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Brad DeLong: Are Your Wages Set in Beijing?


This is I think an argument from my old teacher Richard Freeman, about how in the eighties and nineties effectively 2 billion workers were added to the potential global manufacturing work force. Developments in communication and trade, the coming of the container, the coming of the Deng Xiaoping policy reforms in China, reform in India, confidence these policy changes would persist--all these meant that businesses all around the world wondering where to locate manufacturing could be confident that they could if they wanted to, if it made sense, draw on a labor force that was 2 billion bigger than it had been in the 1970s.

In that context, the fact that the United States had a lot of highly-skilled manufacturing workers who had an immense productivity edge was no long an effective factor in world production. Thus the claim is that an awful lot of the rise in inequality in the United States between 1980 and today is the result of this global pressure on the American economy.

Back in the mid 1990s when I was working for the Clinton Administration, I wrote a bunch of memos about how this was then nonsense--that is, it was simply too small to matter.

Since the mid 1990s, this factor has become significantly larger.

But I’d say it’s still in fourth place as far as the increase in U.S. inequality is concerned.

First place has been the education factor--the fact the United States is no longer clearly the most educated country in the world, and the education system is no longer is putting downward pressure on wage inequality.

Second place is the shift in the tax and transfer system--the fact that our tax and transfer system as a whole is less progressive than it was a generation ago, and that in fact it’s regarded as Kenyan Muslim socialism to even return taxes on the rich back to their levels of the Clinton Administration. Don’t laugh too much. It really is the case that the bar for what is called "communism" has been significantly lowered. Now it's the policies of Bill Clinton that are "communistic" according to Fox News.

Third are the social structural and economic changes that allow the princes of Wall Street and the plutocrat CEOs to successfully charge what they do charge. If this were 1960 or so, and George Romney as head of American Motors proposed for himself the kind of pay scale that the Presidents of GM and Ford get today--you would’ve seen an immediate explosion from the UAW. The UAW would’ve been out there striking everything and closing down the entire U.S. auto industry within sixteen hours. That no longer happen. That plus the willingness of the upper ten percent to pay extraordinary amounts for advice to what their investments should be is, I think, largely a socio-cultural change. I would call that third.

Global pressures are fourth. They are there, but they are not half but more like ten percent of the process.

And with that ten percent we should in fact be willing to deal. We still are the most favored nation by luck in history. We thus have responsibility to manage the international system as a whole. We have a responsibility to be the importer of last resort for countries that are trying to develop by building up their own industries.