Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else (6 page)

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“The China Syndrome,” a 2011 paper on the impact of trade with China by a powerful troika of economists—David Autor, David Dorn, and Gordon Hanson—underscored what is going on. The empirical study is particularly significant because it marks a shift in consensus thinking in the academy. In the debate about the causes of growing income inequality, American economists have tended to opt for technology as the driving force. But, drawing on detailed data from local labor markets in the United States, the authors of “The China Syndrome” argue that globalization, and in particular trade with the mighty Middle Kingdom, are today also having a huge impact on American blue-collar workers: “Conservatively, it explains one-quarter of the contemporaneous aggregate decline in U.S. manufacturing employment.”

The deleterious effects go beyond those workers who lose their jobs. In communities hit by the China Syndrome, wages fall—particularly, it turns out, outside the manufacturing sector—and some people stop looking for work. The result is “a steep drop in the average earnings of households.” Uncle Sam gets hit, too, especially in the form of increased disability payments.

Messrs. Autor, Dorn, and Hanson are no protectionists. But, in a challenge to the “one nation under God” view of the world, they offer a sharp reminder that the costs and benefits of trade are unevenly shared. As they put it, their finding does not “contradict the logic” of arguments favoring free trade; it just “highlights trade’s distributional consequences.”

That distributional impact is, in the term of art used by economists, to polarize the labor market: there are better and more highly paid jobs at the top, not much change for the low-skill, low-income jobs at the bottom, but a hollowing out of the jobs in the middle, which used to provide the paychecks for the American middle class. Maarten Goos and Alan Manning, writing about the same phenomenon in the UK, call it the division into “lousy and lovely” jobs.

A recent investigation of the direct employment impact of the iPod is a case study in these lousy and lovely jobs—and shows where some of what used to be the jobs in the middle have gone. The research is the work of Greg Linden, Jason Dedrick, and Kenneth Kraemer, a troika of scholars who in a pair of recent papers have examined how the iPod has created jobs and profits around the world. One of their findings is that in 2006 the iPod employed nearly twice as many people outside the United States as it did in the country where it was invented—13,920 in the United States and 27,250 abroad.

You probably aren’t surprised by that figure, but if you are American, you should be a little worried. That is because Apple is the quintessential example of the Yankee magic everyone from Barack Obama to Rick Santorum insists will pull this country out of its jobs crisis, evidence of America’s remarkable ability to produce innovators and entrepreneurs. But today those thinkers and tinkerers turn out to be more effective drivers of job growth outside the United States than they are at home.

You don’t need to read the iPod study to know that a lot of those overseas workers are in China. But given how large that Asian behemoth currently looms in the U.S. psyche, it is worth noting that less than half of the foreign iPod jobs—12,270—are in the Middle Kingdom. Another 4,750 are in the Philippines, which, with a population of just 92 million compared to China’s 1.3 billion, has in relative terms been a much bigger beneficiary of Steve Jobs’s genius. This is a point worth underscoring, because some American pundits and politicians like to blame their country’s economic woes on China’s undervalued currency and its strategy of export-led growth. In the case of the Apple economy, that is less than half the story.

Now come what might be the surprises. The first is that even though most of the iPod jobs are outside the United States, the lion’s share of the iPod salaries are in the United States. Those 13,920 American workers earned nearly $750 million. By contrast, the 27,250 non-American Apple employees took home less than $320 million.

That disparity is even more significant when you look at the composition of America’s iPod workforce. More than half the U.S. jobs—7,789—went to retail and other nonprofessional workers (office support staff, freight and distribution workers, etc.). Those workers earned just $220 million.

The big winners from Apple’s innovation were the 6,101 engineers and other professional workers in the United States who made more than $525 million. That’s more than double what the nonprofessionals in the United States made, and significantly more than the total earnings of all of Apple’s foreign employees. The other jobs are lousy; these are the highly paid lovely ones.

Here in microcosm is why America is so ambivalent about globalization and the technology revolution. The populist fear that even America’s most brilliant innovations are creating more jobs abroad than they are at home is clearly true. In fact, the reality may be even grimmer than populist critics realize, since more than half of the American iPod jobs are relatively poorly paid and low skilled.

But America has winners, too: the engineers and other American professionals who work for Apple, whose healthy paychecks are partly due to the bottom-line benefit the company gains from cheap foreign labor. Apple’s shareholders have done even better. In the first of their pair of iPod papers, published in 2007, Linden, Dedrick, and Kraemer found that the largest share of financial value created by the iPod went to Apple. Even though the devices are made in China, the financial value added there is “very low.”

Rich countries can hold on to some manufacturing jobs, of course, but doing so often means making those jobs a little lousier. Consider, for example, the argument Caterpillar used in a 2012 labor dispute with workers at a locomotive assembly plant in London, Canada. Workers at a Caterpillar plant south of the border in La Grange, Illinois, where they produce rail equipment, earn less than half of what their Canadian brethren make in wages and benefits. You could call that a victory for Canadian unions, and a sign that the country’s political culture has done a better job of protecting its workers. But Caterpillar’s response to that success has been to lock out its better-paid Canadian workforce and move some of the production to a newly opened plant in Muncie, Indiana. There is a similar story behind GE’s much ballyhooed return of some manufacturing jobs to the United States. Workers at the North Carolina factory GE opened in 2011 earned an average hourly wage of eighteen dollars, barely half of what unionized workers in older GE plants make.

This is the downside of the triumph of Western workers over the past century and a half that Milanovic documented. In his paper, Milanovic predicted the gap between Western workers and those in developing countries would mean huge migratory pressure as people moved to higher-wage countries. But in an age when goods and capital flow more freely around the world than people, the more likely outcome may be the jobs moving to them.

This tension of our second gilded age was familiar to Andrew Carnegie during the first one, and plays into the division of society into the rich and the rest, which he, too, perceived: “Under the law of competition, the employer of thousands is forced into the strictest economies, among which the rates paid to labor figure prominently, and often there is friction between the employer and the employed, between capital and labor, between rich and poor. Human society loses homogeneity.” Capitalism, Carnegie believed, required employers to drive the hardest possible bargain with their workers.

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When I raised the issue with Joe Stiglitz, the Nobel Prize–winning economist and longtime Cassandra about the downsides of globalization, he practically crowed with vindication. “The economic theory is very clear,” he said. “What happens when you bring together countries which are very different, like the United States and China—what happens is that the wages in the high-wage country get depressed down. This was predictable. Full globalization would in fact mean the wages in the United States would be the same as the wages in China. That’s what you mean by a perfect market. We don’t like that.”

The truth is we are no longer living in “one nation under God”; we are living in one world under God. Globalization is working—the world overall is getting richer. But a lot of the costs of that transition are being borne by specific groups of workers in the developed West.

We are accustomed to thinking of the left as having an internationalist perspective. Liberals are the sort of people who worry about poverty in Africa or the education of girls in India. The irony today is that the real internationalists are no longer the bleeding-heart liberals; they are the cutthroat titans of capital.

Here, for instance, is what Steve Miller, the chairman of insurance giant AIG and one of Detroit’s legendary turnaround bosses (he wrote a bestselling memoir called
The Turnaround Kid
), had to say to me at Davos about globalization and jobs: “Well, first off, as a citizen of the world, I think everyone around the world, no matter what country they’re in, should have the opportunities that we have gotten used to in the United States. Globalization is here. It’s a fact of life; it’s not going away. And it does mean that for different levels of skill there’s going to be something of a leveling out of pay scales that go with it, particularly for jobs that are mobile, if the products can be moved, which is not everything.”

No matter what passport you hold, if you run or own a global company, that is not really a big deal. But, as Autor, Dorn, and Hanson show, if you are an American worker, that “leveling out” can be painful indeed.

Professor Van Reenen said these tensions have been building for years but have been laid bare by the financial crisis. That, he believes, has sparked a wave of populist protest, ranging from the Tea Party on the right to the Occupy movement.

“These things have been going on for a couple of decades,” he said. “What has happened is, with the rise of the financial crisis, all of these things are coming into sharp relief.”

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The twin gilded ages are speeding each other up: The industrialization of the emerging economies is creating new markets and new supply chains for the West—iPhones are produced in China, and also sold there. The new technologies of the West’s second gilded age, meanwhile, have accelerated the developing world’s first gilded age—it is a lot easier to build a railway or a steel mill in an age of computers and instant communication than it was in the nineteenth century—and the developed economies, too, offer a rich market for the industrializing developing world.

“India’s gilded age is going to be a combination of America’s first gilded age and the second gilded age,” Ashutosh Varshney, a professor of political science at Brown University who was born in India and now spends half his time in Bangalore, where his wife and son live full-time, told me at a meeting of the World Economic Forum in Mumbai in November 2011. “India is going through this phenomenon in the twenty-first century. . . . The pace at which information traveled in the nineteenth century was very different. Today eight hundred million Indians are connected through mobile phones.”

The two gilded ages can also get in each other’s way. As good an explanation as any for the 2008 financial crisis is that it is the result of the collision between China’s gilded age and the West’s—the financial imbalances that are an essential part of China’s export-driven growth model also played a crucial role in inflating the credit bubble that burst with such devastating consequences in 2008.

The two gilded ages have a lot in common, and they are reinforcing each other. But both transformations are creating intense political and social pressures, partly because change is always hard, and partly because the rewards of this sort of convulsive shift are so unequal.

Moreover, this time around, the whole world no longer has the escape valve that, at least for a time, released some of the pressures of the original industrial revolution—the frontiers of North and South America. When the strain of urbanization became too tough, or too unfair, Europe’s huddled masses could emigrate. Even with that option, it is worth remembering, the conflicts and inequities created by industrialization and urbanization were ultimately resolved in the West only after a half century of revolution and war.

“In the long run, we are in good shape,” said Professor Van Reenen. “It depends on your time horizon. After all, the Great Depression and World War II were a massive cost to humanity. Eventually, humanity will prosper. Capitalism does work, but over the medium term, thirty or forty years, there could be incredible dislocations. I am very worried about what happens over the next year or so.”

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Looked at from the international, Olympian perspective of the super-elite, the cost of these short-term “dislocations” pales in comparison with the transformative power of the twin gilded ages.

Mr. O’Neill concludes his book with a heartfelt rebuttal of the gloomsters, with their emphasis on rising national income inequality and the hollowing out of the Western middle class:

This is an exciting story. It goes far beyond business and economics. We are in the early years of what is probably one of the biggest shifts of wealth and income disparity ever in history. It irritates me when I hear and read endless distorted stories of how only a few benefit and increase their wealth from the fruits of globalization, to the detriment of the marginalized masses. Globalization may widen inequality within certain national borders, but on a global basis it has been a huge force for good, narrowing inequality among people on an unprecedented scale. Tens of millions of people from the BRICs and beyond are being taken out of poverty by the growth of their economies. While it is easy to focus on the fact that China has created so many billionaires, it should not be forgotten that in the past fifteen or so years, 300 million or more Chinese have been lifted out of poverty. . . . We at Goldman Sachs estimate that 2 billion people are going to be brought into the global middle class between now and 2030 as the BRIC and N-11 economies develop. . . . Rather than be worried by such developments, we should be both encouraged and hopeful. Vast swaths of mankind are having their chance to enjoy some of the fruits of wealth creation. This is the big story.