Sunday, January 30, 2011

A Dangerous Farce

With income inequality in the US breaking records, it is not surprising to see a kind of social Darwinism returning to the scene as a farce of bad faith among the global elite. Chrystia Freeland's article in the Atlantic on the new superwealthy contains a lot of interesting material. This nugget particularly reveals the potential for self-righteousness among our self-anointed elite:
I heard a similar sentiment from the Taiwanese-born, 30-something CFO of a U.S. Internet company. A gentle, unpretentious man who went from public school to Harvard, he’s nonetheless not terribly sympathetic to the complaints of the American middle class. “We demand a higher paycheck than the rest of the world,” he told me. “So if you’re going to demand 10 times the paycheck, you need to deliver 10 times the value. It sounds harsh, but maybe people in the middle class need to decide to take a pay cut.”
Well, if statistics are to be believed, the people in the American middle class have been taking a pay cut relative to the wealthy for years.

What does seem very clear is that the elite upper class will do anything possible to avoid taking a pay cut. The near-crash of 2008 showed that our economic elite was quite willing to make use of government assistance in order to survive; they were not willing to die by the social Darwinian sword with which they had cut down so many in the middle class. The housing bubble and the Wall Street tycoons it fed were lifted by the flow of money from government agencies such as Fannie Mae and Freddie Mac. The fortunes of money managers have been built on government subsidies, protections, and loopholes. (To be clear, the elite have every right to defend their economic interests, but so do the middle class and the poor.)

The case of "free trade" offers a revealing instance of contemporary trends. Rather than being a kind of victory for the free market, "free trade" has often become merely companies playing nations off of each other in hopes of getting the most subsidies. Consider the following story from the New York Times:
Aided by at least $43 million in assistance from the government of Massachusetts and an innovative solar energy technology, Evergreen Solar emerged in the last three years as the third-largest maker of solar panels in the United States.

But now the company is closing its main American factory, laying off the 800 workers by the end of March and shifting production to a joint venture with a Chinese company in central China. Evergreen cited the much higher government support available in China....

Factory labor is cheap in China, where monthly wages average less than $300. That compares to a statewide average of more than $5,400 a month for Massachusetts factory workers. But labor is a tiny share of the cost of running a high-tech solar panel factory, Mr. El-Hillow said. China’s real advantage lies in the ability of solar panel companies to form partnerships with local governments and then obtain loans at very low interest rates from state-owned banks.

The NYT notes that, within a year of opening the Massachusetts factory in 2008, Evergreen was already investigating opening a factory in China.

So 800 manufacturing jobs were lost in what was supposed to have been a growth industry in the United States. Millions of dollars were extracted from taxpayers in the US and no doubt millions more will be gained in the People's Republic of China. The point here is not to criticize the actions of Evergreen Solar: our government has created the conditions so that a corporation can game the trade-subsidy system, and the company's management is merely operating rationally within that set of conditions.

But it may be time to reconsider whether our government ought to continue that set of conditions. However much some of its members may desire it, the elite does not live in a bubble. Wealthy nations, with a strong middle class, guarantee the global infrastructure upon which this self-proclaimed global elite depends. In the short run, many in the global elite have profited from the current economic order's undermining of the middle class. In the long run, however, the global elite need stable societies.

For allies of small government, the rise of this self-appointed global elite has been problematic. The undermining of the middle class has led to the strengthening of government power. Many of the poor seek an empowered central government to dole out subsistence-level benefits. Meanwhile, the elite have encouraged a stronger central government in order to use it as a conduit to channel more wealth to themselves. President Obama has spoken about the need for the United States to out-innovate the world, but it remains decidedly unclear whether diminished innovation is the real source of our economic troubles. With employment levels faltering and a government and an economy increasingly dependent upon borrowing money, it may be time to consider addressing this increased inequality as contributing to economic stagnation and as threatening the free-market foundations of our economy.

1 comment:

  1. Energy created by fossil fuel is the lowest cost source unless political figures create artificial situations whereby the price of fossil fuels go up dramatically. This would make wind and solar appear to be more cost effective.