Globalization, unemployment, and inequality

Nancy Folbre makes the claim that globalization has worsened unemployment and inequality:

Why has the economic recovery left workers behind?...

Many journalists argue that globalization is partly to blame for historically low rates of job creation over the last year. Companies in the United States are simply less reliant on American workers – and American consumers – than they once were. Maybe they just don’t need us any more...

Few economists like this argument...

If few economists like this argument, it's not clear why. The opening of the Chinese and Indian markets meant that a huge mass of labor was dumped on the world market, without much capital to go along with it. Scarcity creates value; a relative abundance of labor and a relative scarcity of capital means that wages should fall while profits rise. This is exactly what has happened, so I'm not sure why people are surprised.

This creates inequality, since rich people own more capital than poor people. If there are frictions in the labor market ("sticky nominal wages," for example, which means that it's hard to cut headline wages), this translates to unemployment. The "new global elite" that Chrystia Freeland and others write about are just people who are benefiting from the increased return to capital caused by globalization.

Of course, eventually the capital-labor imbalance should right itself, as China and India build up enough capital per worker that our workers become valuable again. This is, in fact, happening; Chinese and Indian wages are rising rapidly. Of course, China is slowing this process by pumping capital back into the U.S. by buying our Treasury bonds (which they do because that keeps their currency cheap and allows them to maintain steady export growth). But eventually, globalization will run its course and we'll see a resurgence in wages and a fall in profit margins.

Unfortunately, in the meantime, our nation's economy as a whole suffers, because it becomes harder to pay for public services like infrastructure and education. In an age when only a few citizens (capital owners) have money to spare, it's hard to get them to pay for stuff that benefits everyone, as Nancy Folbre points out:

During the 25 years after World War II, the interests of American investors and workers were closely, though not perfectly, aligned. Productivity increases were passed on in the form of higher wages that, in turn, fueled increasing demand for domestically produced goods and services.

Businesses willingly paid taxes to support public programs designed to improve the education, health and security of the labor force on which they relied.

The price of the disruption caused by globalization, she argues, is "increased social conflict, intensified economic inequality and weakened democracy." I find it hard to disagree. And unfortunately, I see little we can do about it, other than to try to rebalance global capital flows by pressuring China to revalue their currency. Even if we succeed at that, though, the basic dynamic will remain the same. Inequality is here to stay for quite some time.