The Price of Inequality: How Today's Divided Society Endangers Our Future (51 page)

17.
That was another iniquitous aspect of the 2005 bankruptcy act: it made even loans from for-profit banks for for-profit schools nondischargeable.

18.
We’ll discuss predatory education loans in a later chapter. Another bankruptcy “reform” (discussed in chapter 2), giving derivatives seniority in bankruptcy, not only distorted the economy by encouraging these gambling instruments but did so at the expense of others—including workers and pensioners, whose claims against the bankrupt firm were correspondingly weakened.

19.
The Universal Declaration of Human Rights, adopted by the United Nations on December 10, 1948, recognized both economic rights and political rights; but the economic rights that were identified pertained to the ordinary citizen. “(1) Everyone has the right to a standard of living adequate for the health and well-being of himself and of his family, including food, clothing, housing and medical care and necessary social services, and the right to security in the event of unemployment, sickness, disability, widowhood, old age or other lack of livelihood in circumstances beyond his control.” The Universal Declaration of Human Rights, available at
http://www.un.org/en/documents/udhr/index.shtml
#a25. Implicitly, it was realized that individuals whose survival was at risk could and would not effectively exercise their political rights. In the years of the Cold War, those on the left emphasized the importance of these economic rights, while the U.S. government centered its attention on political rights. Ironically, when economic rights were finally discussed, it was the rights not of workers and citizens but of capital; it was property rights, intellectual property rights, the rights of capital to move freely across borders. In other countries, however, there has been increasing recognition of the economic rights of ordinary citizens, e.g., in the constitution of South Africa, where even the right to housing is accepted. See Chapter 2, Bill of Rights, Section 26: “26 (1) Everyone has the right to have access to adequate housing. (2) The state must take reasonable legislative and other measures, within available resources to achieve the progressive realisation of this right. (3) No-one may be evicted from their home, or have their home demolished, without an order of the court made after considering all the relevant circumstances,” available at
http://www.info.gov.za/documents/constitution/1996/96cons2.htm
#26. The Indian supreme court has recognized rights to education; in 2002, through the 86th Amendment Act, Article 21(A) was incorporated in the constitution to make education a fundamental right for children, and rights to pollution-free-air (under Article 21). It also recognizes fundamental rights, particularly the Right to Life guaranteed in Article 21. Around the world, the rights-based approach has received increasing attention. See, e.g., the work done by the former head of the UN Human Rights Commission (and former president of Ireland) Mary Robinson’s organization, Realizing Rights, available at
http://www.realizingrights.org
/.

20.
This ignores, however, the many social and other consequences of labor migration, both to the country that the migrant leaves and the country to which he comes.

21.
Of course, some, perhaps many, of those advocating the liberalization of financial markets look only at the
direct
increase in their profitability from their ability to invest in places where returns are higher. They don’t think about the systemic effects of asymmetric liberalization on wages.

22.
Financial market integration entails not just the free movement of capital across borders but also the free movement of financial institutions across borders. See chapter 6 for a fuller discussion of these issues.

23.
A similar problem arises in the design of electric networks. More integrated networks are subject to systemic breakdowns—a problem in one little place, like a substation in Ohio, can bring down the whole East Coast. The response is the design of effective circuit breakers, to isolate—or quarantine—the problem.

24.
Banks spend a lot of money lobbying both against regulations and for bailouts that serve their interests. Lobbying expenditures in 2009 jumped 12 percent from 2008, to $29.8 million, among the eight banks and private equity firms that spent the most to influence legislation, and much of the increase happened in the last three months when Congress voted on finance reform bills. See “Banks Step Up Spending on Lobbying to Fight Proposed Stiffer Regulations,”
Los Angeles Times
,
February 16, 2010. As an example of the impact of bank lobbyists, the Federal Reserve set a 24-cent maximum on the fee banks can charge retail merchants for debit card transactions in June 2011, an amount that was a multiple of reasonable estimates of the cost of the transaction, and roughly double the 12 cents tentatively proposed by the Fed in December 2010. See “Fed Halves Debit Card Bank Fee,”
New York Times
, June 29, 2011, available at
http://www.nytimes.com/2011/06/30/business/30debit.html
.

25.
Developing countries also have many complaints against globalization, which I’ve discussed elsewhere. For instance, they rightly complain that the trade agreements are not fair: the bargaining power is all on the side of the developed countries. Consider the so-called Free Trade Agreements, which the United States has with many other countries around the world. These agreements are not really free-trade agreements. If they were, they would be a few pages long, with each side agreeing to eliminate its tariffs, its nontariff barriers, and its subsidies. But the agreements go to hundreds of pages,
because they are in fact managed-trade agreements
,
and managed for the benefit of special interests. They are agreements in which hosts of industries insist on one form of favorable treatment or another. Companies’ focus is naturally on rules that increase their profits. When trade liberalization helps their profits, then they’re in favor of it; but when it works the other way, they oppose it. And for the most part, the U.S. trade representative and trade ministers from other advanced industrial countries represent the interests of the country’s companies. Opening up trade is, however, only one part of the focus of trade negotiations. Today much attention is centered on inducing other countries to open up their markets to foreign investment and protecting the investments that are made there—that is, providing conditions that enhance the movement of jobs overseas. In short, much of the focus is on enhancing corporate profits, rather than on increasing jobs at home. And this is not surprising, given where the campaign contributions and lobbying is coming from. (It’s not an accident that sometimes, the U.S. trade representative has been a presidential campaign manager.) Everybody believes that exports are good—but that imports are bad. (Such a position, of course, is intellectually incoherent.) Our firms claim that if some other firm undercuts them, it must be playing unfair. It must be selling goods below cost, or be subsidized by its government. U.S. firms use these arguments to advocate for the imposition of duties to “level the playing field.” When international trade agreements prevent the imposition of tariffs, the United States (and other countries) turn aggressively to using what are called nontariff barriers, and especially dumping duties. But the fact of the matter is that many American industries are not the most efficient in the world. Many have not invested what they should either in people or in machines, and that’s why their costs are higher. For a discussion of the importance of innovation in the American automobile manufacturing, and how U.S. firms have stacked up against foreign competitors, see McKinsey & Company, “Increasing Global Competition and Labor Productivity: Lessons from the US Automotive Industry,” a report of the McKinsey Global Institute, 2005, available at
http://www.mckinsey.com/Insights/MGI/Research/Productivity_Competitiveness_and_Growth/Increasing_global_competition_and_labor_productivity
(accessed March 6, 2012).

26.
In its early history, the United States had such conditions, and indeed a very different process played out. Territories and the new western states of the Union competed for settlers with the older states on the Eastern Seaboard. This led across the nation to the expansion of voting rights, in the right to run for political office, and in public education, which in turn contributed to the vast expansion of literacy in the United States (relative to what it had been before, and what it was in Europe). See S. Engerman and K. Sokoloff, “Factor Endowments, Inequality, and Paths of Development among New World Economies,”
Economia
3, no. 1 (2002): 41–109; and S. Engerman and K. Sokoloff, “The Evolution of Suffrage Institutions in the New World,”
Journal of Economic History
65, no. 4 (December 2005): 891–921.

27.
This is especially true for smaller countries. Most of the adverse shocks they face come from abroad.

28.
See D. Newbery and J. E. Stiglitz, “Pareto Inferior Trade,”
Review of Economic Studies
51 (1984): 1–12.

29.
These ideas have been at the center of trade theory for more than sixty years. See P. A. Samuelson, “International Trade and the Equalisation of Factor Prices,”
Economic Journal
58 (June 1948): 163–84; and W. F. Stolper, W. F. and P. A. Samuelson, “Protection and Real Wages,”
Review of Economic Studies
9, no. 1 (1941): 58–73. For a more extensive discussion of these issues, see Stiglitz,
Making Globalization Work
, chap. 3
.
A standard implication of these theories is that the differential between unskilled and skilled workers’ wages should narrow in developing countries, reducing inequality. This has not happened. One of the reasons is that the most unskilled workers in developing countries—those who are, e.g., subsistence farmers—may be made even worse-off as a result of trade agreements that open up their markets to highly subsidized agricultural goods. There is no agreement among economists who have attempted to quantify the relative importance of trade globalization on inequality. It used to be part of the conventional wisdom that a small part (at most a fifth) of the increase in inequality was due to globalization. (For instance, Florence Jaumotte and Irina Tytell, “How Has the Globalization of Labor Affected the Labor Share in Advanced Countries?,”
IMF Working Paper
,
2007, argues that technological change was more important than globalization, especially on the wages of low skilled workers.) But more recently, Paul Krugman has argued that the impact of globalization may be larger than was previously thought. “Trade and Inequality, Revisited,”
Vox
, June 15, 2007; see also his paper “Trade and Wages, Reconsidered,” Brookings Panel on Economic Activity, Spring 2008. Part of the difficulty is that globalization is intertwined with the changing productivity within the United States, the weakening of unions, and a host of other economic and societal changes. There is no obvious way to specify the counterfactual: what would the degree of inequality have been, if we had not had globalization, but everything else had been the same?

30.
The relative importance of these societal changes and the market forces described earlier (especially the role of skill-biased technical change) has been a subject of some contention in labor economics. David Card and John DiNardo, ”Skill-Biased Technological Change and Rising Wage Inequality: Some Problems and Puzzles,”
Journal of Labor Economics
20 (2002): 733–83, and Thomas Lemieux, “Increased Residual Wage Inequality: Composition Effects, Noisy Data, or Rising Demand for Skill?,”
American Economic Review
96, no. 3 (2006): 461–98, focus on the timing of the increase in inequality—in the 1980s—suggesting it is caused by the institutional/societal changes, including those we focus on here. Piketty and Saez, “Income Inequality in the United States, 1913–1998,”
Quarterly Journal of Economics
118, no. 1 (2003): 1–39, “The Evolution of Top Incomes: A Historical and International Perspective,”
American Economic Review
96
(2006): 200–206, and Frank Levy and Peter Temin, “Inequality and Institutions in 20th Century America,” working paper, MIT 2007, focusing on the rise of inequality at the very top, advance an explanation based on social norms and regulatory and institutional changes, along the lines presented in this section. Other societal changes have contributed to inequality
among households,
e.g., increases in the number of female-headed households, and an increase in associative mating (where higher-income males are more likely to marry higher-income females). See R. Fernandez and R. Rogerson, “Sorting and Long-Run Inequality,”
Quarterly Journal of Economics
116 (2001): 1305–41. Differences among households in hours worked (partly related to differences in gender participations and changes in patterns of gender discrimination) also played a role. These changes, while important, are less significant than the other changes on which we have focused. See OECD, “Divided We Stand: Why Inequality Keeps Rising,” December 5, 2011.

31.
See
http://www.bls.gov/news.release/union2.nr0.htm
.

32.
See details in Joseph A. McCartin,
Collision Course: Ronald Reagan, the Air Traffic Controllers, and the Strike That Changed America
(New York: Oxford University Press, 2011).

33.
See chapter 4 for a more extensive discussion. Critics ask, If it’s so profitable to pay workers high wages, why don’t firms do it on their own? A central thesis of this book is that managerial incentives are not well aligned either with real economic returns or even with the interests of shareholders.

34.
Part of the reason for the differing interpretations is that there are instances where inefficient work rules do interfere unnecessarily with efficiency. All human institutions are fallible; it makes no more sense to condemn all unions for the failings of some than to condemn all corporations for the failings of some. For a discussion of circumstances under which unionization increases productivity, see Richard B. Freeman and James L. Medoff, “Trade Unions and Productivity: Some New Evidence on an Old Issue,”
Annals of the American Academy of Political and Social Science
473 (1984): 149–64.