A couple of weeks ago I wrote about The Productivity Puzzle, - namely that despite our continuing technology advances, the US and other developed economies have experienced a sharp decline in productivity growth over the past 10 to 15 years. In an article published earlier this year, McKinsey offered three main possible explanations for this productivity growth decline: the difficulty of measuring productivity in the digital economy, the shortage of demand and investment opportunities, and the impact, - or lack thereof, - of technological innovations. “So far, though, economists have failed to reach consensus on the causes of the productivity growth slowdown or indeed the relative significance of the various arguments,” wrote McKinsey.
But another article, The New Class War by Michael Lind, offers a different, rather provocative explanation for our low productivity growth. According to Lind, the last few decades have seen the rise of managerial elites in advanced economies which have been pursuing profits by methods other than technology-driven innovation and productivity growth. Instead, they’ve been taking advantage of the significant reductions of trade barriers over this timeframe to pursue profits based on global labor arbitrage, as well as tax arbitrage and other forms of financial engineering.
Lind references James Burnham, John Kenneth Galbraith, and other political scientists and economists whose works I’m not familiar with. I found the article quite interesting because Lind’s explanation for our declining economic and productivity growth seems quite different from those of most other economists. Let me attempt to summarize his key arguments.
The years following World War II saw the rise of managerial elites in the democratic, capitalist nations of North America and Western Europe as well as in Japan. These managerial elites have effectively controlled the major means of production in their economies as well as key policy planning institutions in government. They include business and financial executives, political and military leaders, members of NGOs and think tanks, government bureaucrats, academics and journalists. They tend to be well educated and resourceful, and have a vested interest in the stability of their economies, governments and societal institutions.
These transnational elites worked closely with each other to avoid a return to the ravages of the Great Depression and WWII. To undercut the threats of communist expansion and anti-capitalist propaganda, national governments brokered cross-class settlements between management and labor. This made it possible for growing numbers of their population, - including blue-collar workers, - to achieve a middle class life-style and aspire to what we think of as The American Way of Life. “The result was the golden age of capitalism from the 1940s to the 1970s, combining high growth with a more equal distribution of its rewards than has ever existed before or since.”
But the cross-class settlements did not last. “Following the fall of the Berlin Wall in 1989, the national settlements brokered by government among managers and labor in Western nation-states were shattered by the emergence of a new pattern of global industrial production and corporate organization.” Advances in technology accelerated the growth of multinational corporations and global supply chains.
By the end of the 2000s, many industries were dominated by a few large corporations. Transnational elites used “their near-monopoly of power and influence in all sectors - private, public, and nonprofit - to enact policies that advantage their members to the detriment of their fellow citizens. Derided and disempowered, large elements of the native working classes in Western democracies have turned to charismatic tribunes of anti-system populism in electoral rebellions against the selfishness and arrogance of managerial elites.”
The Economics of Global Arbitrage
Lind argues that managerial elites and industry oligopolies are a major reason for the productivity growth slowdown. “It is widely assumed that globalization since the 1990s is responsible for unprecedented productivity growth. In fact, productivity growth has been much lower in the era of post-1989 globalization than it was in the post-1945 era characterized by less integrated national economies and far lower levels of immigration. One reason may be that, in the era of globalization, the new transnational oligopolies have pursued profits by methods other than technology-driven productivity growth. The most important of these corporate strategies have been selective arbitrage and selective harmonization.”
“Global arbitrage has come in two forms: labor arbitrage and tax-and-subsidy arbitrage. Labor arbitrage includes both relocation of industrial production from high-wage developed nations to low-wage developing countries, and large-scale immigration of both unskilled and skilled workers to the global North. Such labor arbitrage does not encourage, and may even retard, technological progress, which involves the substitution of new technologies or new techniques for expensive labor or natural resource inputs. There is no incentive to make production technology more efficient when profits can be increased merely by closing factories in high-wage areas and locating them in low-wage areas, be they poor, anti-union Southern states in the United States or foreign nations like Mexico and China.”
“Tax-and-subsidy arbitrage is the practice whereby firms take advantage of differences in tax rates and subsidies in different countries in order to similarly boost profits without boosting productivity. Companies that evade taxation by incorporating in tax havens like the Cayman Islands, Panama, or Ireland do nothing to increase productivity. Neither do transnational companies that relocate to China to enjoy not only low-wage, unfree labor but also ample subsidies of various kinds, including subsidized electricity and tailor-made infrastructure and worker education programs.”
Potential Future Directions
According to Lind, advanced economies have now entered a new and turbulent era, with growing populist conflicts between their managerial elites and large segments of their populations. Where is this all heading in the future? He discusses three potential long-term directions.
One highly negative direction would be an increase in class wars pitting oligarchic elites versus workers, which Lind calls the banana republic model because it’s occurred in a number of Latin American countries. “Those who believe in liberal democracy can look on this kind of political order only with dismay… Formal democracy may survive, but its spirit has fled. No matter who wins, the insiders or outsiders, the majority will lose.”
An alternative to these conflicts would be to try to work out something like the post-1945 cross-class social contract that led to the golden age of capitalism. Lind calls one such option neoliberalism plus, an inclusive form of capitalism to help those left behind by automation and/or globalization. It would include wage subsidies, like the earned income tax credit; various forms of social safety nets to help workers through the ups and downs of a more volatile job environments; and some kind of basic universal wage.
Some countries have been experimenting with innovative such models. For example, flexicurity - shorthand for flexible security, - is a social model from the Nordic countries which aims to achieve both flexibility in labor markets and security for workers. It’s based on the notion that government social policy shouldn't just compensate workers for occasional market failures but should work alongside markets to help sustain a flexible, well-trained, highly productive work force.
Lind believes that these kinds of social programs will likely not be affordable in an environment that continues to favor managerial elites. “In other words, neoliberal economic strategy itself, because of its bias in favor of business models relying on cheap labor at home and abroad, tends to undermine the productivity growth needed to pay for the massive redistribution that, it is hoped, would align the interests of workers and managerial elites.”
Instead, Lind advocates what he calls a new developmentalism. The key to this strategy is to “discourage corporations from seeking to boost profits by labor arbitrage, tax arbitrage, and financial machinations like stock buy-backs and corporate inversions,” through a mix of incentives and compulsion. This would force global companies to compete by investing in technologies and innovations that will increase profits through productivity growth.
“Managerial elites are bound to dominate the economy and society of every modern nation,” writes Lind in conclusion. “But if they are not checked, they will overreach and produce a populist backlash in proportion to their excess. By a misguided policy of suppressing wages and thus throttling mass consumption, unchecked managerial elites may inadvertently cripple the technology-driven productivity growth responsible for their rise and accidentally cause the replacement of managerial society itself by a kind of high-tech rentier feudalism. Managerial society works best when there are not only concessions to national working-class economic interests… but also genuine economic bargaining power and political power wielded by the many.”
One flaw would appear to be the idea of "compulsion", as a US company might be compelled, as Obama tried with restrictions and penalties on inversions; but the US company eventually has to compete with the 'non-compelled' companies headquartered in other countries for production and R&D.
As such, I'd also posit that an emphasis on supporting corporate and entrepreneurial startups and education, which are almost anathema to the compelled philosophy with accompanying regulatory zeal, are showing that jobs can be created when individuals are empowered and a focus is on 'opportunity' versus 'outcome'.
'Outcome' based programs obviously feed directly into emotional drivers of entitlement, which blame others and disincentivize.
If there are 6 million, ostensibly well-compensated, cross-class jobs going unfilled in the US, these facts alone would seem to argue that the incentives and support for education and training have been mis-directed and the funds appropriated by other entitled classes in society (here I might suggest that 2 places to look are those using government tax monies, which could otherwise be used for education and training but are going for eldercare and public pensions).
There are clearly no easy solutions as current-consumption (including at a government and social level) makes investments in future technologies more difficult.
It is also clear that some low-tech jobs may need to be socially supported as either long-term job and careers and as entry ladders for many people. Notwithstanding, the emphasis should be on helping people opportunistically participate in the higher skilled and better compensated parts of the economy.
Posted by: Bruce B | August 15, 2017 at 06:41 AM