The Elite's Comforting Myth: We Had to Screw Rich Country Workers to Help the World's Poor

Roger Cohen gave us yet another example of touching hand-wringing from elite types about the plight of the working class in rich countries. The gist of the piece is that in Europe and the U.S. we have seen growing support for candidates outside of the mainstream on both the left and the right. Cohen acknowledges that there is a real basis for their rejection of the mainstream: they have seen decades of stagnating wages. However Cohen tells us the plus side of this story, we have seen huge improvements in living standards among the poor in the developing world.

In Cohen's story, the economic difficulties of these relatively privileged workers is justified by the enormous gains they allowed those who are truly poor. The only problem is that these workers are now looking to these extreme candidates. Cohen effectively calls for a more generous welfare state to head off this turn to extremism, saying that we may have to restrain "liberty" (he means the market) in order to protect it.

This is a touching and self-serving story. The idea is that elite types like Cohen were winners in the global economy. That's just the way it is. Cohen is smart and hard working, that's why he and his friends did well. Their doing well also went along with the globalization process that produced enormous gains for the world's poor. But now he recognizes the problems of the working class in rich countries, so he says he and his rich friends need to toss them some crumbs so they don't become fascists.

We all should be glad that folks like Cohen support a stronger welfare state, but let's consider his story. The basic argument is that poor countries have only been able to develop because their workers were able to displace the workers in rich countries. This lead to unemployment and lower wages in rich countries.

Let's imagine that mainstream economics wasn't a make it up as you go along discipline. The standard story in economics is that capital is supposed to flow from rich countries to poor countries. The idea is that capital is plentiful in rich countries and therefore gets a low rate of return. It is scarce in poor countries and therefore gets a high rate of return.

In this story rich countries lend poor countries the capital they need to develop. This would correspond to rich countries running large trade surpluses with the developing world. In effect, the rich countries would be providing the capital that poor countries need to build up their capital stock and infrastructure, while still ensuring that their populations are fed, housed, and clothed.

We actually were seeing a pattern of development largely along these lines in the early 1990s. Much of the developing world, especially Asia, was growing rapidly while running large trade deficits with rich countries. (The United States had a modest trade deficit in these years, but Europe and Japan had large surpluses.) This pattern was reversed in 1997 with the U.S.-I.M.F.'s bailout from the East Asian financial crisis.

As a result of the terms of this bailout, directed by the Clinton administration, the countries directly affected began to run huge trade surpluses in order to accumulate massive amounts of reserves. Other developing countries also decided to go the same route in order to avoid ever being in the same situation as the countries of East Asia.

From that point forward developing countries like China and Vietnam ran enormous trade surpluses. This implied huge trade deficits and unemployment for manufacturing workers in the United States and to a lesser extent Europe. The U.S. trade deficit eventually peaked at almost 6 percent of GDP in 2005, the equivalent of a deficit of $1080 billion in today's economy. This trade deficit led to the loss of close to one-third of all jobs in manufacturing.

So Cohen is giving us this impressive display of hand-wringing, telling us that it is unfortunate that rich country workers had to get whacked, but it was necessary to allow for the poor in the developing world to improve their living standards. It's very touching, but in the standard economics, it was hardly necessary.

The standard economics would have allowed the pattern of growth of the early and mid-1990s to continue. In that story, rich country workers would still have their jobs. Instead of producing goods for people in rich countries, people in poor countries would produce goods and services for their own populations. This should have allowed for even more rapid gains in living standards.

The fact that the textbook course of development was reversed, with massive capital flows going from poor countries to rich countries, was due to a massive failure of the international financial system. Workers in rich countries did not suffer from any inevitable process that allowed the world's poor to improve their living standards, they suffered because of the ineptitude and corruption of the folks at the Clinton Treasury Department and the I.M.F.

There is one more point that I must add here. The fact that manufacturing workers paid this price, and not doctors, lawyers, and other highly paid professionals, was by design. There are tens of millions of very bright and ambitious people in places like India and China who would be happy to train to U.S. standards and work as professionals in the United States at a fraction of the wages of our professionals, just like their manufacturing workers were happy to work for lower wages.

While our trade deals were designed to encourage competition for our manufacturing workers, they did little or nothing to open the door for competition for professionals. There was nothing inevitable here, the issue was the class of people who were writing the trade agreements.

Finally, we also made patent and copyright protection longer and stronger. This transfers hundreds of billions of dollars every year from the rest of us to folks like Bill Gates and Pfizer. There is also nothing inevitable about this story, the rules were written to redistribute upward.

Long and short, it's touching that folks like Roger Cohen feel bad for the losers from the process of globalization. But the story is that they didn't just happen to lose, his friends designed the game that way.