A retreat from globalization also risks pitting nations against each other, making it more difficult to solve the problems that face humanity, such as climate change, refugees, world poverty, and international security. After World War II, world leaders worked to learn the lessons of two world wars and the Great Depression. They fostered international institutions like the IMF, the World Bank, and an International Trade Organization to bring the world together, working toward peace and prosperity.4 These institutions set up an international trading system, an international financial system, and an international funding source for reconstruction and development. In Europe, the European Union worked toward similar aims, encouraging peace through closer integration.5 These institutions were largely successful in bringing nations together and fostering peace. The last seventy years in European history were the most peaceful time in recorded history, and while there are many tragic exceptions, worldwide deaths due to violent conflict have been declining steadily in recent decades.6
The policy threats to this era of peace and prosperity are real. In addition to the threats to global trade and migration made by the Trump Administration, many other nations are experiencing similar backlashes against globalization. Britain has recently invoked Article 50 to leave the European Union, a victory for those opposing immigration and free labor mobility in Britain and a clear turn inward. Parties on the far right and far left have been ascendant throughout Europe, leading to a hollowing out of the middle ground, and even threatening democratic institutions in countries like Poland and Hungary.
Of course, there are encouraging exceptions, such as the victory of En Marche and Emmanuel Macron in France. And there are other supporters of an open trading system. Xi Jinping has articulately defended an open trading system, and China has fostered international trade through large public investments in the One Belt, One Road initiative.7 India, the world’s largest democracy, has pursued more open economic policies in recent decades.
Still, it is deeply problematic to have the United States step back from this role. Of late, our position on the global stage has moved from leader to laughingstock and, at times, villain. The United States is now the only country not to support the Paris Agreement on Climate Change, having withdrawn its support early in the Trump administration. And when representatives from over seventy countries gathered in June 2017 to sign a convention on tax treaties that would help prevent corporate tax base erosion, the United States was also conspicuously absent. The United States is stepping back from global economic leadership.
At this important moment in our history, it is essential to make the case for globalization well, and to place this argument within a context that recognizes the very real struggles of the middle class. The strain of several decades of poor economic outcomes has frustrated voters. Political polarization is deep, as each side of the political spectrum considers the disappointing economic results to be a vindication of their particular view. Elites are reevaluating the best way to respond to the frustrations of voters. Are there quick and easy solutions that would be preferable to the slow, grinding work of building up a country’s potential? Should America continue to look outward, or turn inward? How do we build economic and political institutions that are inclusive and that lead to shared prosperity?
The world has made tremendous progress since World War II. While many troubling situations exist all around us, things could be a lot worse. The world is more peaceful, and less poor, than at any time in history. Learning the lessons of the past, and of economics, will keep us from repeating the policy mistakes of the 1920s and 1930s, or turning to new variations of those old mistakes. While bad policy choices can be politically appealing, they are also destructive to prosperity and humankind. We can do better. With kind hearts and tough minds, we should move forward—toward a more equitable globalization.8
Notes
Acknowledgments
Index
Notes
1. Making the Global Economy Work for Everyone
1. Recent work by Raj Chetty and collaborators shows that the percentage of American children that can expect to exceed the living standards of their parents has fallen steadily in recent decades. Children born in 1940 had a greater than 90 percent chance of earning more than their parents, whereas those born in 1980 had only a 50 percent chance of earning more than their parents. See the Equality of Opportunity Project’s website (http://www.equality-of-opportunity.org/) for more on this line of research.
2. Corporate profits data are from Federal Reserve Economic Data at https://research.stlouisfed.org/fred2. Data on the declining labor share are discussed in Margaret M. Jacobson and Filippo Occhino, “Labor’s Declining Share of Income and Rising Inequality,” Working Paper 2012-13, Economic Commentary, Federal Reserve Bank of Cleveland, 2012; ILO and OECD, “The Labour Share in G20 Economies,” Report, International Labour Organization and Organisation for Economic Co-operation and Development, 2015; Loukas Karabarbounis and Brent Neiman, “The Global Decline of the Labor Share,” Quarterly Journal of Economics 129:1 (2013), 61–103; and Loukas Karabarbounis and Brent Neiman, “Capital Depreciation and Labor Shares around the World: Measurement and Implications,” Working Paper 20606, NBER Working Papers, National Bureau of Economic Research, 2014.
3. I suspect those that assume American negotiators are not acting “toughly” in our national interest know very little about US trade negotiations.
4. For more on polarization, see Marina Azzimonti, “The Political Polarization Index,” Working Paper 13-41, FRB of Philadelphia Working Papers, Federal Reserve Bank of Philadelphia, 2013. For evidence linking income inequality and political polarization, see Adam Bonica, Nolan McCarty, Keith T, Poole, and Howard Rosenthal, “Why Hasn’t Democracy Slowed Rising Inequality?” Journal of Economic Perspectives 27:3 (2013), 103–123.
5. The eight wealthiest men have $426 billion; the assets of the bottom half of the world’s income distribution total $409 billion. The fact that many people in the bottom half of the wealth distribution have negative wealth, however, may cloud such comparisons. See “Are Eight Men as Wealthy as Half the World’s Population?” Economist, January 19, 2017; Gerry Mullany, “World’s 8 Richest Have as Much Wealth as Bottom Half, Oxfam Says,” New York Times, January 16, 2017.
2. Middle-Class Stagnation and Economic Inequality
1. See Raj Chetty, David Grusky, Maximilian Hell, Nathaniel Hendren, Robert Manduca, and Jimmy Narang, “The Fading American Dream: Trends in Absolute Income Mobility since 1940.” Science 356:6336 (April 2017), 398–406.
2. Some of these ideas are discussed in greater detail within Kimberly Clausing, “Labor and Capital in The Global Economy,” Democracy: A Journal of Ideas, 43:1 (2017).
3. See Loukas Karabarbounis and Brent Neiman, “The Global Decline of the Labor Share,” Quarterly Journal of Economics 129:1 (2013), 61–103.
4. For capital income data, see https://www.irs.gov/uac/soi-tax-stats-individual-statistical-tables-by-tax-rate-and-income-percentile for all income, and http://www.taxpolicycenter.org/model-estimates/distribution-capital-gains-and-qualified-dividends/distribution-long-term-capital-2. The US Treasury also reports data on the top four hundred taxpayers. This particularly small group of taxpayers reports 1.48 percent of total income in 2012, but 0.16 percent of total wage and salary income, 8.3 percent of total dividend income, and 12.3 percent of total capital gains income. This group of taxpayers is a tiny fraction of an American population totaling about 325 million people. See https://www.irs.gov/pub/irs-soi/13intop400.pdf.
5. See ILO and OECD, “The Labour Share in G20 Economies,” Report, International Labour Organization and Organisation for Economic Co-operation and Development, 2015; Margaret M. Jacobson and Filippo Occhino, “Labor’s Declining Share of Income and Rising Inequality,” Working Paper 2012-13, Economic Commentary, Federal Reserve Bank of Cleveland; Loukas Karabarbounis and Brent Neiman, “The Global Decline of the Labor Share,” Quarterly Journal of Economics 129:1 (2013), 61–103; L
oukas Karabarbounis and Brent Neiman, “Capital Depreciation and Labor Shares Around the World: Measurement and Implications,” Working Paper 20606, NBER Working Papers, National Bureau of Economic Research, 2014; Michael W. L. Elsby, Bart Hobijn, and Ayşegül Şahin, “The Decline of the US Labor Share,” Brookings Papers on Economic Activity, 2013, no. 2 (2013): 1-63. https://muse.jhu.edu/.
6. The graph focuses on major countries included in the Group of 20; these are the largest economies in the world.
7. Some argue that the capital share of income is also declining, and that it is the profit share (excess profits above the “normal” return to capital) that is driving down the other two shares. These trends may result from the increasing market power of large companies. See Simcha Barkai, “Declining Labor and Capital Shares,” Working Paper No. 2, New Working Paper Series, University of Chicago Booth School of Business, November 2016. And see David Autor, David Dorn, Lawrence F. Katz, Christina Patterson, and John Van Reenen, “Concentrating on the Fall of the Labor Share,” Working Paper 23108, NBER Working Papers, National Bureau of Economic Research, 2017.
8. A diminished labor share of income, an increased dispersion of labor incomes, and an increased dispersion of capital incomes all contributed to rising income inequality. Increased dispersion of capital incomes occurs when those at the top have higher returns to their investments than those at the bottom. Most data confirm that pattern.
9. These data are frequently omitted from surveys.
10. China’s income share of the bottom half of the population has shrunk, and it is now similar to that in the United States. But income for US workers in the bottom half has stagnated, while income for Chinese workers in the bottom half of the population has increased fivefold over its 1978 level, See “The Great Divide of China,” Economist, February 16, 2017.
11. For example, see Bruce Sacerdote, “Fifty Years of Growth in American Consumption, Income, and Wages,” Working Paper 23292, NBER Working Papers, National Bureau of Economic Research, 2017.
12. Sarah Sattelmeyer and Sheida Elmi, “Policymakers Should Focus on Economic Security in 2017,” The PEW Charitable Trusts, March 1, 2017.
13. For example, survey results in multiple countries show that respondents without growing income view both trade and immigration much more negatively than others. See Laura Tyson and Anu Madgavkar, “The Great Income Stagnation,” Project Syndicate, September 7, 2016.
14. For more on polarization, see Marina Azzimonti, “The Political Polarization Index,” Working Paper 13-41, FRB of Philadelphia Working Papers, Federal Reserve Bank of Philadelphia, 2013. For evidence linking income inequality and political polarization, see Adam Bonica, Nolan McCarty, Keith T. Poole, and Howard Rosenthal, “Why Hasn’t Democracy Slowed Rising Inequality?” Journal of Economic Perspectives 27:3 (2013), 103–123.
15. See Bonica et al., “Why Hasn’t Democracy,” for evidence on political contributions and income concentration as well as the increasing importance of the top 0.01 percent and large donors in driving political campaign funding.
16. See Robert J. Gordon, The Rise and Fall of American Growth: The US Standard of Living since the Civil War (Princeton: Princeton University Press, 2016), 624–625.
17. See Anya Kamenetz and Cory Turner, “The High School Graduation Rate Reaches a Record High—Again,” NPR Oregon Public Broadcasting, October 17, 2016.
18. National Center for Education Statistics, “International Educational Attainment,” May 2016.
19. Angel Gurría, “PISA 2015 Results in Focus,” PISA in Focus: Paris 67 (2016), 1–14.
20. The WTO website lists the history of membership for each country. WTO, “Members and Observers,” wto.org, https://www.wto.org/english/thewto_e/whatis_e/tif_e/org6_e.htm. Officially, members did not belong to the WTO until it became an organization in 1995; prior to that, members were merely “contracting parties” under the General Agreement on Tariffs and Trade (GATT).
21. Foreign countries are not typically more open to international trade in terms of their policy choices.
22. For an extensive discussion of these indicators of the importance of multinational companies, see Chapter 7.
23. For example, see World Bank Group, Taking on Inequality, 2016, 10–12.
24. It could also be the case that international trade raises demand for skill and capital across all countries. In poor countries, for example, jobs sewing shirts could require more skill than the average job, whereas that would not be the case in the United States, where sewing shirts would be a job for unskilled workers. Thus, when the United States trades software or soybeans with a poor country in exchange for shirts, that increases demand for capital (for tractors and computers) and skilled labor the United States, but it may also increase demand for capital (for sewing machines and factories) and skilled labor in poor countries. While this is not a standard result of trade theory, it is possible. Traditional Heckscher-Ohlin trade theory requires international trade to reduce income inequality in poor countries, since demand for unskilled labor must increase in the unskilled-labor-abundant country. However, other models of trade (for example, those based on the disintegration of the production process) can allow for the demand for skilled workers to increase in both rich and poor countries.
25. See Marie Connolly and Alan B. Krueger, “Rockonomics: The Economics of Popular Music,” in Handbook of the Economics of Art and Culture 1, eds. Victor A. Ginsburgh and David Throsby (Amsterdam: Elesevier, 2006), 667–719.
26. See David Autor et al., “Concentrating”; and David Autor, David Dorn, Lawrence F. Katz, Christina Patterson, and John Van Reenen, “The Fall of the Labor Share and the Rise of Superstar Firms,” Discussion Paper 1482, CEP Discussion Papers, Centre for Economic Performance, 2017.
27. In the United States, corporate profits in recent years are higher as a share of GDP than they have been at any point in the last fifty years, in both before-tax and after-tax terms, as shown by Federal Reserve data. Since 1980, after-tax corporate profits have increased several percentage points, from about 6 percent of GDP to over 9 percent. See Chapter 7 for more data on these trends.
28. See Figure 1 in Loukas Karabarbounis and Brent Neiman, “Declining Labor Shares and the Global Rise of Corporate Saving,” Working Paper 18154, NBER Working Papers, National Bureau of Economic Research, 2012.
29. Interested readers are referred to Larry Summers’s excellent pieces on these concerns. Lawrence H. Summers, “The Age of Secular Stagnation,” Larry Summers Blog, February 15, 2016. And Lawrence H. Summers, “Secular Stagnation and Monetary Policy,” Federal Reserve Bank of St. Louis 98:2 (2016), 93–110.
30. Treasury economists calculate that the fraction of the corporate tax base that consists of excess profits averaged 60 percent from 1992 to 2002, but has since increased to about 75 percent over the period 2003–2013. See Laura Power and Austin Frerick, “Have Excess Returns to Corporations Been Increasing Over Time?” National Tax Journal 69:4 (2016): 831–846.
31. See McKinsey Global Institute, Playing to Win: The New Global Competition for Corporate Profits, Report, September 2015.
32. See David Autor et al., “Concentrating,” and see David Autor et al., “The Fall of the Labor Share.”
33. US data are from the US Bureau of Labor Statistics. Data from other OECD countries are from https://stats.oecd.org/Index.aspx?DataSetCode=UN_DEN#. Other aspects of labor bargaining power, aside from the unionization rate, are also important. For example, while the unionization rate in Germany has fallen, observers note that labor has more power in Germany due to greater representation in corporate decision making, a greater cultural emphasis on including labor “stakeholders,” a greater sense of trust between management and workers, and a strong social commitment to providing a safety net. For a good news story on this issue, see Stephen J. Dubner, “What are the Secrets of the German Economy, and Should We Steal Them?” Freakonomics Radio, October 11, 2017.
34. See Brantly Callaway and William J. Collins, “Unions,
Workers, and Wages at the Peak of the American Labor Movement,” Explorations in Economic History, August 2017.
35. Right-to-work laws prevent agreements between businesses and workers that require employees to belong to a union or pay union dues.
36. This example is discussed further in Chapter 9.
37. See Lawrence Mishel and Alyssa Davis, “Top CEOs Make 300 Times More than Typical Workers,” Issue Brief 399, Economic Policy Institute, June 2015. Opinions differ within the profession regarding whether high CEO pay is merely a reflection of very high productivity. For a review of studies that argue in both directions, see James Kwak, Economism: Bad Economics and the Rise of Inequality (New York: Pantheon Books, 2017), 80.
38. This is also true in several other countries, including Australia, Canada, and the United Kingdom. Other countries such as Japan, Germany, France, and Sweden have seen a different pattern, where the top share fell in the first half of the century, but did not rise in the second half of the century. See Facundo Alvaredo, Anthony B. Atkinson, Thomas Piketty, and Emmanuel Saez, “The Top 1 Percent in International and Historical Perspective,” Journal of Economic Perspectives 27:3 (2013), 3–20.
39. Additional evidence on this mechanism is provided within Enrico Rubolino and Daniel Waldenström, “Tax Progressivity and Top Incomes: Evidence from Tax Reforms,” IZA Discussion Paper No. 10666, IZA Institute of Labor Economics, March 2017.
40. These are long-term capital gains tax rates. Data are available at http://www.taxpolicycenter.org/statistics/historical-capital-gains-and-taxes.
41. While statutory corporate tax rates remained relatively high until 2018 (at 35 percent), the effective tax rates paid by businesses have fallen steadily in the same time period, due to tax avoidance through both international profit shifting and changes in the organizational form of business. This issue is covered more extensively in Chapter 7.
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