’s Warren’s study on the middle class.

  13. Pingback: The caring neoliberal « Echolocation

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