The Myth About Raising Living Standards

Jeez, I really do hate to keep on harping on Evan Thomas’ piece in the NYT, but another one of his statements just needs to be expanded upon. To quote, “They expanded trade, deepened alliances and underwrote billions in foreign aid. None of this was cheap, but they understood — as Mr. Trump seems not to — that the global stability bought with such efforts is worth far more.”  There is a subtle implication that the improvements in the quality of life for poorer countries around the world was worth some of the sacrifices that American workers were forced to make. This implication is made even more explicitly in Roger Cohen’s opinion piece in the Times where he says, “In the developing world, the past two decades have seen hundreds of millions of people emerge from abject poverty and join the “consuming class.” Many of these new consumers now have access to education, health services and opportunity. That’s a huge gain for humanity. The problem is the rise of the rest — with its accompanying transfer of jobs, investment and optimism from places like Ohio or Alsace-Lorraine to places like Vietnam or Indonesia – has created a bitter class made up of the losers in this global shift.” Thankfully, he at least goes on to say that this trend cannot continue without leading to some sort of social breakdown.

But the fact of the matter is, there did not have to be these classes of winners and losers. And the fact that the losers were working class as opposed to white collar was and is due to very deliberate policies. Dean Baker, in a stinging rebuke to Cohen’s column, points out that the way things are supposed to work is that rich countries provide the capital to poorer countries at higher rates of return that they would get domestically in order to help those poorer countries develop the infrastructure to improve the livelihoods of their citizens. This, then, implies that the rich countries would be running a trade surplus with the poorer countries. As Baker points out, this was what was happening up until the East Asian financial crisis of 1997.  In response to that crisis, poorer countries decided to hoard massive amounts of reserves and, in order to accomplish that, started to run huge trade surpluses with the West, primarily through the export of cheap manufactured goods which, of course, led to increasing unemployment for those manufacturing workers in the developed world, completely reversing the traditional balance of trade. The trade deals in this period provided plenty of external competition for domestic manufacturing, but, at the same time, increased patent and copyright protections for domestic pharmaceutical and technology companies and did nothing to break the licensing requirements that protect lawyers, doctors, and other professionals from competition with qualified overseas candidates. One class was protected; the other was not.

There is a myth that it was inevitable that the working class in the developed world would have to suffer somewhat so that the living standards in the developing world could improve – what Kevin O’Rourke calls the Davos Lie. But there was nothing inevitable about that – it was a conscious choice.