Thursday, May 18, 2017

Is “neo-imperialism” the only path to development?

As is well-known (or should be well-known) Marxism has gradually developed two approaches to imperialism. Marx’s own position was (until the very last years of his life) essentially and unbendingly positive: imperialism, however brutal and disruptive, was the engine whereby more advanced social formation, namely capitalism, was introduced in and transformed more backward societies. Marx’s own writings on the British conquest of India are fairly unambiguous in that respect. Engels’ writings on the French conquest of Algeria are  (as is usually the case when one compares Engels’ and Marx’s writing styles) even more “brutal”. In that “classical” view, Western Europe, the United States and the “Third World” would all develop capitalistically, may relatively quickly come to the approximately same levels of development, and capitalism will then directly be replaced by socialism in all of them.

This view  depended crucially on two assumptions: that (1) the Western working class remain at the low level of income (subsistence) which would then (2) assure its continued revolutionary fervor. Assumption (1) was common to all 19th century economists, was supported until the mid-19th century by the observed evidence, and Marx was not an exception. But towards the end of the century, Engels had noticed the emergence of “workers’ aristocracy”  which blunted the edge of class conflict in Britain, and possibly other advanced countries. The increase in wages was “fed”, Engels argued, from colonial profits realized by British capitalists. Although the increases were mere “crumbs from capitalists’ table” (Engels) they exploded the theory of the “iron law of wages” and, collaterally, the revolutionary potential of the working class in the West.  Thus the seeds of the idea that imperialism may undermine class struggle in developed countries were sown and that had far reaching consequences.

Bill Warren’s “Imperialism: Pioneer of Capitalism” (published in 1980; unfinished due to Warren’s death) credits Lenin of the post-1914 vintage for the change (or rather criticizes him for it). In Lenin’s “Imperialism…” the monopoly capitalism having lost the vigor of free-market capitalism and having become “decrepit” was seen in need of foreign expansion (to maintain profits at earlier levels). This in turn led to imperialist struggle for territories that ended up in World War I.  At the same time, working classes’ relative material ease in developed countries made them abandon the revolutionary path and support “opportunistic” and nationalistic social-democratic parties (and their leaders, notably the “renegade” Kautsky). The struggle of the “peoples of the East” (as they were called in the first congress in Baku in 1920) against imperialism become integrated into an overall struggle against capitalism, and imperialism ceased to be seen as a dynamic precursor of the forthcoming socialism, but rather the extension of moribund capitalism. In Warren’s words, “it is now not the character of capitalism that determines the progressiveness…of imperialism, but the character of imperialism that determines the reactionary character of capitalism” (p. 47).

This change of position had far-reaching consequences for the thinking of the left  that Warren excoriates. It led to the theories of “core” and “periphery”, “structural dependency” etc. (Frank, Amin, Cardoso, Prebisch). These theories, Warren argues, were wrong because they predicted faster growth if countries were to disengage from the dominant global system (which all proved to have been illusions—Warren is less sanguine on that than we can be now), and they had nothing to do with workers’ struggle in the emerging economies because they reflected the interests  of nationalist Third World bourgeoisies.

Now, I wish I could write a very lengthy review of Warren’s extremely stimulating book—which also contains many infuriating sections—but I will have to leave it for another time. (In the “infuriating area”, Warren, for example, celebrates the increase of inequalities in developing countries such as the concentration of land ownership into the hands of latidundistas because he regards it as an indicator of adoption of more efficient capitalistic methods of production in agriculture, p. 207). His celebrations of inequality throughout the second part of the book—dealing with post-1945 developments—would make Friedman and Hayek blush!)  But my point is not Warren’s book as such but its very contemporary implications.

It is directly relevant for the understanding of the rise of new capitalist economies in Asia. Richard Baldwin’s recent book (reviewed here), even if Baldwin does not make any allusions to either the classical Marxist position or to the dependency theory, clearly shows that the economic success of Asia was based on the use of  capitalistic relations of production and inclusion in the global supply chains, that is in active participation in globalization. Not passive—but a participation that was sought after, desired. It is thus no accident that China has become the main champion of globalization today. Therefore, Asian success directly disproves the dependency theories and is in full agreement with the classical Marxist position about the revolutionary impact of capitalism, and by extension of “neo-imperialism”, in less developed societies.

This has enormous implications on how we view and try to explain dramatic shifts in economic  power which have occurred in the past half-century (whence the origins of this transformation? the role of the nation-state and imperialism? the role of the bourgeois-led independence movements?) and how we see the developments ahead. I will not develop these issues now because my thinking is still evolving and I plan to lay it out in a book, but I think that, in trying to understand the changes in the modern world, the best we can do is to go to the literature and the debates from exactly one hundred years ago. (And Warren’s book although of course much more recent has its roots in what was discussed then). Short of that I cannot see any broader narrative that makes sense of the epochal changes we are living through.



Saturday, May 13, 2017

The unknown Tocqueville in America

Several years ago, a friend presented me with a small volume entitled “Quinze jours dans le désert” written by Alexis de Tocqueville in 1831 when he visited (the only time ever) the young United States. This is a short book of some 100 pages, on his travel to the then extreme confines of “civilization”, Flint (the city which in the 1989 was the subject of Michael Moore’s famous documentary “Roger and me”) and Saginaw, both of them situated on the eponymous rivers.

The book is written in the recognizable limpid prose that we associate with Tocqueville and although it has no depth or pretension of his “Democracy in America” it is interesting and worth reading—for the reasons which I hope to explain.

“The desert” in the title does not refer to the physical “desert” but to the civilizational desert. The level of development (if that term has some meaning in the context of these areas in 1831) is so low, the amount of physical difficulties that beset the traveler on all sides is so huge, the forests  almost impenetrable, the mosquitoes omnipresent, the log cabins so few and so uncomfortable, the people barely existent, that the story reads like the adventure of explorers penetrating the deep Amazon. Indeed, the landscape offers, at the rare times when the traveler can relax, some astonishing sights of beauty (“la beauté sauvage” as Tocqueville terms  it, the word “sauvage” occurring probably 100 times on 100 pages of the book) felt in presence of intact nature. As Tocqueville mentions, there was absolutely nothing similar in Europe and the Mediterranean at the time. Perhaps only Siberia, parts of Africa or Brazil’s Northwest come close to such a complete dominion of nature over civilization and absence of practically any trace of human activity that Tocqueville and his companion (Beaumont) witnessed in the 1831 Michigan.

This naturally leads economists to think that perhaps no part of the world had seen such a dramatic transformation from where it was in 1830-1850 and today like the American Midwest and the West. It would be hard to put a number such as modern GDP per capita on what the level of income was in the Midwest then. While the production of anything was very low, so was the population, and while Indians clearly lived at the level of subsistence, European settlers were better-off perhaps by a factor of 2 to 3.  The scale of relative incomes was clearly established with “colonists” of English and French extraction at the top, the Indian-European mestizos in the middle,  and the Indians on the bottom. However, if we (tentatively) put GDP per capita at the frontier at $500 in PPP terms (note that the Maddison project update gives GDP per capita for the eastern board of United States in 1830 at $1600), income per person has then increased in Michigan by almost one hundred times in less than two centuries. This gives an astonishing average rate of growth of 2.5% annually which I doubt to have been “bested” anywhere in the world.

Tocqueville is interested in Indians as a prototype of people who had not developed much of what is (was) considered “civilization”. He is to some extent testing the hypothesis of the “noble savage” and gives what seems to me a realistic portrait of the situation of Indians at that time. When he meets Indians the first time, in Buffalo, as they queue to receive US government money for the land they had sold, he is disappointed by their physique and general looks that bear little resemblance to the idealized free warrior living in the state of natural freedom. They looked, Tocqueville writes, “like the lowest layer of population in our great European cities” (p. 10).

But that perception changes later when Tocqueville and his companion are led by two Indians through the wilderness of forests between Flint and Saginaw. He appreciates their incredible stamina (the two Indian guides lead the two Frenchmen, riding on horses, by running ahead of them), knowledge of nature, resourcefulness and honesty. Indian honesty (and what to a European seems like a naiveté) is several times contrasted with European cupidity. When the two Indians are introduced by a European settler to Tocqueville and Beaumont as reliable guides, Tocqueville asks how much they should be paid for their work (one day of guiding the two through quasi impenetrable forests). The settler says that two dollars would be enough but that since Indians do not know what to do with money, he (the settler) would give them instead goods worth two dollars. Tocqueville notices that what the Indians did get could not have amounted to even one dollar worth, the settler clearly taking 50% as his “fee”.

Here is how Tocqueville describes the settlers he met: “It is not only Indians whom the American pioneers take for fools. We were ourselves every day victims of their extreme avidity for profit. It is true that they never steal. They have too much of intelligence to do such an impudent thing. Yet I have never seen the owner of a hotel of a big city [in Europe] overcharge with such shamelessness as these inhabitants of the desert in whom I expected to find primitive honesty and patriarchal simplicity of manners” (p. 57). 

The contrast between the external polish of civilization and indifference to the lives of “others” is brilliantly drawn: “In the midst of this [American urban] society, so well organized, so prude and full of morality and virtue, one meets complete insensitivity, a sort of cold and implacable egotism whenever indigenous population is concerned. The inhabitants of the United States do not chase these Indians freely as the Spaniards did in Mexico. But it is the same pitiless sentiment that moves the Europeans here as it does elsewhere.” (p. 13) We are indeed far from “Democracy in America”.

Later in Saginaw Tocqueville also notes that Indians are “swindled” by being overcharged, although to an economist the charge of trumpery is not easily defended since Indians (one would expect) paid for the moccasins, clothes etc. what they believed was an acceptable price in the goods they produced. The issue is rather, I think, that Tocqueville uses the European prices: at these prices, the trinkets European sold were evidently much less valuable than the goods they received in exchange from the Indians. But at Indian prices, the trade might have been equally advantageous to them. So, Tocqueville’s example may rather convince an economist of the value of trade then of European duplicity.

Indians seem indifferent to comfort and to many of the commodities of “civilization”. The only thing that attracts them are European rifles. Interestingly, alcohol, often used in the stories of American Indian decadence and fall in the encounter with the Europeans, is never mentioned in the book. 

This small book comes to us like a piece, a remnant of a great monument. In it are recognizable many of the traits that have made Tocqueville famous, precursor in a number of social sciences. The great themes of civilization, colonization, imperialism, and development are opened—the themes that will become so pervasive in the next one hundred years with European expansion to the four corners of the globe. 

Friday, May 5, 2017

The “deep state” as a tool for redistribution of income in favor of the rich. Review of Mike Lofgren’s “The deep state”

The term “deep state” started to be used in the United States during the last electoral campaign, and to some extent overshadowed its older “twins”, “the elite” and “the establishment”. There are certain advantages to the use of each of these terms to describe the web of organizations and people that run US domestic and foreign policies, and the “deep state” definitely has its place there.  The term “deep state” itself originated in Turkey where it described the occult power of the Army as opposed to the political sphere that functioned in a seemingly democratic fashion. It was used as well in Italy in the 1960s and elsewhere.

Mike Lofgren in his “The deep state: The fall of the constitution and the rise of a shadow government”  makes a good case that such a “deep state” exists in the United States too. It is not composed, as some mainstream media recently ridiculed the term, of a “shadowy combination of government bureaucrats”. Obviously, it is not bureaucrats who matter. Whoever has spent any time in Washington DC (even just by being around) knows that the “deep state” is not composed of flannel-suited, thick-sole-shoe wearing, pen-in-the-shirt-pocket bureaucrats living on modest salaries and in 90% mortgaged houses. Mike Lofgren, not being a political scientist, does not provide an exact definition, but comes close to it: the deep state  is “a hybrid association of key elements of government and parts of top-level finance and industry that…effectively govern the United States with only limited reference to the concerns of the governed as…expressed through elections” (p. 5).

The deep state includes the old-fashioned military-industrial complex, top of Wall Street and Silicon valley, think tanks and foundations, and the mainstream media, most of them (with the obvious exceptions of Silicon valley and Hollywood) located in Washington, DC and New York. These are people who often seamlessly move between government, its legislative and executive branches, and then when not in power, populate think tanks, sit on the boards of large financial, IT or military-related companies or pen editorials for the mainstream media. They are linked by shared backgrounds, same ideology and even more strongly by shared economic interests. It could be almost said that they are all but one person, so at ease at seemingly very different tasks, Deputy Secretary of Defense, writer of an editorial in the Washington Post, analyst in a top Washington think tank.  As Tocqueville wrote of another deep state from two and half centuries ago: “The nobles held identical positions, had the same privileges, the same appearance; there was, in fact, a family likeness between them, and one might almost say they were not different men but essentially the same men everywhere" (The old regime and the French revolution).

There are two very strong points of Lofgren’s book. First, Lofgren is somebody who knows the system from the inside (he worked for almost thirty years in Congress, sat on budget and armed services committees and knows personally a number of key political players). He thus brings to the book a knowledge that a political science professor just simply does not have. Second, Lofgren shows that there are strong links between domestic and foreign policy preferences of the deep state. The rising political power of the rich (documented by Larry Bartels and Martin Gilens) and increasing income inequality (documented by so many that it is superfluous to give citations) are, as Lofgren shows, intrinsically linked to domestic policy choices that reduce taxes on the rich, provide an increasing number of loopholes for the rich, curb social spending, but also (and only apparently contradictorily) increase military spending. Why the latter? Because the beneficiaries  from the military spending are precisely the members of the deep state. As Lofgren argues, TARP and military spending are just the two facets of the same coin: the use of government resources for the benefit of the rich.

We should, it seems, stop thinking of  government spending as the opposite of private spending. This is because government spending has two radically different constituencies and two very different objectives. One part of government spending (the one that we traditionally emphasize) serves the needs of the middle class and the poor: social security, Medicare, Medicaid, unemployment benefits. This is the part that, from the point of view of the deep state, should be cut. The second part of government spending is to support (when needed)  the financial sector and  to buy new military hardware. There, the beneficiaries are the people from the other end of the income distribution spectrum: the financiers, owners and managers of large military supplier companies, telecommunications, private security firms and the like. When we think of government in this way, the apparent paradox of Republicans (and many Democrats) being at the same time in favor of smaller government, and TARP and larger military spending vanishes. We are really witnessing a struggle over a quarter of GDP that is redistributed through the federal government: will most of that money go to the pockets of the rich, or to the pockets of the middle class and the poor?

What Lofgren argues is that the deep state has effectively kidnapped the government. Its objective is to use this enormous money-churning  machine to help its own members. But the deep state was able to kidnap the government because it was able to kidnap the Congress, that is to make sure that majority of the members of Congress vote the way that the deep state wants. They were able to do so thanks to an electoral system where winning is practically synonymous with having access to more money than your opponent. This is why Lofgren in the last chapter, where he discusses the changes that need to be done, puts the reform of electoral funding (“ Eliminate private money from public elections”) as the number 1 priority. It all starts there, and then logically unfolds further.  

As always, when you dig deeper, the origins of domestic and foreign policies are to be found in economic interests. An oft-used aphorism says that “all politics is local”. It would be more appropriate to say that “all politics is about money”.


Thursday, April 27, 2017

El super clasico: trade and technology duke it out at CUNY

Graduate Center CUNY organized yesterday (April 26) a star-studded discussion of the effects of trade on US jobs and wages. The participants were David Autor and Ann Harrison, both authors of seminal economic papers on the effects of China’s imports on US employment and wages (and professors at respectively MIT and Wharton), Brad DeLong, a polymath and former high Treasury official in Clinton’s administration (and professor at Berkeley), and Paul Krugman, Nobel Prize winner, professor at the Graduate Center CUNY, and probably one of the three most influential economists in the world.

The discussion was started by David Autor who pointed out that although US manufacturing employment was on a downward trend since 1943 (when it accounted for almost 40% of the labor force), what happened in the early 2000s with China’s accession to the WTO was a sharp (“off-the-cliff”) decrease in the number of manufacturing jobs. Between the late 1990s and today some 5 million manufacturing jobs were lost. While Autor thought that technological change was indeed a big factor explaining longer term trends the most recent drop cannot be dissociated from trade (import penetration from China).

Next, in the opening statements, Ann Harrison, referring to two very important papers which she coauthored, argued that the effects of trade are visible when one follows workers by occupation much more than when one looks simply at a given industry. Thus, people displaced by trade, even if they ultimately get reemployed, lose some 25% of their wage. The second paper of Ann Harrison carries a possibly slightly different message: many jobs were lost because capital goods became cheaper, and machines thus substituted for labor. It is a technology story with a twist: technological change responded to the change in relative prices. Harrison said that her position on the technology-trade (TT) debate is probably closer to the presumed position that Brad DeLong (the next speaker) would take than David Autor’s.  

Indeed, in his opening statement DeLong supported the technology explanation although, since he made this point after a long detour through his family history, it was not too clear to me whether it still applied to the current situation and China in particular.

Paul Krugman (the statements were made in alphabetical order), referred to the similar TT discussions in the 1990s where the consensus was that some 2/3 or more of the job and wage effects were due to technology. But, Krugman said, economists might have been right on trade’s limited role then; yet keeping the same opinions now was wrong since the boost in trade that has occurred in the past 20 years was much greater than what the US witnessed in the 1990s. He thought that trade today has a massive impact but that it is one-off event, linked to China, and unlikely to be replicated.

If soccer-like I were to summarize the positions, I would say that Autor and Krugman were of the opinion that “trade matters” while Harrison and DeLong tended to favor technological explanation. But that classification is too rough. Autor’s own work, of which he briefly spoke later, shows huge importance of technology, especially in displacing routine labor. (My favorite paper of Autor, Dorn and Hanson is the one which pits the trade vs. technology stories against each other and finds that both…matter.) Similarly, as I mentioned, Harrison does find incontrovertible impact of trade too.

There were at least three areas where the panelists seemed to agree.

(1) Withdrawing from globalization would be extremely costly for the US and the world. DeLong pointed out to the asymmetric effects of NAFTA. While he argued that NAFTA (trade with Mexico) had a miniscule impact on US job loss, withdrawing from NAFTA today would have an enormous negative impact because of the number and density of trade links that have been established in the past two decades. Everybody agreed that it was madness to withdraw from globalization and to go back to protectionism.

(2) Everybody agreed that economists underestimated the impact of trade. As Autor put it, the benefits of trade (cheaper goods) are diffuse, but the costs are concentrated (aka you lose your job). Krugman thought that this was because economists, enamored by the “jewel in the crown of economics”, theory of comparative advantage, tend to look at average effects, not at the heterogeneity of effects. He thought that this was changing now.

On a more philosophical note, Autor added that workers are people (yes) and that even if the compensating mechanisms for job loss were effective (Ann Harrison said they were not), people desire to have meaningful jobs and high wages rather than to subsist on  handouts.

(3) The China effect will not reoccur. As I mentioned, the point was made by Krugman in the opening statement, but was expanded on by both DeLong and Autor. DeLong thought that China will be the last example of export-driven development, made possible by the willingness of the US to be open to Asian imports (Japan and Korea before) and by the eagerness of the rest of the world to cover US deficits by squirreling the money in the United States. DeLong thus touched upon the global political economy issues which paradoxically made the richest economy in the world be capital importer rather than exporter. (Yet another example, in my opinion, of how with globalization many of the nostrums of the mid-century neoclassical economics got overturned.)   But the one-off effect of China (no Indias, Ethiopias, Burmas waiting in the wings) means that the current trade effects on US labor are not going to be repeated.

It was a great evening. The top economists in perhaps the hottest area of economic policy dispute today duked it out in a very fair way,  and came out to a fairly consensual position. We are back to 1817 where trade and technology (the famous Chapter XXXI) played such a great role in Ricardo’s “Principles”.  

Saturday, April 22, 2017

A theory of the rise and fall of economic leadership: review of Bas van Bavel’s “The Invisible Hand?”

The recently published “The invisible hand?: How market economies have emerged and declined since AD 500” (Oxford University Press, 2016, 330 pages) by Bas van Bavel has, like all important books, a relatively simple core theory which Van Bavel, a well-known economic historian teaching at the University of Utrecht, illustrates on five historical examples:  Iraq between 500 and 1100, Central and Northern Italy 1000-1500, the Low Countries 1100-1800, England 1800-1900, and the United States 1800-today. (The first three cases are discussed in detailed separate chapters, each running  to 50-60 pages, while the last two, to which Western Europe may be appended, are discussed in a single chapter called “Epilogue”).

Van Bavel’s key idea is as follows.  In societies where non-market constraints are dominant (say, in feudal societies), liberating factor markets is a truly revolutionary change. Ability of peasants to own some land or to lease it, of workers to work for wages rather than to be subjected to various types of corvées, or of the merchants to borrow at a more or less competitive market  rather than to depend on usurious rates, is liberating at an individual level (gives person much greater freedom), secures property, and unleashes the forces of economic growth. The pace of activity quickens, growth accelerates (true, historically, from close to zero to some small number like 1% per year) and even inequality, economic and above all social, decreases. This is the period so well recognized and analyzed by Adam Smith. Van Bavel, in a nod to Braudel, shows that very similar “essors”  have existed in the pre-medieval Iraq (then the most developed part of the world), medieval Central and Northern Italy (Florence, Venice, Milan, Genoa..) and on the cusp between the late medieval Europe and early modern period in the Low Countries.

But the process, Bavel argues, contains the seeds of its destruction. Gradually factor markets cover more and more of the population: Bavel is excellent in providing numerical estimates on, for example, the percentage of wage-earners in Lombardy in the 14th century or showing that in Low Countries wage labor was, because of guilds, less prevalent in urban than in rural areas.  One factor market, though, that of capital and finance, gradually begins to dominate. Private and public debt become most attractive investments, big fortunes are made in finance, and those who originally asked for the level playing field and removal of feudal-like constraints, now use their wealth to conquer the political power and impose a serrata, thus making the rules destined to keep them forever on the top. What started as an exercise in political and economic freedom begins to look like an exercise in cementing the acquired power, politically and economically. The economic essor is gone, the economy begins to stagnate and, as happened to Iraq, Northern Italy and Low Countries, is overtaken by the competitors.*

As this short sketch shows, Bavel’s theory has many links, or can be juxtaposed, to several contemporary views of economic history. Bavel is dismissive of a unilinear view that regards the ever widening role of factor markets, including the financial, as leading to ever higher incomes and greater political freedom. His view, although not fully cyclical (on which I will say a bit  more at the very end of the review) is “endogenously curvilinear”: things which were good originally, when they hypertrophy, become a hindrance to further growth. It is thus a story of the rise and fall where, like in Greek tragedies, the very same factors that brought the protagonists grandeur, eventually hurl them into the abyss.

Bavel’s view is at variance with recent theories proposed by Acemoglu and Robinson as well as by Landes, or even by McCloskey (although I write this based on the reviews and a couple of short articles; I have not read her “Bourgeois Virtues”). Unilineal theories are, according to Bavel, ahistorical and unduly Euro-centric. They ignore very similar developments in other parts of the world and, while he does not discuss it in the book, Bavel mentions, Roman Empire, Song China and Byzantium. By focusing on Europe only, and its increase in real income which parallels the growing marketization of the economy from the 18th century to today, such theories fail to acknowledge the elements of economic decadence.

This brings me to a point where, in my opinion, Bavel’s approach could have been made more effective. In the introduction and in the very detailed discussion of the three cases, Bavel speaks of a real-income rise and decline, that is of the economies that have become rich and then declined and got impoverished. This is especially evident for Iraq and Northern Italy, and slightly less so for the Low Countries. But when he discusses even the Low Countries at the end of their “Golden Age” and all the later cases, the decline is a relative one, that is compared to other competitors. Thus, the Low Countries were overtaken by England, the latter is overtaken by the United States, and (we are led to extrapolate) the United States will be overtaken by China. Thus, in my reading of the book, Bavel discusses the rise and fall of economic powers which would be a more effective way to present his central thesis and to solve a facile (and in my opinion wrong, but to some perhaps  fatal) objection that the Netherlands or England can hardly be said to have declined if their today’s real incomes are twenty or more times greater than what they were at their (relative) “peaks”.

It is not only the plausibility of the mechanism of decline that gives strength to Bavel’s thesis; it is also that he lists the manifestation of the decline, observable in all six cases. Financial investments yield much more than investments in the real sector, the economy begins to resemble a casino, the political power of the financiers becomes enormous. The richest among the financiers either directly or indirectly enter politics, they become patrons of arts,  sponsors of sports and education,  and we witness simultaneously (1) oligarchic politics, (2) slower growth and lower level of real investments, (3) higher inequality, (4) domination of finance and (5) artistic efflorescence.  What the ancient writers describe as “decadence” clearly sets it, but, as Bavel is at pains to note, it is not caused by moral defects of the ruling class but by the type of economy that is being created.  Extravagant bidding for assets whose quantity is fixed (land and art) is a further manifestation of such an economy: the bidding for fixed assets reflects lack of alternative profitable investments as well as the expectation that, as inequality increases, there would be some even crazier and richer investors who would pay even more for a work of art, thus enabling the realization of a capital gain.

The readers will not be remiss in seeing clear analogies to today’s West.

Let me end with the point about the cycles. Bavel’s theory is not fully cyclical, in the way that (say) Plato‘s was where each political system led to another one, in an endless cycle. In Bavel, after the relative fall, the economies do not seem to recover, although it is possible to imagine that, if the shackles of finance and inequality were broken, a Phoenix-like recovery should not be excluded (leading perhaps in its turn to another decadence). So not everything is yet lost!

In my own notes, I summarized the book thus: prerequisite for growth is more or less equal distribution of assets coupled with factor markets. But factor markets generate inequality.

* Strictly speaking, Van Bavel distinguishes three stages: market economy (output markets and security of property), accumulation (wage labor, capital accumulation, and growth), capitalism (dominance of the financial sector, use of the state by capitalists, monopolization).

Sunday, March 26, 2017

The welfare state in the age of globalization

In my previous post that looked at policies to reduce inequality in the 21st century, I mentioned that I will next discuss the welfare state. Here it is.

It has become a truism to say that the welfare state is under stress from the effects of globalization and migration. It will help to understand the origin of this stress if we go back to the origins of the welfare state.
As Avner Offer has recently reminded us in his excellent book (co-authored with Daniel Söderberg), the origin of social democracy and the welfare state is in the realization (and financial ability to deal with it) that all people in their lives go through periods where they are not earning anything, but have to consume: this applies to the young (hence children’s benefits), to the sick (health care and sick pay), to those who had a misfortune to get injured at work (worker’s accident insurance), to mothers when they give birth (parental leave), to people who lose jobs (unemployment benefits), and to the elderly (pensions).  The welfare state was created to provide these benefits, delivered in the form of insurance, for either unavoidable or very common conditions. It was built on the assumed commonality of behavior or, differently put, cultural and often ethnic homogeneity. It is no accident that the prototypical welfare state born in Sweden in the 1930s, had many elements of (not used here in a pejorative sense) national socialism.

In addition to commonality of behavior and experiences, the welfare state, in order to be sustainable, required mass participation. Social insurance cannot work over small parts of the workforce because it then naturally leads to adverse selection, a point well illustrated by the endless wrangles over US health care. The rich, or those who are unlikely to be unemployed, or the healthy ones, do not want to subsidize the “others” and opt out.  The system that would rely only on the “others” is unsustainable because of huge premiums it would require. Thus  the welfare state can work only when it covers all, or almost all, labor force, i.e. when it is (1) massive and (2) includes people with similar conditions.

Globalization erodes both requirements. Trade globalization has led to the well-documented decline in the share of the middle class in most western countries and income polarization. With income polarization the rich realize that they are better off creating their own private systems because sharing the systems with those who are substantially poorer implies sizeable income transfers. This leads to “social separatism” of the rich, reflected in the growing importance of private health plans, private pensions, and private education. The bottom line is that a very unequal, or polarized, society cannot maintain an extensive welfare state.

Economic migration to which most of the rich societies have been newly exposed in the past fifty years (especially so in Europe) also undercuts the support for the welfare state. This happens through inclusion of people with actual or perceived differences in social norms or lifecycle experiences.  It is the same phenomenon as dubbed by Peter Lindert lack of “affinity” between the white majority and African Americans in the US which rendered the US welfare state historically smaller than its European counterparts.  The same process is now taking place in Europe where large pockets of immigrants have not been assimilated and where the native population believes that the migrants are  getting an unfair share of the benefits. Lack of affinity need  not be construed as some sinister discrimination. Sometimes it could be indeed that, but more often it may be grounded in correct thinking that one is unlikely experience the lifecycle events of the same nature or frequency as the others, and is hence unwilling to contribute to such an insurance. In the US, the underlying fact that African Americans are more likely to be unemployed probably led to less generous unemployment benefits; similarly, the underlying fact that migrants are likely to have more children than the natives might lead to the curtailment of children’s benefits. In any case, the difference in expected lifetime experiences undermines the homogeneity necessary for a sustainable welfare state.

In addition, in the era of globalization more developed welfare states might experience a perverse effect of attracting less skilled or less ambitious migrants. Under “everything being the same” conditions, a decision of a migrant where to emigrate will depend on the expected income in one country vs. another. In principle, that would favor richer countries. But we have also to include migrant’s expectation regarding where in the income distribution of the recipient country she expects to end up. If she expects to be in the low income deciles, then a more egalitarian country with a larger welfare state will be more attractive. An opposite calculation will be made by the migrants who expect to end up in the higher ends of recipient countries’ income distributions.  If the former migrants are either less skilled or less ambitious than the latter (which is reasonable to assume), then the less skilled will tend to choose countries with more developed welfare states. Hence the adverse selection.

In very abstract terms, the countries that would be exposed to the sharpest adverse selection will be those with large welfare states and low income mobility. Migrants going to such countries cannot expect, even in the next generation, to have children who would climb up the income ladder. In a destructive feedback, such countries will attract the least skilled or the least ambitious migrants and once they create an underclass, the upward mobility of their children will be limited. The system then works like a self-fulfilling prophecy: it attracts ever more unskilled migrants who fail to assimilate. The natives tend to see migrants as generally lacking in skills and ambition (which may be true because these are the kinds of people their country attracts) and hence as “different”. At the same time,  failure to be accepted will be seen by the migrants as confirmation of natives’ anti-migrant prejudices, or, even worse, as religious or ethnic discrimination.

There is no easy solution to the vicious circle faced by developed welfare states in the era of globalization. This is why I argued in my previous blog for (1) policies that would lead toward equalization of endowments so that eventually taxation of current income can be reduced and the size of the welfare state be brought down, and (2) that the nature of migration be changed so that it be much more akin to temporary labor without automatic access to citizenship and the entire gamut of welfare benefits. This last point in discussed in Chapter 3 of my “Global inequality” as well as here and here.