ECONOMY

Globalization’s effect on equality

The view that cuts in the lowest wages increase employment is mistaken, argues James K. Galbraith, a professor of government/business relations at the University of Texas at Austin and a specialist in issues of inequality in pay. In an interview with Kathimerini, Galbraith, whose book «Created Unequal: The Crisis in American Pay» attracted great interest when it was first published in 1998, also says that the globalization of capital markets is largely responsible for an increase in inequalities worldwide in the last 25 years. But Galbraith, son of renowned economist John Kenneth Galbraith who died last April at the age of 98, is also outspoken on political issues. He calls the present US administration «an alliance of predators.» He advises young economists to resist the dominance of the «orthodox» economic school and keep their «heads high.» How do we measure economic inequality and why has economic inequality increased among and within countries in the last decades? Does globalization increase or decrease inequalities? I work mainly on the inequality of economic incomes, especially wages and salaries, and I measure this inequality from underlying data sources that provide information on pay by regions and/or sectors of each country under study. This is a very reliable and inexpensive method permitting the construction of large and detailed data sets. From an analysis of patterns in these data we draw our basic conclusion: A rise in inequality from 1981 through at least 2003 is a worldwide phenomenon, and mainly associated with high interest rates, debt crises, exchange rate crises, and other forms of financial instability. Globalization of the capital markets under the deregulated conditions prevailing since the collapse of the Bretton Woods system is deeply implicated. The financial sector has not only been the engine of globalization but also gained the most out of it. It amassed power and set the agenda for national governments, even the most powerful ones. In the 1960s President Eisenhower talked about the industrial military complex and the need to control it. Is the issue of our time «how to control the financial sector»? Yes, exactly. It is not so much an issue for the United States or Europe as the capacity to regulate financial activity exists there. And large countries such as China and India have historically also been able to look after their own interests. But the deregulation of finance has been disastrous for many smaller developing countries; the short lesson of the past quarter-century is that development cannot be financed effectively on ordinary commercial terms. (It is surprising that anyone ever thought it could.) The middle-class dream of the 20th century has created some very important institutions, such as social security and public health systems and universal education. Many argue that the middle class – at least in the Western world – is declining and, with it, so are those institutions. Which are the institutions that we mostly need to defend? Middle-class institutions are certainly endangered, both in Europe and the United States. In the US, the challenge is to defend Social Security and extend health services to those not presently covered by insurance, in a way that thwarts the many politically well-connected predatory interests that beset social programs. Europe’s main challenges are to extend the successful institutions of the welfare state across national lines, to pursue a policy of egalitarian growth and convergence that will develop Europe’s poorer and accession countries. Europe should also build new institutions where the quality of the existing ones is not adequate. This is particularly true of universities in many parts of Europe, which are very poorly equipped and funded by American standards. You have just mentioned the «predatory interests» and in a recent article you talked about the predatory class ruling America today. What is happening in America regarding this aspect? Economic predation is not a new phenomenon but what is troubling about the current US government is the fact that predatory interests are practically alone in being serviced by those in power; indeed the government is effectively an alliance of predators. Enron in its day was of course an iconic example. But one finds the same pattern everywhere in the conduct of the Bush government: in energy policy, in environmental policy, in labor policy, in military contracting. The government ought to be the regulator of predation, not its sponsor and protector. President Bush is currently running a kind of a war economy, reversing the «peace dividend» of the Clinton administration. What are the consequences for the US economy and what is the real cost of this war? The war in Iraq so far has played only a small role in the overall development of the US economy, though the associated spending did help improve the overall growth numbers, especially in the election year of 2004. Currently the war is showing signs of having added somewhat to the underlying pace of inflation, as all wars do, and this could have a very negative effect eventually if increases in the interest rate continue unabated. The real costs of the war are very diverse, and have been well treated in a paper by (Nobel Laureate) Joseph Stiglitz and Linda Bilmes (of Harvard University), presented to the American Economic Association in early 2006. Stiglitz and Bilmes estimated the total economic cost of the war at between $1 and $2 trillion, far above the official estimates. Why has Europe steadily lagged behind the US in terms of economic growth and per capita income during the past 15-20 years? Is it a strictly economic phenomenon or does it have to do with political hegemony in the world economy? In my judgment, three factors are paramount: First, the US has pursued fuller employment policies, permitting fuller utilization of economic resources and encouraging more rapid technological progress, in part because – and this is the second factor – US capital markets are more liquid and elastic, and therefore open to financing the creation and rapid growth of new enterprises. Third, there is certainly a contributing element of dollar hegemony, which makes it easier to finance public and private debt at low rates of interest. However the latter two factors are closely related, and reflect in part the inadequate development of the EU financial structure, which lacks a deep and liquid market in true EU public debt, a lender-of-last-resort function, and other attributes of a fully realized capital market. The supposed greater flexibility of US labor markets, on the other hand, is a myth; wage differentials in the US declined on the route to full employment in the late 1990s. Many here in Europe, and also in Greece in particular, argue that lowering the minimum wage would boost employment. However, empirical research has proved the opposite. Could you explain these findings? The argument that cutting the minimum wage raises employment rests on a simple but false supply-and-demand theoretical view of the labor market. In practice, maintaining a reasonable and stable minimum wage puts pressure on less-competitive firms to raise their performance, and the result over time is a more productive economy, with greater capacity to absorb labor into sectors providing desired services. For this reason, egalitarian wage policies have contributed to the rise of income and wealth in Northern Europe in the past century in both absolute and relative terms. What are the main problems of the so-called «orthodox» economy theory? Where do they get it wrong and why do they still insist? I would refer you to my paper «How the Economists Got it Wrong,» published in The American Prospect, February 6, 2000 and widely reprinted. The main problem of orthodox theory is a fixation on a very narrow theoretical framework, coupled with assumptions about behavior that are not only unrealistic but also inappropriate, and motivated in many cases by a profound desire to reinforce conventional prejudice. What would be your advice to a young economist facing all the peer pressure to bow to orthodox economics in order to advance in terms of career? I would never advise a young person of integrity to compromise themselves in order to advance. The only way forward is to do good work of a high scientific standard, and I would especially emphasize empirical investigations with relevance to economic and social problems and to policy. Obviously there are difficulties and obstacles but the alternative is not worth the candle. And if one pursues an honest path and fails to advance at least you can then go forth to other things in life with your head high.