SYNOPSIS: An Essay on Krugman's Analysis of Increasing Inequality*

Jim Devine
Economics Department
Loyola Marymount University
7900 Loyola Blvd.
Los Angeles, CA 90045-8410 USA
e-mail: mailto:
revised: August 13, 1999

The slipping fault-line between the rich and the poor within U.S. society must be shaking the commanding heights of the economics profession. Otherwise, a superstar economist like Paul Krugman would never write for Mother Jones, traditionally a liberal muck-raking magazine.(1) Once a staffer of President Reagan's Council of Economic Advisors, often quoted by the New York Times, now a regular columnist for Fortune and Microsoft's on-line Slate magazine, and residing at the top of what he approvingly terms the "academic pecking order" (M.I.T.), Krugman is an extremely clever establishmentarian spokesman on the economic issues of the day.(2) He has done us a favor: by bringing major suspected causes of increased inequality together in one place, the MJ article provides the structure for the construction of an alternative primer on internationalization, applying the perspective of political economy.

On top of his lucid and engaging writing style, Krugman's usual punditry centers on critiquing economics authors whose opinions deviate from the established wisdom. This "essay of persuasion and interpretation" turns the tables, pointing the pontificating pen against him. The point of using him as a foil is not to criticize his innovative scholarly research (3) but to focus on his popular articles. The latter totally miss the depth of his more serious work. But they are like textbooks, which state the consensus among orthodox professionals, i.e., what students should know, without the sophisticated complications that just confuse them. Thus, a criticism of his popular work can reveal the conventional thinking on globalization -- and point to an alternative vision.

Krugman forthrightly and rightly rejects "the hired guns of the right" who still claim that the widening of income gaps is only a statistical illusion. The discussion thus moves onto a different and higher level, the investigation of "The Sources of Inequality": his major thesis is that "Imports from low-wage countries -- a popular villain -- are part of the story, but only a [small] fraction of it. The numbers just aren't big enough."

As usual with an intelligent observer, Krugman has something right: "globalization" per se is not the enemy. Dropping his static assumptions and his near-total avoidance of issues of international investment and macroeconomics, however, globalization is more important than he sees it. Further, the evidence presented below indicate that to some extent, the phenomenon under discussion is just beginning: globalization (i.e., increased international dependency) has accelerated in the 1990s. Nonetheless, it is but one part of a larger process, the development of what Harry Braverman termed "the Universal Market," one side-effect of the competitive and aggressive capitalist drive to accumulate wealth and power.(4) Part of this development in recent years has been the ideological dominance of laissez-faire "neoliberalism" at the U.S. government and the Bretton Woods institutions (the International Monetary Fund and the World Bank).

This abstract tendency toward marketization should not be considered in isolation (as Braverman usually did), but in conjunction with people's efforts to resist being reduced to being treated like commodities. Absent a broad socialist or labor movement that makes efforts to organize the least powerful, their limited success at gaining security in an insecure economic system is crucial. Because of differential ability to resist capital's depredations, the development of the universal market occurs unevenly. Because those with the most power and privilege at any point are able to resist marketization the most, rising inequality is encouraged.(5)

It should be stressed at the start that the size of the "fraction" that imports from poor countries play in encouraging growing income gaps amongst wage-earners is not central to this essay. Whatever the size of this fraction, it must be combined with the other elements of the story. More importantly, this combination is not a simple addition, since the various elements interact with -- and reinforce -- each other. The whole (the universalization of markets) is more than just a sum of the parts (including trade competition).

My criticism of, and alternative to, Krugman's primer generally follows his outline, starting first with international issues: global investment and trade competition. Some historical background is presented concerning these issues. The discussion then turns to more so-called "domestic" issues that he mentions, i.e., the role of technology and (to use my terminology) the rise of secondary labor markets.

This investigation necessarily get far beyond the restricted scope of Krugman's article, because of the impact of globalization and marketization on profit rates, macroeconomic policy, inflation, and unemployment. Part of the problem with his argument is his artificial limits on subject matter minimizes the role of globalization. My "going out of bounds" has the benefit of helping to explain the recent unexpected phenomenon of falls in unemployment rates below 6 or even 5 percent without causing accelerating inflation. This essay finishes with some comments on the prospects of world economy and what can be done.

Like Krugman's, this essay is centered on U.S. concerns. Naturally enough, the contrast is between the "Golden Age" of what Tom Weisskopf termed "security capitalism" and the increasing insecurity of recent decades.(6) The trend toward globalization of the U.S. economy which plays such a large role in this increased insecurity, it should be noted, started mostly in the aftermath of World War II. Thus, the story of U.S. globalization is different from that of say, the U.K., which had been immersed in the global economy during the 19th century and had then joined the general trend toward anti-globalism in the 1930s.

Capitalizing the World

Let us turn to Krugman's discussion. Strangely, both immediately before and directly after mentioning international trade, he brings up the issue of foreign investment: "We [i.e., U.S.-based capitalists] invest billions in low-wage countries -- but we invest trillions at home."7 This comparison of unspecified and unreferenced amounts that "we" invest totally ignores the steady growth of the amounts that U.S.-based capitalists invest abroad. Since we [the readers and I] are living through a dynamic process, the spiraling rise in inequality, not only does the level of investment in low-wage countries at any one time deserve attention but also how things have changed. A single gee-whiz statistic, no matter how vague, will not do.

But the readers should thank Krugman for bringing up international investment -- even if only to dismiss it.(8) It suggests that his strategy of focusing only on foreign trade ("imports from low-wage countries") is excessively narrow. A central fact of the current globalization that differentiates it from previous eras for the US is that more than merely commercial capital (involved in trade) and financial capital (loans) are being internationalized.(9) More and more, it is productive capital that is being globalized as the entire circuit of capital covers the earth, in a more unified way.(10)

This increasingly globalized productive capital -- money-capital invested to garner a profit from production -- is more than the traditional investment in the poorer capitalist nations, i.e., infrastructure, raw material extraction, and manufacturing protected by tariff walls of countries promoting "infant-industry" manufacturing (import-substituting industrialization, ISI). The new investment involves what Krugman (in Brookings) terms the "slicing up the value chain" among different sites around the world, as when different components of the "world car" are produced in many countries. This works in tandem with the rising role of manufacturing in the so-called "newly industrialized countries" (NICs).

This process is unified by the bureaucratic power of transnational corporations (which often out-sourced in these NICs) and by the increasingly prevalent tendency for profit rates to be equalized internationally.

This crucial long-term trend of U.S. capitalism since World War II can be seen statistically: the ratio of direct investment by non-financial corporations to total non-financial corporate investment almost tripled, from below 4 percent for most of the 1952-59 period to over 11 percent in the 1990s, showing a steep rise after 1988. As a fraction of GDP, this investment more than tripled, from 0.3 percent to over 1 percent, between the same periods.(11)

Further, the profit reaped in foreign climes rose from about 5 percent of total profit in the 1950s to an average of above 12 percent in the 1990s. Though this ratio falls a bit in recent years (partly due to the rise of domestic profit rates), the upward trend is clear.(12) Among other things, this tendency implies a greater dependency of the profits of U.S.-based corporations on the health of the world economy. Since these corporations are so central to the U.S. economy's prosperity, that economy is also increasingly dependent.

Foreign investment in the United States is also rising: here in Los Angeles, one can see not only a branch of Lippobank, an organ of the infamous Indonesian group which encouraged White House corruption, but also delivery trucks for Pan Bimbo, the Mexico-based company that produces a Wonder-like bread. Foreign direct investment in the U.S. has also risen steadily over the decades as a percentage of the total domestic investment, from below 1 percent in the 1950s and early 1960s to 19 percent in 1988.13 Though this ratio fell soon thereafter, it still exceeded 11 percent in 1998.

The point here is not to blame either U.S.-based or foreign-based capitalists for globalization. Rather, the issue is the role of world capitalism as a whole in transforming the U.S. economy. Thus, a better measure of the degree of internationalization of capital for the U.S., the average of both investment abroad and foreign investment here, has risen dramatically from less than 2 percent in 1952 to above 11 percent in 1998, with a surge in the 1990s encouraged to rise by both of its components.(14)

It is commonplace at this point in the discussion to note that most U.S. foreign direct investment is in other advanced capitalist counties, not in low-wage areas (just as most direct investment in the U.S. is from other rich countries). But in recent years, direct investment in low-wage countries has risen sharply relative to that in rich countries. Consider direct investment in manufacturing, the center of most discussions of so-called "deindustrialization" and capital flight. In 1952, about 25 percent of the total U.S. direct investment position in foreign manufacturing industries was in what the Commerce Department defined as "developing countries" in the early 1980s. As orthodox economists emphasized, this ratio fell until 1960 (to 15.6 percent): U.S.-based companies shifted away from investment behind third-world tariff barriers (mostly in Latin America, which had pursued ISI) to tap the markets and skilled labor forces of the other advanced capitalist countries as the latter recovered from the devastation of World War II. However, since that period the ratio has risen dramatically, totally reversing this trend. After some hesitation due to the Debt Crisis (roughly from 1982 until 1986), the share of investment in "developing countries" has soared to 26.4 percent, more than exceeding both the pre-Crisis peak and the 1952 record.15

Of course, an increasing percentage of this investment has been in countries once dubbed "developing" but now seen as joining the relatively-developed NIC club (though they're still on probation and currently under threat of expulsion). Most crucial are the 4 Tigers (Hong Kong, South Korea, Singapore, and Taiwan) plus Israel (an extension of the rich countries). The U.S. manufacturing investment position in these countries as a percentage of all of the "developing countries" rose from about 6.5% in 1977 (when this data series starts) to more than 23% in 1997. Fitting with the usual globalization thesis, these countries offer lower wages than do Europe or North America.16 But they also offer crucial attractors for capitalist investment that should remind us that low wages, tame labor forces, and lenient environmental laws are not -- and have never been -- the whole story: these countries also offered friendly and relatively stable political environments, relatively skilled workers, and developed infrastructure.

So let us exclude these five locations. The ratio of manufacturing investment position in the poor countries to all U.S. foreign direct investment in manufacturing rose steeply after 1986 and especially after 1991, climbing from 17.4 percent in 1977 to almost 20 percent in 1997. Capitalist investment has spread deeper and wider in search of profits, to such places as Sri Lanka and Indonesia. Of course, it has not spread to many places in Africa, but that should remind us once again that businesses care about issues of civil peace, the availability of infrastructure and skilled workers, and the like.

Some may argue that these fractions are marginal, but as economics teaches us, margins can be quite important: a marginal process of erosion eventually produced the Grand Canyon. It is precisely U.S. workers at the margin -- those in labor-intensive manufacturing industries using little fixed capital, such as textiles, apparel, and leather goods -- that have been bearing the load of threats of capital flight. Just as they were the first ones to suffer from mobility within the U.S. (from Massachusetts to South Carolina, etc.), they lead the way in being punished by cross-border flight.

Ignoring in-person services (which involve jobs that cannot be moved), labor-intensive industries are more likely to move to low-wage areas for two reasons. Labor intensity makes bosses more conscious of wage costs while the relative non-use of fixed capital makes it less expensive to move (or to scrap a plant here and build a new plant there).

This is especially true of routine production tasks with relatively low skill requirements. As the normal capitalist trend of the deskilling (routinization) of existing production processes continues, more and more of the older and established industries are subject to this kind of mobility, as noted in Raymond Vernon's "product cycle" theory.17 With the rise of countries such as Taiwan and South Korea having relatively high skill levels, this problem is beginning to undermine the position of even "semi-skilled" workers in less routinized industries.18 The threat of capital mobility hits the relatively low-wage workers in routinized labor-intensive jobs first, but it slowly climbs the wage ladder.

The numbers on capital mobility do not capture the full impact of this phenomenon. First, those who provide in-person services or work in capital-intensive manufacturing or jobs requiring high educational credentials (who do not suffer the brunt of capital-flight fears) end up competing with those losing jobs due to capital flight in the same country. Absent successful resistance from the workforce, this depresses their wages relative to their productivity. This phenomenon, as explained below, hits those at the bottom of the wage hierarchy (those least insulated from market forces) hardest, encouraging wage inequality.

Further, to compete with the high profit rates earned on new investment in low-wage countries, i.e. to prevent the movement of capital out of high-wage countries such as the U.S., more substantial profit rates have to be garnered here. Trying to eke as much profit as possible out of sunk costs (fixed capital), capitalists press in every way possible (union-busting, lobbying, two-tiered wage systems, etc.) to cut wages, benefits, work-rule protections, and unit labor costs, all justified in the name of "flexibility" (i.e., their own power) and "competitiveness" (i.e., that others are doing the same). Again, assuming that resistance fails, that depresses wages and boosts profits in the home country. The restoration of higher profit rates in the U.S. and other rich countries in turn prevents investment in low-wage countries from rising very quickly: it keeps the size of investment in such countries small for a long time even as the possibilities for mobility rise.19 That is, capital threatens to flee more than it actually has to make that warning real.

Underdeveloped Wages

Krugman denies that moving manufacturing to Third World countries depresses U.S. wages, arguing instead that international equalization of wages should work in the upward direction:

"If you can shift machinery from the United States to Mexico, why should you think that would level American wages down rather than Mexican wages up? If a Mexican worker's output goes from one widget to 10 widgets a day, his [sic] wages rise to that level. If you strip the story down, this is the only explanation that makes sense."20

Perhaps this "makes sense" in the abstract realm of High Theory (the only place where "widgets" are made) or in the long run (perhaps after global warming has destroyed civilization).21 But, as usual in popular pronouncements, Krugman does not make his assumptions explicit: he seems to be presuming that the demand for labor-power depends only on technically-determined labor productivity (i.e., that recessions and changes in management labor-control strategies do not occur), that the supply of labor supplied does not shift, and that the interaction of supply and demand is the only determinant of wages.22

In the here-and-now, these assumptions are nothing but bullfeathers, both in terms of the empirical evidence on Mexican wages and in terms of logic. In Mexico, the official minimum wages (corrected for inflation) has been falling steadily at least since 1984 and took a steeper dive in the year or so after the "N.A.F.T.A. crisis" of 1995. Officially-measured real wages in manufacturing have also been falling in Mexico after that crisis. The slight uptick in 1998 still left these wages 20 percent lower than in January 1995 and about the same level as in 1985. Looking at it from the perspective of capitalists interested in investment opportunities, manufacturing wages fell from 23 per cent of U.S. wages in 1975 to 8 percent in 1996.23 In the meantime, it seems quite likely that labor productivity in the maquiladoras has risen as more manufacturing capital has flowed in that direction.24 So the potential is there for investors to benefit from significantly lower unit labor costs (the ratio of the wage rate to labor productivity) in Mexico.

Krugman would probably argue (correctly) that it is a mistake to generalize from a single case to the future or to other poor countries. But most of the more industrialized capitalist countries of East Asia have been undergoing a similar crunch since 1997's financial crises. At this writing, there is no end in sight and the problems seem to be deepening, especially as the crisis has spread to Latin America, Russia, and most crucially, Japan (which had already been suffering from a depression). At the time of this writing, the falling demand for labor-power has not yet spread to the U.S., though some forecasters predict slowing growth of the economy in the future.

Even absent financial crises and recessions, there are good structural reasons to expect (at least for the next decade or so) that wages will be depressed relative to productivity growth in most if not all of the countries competing to attract capital from the advanced capitalist world. First, the commercialization of underdeveloped countries' agriculture (intimately linked, of course, to the spread of capital out of the rich countries) is causing massive social transformations that expel people from the land.25 The resulting surge of the labor-power supply helps keep wages down (often even across international boundaries). This process is further encouraged in the urban sector by the current campaign in many countries to privatize government enterprises and downsize private ones, shedding "redundant" labor. Additionally, in the ruins of the Soviet Bloc, more and more countries have entered the fray, offering relatively skilled but low-wage labor-power to (the always) profit-hungry transnational corporations. These processes are most pronounced, of course, in China, a low-wage leader in world manufacturing.

The governments and capitalist elites of these countries are the main local beneficiaries from foreign investment, collecting taxes, bribes, partnerships, out-sourcing contracts, and directorships. That low-wage labor is the basis for their competitive advantage intensifies their normal vested interest in repressing unions and gutting labor laws to keep wages down, using violence, co-optation, or a combination of the two. Having been pushed (since 1980 or so) by the U.S. and the Bretton Woods institutions to abandon all nationalist and populist pretensions, to pursue laissez-faire and export-led growth, and to link their fate to foreign investment, these elites struggle mightily to maintain their "competitiveness." Having abandoned import substituting industrialization, they no longer see wage income as a source of demand but only as a cost of production. They know that if wages rise too much, investment will flee to greener pastures (e.g., from Mexico to Asia, from South Korea to China).

In one of his rare forays into empirical research, Krugman cites evidence for rising high wages in Taiwan and South Korea (relative to the U.S.) as evidence that wages rise with productivity.26 That wages are rising relative to productivity is indicated by the rise in manufacturing unit labor costs in these countries, at least until 1992 or so.27 However, even if the recent stagnation (which preceded the 1997 crisis) is temporary and soon to be surpassed, generalizing from these two countries to the rest of the non-O.E.C.D. world is a major analytical mistake. By doing so, Krugman becomes what he terms an "accidental theorist," spinning half-baked theories despite himself.28 For his argument to make sense, he must assume that all of the underdeveloped countries now receiving international capital will automatically follow the lead of Taiwan and South Korea, following an automatic stage theory of the sort that W.W. Rostow advocated.29 Alternatively, Krugman may be arguing that underdeveloped countries will follow South Korea and Taiwan if they follow the advice of the Bretton Woods institutions. But recent history (sketched below) belies that assumption.

A crucial problem with such a stage theory is that the "export-led growth model" pursued by those two nations was quite different from that of their would-be followers, so the results should be different. South Korea and Taiwan rose toward the top at the same time the benefits of growth were distributed in a relatively equitable way.30 Somewhat similar to Japan after World War II, they had successful land reforms combined with the fostering of agriculture, an emphasis on education, and state-capitalist planning aimed at entering the game of international trade in order to win (rather than following the defensive strategy of ISI).31

These authoritarian countries were able to climb major barriers to growth during an era in which the U.S. policy-makers wanted (and, more importantly, were willing to pay for) showcases to make the communists in North Korea and China look bad -- at a time that the world economy was booming due to Vietnam war spending, providing a market for export-led growth.

The advice that U.S. and the World Bank have been giving other countries, such as Indonesia, China, Sri Lanka, and Mexico, has not been to emulate Taiwan and South Korea but to pursue a very different growth strategy, that of laissez-faire. Instead of a high-skill, high-wage strategy, it is low wage costs that have become the mainstay of the new export-oriented model.32 Instead of state capitalism, a greater degree of passive receptiveness to international capital prevails.

An additional problem is that of the fallacy of composition: if all or a large number of poor countries pursue the same strategy of pushing exports, it does not work. It is impossible for all nations to enjoy a trade surplus at the same time. This is especially true in a depressed global economy, because the poor countries compete over a limited amount of demand for their products from the rich countries. Note also that the U.S. elites' incentive to prop up the South Korean or Taiwanese economies -- or to tolerate deviations from U.S. orthodoxy concerning economic policy -- has fallen since the end of the Cold War.

The fallacy of composition problem was seen dramatically in 1997, when the aggressive competition among the East Asian nations to attain markets in O.E.C.D. nations started to undermine their prosperity, setting the stage for the financial crises.33 Then competitive devaluations produced little or no increases in exports by the East Asian countries -- while increasing the value of external debts (and debt service) and the price of crucial imports in terms of local currency.

This spur to world recession was amplified as those countries that did not devalue raised interest rates. At the same time, the low-wage strategy itself rules out reliance on the home market and sales to other low-wage countries as panaceas for underdevelopment.34 In the end, countries that pursue the low-wage strategy of development will likely get stuck, especially since there will probably always be other countries offering even lower wages. In the end, the wide-spread application of the model of economic development that Krugman advocates undermines his prediction of rising wages in the poorer countries.

Global Roots

Despite the involvement of the Bretton Woods institutions and even the C.I.A., the depression of wages in underdeveloped nations do not reflect a conspiracy by some nefarious elite but one of the seemingly inevitable processes of capitalist development: there has been a steady strengthening of the process of equalization of profit rates between all countries, including between low-wage and high-wage countries. This process reflects the way in which capitalists incessantly seek out more profitable arenas to invest in, by mining loopholes in existing laws, by lobbying and bribing politicians to change laws or their interpretation, and by developing new technologies that allow mobility.

The strengthening of profit-rate equalization tendencies is linked to that of growing international trade (discussed below), as complementary parts of a unified process.35 Trade and international investment are not simple substitutes as asserted by the "factor-price equalization theorem": the balance-of-payment surplus that high-productivity countries initially have when trade is opened up allows them to buy the underdeveloped countries' resources,36 the ability to export to the home countries makes investment in a poor country profitable, and foreign investment in the latter leads to export earnings that help them buy rich countries' products. Of course, global trade and investment are not mere complements, since the latter is a dynamic force driving the former forward.

First, improvements in communication, computational, and transportation technologies, a seemingly normal result of capitalist development that seem to have become more common in recent decades, lower the costs of world-wide corporate operations. For example, it is easier to organize a factory producing shoes in Vietnam from the head office in the U.S. if one uses e-mail or FAX instead of telephones.37

Second, the move toward increased capital mobility interacted with and was reinforced by political change, more specifically the world-wide free trade and investment campaign led by the U.S. starting after World War II. Of course, increased international investment has also resulted from international agreements, culminating in the proposed Multilateral Agreement on Investment (M.A.I.) In addition, with the undermining or dismantling of trade barriers, businesses can more profitably move operations to other countries (e.g., Mexico) and then ship their products back to their original homes, the site of relatively high incomes and thus markets.

In recent years, this process has accelerated as opposition to trade liberalization and capital mobility has faded, due to the shrinkage of those sectors of capital that are tied down to the nation-state and the sapping of labor's organizations, the major political forces favoring protectionism. The demise of the U.S.S.R. implied less pressure for "Western" elites to promote domestic prosperity via high wages and welfare-state programs in order to win the ideological war. Anti-globalization forces have been swamped by arguments that There Is No Alternative (TINA), i.e., that any kind of control over capital is a bad idea. At least in the U.S., the possibility of a serious Perotista protectionist movement has fallen drastically, leaving trade war fears as mostly a tactic in free-trader hype.38 The victory of the free trade movement has recently been codified in such institutions as the N.A.F.T.A. and the World Trade Organization.39

Even though this force is typically seen as "political" rather than purely "economic" in origin, political decisions typically reflect economic power, as most capitalist countries follow the U.S. system of "one dollar, one vote" in the continuous process of informal elections that occurs between the formal ones, which are themselves dominated by campaign contributions.40 The role of these contributions is similar to that of cigarette advertising: though advertising of Camel to a large extent cancels out that by Marlborough, the net effect is to hook some new teenagers on nicotine, expanding the market. Similarly, the general impact of the contributions of competing fractions of capital is to push the general capitalist agenda.

The third factor involves the opening of the "South" to international investment and trade. In the Brookings discussion, both Krugman and Richard Cooper misleadingly refer to this turn toward more open trade as "unilateral," ignoring the predominant political influence of the North. But this "opening" trend started in a big way in Chile, after the U.S.-aided and -abetted coup that replaced Allende's social-democratic Unidad Popular government with military terror combined with laissez-faire economics after 1973.41 Following this lead, the Bretton Woods institutions and consortia of private banks have leveraged their superior position in the 1980s Debt Crisis and similar events to impose structural adjustment programs.42

These force many "developing" countries to open their economies to trade and to sap any efforts to regulate investment to capture benefits and limit its costs to cultivate national development. Hoping for a piece of the action, suffering diminishing returns from ISI, and/or fearing loss of investment to the more open countries, some other elites have steered their economies in this direction even without obvious Northern bullying.

Fourth, individual capitalists learn over time how to expand their operations across the globe, learning how to get around or abolish existing barriers to trade and capital mobility, both "natural" and legal. In fact, the revived aggressiveness of the U.S. domestic competitive process (spurred by the decline of the old oligopolies that dominated many industries in the 1950s and 1960s) pushes them to do so.43 The intensity of the competition -- both in the U.S. and the rest of the advanced capitalist world -- has been increasing lately, partly because the barriers to foreign competition have broken down. Since causation is running in both ways, the increase in the degree of globalization is a self-feeding process.

Similarly, the economic effects of the free-trade campaign and the spread of international investment are very difficult to reverse once they have been established: just as when a teenager gets hooked on nicotine, it is extremely hard to break the habit of internationalization. A refusal to lower trade barriers or foreign-investment controls has little or no negative effect on the world economy, but raising them evokes retaliation, destabilization, and hot money flight. There is a clear asymmetry adding to the momentum of the free trade and investment movement.

As a result of this internationalization, the national governments of the poorer countries find themselves in a rat-race, vying with each other to attract investment, in a desperate effort to get money and jobs by offering tax breaks, subsidies, infrastructure, etc. This process makes the competition among various U.S. states and municipalities to attract business investment and professional sports teams seem amateur. That government elites are dominated by business and not held responsible to the populace (except in the most attenuated way) encourages this process, since they can shift the costs to the people without having to have a public bond-issue referendum or even public debate. This threatens to be further institutionalized by the proposed M.A.I., aimed at cementing the global dictatorship of capital.44

The competition of different countries to attract direct investment, jobs, and funds is a crucial (but hardly the only) factor encouraging the global spread of austerity programs, export-promotion, and the process of downward equalization of unit labor costs, labor laws, taxes on capital, environmental regulations, and the like. This process may explain why South Korean and Taiwanese manufacturing labor costs per unit have stopped rising or even started to fall after 1992. It is also one factor encouraging the current stagnation outside the U.S. and the rising likelihood of turning that stagnation becoming a full-scale depression akin to that of the 1930s.45 It also helps us understand the impact of the increasing U.S. openness to international trade.

Commercial Competition.

On the issue of international commerce, Krugman suggests:

"What we [the U.S. as a whole] spend on manufactured goods from the Third World represents just 2 percent of our income. Even if we [the U.S. government] shut out imports from low-wage countries (cutting off the only source of hope for the people who work in those factories), most estimates suggest it would raise the wages of low-skill workers here by only 1 or 2 percent."

As in Krugman's parenthetical remark, I sympathize with the plight of those in low-wage countries.46 But as a socialist, I do not see protectionism and begging for capitalist investment as the only ways workers can prosper. Implicit TINA assumptions that capitalism and its version of globalism are inevitable should be avoided. Even from a nonsocialist perspective, there can be alternatives, such as ISI or the export-pushing state-capitalist route of South Korea or Taiwan discussed above. There is no reason except the dictates of power why we could not shift from the I.M.F. vision of every nation following identical "one best way" neoliberal policies to one where each nation could experiment with policies that were seen by the people in those countries as beneficial (within the constraints set by international agreements among equal nations).47

Even given his implicit political assumptions, however, Krugman's assertions are much too glib. He does not specify the source of the "2 percent of our income" statistic or how it was calculated (or to whom "our" refers).48 Nor does he explain the theory or the assumptions behind the "1 or 2 percent" estimated wage hike. The basis of his argument is simply that people should trust him. It is Krugman's standard method in popular works to argue by appeal to the authority of Big Name economists ensconced at the hegemonic schools.49 This kind of sloppy scholarship, of course, works for him because he represents the professional consensus; it also encourages his use as our representative of the orthodoxy.

In the case of the "1 or 2 percent," it is his own authority to which he is appealing. A little digging indicates that the source is Krugman's article in the 1995 Brookings Papers on Economic Activity. There, the ratios are stated tentatively and with qualifications, as is usual in academic research. Then, in MJ, for the unwashed masses of the public, they become facts, premises for his further argument.

But as Richard Cooper notes in his Brookings comments, the model allowing Krugman's calculations "has the great merit of being free of facts." It is an utterly idealized model, based on crucial assumptions such as full employment, perfectly flexible wages and prices, an iron dichotomy between skilled and unskilled labor, general equilibrium, zero capital mobility, and a fixed share of national income going to property owners. The penultimate assumption is contradicted by data cited above, while the ultimate one is belied by data presented below. The other assumptions seem totally unreasonable. I, for one, see no relevance of Walrasian general equilibrium (the dominant vision among orthodox economists, one which lacks time, buying-and-selling costs, uncertainty, market structure, and much more) to the real world.

To then state the conclusions of this model as fact as Krugman does is to apply the fallacy of argument by analogy, that because the economy is in some vague ways like the model, the economy is the model. (Krugman does no sensitivity analysis to see how his conclusions change as his assumptions are dropped.) Milton Friedman once justified the use of unrealistic assumptions by the predictive ability of the resulting model. But since Krugman's model predicts nothing, he cannot use this justification. The assumptions seem justified by the attractive political conclusions they produce.

Gary Burtless's very complete and critical survey of the theoretical and empirical literature on the impact of increased trade on wage inequality suggests that Krugman's opinion represents only one of several perspectives: he is in the "low impact of trade on wages" camp.50 For example, Adrian Wood's magisterial book used different assumptions (including a rejection of factor-price equalization) to convince Burtless that "North-South trades plays an important role in determining the demand for less-skilled workers in the United States and other advanced industrialized countries." He sees Wood's estimate that this trade explains half of the decline in this demand as an upper limit.51 This 50 percent is significantly larger than Krugman's 1 or 2 percent.

However, an alternative estimate of the impact of trade on wages is impossible: the internationalization of trade is inextricably connected with the internationalization of investment that Krugman also tries to ignore. These two forces interact with and reinforce each other in a complex way. In turn, globalization reacts on and is conditioned by the broader process of market universalization. So such quantification -- separating trade from investment, globalization from universalization -- is as impossible as quantitatively separating "heredity" and "environment" in determining an individual's character or abilities.52

As a rough and ready substitute for Krugman's assumption-intensive model, reconsider the 2 percent of national income that he assumes represents what U.S. citizens spend on third-world manufacturing. But no-one asserts that low-wage workers in poor countries are competing with high-wage and -salary workers in the U.S., except in a extremely attenuated way. The workers in China are not competing with Disney's Michael Eisner, nor with professors such as Krugman or myself. They are competing instead with workers who do similar types of work, for example, routine production labor with low skill requirements. It is these workers, of course, who have suffered the greatest declines in real incomes in recent years.

So low-skill workers in the U.S. should be compared with those in poor countries. Assume that Krugman's 2 percent is correct and assume that low-skill workers in the U.S. earn one quarter of the total income of the country, roughly the percentage of total income received by the lowest three tenths of U.S. families in 1994.53 This assumption as arbitrary and subject to debate, but at least it is explicit. Then, if imports from low-wage countries are only 2 percent of the total national income, that is 8 percent of the low-skill workers' national income.

As noted, the one-quarter assumption is arbitrary, just like the dividing line between low- and high-skill workers. But the point remains: moving to lower and lower skill levels, the workers' share of national income falls, so that the importance of international competition rises. Assuming that "low-skill workers" earn 3.5 percent of total income (roughly what the poorest quintile of families earned in 1994) and that foreign labor competes totally with them, then imports from low-wage countries represent 57 percent of their income. The assumptions behind this number are probably wrong, but it gives the general idea of who is suffering the impact of trade's growth. Krugman's "1 or 2 percent" would be higher if the bottom of the wage ladder is considered rather than the whole class of unskilled labor as one homogeneous bunch.54

Similarly, focussing on just the textile, apparel, and leather industries, Cooper finds that 10 percent of their relative wage decline (rather than Krugman's 1 or 2 percent) can be attributed to import competition (see Brookings). Bringing in the role of capital mobility and the other factors highlighted by this paper would probably produce even bigger estimates.

The last seven letters of "globalization" should tell us once again that the topic at hand is a dynamic process rather than some imaginary static equilibrium of the sort that entrances establishmentarian economists.55 What counts is how things have been changing, so some historical perspective is needed.

Beginning in the 1860s, U.S. manufacturing relied on high tariff walls to protect itself from English competition (replacing and intensifying the "natural" protection resulting from transportation costs), as had been proposed by Alexander Hamilton. Instead of trying to compete with Britain, U.S. industry mostly aimed at serving the domestic market.56 Benefiting from a large home market and a relatively small technological gap vis-a-vis its competitors, this was one of the few cases in world economic history of ISI that enjoyed long-term success.57 It allowed U.S. industry to compete and win on more equal terms, especially when its competitors suffered from World Wars.

Unlike for England, the U.S. movement toward freer trade is relatively new, starting after the disastrous Hawley-Smoot tariff of 1930 and accelerating after World War II. Thus, it is specious to deny the importance of commercial globalization to the U.S. by saying that it was important for the U.K. long ago, as Krugman does.58 Since the 1930s, the degree of "openness" of the U.S. economy (the average of imports and exports divided by gross domestic product) has steadily increased. The index rises, with a steepening curve, from 4 percent in 1959 to above 14 percent in 1997. Robert Feenstra argues that a ratio of the average of imports and exports to output of merchandise (i.e., excluding in-person services) is more relevant. This ratio rose dramatically, from below 10 percent in 1960 to almost 36 percent in 1990.59

Even assuming that the share of low-wage countries in total U.S. trade has been constant, the degree of competition that U.S. low-skill workers face has been rising at an accelerating rate. But while it is true that U.S. trade has traditionally mostly been with other rich, high-wage, countries, the share of poor countries in U.S. trade has been rising. The share of total U.S. imports plus exports that the U.S. has with "other" countries (non-OPEC, non-industrial, non-Eastern European) rose steadily from about 28 percent in 1969 to above 38 percent in 1997.60 Finally, as indicated by the figures on international investment presented above, a growing percentage of "other" countries' exports are likely to be manufactured goods.61

These data do not capture the full dimension of the competition with low-wage countries, however. Capitalists in high-wage countries besides the U.S. are also trying to cut unit labor costs to compete with the low-wage countries, so U.S. workers are also competing indirectly with the low-wage countries. Similarly, such businesses often buy inputs from the low-wage countries in order to compete domestically and internationally. All of this competition within the advanced capitalist world tends to drag wages down relative to labor productivity.62

Krugman and Robert Z. Lawrence suggest that the low-wage competition that U.S. exporters nowadays is similar, and of similar magnitude, to the low-wage competition that they faced during the 1950s and 1960s from Western Europe and Japan.63 This is an interesting and valid point. However, what is new is that U.S. workers now suffer from competition at both the high end -- from other rich countries with high and rising productivity and new products -- and at the low, from the NICs and countries offering low wages and tame labor forces. This is qualitatively different from simply facing competition at the low end as in the 1950s and 1960s.

Macropolicy and Moneterrorism

The macroeconomic impact is also crucial. U.S. domestic capital accumulation is becoming more dependent on the rest of the world: as a percentage of non-oil imports, imports of capital goods (excluding autos) climbed from less than 8 percent in 1965 to over 30 percent in 1997.64 As Samir Amin has pointed out, importation of capital goods is the hallmark of the dependent accumulation process that characterizes underdeveloped countries.65 So the statistics suggest that even though the U.S. is currently nowhere near the situation of a Guatemala or a Haiti, economic dependency is slowly becoming generalized, so that even the U.S. is affected. This means that even the advanced capitalist countries are moving toward a situation in which self-sustained (autocentic) demand growth is becoming possible only if it occurs on a world-wide scale. The regular international conferences where rich-country leaders and bankers get together to coordinate policy (and usually fail to agree or to follow through on agreements) are becoming more necessary.

The increased degree of international dependency of the advanced countries also means that state managers and politicians (especially those that have been freed from any democratic obligation to their populations) will increasingly see low labor costs per unit -- in a word, competitiveness -- as their lode star, rejecting any ideas of centering self-sustained growth on a promotion of the domestic market linked to high wages. A liberal version of this vision is seen in Robert Reich's book The Work of Nations, which proposes a modern cargo cult, trying to attract export dollars and transnational investment by offering up a skilled labor force and up-to-date infrastructure.

The role of macroeconomic policy in the U.S. has changed, reflecting the role of globalization. Increased openness has weakened the domestic impact of Keynesian efforts to stimulate the economy via budget deficits, as more and more of the increased demand leaks out to buy imports. On top of this, remember the early-1970s shift to a floating exchange rates system (an inevitable result, it seems, of the U.S. loss in the Vietnam war), the rise of European and Japanese competition, and the decline of U.S. hegemony. This new system helped raise the power of the rentiers, while moving world finance toward what Susan Strange calls "Casino Capitalism," which has spread not only hot money (short-term capital funds) but financial crises around the world.66 Domestically, as macroeconomics textbooks point out, this shift further sapped the effectiveness of Keynesian fiscal policy -- since fiscal expansion raises the dollar exchange rate, hurting exports. Because of this change, plus the Reagan era's excessive accumulation of government debt and many macroeconomists' bizarre conversion to faith in Say's Law, by the 1990s orthodox macroeconomists considered the main task of fiscal policy as being to keep the government budget balanced.

Monetary policy stepped into the power vacuum. Fiscal policy had a certain though attenuated democratic character, at least in the sense that politicians suddenly (and temporarily) seemed to care about unemployment problems during election years. But monetary policy -- not only in the U.S, but in most other capitalist countries -- is run by unelected bureaucrats and bankers. Like many other regulatory agencies, the Fed has been captured by the regulated industry, so its apparent goal has been to keep their friends in the banks and financial markets happy.67 This usually means keeping inflation as low as possible, not caring about such trivia as unemployment or demand growth except to the extent that they affect inflation rates. This can be seen in Alan Greenspan's current concern that any kind of wage hike may cause inflation.

As result of this power shift, it was Paul Volcker's Fed that imposed back-to-back anti-inflation recessions in 1980 and 1982. This, together with the effects of Reagan's ultra-Keynesian deficit expansion, led to high interest rates and thus a severely high dollar exchange rate. The resulting flood of imports and drought of export demand irreversibly transformed much of the former industrial heartland into the Rust Belt, in a extreme case of a classic industrial shake-out. This sudden cold bath of globalization should not be confused with the trend, but definitely contributed to it.68

As James Galbraith emphasizes, this monetary policy contributed to the growing wage gaps among workers, along with such factors as the stagnating real minimum wage.69 The reason why tight monetary and its resultantly high unemployment rates cause increased inequality should be obvious. David Blanchflower and Andrew Oswald present data indicating that high unemployment depresses real wages, fitting well with Karl Marx's theory of the reserve army of labor.70 This "wage curve" applies to the extent that an employee is exposed to the labor market. That is, blue-collar workers without seniority and white-collar workers with entry-level jobs find their wages more depressed by competition with the unemployed than do those insulated in "internal labor markets" as with overhead white collar managers and staff, tenured professors, and high-seniority blue-collar workers. Since the groups whose wages fall least when unemployment rises also typically have the higher wages or salaries in the first place, rising unemployment encourages greater inequality in labor incomes.

The aforementioned power shift also produced the current cult of Greenspan, an erstwhile Ayn Rand follower who combines the obscure style of the Oracle at Delphi with seemingly more power over the U.S. economy than the planners at the Soviet GOSPLAN had over theirs.71 Orthodox commentators such as Krugman have put great faith in Greenspan's control over interest rates in order to fine-tune the economy.72 However, globalization and the flows of hot money show the limits of merely national policies while textbooks tell us that domestic and international policy often conflict.73 For example, the Fed's effort to lower interest rates in order to moderate U.S. financial stresses and the possibilities of recession also drive down the dollar exchange rate. This, in turn, likely hurts the rest of the world's net exports, intensifying stagnation there (except for countries that fix their exchange rates in terms of dollars, like Argentina). Greenspan's balancing act of trying to stabilize the U.S. economy and the world seems to require either good luck or more policy instruments than he has. Or we have to acknowledge once again that his success depends on formal or informal international policy coordination, as when Western European central bankers cut rates soon after Greenspan's 1998 cuts.

Inside the U.S. and going beyond concerns with the stability of financial markets, monetary policy only affects short-term interest rates and small monetary aggregates such as the monetary base, with only indirect and thus limited effects on the more crucial variables (in terms of their impact on the economy) such as long-term real interest rates, profit rates, capitalist "animal spirits" (long-term expectations), and the volume of debt. This suggests that the Fed is more able to affect short-term interest rates, financial markets, and exchange rates than to preserve or promote domestic prosperity.74

Thus much of the recent "success" of the Greenspan Fed's policies (and thus its exalted reputation) in terms of lowering unemployment and inflation have been due to sheer luck. Indeed, it was unintended, since the rentier-allied Fed did not want unemployment rates below 5, 6, or even 7 percent. Nor did it expect falling inflation rates. That is, the Fed's "triumph" has been due to globalization and market universalization, as explained later in this essay.75

The Technological Scapegoat

So far, this essay has argued for the importance of the growing openness of the U.S. economy, in terms of investment, trade, and macropolicy. But it should be stressed that the process is not simply a "natural" result of technological change and may even be reversible. Moreover, Krugman is correct to look beyond globalization for causes of the widening gap between the wealthy and the working. Just as the process of globalization has some domestic roots, forces for growing inequality can and do arise at home. So turn to these.

He sees "information technology" as "a more plausible villain" than globalization. A "skill bias" exists, in which companies "replace low-skill workers with smaller numbers of high-skill ones, and they continue to do so even though low-skill workers have gotten cheaper and high-skill workers more expensive." As in the other places where Krugman discusses technology, the sources of the bias are unexamined and thus unexplained. It seems an article of the orthodox faith, with technology a diablo ex machina, a force that by coincidence happens to be making it harder and harder for the working poor to survive.76 Further, the timing is wrong: as Barry Bluestone notes, technical change "occurred in earlier decades without such an adverse impact on earnings inequality" between the skilled and unskilled.77 Finally, James K. Galbraith presents a sustained and successful critique of the skill-bias hypothesis in chapter 2 of his book cited above.78

The mystery of the alleged "skill bias" disappears once it is realized that the same technical changes that have transformed the labor process so radically are linked intimately if not inseparably with those that encourage the globalization of investment. The introduction of new information technology (including computers), as noted above, is one force allowing globalization, which involves the hiring of low-skill workers all over the world. As Feenstra notes in the article cited above, "the whole distinction between 'trade' and 'technology' becomes suspect when we thing of corporations shifting activities overseas" (p. 41). Thus, Krugman's hand-waving reference to empirical data concerning the employment of low-skill workers should be modified. Adding the workers hired outside the United States to the sum, it is likely that the relative hiring of unskilled workers by U.S.-based companies (or O.E.C.D.-based companies) has increased, especially when out-sourcing is brought in. (Feenstra provides some evidence on the latter.) That is, there is no "skill bias" at all as much as a change in the location of employment. This hypothesis still needs to be tested by comparison to real-world data, of course, but it does tell us that we need to go beyond a merely national focus when discussing the demand for low-skill labor-power.

Further, globalization took time to develop, because the barriers did not disappear overnight: capital flight initially took place mostly within the boundaries of the U.S., going from the Northeast to places such as South Carolina and Oklahoma, or from the cities to the suburbs (often to avoid unions and to take advantage of "right to work" laws). Though this intranational process continues, the data presented above suggest that weight of international capital migration has increased, especially in recent years. This helps answer Bluestone's timing issue.

But this argument poses another question: why have the employees with more exalted educational credentials been spared the brunt of technical change? In order to attain an answer, the source and the nature of the bias in technical change should be examined, along with its impact.

Any biases that exist in the creation of new technology reflect the societal environment in which scientists develop knowledge and engineers apply it.79 Thus, technologies that increase the effectiveness of democracy in workers' co-operatives are not developed, because those co-ops are rare and, more importantly, lack the resources to invest in research. In a largely marketized economy, technological change reflects the bias of the businesses bearing the bucks: the tendency thus come from capitalism's predominant goal of profit-seeking. This often meshes well with the goals of military bureaucracies, which are also well-endowed with research funds and are similarly concerned with issues of the control of human behavior from above.

As Braverman stressed, the capitalist effort to control a fractious workforce leads to a deskilling bias in technology; separation of "conception" from "execution" in the labor process allows managers (the conceivers) to have more power over the actual work done (by the executors), and thus more profits.80 But note that the way in which deskilling technology and management techniques are applied to a job depends crucially on its place in the corporate hierarchy. Efforts by stockholders and boards of directors to control top management typically involve the granting of perks and lucrative stock options rather than the routinization of the job. As junior partners to the owners (and as owners themselves), top managers are part of the decision-making process and would never simplify their own jobs in order to make them more controllable.81

Between the poles of production workers and chief executive officers, the work of high-status workers is also harder to routinize than that of production workers. The further one gets from top management, it is true, the more one's job is subject to the grinding threat of being turned into an interchangeable part. But management employees also gain because they have been put in control of the machines and management techniques which embody the deskilling drive. These insiders also are more able to build "personal empires" and coalitions within the corporate bureaucracy to insulate themselves from management whims and market forces.

Since educational credentials help one rise in a corporate hierarchy (whether or not they actually contribute to the company's profits or productivity), this analysis suggests that those with the highest credentials are least subject to the withering impact of deskilling. The need for close in-person communication also makes them less subject to loss of their jobs due to capital flight; they may, however, have to spend time overseas managing branch plants and trade missions. Further, being services, managers' "products" are harder to ship, so that they do not have to worry about international trade competition for their jobs. On the other hand, the lower a job is in the hierarchy, the less jobs involve conception about what should be done, and more they involve execution of someone else's orders. The lower the job, therefore, the more it is threatened by the "product cycle" capital flight discussed above, with the obvious exception of in-person services.

It should be stressed that as part of the general process of increasing insecurity since the Golden Age did not simply hit employees according to their broad skill categories. As Krugman himself emphasized in previous work, there has been an increase in wage inequality within groups with similar education levels.82 This reflects the power of insiders, especially those higher in the hierarchy, to avoid a fall from grace in the face of increased globalization and marketization.

On The Low Road

Looking for yet more suspects in his mystery, Krugman seemingly enters the fuzzy realm of sociology and the societal ethos. The problem is that

"values changed . . . the kind of values that helped to sustain the middle-class society we have lost. Twenty-five years ago, prosperous companies could have paid their janitors minimum wage and still could have found people to do the work. They didn't, because it would have been bad for company morale. . . . In short, though America was a society with large disparities between economic classes, it had an egalitarian ethic that limited those disparities. That ethic is gone."

This is not as nebulous as it sounds. It recognizes what labor economists have understood for decades, the importance of high morale in spurring labor productivity and of high wages in cultivating morale. High wages can thus "pay for themselves" (from the employer's point of view).

Of course, labor economists go further, pointing to the way in which a wage premium deters workers from "shirking" on the job by raising the cost of being fired, discourages skilled workers from quitting and taking their job skills with them, attracts job applicants so that personnel managers can pick and choose new hires, and helps head off efforts by workers to form a union or to express discontent in other ways (e.g. sabotage or lawsuits).83

Possibilities of job advancement and security, pensions (deferred wage promises), on-the-job training, and similar perks encourage the more experienced workers to train the newer hires (rather than being threatened by the competition they present) and to think more in terms of long-term benefits to the corporation instead of constantly looking for better jobs elsewhere.

Linked to the "job ladder" of promotion from within (or "internal labor market") that many corporations have found to be profitable is some sort of job security. Top management can put up with "personal empires" and coalitions within the bureaucracy (that insulate employees from top management's whims) if they help stabilize the organization as a whole and motivate work in the long run.

In short, to some extent having a "labor aristocracy" helps profits, at least in the short run. However, this is not the only option: companies can follow what Bennett Harrison terms the "low road" of labor-management relations.84 There has always been the "secondary labor market" technique of relying on high turnover (short job tenure) to solve the problem of worker motivation: this is the strategy of telling employees "if you don't like it, you can leave."85 Since other employers are following a similar tack, new hires are available to replace the ones that leave. This, of course, is the "flexible" model of labor relations that many orthodox economists see as the ideal, to be imitated in all areas.

Krugman should be praised for going a little beyond the "free market" model (in his MJ article, at least). But his presentation reeks with implicit voluntarism, which makes it sound as if one fine day, our fearless leaders (or worse, the society as a whole) woke up and decided to abandon the high road and go for short-sighted cost-cutting. After this step, however, Krugman's description is broadly accurate: the "restraining forces" on corporate greed (including not only an ethic but labor unions) have largely disappeared, encouraging capitalist "herd behavior" toward the low road.86

The choice between the two roads is more than a matter of will and thus depends on economic conditions. The 1998 strike against General Motors suggested that it involves investment. On the one hand, G.M. could have invested more in U.S. factories (as it had promised), to raise labor productivity in a way that allowed the continued payment of relatively high wages and benefits. In crude terms, if a job is routinized enough, a robot can be programmed to do it -- and the workers can be trained to run and maintain these machines -- so that routinization need not imply capital flight. On the other hand, if it could not get enough "flexibility" from workers, G.M. could continue to expand in lower-wage areas with new factories, following its apparent long-term strategy.

The same kind of choice applies to the reasons listed above for the profitability of paying high wages (and benefits) or providing job security. All of them involve some sort of training and/or a longer-term commitment to having employees on staff. From the viewpoint of capitalists, these represent investments. It is not the same kind of investment as a machine or a treasury bill, since under current law people cannot be sold and always have their own agendas. But businesses find that training and long-term commitments to employees, though evil to the "bottom line," are sometimes necessary.

The ability to tie up money in big factories, in on-the-job training, or in commitments to employees rises with the ability of companies to plan ahead, i.e., to control their economic environment. Most if not all of the "core" companies that offered high wages and job security (in the "independent primary labor-market" segment) during the 1960s and 1970s were oligopolistic or even monopolistic, like Polaroid or Xerox.87 It is these companies that could afford to put the "middle class" ethos that Krugman praises into practice.

However, monopolistic and oligopolistic position only creates the option of the primary labor-market strategy, so that this policy was not universal among the core corporations: some companies with market power, such as McDonald's, were able to opt for the low road (for reasons discussed below). Further, peripheral companies with little or no market power and planning ability had little choice but to rely on high turnover and low wages.88 Unlike the center companies, they could not support either a "white-collar" middle class of management hierarchs and staff workers or Krugman's "egalitarian ethic."

The primary labor market was not restricted to the white-collar workers: a segment of "blue collar" workers could afford a middle-class life-style.89 When facing companies with large fixed investment centralized in a few plants and the oligopoly-based ability to pass wage costs onto consumers, unions could sometimes win their members high wages and benefits, stronger work rules, pension plans, and some job security.90 Large employers such as Henry Ford resisted unionization with all their might. But when and if the unions won, such employers were able to learn to live with it (while working to mold the unions to serve profits). Nonunionized firms in the same industry then had to offer similar programs to prevent unionization. On the other hand, a company such as McDonald's, which based its market power more on marketing than on centralized fixed capital, was almost impossible to unionize.91 So it maintained a secondary labor market strategy for the vast majority of its employees.

In the 1970s, the middle class status of both white- and blue-collar workers was threatened as U.S. oligopolists' secure position started to erode, making more and more center corporations face a situation like those in the periphery. "Short-sighted" strategies of competition via cost-cutting and the like thus became more rational as the option of the "high road" became less viable.

This process was not simply a matter of globalization. Slowing productivity growth and steep oil-price rises in the 1970s were widely perceived as limiting production and profitability.92 Trust-busters broke up AT&T at the same time that new information technology allowed more competition from MCI and Sprint. Deregulation abolished the government-sponsored cartels in airlines and trucking (the CAB and ICC), encouraging cut-backs and union-busting. New challenges from environmentalists, consumerists, and the oil producers shook up the status quo, making it harder for big businesses to make and keep long-term commitments to their employees. And as Galbraith points out, aggregate demand fluctuations became more pronounced, making long-term planning more difficult. Under these conditions, he argues, only his technologically-progressive sector (e.g., computer-related industries) was able to pay high wages to motivate work.

But in addition, increased competition from abroad undermined oligopoly positions, starting in the late 1960s and early 1970s with increased competition from German and Japanese industry and then widening to include competition from South Korea and eventually places like China. It became harder for domestic oligopolies to raise prices when faced with import competition. Further, as noted, the corporations themselves decided to accelerate globalization as one response to falling profit rates during the 1970s and greater opportunities abroad.93

The results of capitalist efforts to deal with falling profit rates and stagflation hit the blue-collar middle-class first. Our rulers changed the rules of the game, to launch what former United Auto Workers leader Doug Fraser termed a "one-sided class war."94 The sad story of this war stretches from before Reagan's smashing of the Air Traffic Controllers' union in 1981 to after Clinton's 1996 "welfare reform." It involved the Volcker recessions, a falling real minimum wage, the imposition of taxes on unemployment insurance benefits, and much more. There is no point in repeating the details of that sad history here except to note that this was not some sort of gradual or automatic process of the sort that Krugman describes and (once again!) that it involved threats of capital mobility. More and more companies tried to emulate the McDonald's strategy via geographical dispersion of production to avoid future labor union successes, including dispersing it across national boundaries, diversifying to avoid risk.

In the end, the blue-collar middle class has been decimated, as indicated by the shrinking size of the unionized labor force outside of the government sector. Similarly, the large debt load that corporations had accumulated during the 1970s and 1980s encouraged the undermining of white-collar middle class security, most dramatically when waves of "downsizing" hit this group in the 1990s. Many corporations decided that job security, job ladders, and the like were much less profitable given an increasingly competitive environment and corporate over-indebtedness, which gave rentiers greater leverage over corporate management. More and more workers lost their insulation from market forces while the shrinking elite of employees largely escaped this fate.

In sum, the primary labor markets -- the white- and blue-collar "good jobs" -- are shrinking and the secondary labor markets are growing, as percentages of total employment. This shriveling can be seen, for example, in Galbraith's research, where wages have grown mostly in the knowledge- and capital-producing sector, though employment is growing more in the consumption-goods and service sectors; in his view, knowledge-sector employers are more likely to share monopoly profits with their employees, whereas the other sectors have seen wage stagnation. Further, the consumption sector has moved toward the service sector in terms of both product-market competitiveness and wage behavior.

This also meant rising insecurity, as indicated not only by the meteoric rise of temporary employment agencies but also by the fall in the number of years that middle-aged men have stayed with their current employers.95 This phenomenon hit males more than females (and whites more than "minorities"), since of course, white men have traditionally benefited most from job security and the good jobs of the primary labor markets. Their labor-market experience is becoming more like that of most women and minorities, i.e., like those in secondary markets. Those men not part of the economic elite are joining the domestic process of downward equalization of wages.

Luckily, some women and minorities have been able to rise into the primary segment, partly as a result of affirmative action programs. But this success looks less pleasant when it is realized that this segment of the labor market is suffering from a relative contraction.

With these changes have come the widening wage gaps, as the primary jobs' pay scales did not fall as far as the secondary ones under pressure from recession, increased product-market competition, capital flight, import competition, automation, and government cut-backs on domestic programs.

This story -- including the steepening of the wage gradient -- helps us understand why officially-measured unemployment has fallen so low (4.5 percent at one point) without causing the inflationary explosion that orthodox economists, including Krugman, expected. Like the vast majority of macroeconomists, I was surprised by the Fed's inadvertent success in getting low inflation with unemployment rates below 4.5 percent; usually, when workers benefit from a smaller reserve army of labor, they are punished by worsening inflation.96 The secret seems to be that, in addition to the obvious effects of falling import prices, U.S. labor markets are slowly moving toward being like those in Mexico. There, overt unemployment is usually nil, but labor is kept in check, preventing wage increases and preserving profits.

This refers to more than the slow cross-border integration of labor markets taking place in places like Los Angeles or El Paso. It is also more than the turn against labor by the National Labor Relations Board, increasingly imitating the Mexican government's attitude toward independent unions, while the government blatantly grants special visas for workers with skills in short supply to prevent wage and salary increases. It is also more than the increasing emphasis of unions on co-operation with management, slowly losing their independence. What's happening is understandable once it is remembered that the official (overt) unemployment rate is only a proxy for a deeper phenomenon, the "cost of job loss" faced by the average worker.97 The COJL motivates workers to do even the most disgusting jobs, to support their families and pay their bills. In other words, open unemployment is only one aspect of the reserve army of labor as a form of workers' dependence on the good will of capitalists.

An obvious explanation of low unemployment rates without accelerating inflation, therefore, is that the COJL has risen relative to the unemployment rate in recent years.98 This means that any given unemployment rate has more power to deter wage increases, motivate work, and protect profits than it did thirty or even twenty years ago. Then, with profits protected, there is less need for companies to raise prices to try to reestablish profitability. So the unemployment rate threshold below which unemployment leads to high or accelerating inflation (the NAIRU) has fallen.99

Cuts in "welfare" and other social "safety net" programs help raise the COJL, as do the increasing costs of losing medical benefits associated with a job. Further, since about 1991 until very recently, the rise in the duration of periods of unemployment -- a central component of COJL measures -- relative to the norm usually associated with any unemployment rate has added fear to workers' lives.100 Similarly, the increased consumer debt load -- partly the result of falling real wages and stagnant family incomes -- adds fears of bankruptcy to the cost of job loss.101 Even Alan Greenspan has noted the increased insecurity of U.S. workers and has attributed part of recent low inflation rates to this phenomenon.102 Barry Bluestone and Stephen Rose argue that currently-employed workers are working extra hours -- supplying more labor hours -- to develop a financial cushion for dealing with future lay-offs and downsizings.103 This means that the effective threat to employed workers' security is larger than is indicated by standard measures of the Bureau of Labor Statistics.

Going beyond the usual COJL theory, the widening of wage gaps explained above suggest that the unemployment rate has more power than it used to: when the official unemployment rate is low, even though it is more possible than usual to find a job after losing the old one, the cut in income suffered is made larger by the wider gap between the job one has and the job one can get. This raises the COJL.104 The steeper wage gradient makes not only the stick but the carrot stronger: those workers who are stuck low on the scale (taking bad jobs, being "underemployed," instead of being openly unemployed) strive harder to please their bosses in order to climb the wage ladder. In summary, the rats run more rapidly as the race roughens.105

Prospects and Contradictions

Forced to summarize the meaning of "globalization," it would be the end of the mode of capitalist economic development centered on the nation-state that prevailed for most of the last two centuries.106 Nation-states like the U.S. used to center their economies and their growth processes on the domestic market. But nowadays, the growing mobility of productive capital, goods, and finance makes it harder and harder for any nation's policy elites to think of anything but how to attract these items from other nations. But globalization is not the whole story. The movement toward greater international integration is intimately linked with, shapes, and reinforces the intranational movements toward marketization and cuts in wages and social programs. These phenomena can be summarized as the burgeoning of the Universal Market.107

The globalization and universalization drives run like gold threads through the complicated tapestry of recent history. At every front, capitalists struggle to garner profits by any means possible, politicians seek their favor by offering concessions and subsidies, and economists justify or advocate it by reference to excessively idealized economic models or the all-benevolent Invisible Hand. (Unfortunately, many of these economists are in positions of power or influence at the Bretton Woods organizations, the U.S. government, and the economics profession itself.) Initially, these forces were opposed by nationalist capitalists, localist politicians, and the heterodox economic followers of List and Hamilton. But so far the internationalizers have won, so that globalization and marketization have begun to build on previous successes and to accelerate.

However, it is an intellectual trap to try to explain everything by the universalization drive. For example, the U.S. international hegemony after World War II cannot be explained in these terms, even though it is very important to the story above: while this dominance helps explain the Golden Age of more equally shared prosperity of the 1950s and 1960s, it also is the key basis for the success of the free trade and international investment campaigns, organized mostly by the U.S. and the U.S.-dominated Bretton Woods institutions. Similarly, the sudden and surprising way in which the U.S.S.R. fell hardly fits with the notion of an automatic process of the world-enveloping market. But this fall opened the floodgates to marketization there and making state managers elsewhere less concerned with domestic living standards to make the "commies" look bad.

Nor is the submersion of society in market discipline or the competitive austerity universal, since almost everyone struggles to shelter themselves from having their lives ruled by the cruel cash nexus. Those at the top of the societal heap have been most successful in this struggle, and so are insulated from market forces. State programs more and more follow Norman Thomas' classic formula of "free enterprise for the poor, socialism for the rich." Laissez-faire in practice has never meant free markets but a pro-business regime as the rich use their political power to get tax breaks for capital gains, subsidies for their losses, and a ready supply of willing personal servants. Similarly, at the same time as the World Bank marketizes the underdeveloped world, they build a palatial headquarters for themselves. As the I.M.F. imposes austerity, they save the powerful banks and currency speculators. As noted, corporate leaderships never apply downsizing or deskilling to themselves. In fact, those at the top can use their advantages to accumulate further power and wealth, further insulating their status from market forces. Given the growing absence of nonmarket institutions to counteract the trend, the gaps among employees widen.

The theme of widening gaps affects issues beyond Krugman's almost-total emphasis on disparities amongst wage and salary earners, as exemplified by his above-mentioned assumption that the capital's share of income does not change.108 The fruit of globalization -- which gives capital in the U.S. more choices about where to locate -- so far has also been increased power of capital vis-a-vis labor, even if it sometimes means less power for many individual capitalists in relation to their fellows.

This helps explain why the real wages of nonsupervisory workers stagnated relative to the trend growth in their labor productivity. As Thomas Palley writes,

"Up until 1973, productivity and typical worker compensation [which includes benefits such as overpriced health insurance] moved closely together. In the mid-1970s, compensation started to fall behind but continued rising. Compensation peaked in 1978 (a little later than wages), and since then has fallen steadily"

even though labor productivity continued to rise.109 This did not automatically cause U.S. profitability to rise because of factors such as the growing weight on costs of the salaries of overhead workers, low capacity utilization, and falling output prices relative to consumer prices.110

However, the profit share rose steeply soon after the surge of global investment that started in 1988, the wave of downsizings (thinning overhead employment), and the recovery from the recession of 1991-2.111 The share of domestic income taken by property income started soaring in 1992, exceeding the explicitly profit-boosting Reagan era of the 1980s (17.1 percent), though not nearing the Golden Age of the 1960s (21.5 percent).112 The rise in the profit share cannot solely be the result of rising capacity utilization rates since capacity use rates show a leveling out (or even a fall) rather than a rise after 1994 despite the dramatic fall in official unemployment rates.113

Not surprisingly, the rate of profit in the U.S. soared steeply starting in 1992, after the Bush-era recession ended. This was more than the usual cyclical uptick of profitability that results from improved capacity use: though it is true that the average for 1990 to 1997 (8.5 percent) was lower than that for the Golden Age (10.8 percent), it exceeds that for the 1970s and 1980s (8.0 and 7.5 percent, respectively).114

The rising profit rate, by the way, is part of the explanation of how the unemployment rate actually got to 4.5 percent in 1998. It was not the Fed's doing, in that its leadership continuously feared inflation and clung to established (high) estimates of the unemployment rate (the NAIRU) below which inflation was "guaranteed" to explode. In fact, they started boosting interest rates in February 1994 in order to "preempt" inflation (just as they did in July 1999). Real interest rates -- a clear indicator of the contractionary tilt of monetary policy -- rose starting in 1993, leveling off in 1995 at more than one percentage point above the historical average since 1959.115 Despite this tightness and contractionary fiscal policy,116 between 1993 and 1997, private nonresidential fixed investment actually rose from 9.3 percent to 11.7 percent of GDP. This is partly because the profit rate rose by more than 2 percentage points compared to a real interest rate hike of about 1 percentage point for longer terms to maturity.117 This boom was also partly explained (via the "accelerator effect") by the rise in U.S. exports during these years, a trend unlikely to persist given the current international environment. In 1998 and 1999, the boom has continued due to the growth of consumer spending beyond people's incomes, as the rich benefit from the stock-market boom and the rest try to maintain living standards by going deeper in debt.

In his MJ article, Krugman also ignores the related phenomenon of growing disparities in the wealth holdings.118 Roles have radically reversed: while the bottom 90 percent of wealth-holders has seen its share of net worth fall from about 36 percent in 1963 to 31.5 percent in 1995, the top 1 percent enjoyed a rise from 32 to 35 percent.119 This wealth shift seems a result of the rising profit rate which has helped (with an autonomous speculative dynamic) cause the stock-price boom up to 1998, the extreme concentration of stock ownership, and the ability of the rich to utilize their clout to gain further tax breaks and to capitalize those subsidies.

It is always a mistake to extrapolate current trends into the future without examining the possibility that the trends may generate opposing forces: the 64 trillion dollar question is whether or not the steep rise in profit rates and the polarization of wealth holdings are stable and can persist for long. (Was 1998's pause in the profit boom a sign of things to come?) Since these trends are tied intimately with the international spread of capital their persistence increasingly depends on the demand for U.S. exports and thus the health of the world economy -- at a point when the latter economy has taken sick.

It is very unlikely that below-4.5 percent official unemployment rates seen since 1998 can be sustained for years; the reserve army needed to maintain lofty profit rates is probably higher. Already, wages have begun a cyclical uptick,120 putting a cost pressure on profits, especially given import competition (intensified by the high dollar exchange rate) and the Fed's unwillingness to condone inflation. This threat seems to be only partly counteracted by the falling prices of imports -- while oil prices have stopped falling. Adding in the threat to profit rates from the Asian crisis, investment demand should slacken and unemployment rates should climb soon.121 Falling profit rates make it increasingly more difficult for the Fed to stimulate the economy by lowering interest rates.

But the main concern in this essay is not with recessions (or, for that matter, with booms) but with trends. It should be stressed once again that the process of the swallowing of human society by the market is not inevitable and may be reversed. One major possibility is that U.S. capitalist power and ability to raise profit rates could go too far, as in the 1920s.122

Just as in the 1920s, gaps are widening, profit rates soaring, and (until recently) stocks booming, in an atmosphere tinged by the overweening hubris of laissez-faire economics and "New Era" rhetoric (now called "The New Economy" or "New Paradigm"). But just as in the 1920s, the U.S. is one of the few economic bright spots on a generally dark background.123 The recent sag in import prices (noted above as helping the U.S. avoid inflation) is of course a symptom of this global stagnation, one that is hitting domestic primary producers, including farmers, just as in the 1920s. (The recent hikes in oil prices are due to efforts by producers to unite to prevent further falls. Recently, the world aluminum industry started a similar period of consolidation.) Just as in the 1920s, U.S. investment spending may have over-shot,124 so that the only thing keeping the economic boom going is excessive consumer spending (i.e., increasing consumer indebtedness).

The recent boom has been based on large and growth trade (and current account) deficits: the U.S. as a whole is borrowing from the rest of the world to pay for its high imports at a time when the latter lacks the income to buy many U.S. exports. But the world's economic problem is not the creeping protectionism threatening to mutate into trade war as in the 1920s. Rather, it is a world-wide process of competitive austerity and export-promotion that is prevailing (seen most dramatically in the 1997 East Asian meltdown). This process threatens to worsen if the U.S. joins the crowd of low-growth or stagnant economies, pushing them even lower. As in 1929 to 1933, there would be a rapid halt to the previous uneven development between the rich and the poor -- a violent downward equalization -- domestically and internationally. The crisis might even shake the power elites of the U.S. government, transnational corporate boards of directors, and the Bretton Woods institutions, especially since it would likely evoke and strengthen worldwide movements against laissez-faire.

But despite the plethora of possible future triggers for collapse (from the current slowdown to the "year 2000" computer bug to the unification of European currencies), an instant replay of the Great Depression is far from inevitable.125 History never repeats itself exactly (and never will, if past experience is any guide!) It is unclear exactly how far the overaccumulation process has gone or how vulnerable the U.S. and the world economies are. It is also unclear how long the Fed can delay the recession. My guess that it will hit some time during late 2000 or early 2001, when the election is effectively over (and incumbents no longer need the electoral boost that low unemployment gives them).

Another counter-tendency comes from the way in which the growth of capitalism traditionally has disturbed, uprooted, and destroyed communities, traditional ways of life, and grassroots democracy. In the past, people have fought to soften the blow (or rather, the repeated blows) by using the welfare state to provide services that previously had been supplied by customary institutions such as churches and community support systems.126 But the welfare state is under severe attack, with even European social democracy increasingly undermined. The Bretton Woods institutions and its allies push for a move to greater flexibility at every front, attaining most the success outside of Western Europe.

With domestic policies of this sort ruled out, the subordination of all social relations to the crass cash nexus and the TINA rejection of all reform alternatives can easily produce reactionary nationalism and communalism. In the U.S., it is seen in a microcosm as NIMBYism but in much more virulent forms in European neo-Nazi movements to Afghanistan's Taleban to the U.S. militia movement.127 All such movements lean toward not only authoritarianism but autarky, a total rejection of globalism. So success of globalism can undermine itself with another period of anti-globalism -- including Krugman's trade-war nightmare -- such as that from 1900 (and especially after 1930) to roughly 1945.

The mixture of depression and reactionary nationalism was especially explosive during the 1930s, helping to spawn the U.S./Japan war over raw material supplies and the Nazi rise to power (and much worse). Neither a new Depression nor nationalism can solve the problems of capitalist globalization and marketization, including such matters as increasing inequality, societal disruption, and global warming.

Policy and Politics

In this situation, what does orthodox economics have to offer? Much of the globalization trend was abetted by the neoliberal orthodoxy. Though the recent accumulation of failures of this laissez-faire model, especially the East Asian and Russian financial crises, should have encouraged the wholesale sacking of its advocates, they still hold sway in policy circles. Given their power, we have no choice but to consider their viewpoints, including that of Krugman.

In the face of the Asian crisis and its spread to Russia and Latin America, some of the stars in the economics constellation have deviated from what had been dogma: facing blatant market failures, laissez-faire policies have been moderated. Krugman has publicly called for capital controls in some circumstances, limiting the short-term flow of hot money. Interestingly, even ultraconservative economist Robert Barro endorsed this policy, as practiced in Malaysia after September 1998 by the outlandish oppressor Prime Minister Mahathir Mohamad. Generalizing these concerns, the well-known international economist Jagdish Bhagwati has criticized the international flow of short-term capital. On the issue of managing the crisis, Harvard's Jeffrey Sachs (famous for helping to marketize Moscow) has criticized the I.M.F.'s handling of the Asian meltdown. More broadly, Joseph Stiglitz, a former chair of the U.S. Council of Economic Advisors under Clinton and now top economist at the World Bank, has severely criticized the "Washington Consensus" of global monetarism that has dominated the Bretton Woods institutions.128

Of course, economists such as Stanley Fischer of the I.M.F. and Lawrence Summers of the U.S. Treasury continue to defend the True Faith, along with such powerful noneconomists as former Treasury Secretary Robert Rubin and President Clinton. Since these defenders of the neoliberal creed have much more power, so far the Washington Consensus still rules in most countries, while allowing piece-meal changes like limits on short-term capital flows. More importantly, even the more radical proposals would have little effect on the world-wide drive to impose flexibility, cut wages and social programs, and to boost exports that forms fundamental basis for world stagnation.129

In the MJ article, Krugman addresses the wage question. It is pleasing to see him praising labor unions and calling for their strengthening. After decades of the mean season, it is surprising to find an orthodox economist willing to sacrifice the hallowed ideal of efficiency (reducing "average income a bit") in return for enhancing "the power of ordinary workers." This contrasts favorably with the standard trumpeting of the Bretton Woods party line on the need for increased labor-market "flexibility," i.e., shrinkage of labor unions, the social safety net, the value of the minimum wage, etc. But this stand is difficult to reconcile with Krugman's statement elsewhere that "Part of the problem is that many people are still [!] unwilling to accept the idea that the labor market will not function well unless it is allowed to behave more or less like other markets,"130 an obvious call for "flexibility": workers' labor-power should be bought and sold like oranges at a fruit stand. (Did his concern with society's lost "egalitarian ethic" get lost?) Looking at a wide variety of his writings, the only way that can reconcile these two contradictory statements seems to be a matter of endorsing redistribution of income using tax hikes on the rich and tax cuts for workers, while seeing this policy as an increase in workers' power.131

This program, however much sense it makes on a blackboard or at an academic seminar, seems nonsensical in terms of politics. If the money (campaign contributions) dominates most countries' politics the way it does in the U.S., the only way that this program will work is if the very rich voluntarily decide to tax themselves drastically in order to finance welfare-state programs. This is unlikely, to say the least, unless perhaps the rich become scared about the survival of their system.

Alternatively, the rules of the game can be changed, as in the immediate post-World War II era in Western Europe: the power of organized workers -- in unions linked to political parties -- was able to counteract the power of money for quite awhile, allowing the development of welfare states and Keynesian regulation of the national economy. In arguing for greater flexibility, however, Krugman is pushing in exactly the opposite direction. After all, what interferes with labor-market flexibility more than a union?

Krugman does not belong to the extreme wing of Chicago-school economists who try to force all of the world into the mold of utopian general equilibrium models. But his proposed reforms (in Theorist) propose market-type solutions (e.g., the creation of artificial markets or the right to pollute) and/or faith in technocratic wisdom (Alan Greenspan). But neither the market nor condescending saviors represent a source of hope for the creation of democratic and socialist globalism. What's needed is a mass democratic movement at the grass roots. The power of capital can only be counteracted by the organized power of the oppressed.

Some sort of new world socialist movement is needed, not to end globalization but to subordinate that process to democratic control. Socialist movements are very weak at the moment and thus cannot be relied upon to save the day soon. But perhaps defensive opposition to M.A.I., the President's "fast track" authority, and other aspects of the globalization drive can help build the movement. To get more breathing room for efforts to humanize national economies, capital controls are needed to prevent the flow of hot money, along with controls over foreign investment. Efforts to hold the unelected dictatorships of the Bretton Woods institutions responsible for their actions also seem necessary. Such anti-globalization goals must be linked to anti-laissez-faire, anti-market, domestic programs. Those especially likely to have positive results, such as minimum wage increase, the creation of a Canada-style single-payer health plan, or the imposition of a tax on each purchase or sale of financial assets (a Tobin tax) seem recommended.132 Finally and most importantly, a hand of solidarity should be extended to the workers in the underdeveloped countries, helping them fight dictatorships, the Bretton Woods institutions, and their local bosses. Everything must be done to put a stop to the downward equalization of wages and conditions. Even Sachs has advocated canceling the external debts of countries like Mozambique, for which debt service has become debt peonage. This generosity should be spread widely, to shore up the world economy and to defend the livelihood of the world's producers. --------------------


* This paper was presented at the URPE@ASSA sessions in New York on January 4, 1999. A version of this paper has been submitted to be considered for publication by the Review of Radical Political Economics. It has been much revised since. Thanks to Paul Burkett, Peter Dorman, and Reza Fazeli for their comments on earlier drafts. As usual, all low crimes and misdemeanors are my own. Readers should be alerted to a possible bias in Krugman's favor: he was my roommate in college and is a friend.

(1) Paul Krugman, "The Spiral of Inequality," Mother Jones, Nov./Dec. 1996, p. 44-9. All unassigned quotations are from this article. Those labeled "Brookings" refer to his article "Growing World Trade: Causes and Consequences," Brookings Papers on Economic Activity, 1995 Issue 1, p. 327f. "Theorist" references are to his The Accidental Theorist (W.W Norton, 1998). "Peddling" is his Peddling Prosperity: Economic Sense and Nonsense in the Age of Diminished Expectations (W.W. Norton, 1994).

(2) Krugman clearly states his overall political perspective in Theorist's Introduction. The quote is from Louis Uchitelle, "Princeton Economist to be Named to Clinton's Council, Aides Say," New York Times (Jan. 4, 1993, pages A1 and D2). If forced to identify his politics, I would call him "marginally left of center" (where the "center" is defined by the current US President) and technocratic.

(3) For example, see his Rethinking International Trade (M.I.T. Press, 1990).

(4) Labor and Monopoly Capital: The Degradation of Work in the Twentieth Century (Monthly Review Press, 1974), chapter 13.

(5) This is akin to an "insider/outsider" model where the insiders at the bottom of the wage hierarchy are steadily kicked out, widening the wage disparity vis-a-vis the insiders who remain inside and suffer much more limited wage cuts, if any. See, for example, Olivier J. Blanchard and Lawrence H. Summers, "Hysteresis and the European Unemployment Problem," NBER Macroeconomics Annual, 1986, pp. 15-78. Their emphasis is on the rigidity of wages due to "insider" power causing persistent high unemployment as the labor-power market is prevented from adjusting. My emphasis is on the increase in inequality that results even if the labor-power market adjusts to keep unemployment constant (even though I disagree with the orthodox story of labor-power market adjustment via wage changes).

(6) Thomas Weisskopf, "The Current Economic Crisis in Historical Perspective," Socialist Review, no. 57 (vol. 11, no. 3) May-June 1981, pp. 9-53.

(7) The unexplained transition in Krugman's text implies that trade and investment are identical, very similar, or that the latter was part of the former. This may reflect orthodox dogma either that investment is merely deferred consumption, that trade in pieces of paper (financial obligations) is the same as trade in goods and services, or that international investment and trade are close substitutes and thus pretty much the same thing (as in the "factor-price equalization theorem"). This paper rejects these assumptions.

(8) Even Krugman's usual foe, Robert Reich (The Work of Nations: Preparing Ourselves for the 21st Century, Knopf, 1991), downplays the role of capital mobility. Going further outside the orthodoxy, Barry Bluestone and Bennett Harrison put a major emphasis on this phenomenon. See their The Deindustrialization of America: Plant Closings, Community Abandonment, and the Dismantling of Basic Industry (Basic Books, 1982) and The Great U-Turn: Corporate Restructuring and the Polarizing of America (Basic Books, 1988). The evidence and arguments they present fits with the major theses of this paper. Better than Krugman's approach but still pretty orthodox is Maurice Obstfeld's "The Global Capital Market: Benefactor or Menace?" Journal of Economic Perspectives 12(4) Fall 1998: 9-30, especially pp. 21-2.

(9) Other major changes include the demise of formal empires and currency blocs, along with the rise and weakening of both U.S. hegemony and the international dollar standard. In addition, recent decades have seen the collapse of the U.S.S.R. and its empire, along with the end of the Cold War.

(10) This circuit refers to the conversion of money-capital into commodities, their transformation into more valuable goods in production, and their sale to make a money-profit (on top of the initial money-capital), followed by the reinvestment of that profit.

(11) Thanks to Doug Henwood for providing this time series, based on the Federal Reserve's Flow of Funds, table F.102.

(12) Council of Economic Advisors, Economic Report of the President (ERP), 1998: table B-91 and similar tables from previous issues. A simple regression of the log of this ratio against time produces a t-stat of over 15, which indicates a highly significant upward time trend of about 3 per cent per year.

(13) These data are from Henwood. It should be noted that there was a recession in this type of investment from 1990 until 1995. The gyrations of exchange rates have added fluctuations to these series. For one analysis, see Edward M. Graham and Paul R. Krugman, Foreign Direct Investment in the United States, 3rd ed. (Institute for International Economics, 1995).

(14) There was a small decline in 1998. But a regression of a log of this average indicates that between 1952 and 1998 (preliminary), it has risen on average 0.17 percent per year. The t-stat of over 10 indicates that the time trend is significant (despite the disturbances of recessions and exchange-rate fluctuations).

(15) See Selected Data on U.S. Direct Investment Abroad, 1950-76 (U.S. Department of Commerce Bureau of Economic Analysis, Feb. 1982), and the same books for 1977-81 and 1982-8, published Nov. 1986 and Sept. 1995. See also the Survey of Current Business (SCB), various issues, including July 1998. Examining the ratio of a five-year moving average of new investment in developing countries (the change in the investment position) relative to a similar average of new investment in all countries' manufacturing presents similar results.

(16) See, for example, the international wage comparison data posted by the Bureau of Labor Statistics (B.L.S.) at [** needs to be updated.]

(17) This deskilling process under capitalism was noted by Marx in Capital and is central to Braverman's thesis. It is explained further below. Vernon's "product cycle" puts this routinization into an international framework. See his "International Investment and International Trade in the Product Cycle," Quarterly Journal of Economics, 80 (May 1966), 190-207. An alternative to capital flight is the mechanization of production in the home country. The choice between mechanization and the low road of capital flight linked to depression of rich-country wages is discussed below.

(18) In Brookings, Krugman assumes that skill levels in both the advanced and newly-industrialized countries are constant. The effects of rising skill levels in the latter (or growing ease of tapping their labor forces, which has the same effect) are not considered. If we are to take globalization seriously, we cannot take events in these countries for granted when analyzing the U.S.

(19) Similarly, immigration of low-wage labor into the United States makes the flight of capital to low-wage areas less necessary to profits.

(20) Quoted in Louis Uchitelle, "Like Oil and Water: A Tale of Two Economists," New York Times, February 16, 1997, section 3, page 10. Strictly speaking, Krugman could be right here if we interpret him as talking about relative wages (Mexican wages divided by U.S. wages), since this can rise as U.S. wages fall. But even this does not fit the evidence cited below.

(21) This conclusion certainly does not follow from Krugman's Brookings article, which involves no effort to describe the structure of the newly industrialized countries' labor-power markets.

(22) He also seems to be assuming that the amount of labor supplied does not increase substantially with wages (i.e., that supply is inelastic). Following the lead of W. Arthur Lewis, it has long been customary for economists studying the poorer countries to assume (as a first approximation) that increased demand for labor-power raises employment rather than wages due to an elastic supply of labor-power from the countryside and "traditional" sectors. But our concern is with the future.

(23) On the former, see the Bank of Mexico's web site at On the latter, see the B.L.S. international wage comparison cited above. [** these need to be updated.]

(24) For some evidence on the maquilas, see Harley Shaiken, "Going South: Mexican Wages and U.S. Jobs After NAFTA," The American Prospect no. 15 (Fall, 1993), on the web at:

(25) This process is similar to the enclosure movement that Marx described in volume I of Capital (chs. 27-9), and also encourages the destruction of the natural environment, a point not emphasized by Marx there.

(26) See Theorist, p. 91. This rise in wages is not corrected for the shrinkage of the availability of non-market means of subsistence or the added costs of urban life and so is an exaggerated measure of the rise of the standard of living of these workers. For a useful critique of establishmentarian thinking about the East Asian "miracle," see Paul Burkett and Martin Hart-Landsberg, "East Asia and the Crisis of Development Theory," Journal of Contemporary Asia, 28(4), 1998, pp. 435-56.

(27) See and prod4.t16/htm. [** needs updating.]

(28) This is his accusation in Theorist, ch. 1 against William Greider's book One World, Ready or Not: the Manic Logic of Global Capitalism (Simon & Schuster, 1997). He criticism of Greider seems to be based on the latter's unwillingness to accept his own implicit assumptions (either acceptance of Say's Law or a more secular belief at that time in the power of the Federal Reserve to prevent recession) in the face of world aggregate consumption demand being depressed by wages falling relative to labor productivity growth.

(29) See The Stages of Economic Growth: A Non-Communist Manifesto (Cambridge U.P., 1960).

(30) This equity was not the intent of these countries' rulers, but that was the result of conditions that they helped create.

(31) See, for example, Irma Adelman, "Growth, Income Distribution and Equity Oriented Development Strategies," World Development, 3(2/3), 1975. On South Korea, see Alice Amsden, Asia's Next Giant: South Korea and Late Industrialization, New York : Oxford University Press, 1989. See also the article by Burkett and Hart-Landsburg cited above.

(32) In wake of the 1997 crisis, South Korea is being encouraged to pursue this path; so far, worker resistance has slowed this regression.

(33) Financial liberalization -- the allowing of the inflow of short-term capital -- encouraged the rapidity and severity of these crises.

(34) The fact that most capital goods are imported prevents real investment spending from being an enduring source of domestic demand-side prosperity.

(35) Thus the factors discussed below encouraging capital mobility are linked to the growth of international trade, as sketched by Krugman, Richard Cooper, and T.N. Srinivasan in Brookings. See also the books by Bluestone and Harrison cited above for further discussion of the forces promoting internationalization.

(36) For more on the integration of capital flows and trade, see Anwar Shaikh, "The Laws of International Exchange" in Edward J. Nell, ed. Growth, Profits, and Property: Essays in the Revival of Political Economy (Cambridge U.P., 1980), pp. 204-235. His assumption that the high-productivity country also owns the gold mines should be replaced by the more reasonable assumption that it has the convertible currency but the country with the absolute disadvantage does not. The key assumption is that exchange rates do not follow the classical species-flow adjustment but are instead determined by such things as relative interest rates. Thomas Palley's Plenty of Nothing: The Downsizing of the American Dream and the Case for Structural Keynesianism (Princeton, 1998), chapter 9 also presents a useful analysis.

(37) As Palley notes, transactions costs have fallen in general. See his book cited above, pp. 78-83.

(38) For an example of this hype, see the epilogue of Peddling.

(39) Of course, commitment to free trade disappear when the aims of US foreign policy (and the political power of interested parties) intervene, as with the Helms-Burton law aimed at destroying Castro's Cuba.

(40) In his MJ article, Krugman applies the "median voter" rule (that the preferences of the voter in the middle of political spectrum prevails), assuming that the unrealistic "one person, one vote" rule applies. I follow this precedent of what Robert Kuttner calls "practicing political science without a license." But if one needs a equally simple but more accurate formula, this should be replaced by the "median dollar" (invested in political maneuvering) rule.

(41) Similar attacks were launched against any country attempting to pursue polices that deviated from free-market capitalist principles, as with the Reagan administration's war against Nicaragua in the 1980s.

(42) For one recent critique of the World Bank, see Susan George and Fabrizio Sabelli, Faith and Credit: The World Bank's Secular Empire (Westview Press, 1994). See also Cheryl Payer's books The Debt Trap: the IMF and the Third World (New York: Monthly Review Press, 1975) and The World Bank: A Critical Analysis (New York: Monthly Review Press, 1982).

(43) It has also encouraged the current movement toward the establishment of new oligopolies, sometimes across national borders, as with the proposed Daimler-Benz/Chrysler and British Petroleum/Amoco mergers.

(44) See, for example, Joseph K. Roberts, "Multilateral Agreement on Investment," Monthly Review, 50(5) October 1998, pp. 23-32.

(45) See my "The Causes of the 1929-33 Great Collapse: A Marxian Interpretation," Research in Political Economy (Paul Zarembka, ed.) vol. 14, 1994: 119-94, especially pp. 168-70. It is available at:

(46) For more on his view, see ch. 13 of Theorist.

(47) Given this constraint, evolutionary theory suggests that an approach allowing heterogeneity would allow the best policies to evolve, especially if states are run democratically. The I.M.F. approach restricts heterogeneity and thus the evolutionary vigor of institutions (in terms of serving human needs).

(48) A larger estimate of the size of non-oil import competition with low-wage countries (2.8 as opposed to 2 percent) can be found in his article with Robert Z. Lawrence, "Trade, Jobs and Wages," Scientific American, April 1994, pp. 49. It is unclear what their data sources, theoretical assumptions, or methods of calculation were. Why the estimates differ is unclear.

(49) See, for example, Peddling, where there are almost no footnotes to explain the theory or calculation method of his empirical assertions. There are only references to famous names (at least of those economists with whom Krugman agrees), whose work is assumed to be true. If journalistic interpreters of globalism such as Robert Reich were to follow such scholarly methods, they would be criticized sharply by all. For a useful critique of Krugman's style of argument, see Robert Kuttner, "Peddling Krugman," The American Prospect no. 28 (September-October 1996): 78-86,

(50) "International Trade and the Rise in Earnings Inequality" Journal of Economic Literature 33(2) June 1995, pp. 800-16.

(51) Burtless, page 813. Wood's book is North-South Trade, Employment and Inequality: Changing Fortunes in a Skill-Driven World (Oxford: Clarendon, 1994). See also his article "How Trade Hurts Unskilled Workers," Journal of Economic Perspectives, 9(3) Summer 1995, 57-80.

(52) See, for example, R.C. Lewontin, Steven Rose, and Leon J. Kamin, Not in Our Genes: Biology, Ideology, and Human Nature (Pantheon, 1984), especially ch. 5.

(53) See the income statistics reported by the Economic Policy Institute at

(54) Mishel, Bernstein, and Schmitt collect data that show the differential impact of international trade (The State of Working America, 1996-97, Armonk, NY: M.E. Sharpe, 1997, pp. 193, 195-6). Krugman goes against one current trend among the orthodox of avoiding excessive aggregation and the explicit abstraction from real-world heterogeneity: see, for example, Alan P. Kirman, "Whom or What does the Representative Individual Represent?" Journal of Economic Perspectives 6(2), Spring 1992: 117-136.

(55) See Michel, Bernstein, and Schmitt, 1997, pp. 190-7 for one analysis that is very conscious of the dynamic dimension.

(56) With average tariff rates of 30 percent for 1913 and 1925, Angus Maddison dubs the U.S. a "heavy protectionist," while the U.K. was a "free-trader" (The World Economy in the 20th Century, OECD, 1989, p. 47). Chapter 7 of Ravi Batra's otherwise poor The Myth of Free Trade: The Pooring of America (Touchstone, 1996) tells the story of how tariffs successfully promoted the infant industries in manufacturing.

(57) This success had a lot to do with the competition discouraging monopolistic waste behind the tariff barriers, as Batra argues. The large internal market arose from high wages (compared to Europe) and the high incomes of Northern farmers.

(58) See Peddling, pp. 258-9.

(59) See the ERP, 1998: table B-2. Highly significant statistical regressions against a time trend indicate that this ratio rose 1.8 percent per year over the entire period and 4.2 percent per year after 1983. Batra produces a graph (p. 40) that indicates that the degree of U.S. openness was generally lower during period 1890-1940 (with the exception of World War I) than it has been since 1970 or so. Finally, see Robert C. Feenstra, "Integration of Trade and Disintegration of Production in the Global Economy," Journal of Economic Perspectives 12(4) Fall 1998: 31-50.

(60) ERP, 1998, table B-105 and similar tables in previous issues. Corresponding to this is a decline in the share of "industrial" countries, from about 72 percent to below 56 percent during the same period. Before 1969, there is some shrinkage in U.S. trade with the "other" countries, reflecting the move away from trade with Latin America noted above.

It should be noted that transfer pricing and similar activities by transnational corporations make these data fuzzy. However, that does not seem to invalidate the perceived trends, since the growth of the importance of transnationals would make it more difficult over time to see the trend in the data.

(61) Lawrence Mishel, Jared Bernstein, and John Schmitt, p. 192, present data showing a speed up of commercial competition in the 1980s and 1990s compared to the 1970s.

(62) Krugman ignores competition within the advanced capitalist world in his Brookings piece.

(63) See the article cited above, p. 49.

(64) ERP, 1998, table B-104.

(65) See Unequal Development: An Essay on the Social Formations of Peripheral Capitalism (Monthly Review Press, 1976), pp. 72f.

(66) See Casino Capitalism (Oxford, UK: Basil Blackwell, 1986). Doug Henwood emphasizes the rise of rentier capitalism in his Wall Street: How it Works and for Whom (London: Verso, 1997). This essay downplays the role of the financial dimension, because (as argued in my 1994 article) the role of finance reflects, exaggerates and reinforces the role of real capital accumulation. Bob Brenner's "The Economics of Global Turbulence" (New Left Review, issue 229 1998) presents an excellent analysis of the rise of international competition amongst the rich capitalist countries.

(67) Like the Civil Aeronautics Board, this capture came very early, at the foundation of the Fed. Even during the Great Collapse of the early 1930s, the interests of the regulated prevailed over that of the public as a whole. See Gerald Epstein and Thomas Ferguson. "Monetary Policy, Loan Liquidation, and Industrial Conflict: The Federal Reserve and the Open Market Operations of 1932." Journal of Economic History 44(2) December, 1984: 957-83.

(68) Cold baths of globalization also occurred in the 1970s, when the two "oil crises" showed the importance of imported raw materials to U.S. prosperity.

(69) See his Created Unequal: The Crisis in American Pay (New York: Free Press, 1998), chs. 8-9, especially pp. 140-9 and the appendix to chapter 8.

(70) The Wage Curve, Cambridge, MA: MIT Press, 1994. See also David Card, "The Wage Curve: A Review," Journal of Economic Literature, 33(2), June 1995: 785-799 and Karl Marx, Capital, vol. I, ch. 25.

(71) This cult involves a mutated version of Kremlinology, trying to guess Greenspan's moves before he makes them.

(72) See ch. 3 in Theorist. He posits that the Fed can target the Non-Accelerating Inflation Rate of Unemployment (NAIRU), i.e., the Fed's desired rate of unemployment to avoid inflation, which is especially problematic in that this unemployment rate is unknown and changing, as in recent years. In 1999, in view of the possibility of world depression, Krugman has renounced his faith in Greenspan's power. See "The Return of Depression Economics," Foreign Affairs, January/February, 1999, especially pp. 59-60.

(73) Measures such as the money supply change their meaning as the percent of U.S. currency held outside the country rise rapidly, from about 40 percent in 1988 to 55 percent in 1998. See Gene Koretz, "Where Did All the Dollars Go?" Business Week, October 19, 1998, p. 18.

(74) This was seen in 1992, when the Fed's efforts to stimulate the economy in the election year (perhaps in hopes of helping President Bush's re-election chances) only succeeded in steepening the yield curve, raising the gap between short- and long-term interest rates.

(75) It should be noted that even this luck is not as good as that of the Golden Age in that the unemployment rate has not fallen as low as in the 1960s, while worker insecurity has increased compared to that era.

(76) See also Krugman and Lawrence, cited above. The orthodox (neoclassical) theory of induced technical change (cf. William Nordhaus, "Some Skeptical Thoughts on the Theory of Induced Innovation," Quarterly Journal of Economics 87(2), May, 1973: 208-215) suggests that technical change is simply a delayed process of substitution of less expensive inputs for more expensive ones. This hardly fits with the bias that Krugman posits, since it suggests that technology would favor those whose wages are falling. In fact, his evidence should be seen as knocking down the orthodox theory of technical change. But we do not see Krugman questioning or rejecting the neoclassical theory. It always surprises me that a school that puts so much emphasis on the role of technology invests so little of its intellectual resources into actually understanding it, leaving this job for heterodox economists such as Nathan Rosenberg.

(77) Barry Bluestone, "The Inequality Express," The American Prospect no. 20 (Winter 1995), pp. 81-93 at

(78) See also Mishel, Bernstein, and Schmitt, pp. 170f, Palley, pp. 70-73, and David R. Howell, "Theory-Driven Facts and the Growth in Earnings Inequality," Review of Radical Political Economics, 32(1) Winter 1999: 54-86.

(79) Obviously, there is technological change that occurs by accident or simply follows the path of least theoretical or empirical resistance, but that defines the benchmark relative to which a "bias" is defined. That is, there are a lot of unexplained technological changes, but those do not help us understand anything.

(80) This control issue has recently appeared in the orthodox economics literature as the "principal/agent problem," though usually the issue is not approached in Braverman's way. For one approach that fits in the general tradition of Braverman, see James Devine and Michael Reich, "The Microeconomics of Conflict and Hierarchy in Capitalist Production," Review of Radical Political Economics, 12(4), Winter 1981: pp. 27-45.

(81) Deskilling is not an aggregate trend (as Braverman's work sometimes implies) but a microeconomic bias. The simplification of the production worker's job implies more complicated and thus more skilled work for the managers and the machine repairers. Similarly, the creation of new industries (such as the computer software industry) can raise the aggregate skill level. The latter also depends on the supply of skills outside of business control (to some extent in public schools, to a large extent in craft unions and the like).

(82) See Peddling, p. 148. This concern was somehow forgotten in the Brookings article.

(83) See, for example, George Akerlof and Janet Yellen's introduction to their edited volume, Efficiency Wage Models of the Labor Market (Cambridge University Press, 1986).

(84) See his Lean and Mean: The Changing Landscape of Corporate Power in the Age of Flexibility (Basic Books, 1994).

(85) The basic idea of dualism theory is that the equilibrium in any given labor-power market is not unique, so that there are two (or more) equiprofitable ways of hiring labor-power and using it in production (or at least two or more methods that represent known local profit maxima). For different views and evidence, see Peter B. Doeriger and Michael J. Piore (Internal Labor Markets and Manpower Analysis, Lexington Books, 1971), James O'Connor (The Fiscal Crisis of the State, St. Martin's Press, 1973, ch. 1), Richard C. Edwards (Contested Terrain: the Transformation of the Workplace in the Twentieth Century, Basic Books, 1979), and William T. Dickens and Kevin Lang, "Labor Market Segmentation Theory: Reconsidering the Evidence," in William Darity, Jr., ed. Labor Economics: Problems in Analyzing Labor Markets (Kluwer Academic, 1993), pp. 141-80. Recently, Krugman himself has brought in the possibility of regime shifts -- to the low road -- as part of a multiple-equilibrium system to explain widening wage gaps. He uses an abstract version of labor-market dualism that is common among orthodox economists. See his paper at:

(86) A highly superior orthodox approach bearing some resemblance to Krugman's analysis here is that of Robert Frank and Philip Cook, The Winner-Take-All Society (Free Press, 1995).

(87) One of the first applications of the core/periphery distinction to the U.S. economy was by Robert T. Averitt, The Dual Economy: the Dynamics of American Industry Structure (W. W. Norton, 1968). Something similar shows up in John Kenneth Galbraith, Economics and the Public Purpose (New American Library, 1973). The core/periphery distinction corresponds roughly to James Galbraith's separation of the K-sector (knowledge or capital goods-producing), on the one hand, and the C- and S-sectors (which use knowledge and capital goods), on the other (see chs. 6 and 7). In the K-sector, in his view, part of "monopoly rents" garnered because of technological innovation are shared with employees. In the "consumption goods" (C) and service (S) sectors, where technological rents are rarer, this is less much less possible. We should add that in previous decades, even corporations outside the K-sector were able to receive and share such rents not only due to technological change but due to barriers to entry and imitation (traditional monopoly rents). Part of the story presented below is that such barriers have weakened.

(88) The major exception was in construction and similar industries. There, craft union members were able to attain a middle-class life-style based on their worker-controlled skills, despite the "peripheral" status of their employers. In return, the craft unions helped stabilize the market in a way that the relatively competitive contractors could not. A milder exception occurs due to the minimum wage and welfare-state programs that put a floor under the capitalist competition to cut wages: these stabilize the secondary labor markets, allowing an anemic version of primary labor market relations and the efficiency wage hypothesis. In this situation, a higher wage "pays for itself" within some unknown range. This fits with the research of Card and Krueger, who find that minimum wages don't hurt employment. (See David Card and Alan B. Krueger, Myth and Measurement: the New Economics of the Minimum Wage Princeton, N.J. : Princeton University Press, 1995.)

(89) As an operational definition, one enjoys a "middle-class life-style" to the extent one owns equity in one's home (or has the ability to buy that equity with one's other wealth) without being independently wealthy (i.e., able to eschew paid work altogether so that one can pick and choose the job one actually does).

(90) In terms of the multiple-equilibrium model that is at the center of segmented labor-market theory, these unions were able to push management from the type of equilibrium seen in secondary labor markets to more of a (subordinate) primary labor-market equilibrium.

(91) On recent efforts to organize unions at McDonald's see Liza Featherstone, "The Burger International," Left Business Observer, 86 (November 14, 1998), pp. 3.

(92) The oil price rises were partly a domestically-caused event, based on abundant growth of demand in the 1960s and 1970s, so that raw material prices were rising before the OPEC shock of 1973. As Brenner points out, most of the profit rate's fall preceded the oil crisis.

(93) The profit rate is the rate of return on net reproducible assets as measured by the Department of Commerce. See SCB, June 1998, p. 9, table 9 and chart 5. See also Brenner, cited above. Howell, "Theory-Driven" points to a similar list of factors to explain widening wage disparities. Stanley Masters, "The Role of Flexible Production in Earnings Inequality," Challenge 42(4) July/August 1999: 102-117, emphasizes the role of increased flexibility in capitalist work organization as part of this process.

(94) In the background, this war had started earlier than the 1970s and more gradually, as labor-intensive businesses moved to right-to-work states (living with unions at the same time trying to avoid them). See, for example, David Fairris, 1989. Appearance and Reality in Postwar Shopfloor Relations. Review of Radical Political Economics 22(4) Winter: 17-43.

(95) For example, according to the Bureau of Labor Statistics, 45 to 54-year-old men's job tenure fell 31 percent, from 15.3 to 10.5 years between January 1983 and February 1996. See Comparing two recessions, a study by the Council of Economic Advisors aimed pretty explicitly at debunking the phenomenon of "downsizing" concluded in 1996 that "Displacement rates for older and more educated workers, who had largely been unaccustomed to facing such risk, rose between 1981-2 and 1991-2" despite the relative mildness of the latter recession compared to the former. See For a more complete analysis of rising job insecurity, see Mishel, Bernstein, and Schmitt, cited above, ch. 4. Palley also collects information on increasing insecurity in his book cited above, pp. 59f. On the recent downsizing of management and supervisors, see Michael Reich, "Are U.S. Corporations Top Heavy? Managerial Ratios in Advanced Capitalist Countries," Review of Radical Political Economics, Summer 1998 30(3): 33-45. See also Richard Marens, "Life after Organization Man," Left Business Observer, 87 (December 1998), pp. 2-3.

(96) For an excellent discussion of this issue that is similar to what follows, see Robert Pollin, "The 'Reserve Army of Labor' and the 'Natural Rate of Unemployment': Can Marx, Kalecki, Friedman, and Wall Street All Be Wrong?" Review of Radical Political Economics Summer 1998 30(3): 1-13.

(97) See Juliet Schor, "Class Struggle and the Macroeconomy: The Cost of Job Loss," in Robert Cherry et al., eds. The Imperiled Economy, Book I: Macroeconomics from a Left Perspective (URPE, 1987) and Juliet Schor and Samuel Bowles, "Employment Rents and the Incidence of Strikes," Review of Economics and Statistics 69(4) Nov. 1987: 584-592.

(98) Whether or not this fits the empirical data is unclear. Reading the business and economic news suggests that this is so, but the data series kindly provided by Eric Nilsson (of California State University-San Bernardino) ends in 1991. The ratio of his COJL to the unemployment rate starts rising in 1984, but is strangely far below that of 1969. Further, the measurement of the COJL requires more theorization in view of the comments below.

(99) See Barry Bluestone and Stephen Rose, The Unmeasured Labor Force, Jerome Levy Economics Institute Policy Brief #39, May 1998 (, The Growth in Work Time and the Implications for Macro Policy, Jerome Levy Economics Institute Working Paper #204, August 1998, and "The Macroeconomics of Work Time," Review of Social Economy, 54(4) Winter 1998: 425-41.

(100) Patricia S. Pollard, "Finally Falling: Unemployment Duration," National Economic Trends, Federal Reserve Bank of St. Louis, July 1998.

(101) The ratio of outstanding consumer credit debt to disposable income shows a clear upward trend; for data, see the ERP, 1998, tables B-7 and B-31. This ratio has been rising at about 0.04 percent per year; the t-stat of this coefficient equals 2.4.

(102) See his statements to the Joint Economic Committee on June 10, 1998 and to the House Banking Committee on July 21, 1998. See

(103) See the articles cited above.

(104) This suggests that causation runs in two different ways. First, persistent high unemployment raises the wage dispersion. Second, a wider wage dispersion adds more power to any specific unemployment rate to deter inflation, which implies that the NAIRU, if it exists, is lower. One way to clarify this two-way causation is to say that it is persistent unemployment above the NAIRU (cyclical unemployment) that causes rising inequality. Thus, persistent unemployment, along with the other changes discussed in the text, can in the long run mean lower unemployment. However, high cyclical unemployment can worsen the vicious circle of poverty, making structural unemployment worse. This raises the NAIRU.

(105) As Frank and Cook put it in their chapter 7, the concentration of rewards at the top of the distribution encourages a lot of wasteful rent-seeking investment -- including hard work -- by those lower down as part of a largely futile effort to join the lucky few. What is being described is not quite a "rat race" in George Akerlof's terms. (See his An Economic Theorist's Book of Tales Cambridge U.P., 1984: 27-31.) But like in his model, a worker's reward doesn't simply reflect his or her individual merit; they also depend on the work environment (the segment of the labor force, the position in the corporate hierarchy). This encourages the (employed) individual to do more work than they would normally desire.

(106) This assumes away radical changes in international politics and policies. Leo Panitch provides a much longer definition of globalization in "'The State in a Changing World': Social-Democratizing Global Capitalism," Monthly Review, 50(2) October 1998, pp. 12-13. Brenner's book, cited above, gives a good history of the transition from competing capitalist nation-states (among the rich countries) in the direction of increased globalization.

(107) Both the Frank and Cook book (cited above) and Bluestone emphasize the importance of marketization.

(108) It is interesting that this total focus on wage inequality alone is another characteristic he shares with his nemesis, Robert Reich.

(109) See Palley, cited above, p. 53. Krugman and Lawrence say that "It makes sense to talk of a competitive problem [due to international trade] only to the extent that earnings growth falls by more than the decline in productivity growth" (cited above, p. 47). However, this fact should be seen as also a result of the other dimensions of globalization and marketization, such as capital mobility.

(110) On the last, see Galbraith, 1998, pp. 79-80.

(111) This can be seen dramatically in figure 1 (p. 37) in Michael Reich's article cited above. Unlike the normal pattern of economic prosperity periods of the 1947-90 period, managers and supervisors fell as percent of private nonfarm employment in the 1990s.

(112) These data come from the SCB, June 1998, p. 9, table 9 and chart 5. The more recent SCB article on this subject (June 1999) shows a moderation and perhaps a slight fall in property income's share of domestic income.

(113) See the 1998 ERP, table B-54. Rising capacity utilization boosts profit shares because of the role of overhead costs, including overhead salary costs.

(114) These data come from the June 1998 SCB, cited above. (As with the profit share, the profit rate showed a small fall in 1998, as seen in the June 1999 SCB, without undermining the upward trend yet.) The rising profit rate results not only from the rising profit share but from rises in the output-capital ratio. The output-capital ratio (Y/K) -- implied by the SCB figures on profit rates R/K and profit shares R/Y -- rose steadily from 1991 on, attaining a level comparable to that of the 1960s.

This Y/K increase seems linked to the 1980s and 1990s shake-out of U.S. manufacturing (disinvestment from old equipment and plant), investment in more modern fixed capital, and the falling prices of some capital goods (specifically, computers) and important raw materials such as oil. But until more research is done, this rise is somewhat of a mystery. For example, lot or most of the research on computerization has been about why it has not contributed to labor productivity much as yet, ignoring its possible effects on "capital productivity." (See, for example, Jeffrey Madrick, "Computers: Waiting for the Revolution," Challenge, 41(4) July-August 1998, pp. 42-65.) As with R/Y, the role of capacity utilization in explaining recent changes is minimal.

(115) This calculation is based on a simple subtraction of the chained GDP price index inflation rate from treasury bond rates, based on tables B-3 and B-73 of the 1998 ERP. The fact that inflation has been slowing in recent years suggests that inflationary expectations have also fallen, so that these estimates are low compared to the expected real interest rate.

(116) Robert J. Gordon, Macroeconomics, 7th ed., p. 141, diagram 5-9 shows a shrinking structural deficit after 1992, a sign of contractionary fiscal policy. Government purchases fell from 20.2 percent to 16.5 percent of GDP between 1993 and 1997. In 1999, the Federal government ran a budget surplus.

(117) This fits with the relative shrinkage of the share of interest income in property income seen in SCB, June 1998, p. 9, table 9, columns (5) and (8) (and repeated in SCB, June 1999). The Investment/GDP ratio is based on ERP, 1998, table B-2. During this period, consumption was a relatively constant fraction of GDP. The more intense battle of competition implies increased pressure for businesses to invest to keep up with (or gain an edge versus) the competition and to avoid losing out permanently. The increased flexibility of capital equipment associated with the computer revolution also seems to have compensated for the increasing uncertainty associated with more intense competition.

(118) However, he is conscious of the problem; see ch. 7 in Theorist.

(119) See Doug Henwood, "Measuring Privilege," Left Business Observer #78 July 1997, pages 1 and 3. As he notes, during the 1990s, most of the gain of the top 1 percent has been at the expense of the next 9 percent. But this fits with the general polarization. See also Edward N. Wolff, "Recent Trends in the Size Distribution of Household Wealth," Journal of Economic Perspectives 12(3) Summer 1998: 131-50.

(120) See Left Business Observer, #8 July 21, 1998, p. 8 and Lawrence Mishel, Jared Bernstein, and John Schmitt of the Economic Policy Institute, "Finally, Real Wage Gains" at, on the page for articles on labor market conditons.

(121) As noted, fiscal policy has had a contractionary tilt, as part of the effort to balance the budget and to keep it balanced.

(122) See my article cited above.

(123) See Evelyn Iritani, "U.S. Is Globe's Last Hope to Halt Recession Finance," L.A. Times, August 2, 1998, p. A1.

(124) See for example, the op-ed piece by the Merrill-Lynch economist, Charles Clough, "Too Much of a Good Thing," New York Times, November 17, 1998.

(125) On these triggers, see the article by Iritani cited above.

(126) This is a major theme of Karl Polanyi, The Great Transformation (Boston: Beacon Press, 1944). Manfred Bienefeld's "Lessons of History and the Developing World" (Monthly Review, 41(3) July-August 1989, pp. 9-41) applies a Polanyian approach to the questions at hand. A third counter-tendency, that environmental destruction, will cause a global slowdown of capital accumulation, is similar in its impact.

(127) NIMBY stands for "not in my back yard." Of course, it should be stressed that Taleban is not simply reacting to capitalist "modernization" but to the U.S.S.R.'s 1979 invasion (using CIA funds).

(128) See Paul Krugman, "Saving Asia: It's Time to Get Radical," Fortune, Sept. 7, 1998; Robert Barro, "Malaysia Could Do Worse than This Economic Plan," Business Week, Nov. 2, 1998; Jagdish Bhagwati, "The Capital Myth: The Difference between Trade in Widgets and Dollars," Foreign Affairs, May/June 1998; Jeffrey Sachs, "Making it Work," The Economist, Sept. 12, 1998; and Joseph Stiglitz, "More Instruments and Broader Goals: Moving Toward the Post-Washington Consensus," 1998 WIDER Annual Lecture, January 7, 1998.

(129) See Panitch (cited above) for one critique of the current World Bank line on economic policy.

(130) Theorist, p. 15.

(131) See Theorist and "Moral Economics: What the Campaign For a Living Wage is Really About," Washington Monthly, September 1998.

(132) Palley's prescription (in his chapter 10) of floating exchange rates with capital controls seems plausible. If a Tobin tax is imposed by the United States, it is quite likely that other nations will follow, just as the Western European central banks followed Alan Greenspan's interest rate cut in 1998.