Globalization’s Intended Destruction

Capitalism includes globalization, which increases labor supply and allows companies to bypass whatever labor exists in their company’s national residency. This may be good in the short-term, but devastating in the long time.

Income inequality exploded when labor rights were weak before the unions forced the owners of capital to pay them a fairer share than what they were paying (below a livable wage); they were able to do this because there was enough friction in transportation that outsourcing to lower cost regions was not an option. Now that it is readily an option, US labor has no traction to keep itself in a bargaining chair.

We get cheap products at a reasonable nominal price but income stagnation here, primarily due to free trade and globalization, has forced households to borrow to maintain their consumption habits – and now that they’ve borrowed to the limit, consumption inequality is skyrocketing, driving down demand for goods and, as a consequence, we never truly recovered from the recession.

So free trade has its drawbacks; we’re dealing with them right now. Those jobs that have been outsourced aren’t coming back – ever. Once producing in China becomes to expensive if marginal labor costs there cut into profit margins, producers will simply move to the next low cost region. What we need to do is create new industry here, whether it’s service sector (which is an improvement from nothing, but still delivers low income) or new manufacturing industry. In the mean time, what we need is to artificially increase incomes through the government, the only entity which can fill the gap in this market failure (it’s technically working as intended but it’s still a failure). A boosted Earned Income Tax Credit, which is means tested right now, that should be tacked to inflation would supplement incomes in the short-term to boost demand and, perhaps, lead to new industry and job creation.

In the mean time, leadership is trying to find supply-side solutions when there is so much liquidity on the supply-side that lubrication would only lead to a slippery slope of economic destruction.

Economic destruction can come because globalization also has another side-effect: conglomeration of industry.

From The Nation’s Matt Stoller:

Barry Lynn of the New America Foundation has been studying industrial supply shocks since 1999, when he noticed that global computer chip production was concentrated in Taiwan. After a severe earthquake in that country, the global computer industry nearly shut down, crashing the stocks of large computer makers. This level of concentration of the production of key components in a globalized economy is a new phenomenon. Lynn’s work points to the highly dangerous side of globalization, the flip side of a hyper-efficient global supply chain. When one link in that chain is broken, there is no fallback.

One slip-up and the entire supply chain can come tumbling down, leading to a supply shock that is destructive to the entire world market. That’s globalization for you – and it’s one of those un-quantifiable variables that won’t show up in economic growth rates. That destruction won’t appear in the numbers until it’s too late.

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