YOYO, WITT, Globalization, and a Heartfelt Tale from the Heartland

August 5th, 2013 at 12:02 pm

Robert Putnam tells a resonant and heartfelt story about how his hometown in Ohio has changed since he grew up.  It’s a microcosm of the economic and social trends that have beset towns and cities across the nation, featuring the impacts of globalization, changes in family structure, inequality, and diminished mobility.

To Putnam, a sociologist, the ultimate cause of our unwillingness to take the necessary steps to push back on these factors, is a “shriveled sense of ‘we’”:

The crumbling of the American dream is a purple problem, obscured by solely red or solely blue lenses. Its economic and cultural roots are entangled, a mixture of government, private sector, community and personal failings. But the deepest root is our radically shriveled sense of “we.” Everyone in my parents’ generation thought of J as one of “our kids,” but surprisingly few adults in Port Clinton today are even aware of R’s existence, and even fewer would likely think of her as “our kid.” Until we treat the millions of R’s across America as our own kids, we will pay a major economic price, and talk of the American dream will increasingly seem cynical historical fiction.

I agree with that analysis.  In fact, it was at the heart of a book I wrote years ago condemning YOYO economics and advocating WITT economics (you’re-on-your-own vs. we’re-in-this-together).  YOYO economics is a health care voucher, a privatized retirement program, an absence of investment to offset disadvantages at the starting gate, no minimum wages, anti-unions, etc.  WITT is work supports for the poor, a strong safety net, Keynesian countercyclical measures, full employment as a fiscal and monetary policy goal, manufacturing policies in the face of global competition.

But as I read Putnam’s piece, it’s that last part that jumped out at me.  That is, where things really start to unravel in his telling was in the loss of factory jobs.  That’s not to say that had the factories not closed, 2013 would be 1950 (with much better television).  Large social changes would certainly have effected towns like this no matter what the economics.  But globalization—a word not in his piece—plays a dominant role in his story.

The timing matches up.  The figure below shows imported goods as a share of GDP all the way back to 1939.  The series starts climbing around the time employment problems enter Putnam’s story.  And some of the research, nicely reviewed this very morning by economist Nancy Folbre, is also illustrative of the distributional outcomes of the trend shown in the figure.

So how is that increased global trade played such a key role in this story and is yet hailed and revered by policy makers and most economists as a great benefit of modern economies?  In fact, for some good reasons.  More trade has provided a greater supply of goods and lower prices, of course, but also more fluid supply chains for goods and capital to help moderate supply shortages more common in closed economies.  One would be very hard pressed to argue that increased trade has not made most of us better off—but only in a gross sense, not in a net sense.  Let me explain.

At the bottom of the globalization debate is a fundamental error by the policy, political, and punditry community: the assumption that people are first and last consumers, not workers.  But when trade effects prices, it also effects jobs and wages.  Sure, there are models that tell us how displaced workers from sectors hurt by import competition find their way to shiny new sectors in other parts of the economy, but a) that’s not been the case for a lot of folks (see Putnam, or just look around), and b) that’s a lot less likely when you run persistent trade deficits, as has been the case in the US for decades.

So does that imply that more globalization in advanced economies necessarily implies outcomes like that described by Putnam?  To a small extent, yes.  Pre-globalization, there were workers and industries extracting economic “rents” that got squeezed out of the system by more trade.  But the much more important answer is: of course not.  It’s all a matter of distribution.  Back to Folbre:

Trade theory emphasizes that those who benefit from free trade should be able to compensate those who suffer, making everyone better off. What trade theory doesn’t explain is why the beneficiaries would offer such compensation unless they are forced to do so.

The key is to take some of the benefits of more trade and invest them in WITT-style solutions to the distributional problems caused by globalization.  And the problem here is political—the same one I keep coming back to in post-after-post.

The challenge we face is the interaction of a) a system where politics is deeply infused with private money, and b), where market outcomes, including those generated by globalization, continuously concentrate more wealth at the top of the scale.  The beneficiaries of that system will buy YOYO economics and block WITT solutions.

I’m not sure how much of that is a “shriveled sense of we” and how much is unrepresentative political, legal, and economic institutions born of unfettered greed supported by politically biased economic theory.

 

impgoods

 

Source: BEA

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9 comments in reply to "YOYO, WITT, Globalization, and a Heartfelt Tale from the Heartland"

  1. george kaplan says:

    In the movie ‘inherit the wind’ Spencer Tracey talks about how each new invention isolates us. The telephone, for example, replaced leaning ot the fence to speak with ones neighbor. I also recall interviews with East Germans after merging with the west G’s. They said they no longer had time for themselves, family or friends since they had to hustle to earn money. They regretted the lack of a more leisurely life despite fewer goodies.

    My stepdaughter wants my wife to get an I-phone so she can text instead of calling. Same isolation symptom.

    Masters of the universe do not recognize that their leadership leads to success only if the ordinary worker does the detailed work.


  2. mitakeet says:

    I consider it the Wallmart phenomenon. At each new location the locals often rise up in arms complaining about the impact on the local businesses, yet once the store is open, you see many (if not most) of them in there shopping. It is a rare person who, when given a choice between, say, a $10 T-shirt from a local vender vs a functionally identical T-shirt from Wallmart for $5 will pony up the extra $5, particularly since he sees his neighbors in the store as well. Each person individually makes decisions that are unambiguously in his or her best interest (paying less for the T-shirt), yet in aggregate it is the worst choice for the society at large (no (or vastly reduced) multiplier effect if that $5 is sent overseas compared to the $10 spent domestically). While I do firmly agree that our ruling oligarchy has negative incentive to support WITT and plenty of incentive to support YOYO, I think that the majority of us are complicit in the slitting of our own throats, one tiny decision at a time.


  3. Fred Donaldson says:

    Imagine for a moment, five laborers working for decades on a farm owned by a company. They each earn $300 per week.

    The company, after paying wages, accumulates enough to buy a machine that replaces four of these workers, and reduces the work force to one. The remaining workers, now unemployed, suggest they would work for less than $300 and fight among themselves to get the single job left at the farm.

    Instead of $1,500 in weekly labor costs, the farm pays less than $300, and continues to reduce that amount as the unemployed workers become more desperate for a job to pay their mounting bills.

    Strangely, it was the workers’ efforts and dedication that produced the profit to buy the machine to replace them, but since capital is king in America, the reward goes to the owner and the workers in this example lose nearly everything.


  4. save_the_rustbelt says:

    I’ve spent a lot of time in Port Clinton.

    Two major factors:

    the self-induced near suicide of the the BIG 3 auto makers

    globalization, factories moved to Mexico and China

    The entire northern edge of Ohio has deteriorated badly, including my hometown.


    • purple says:

      The Big 3 have resuscitated themselves with $12 entry level wages. So I think this globalization story, which is more about how laissez-faire capitalism operates, is just getting started.

      The current pressures on public education is basically an admission that it represents the last possibility of equal opportunity. Of course, it won’t work.


  5. Dave says:

    Well, Jared, you are one of the only ‘liberal’ economists I believe on this issue.

    You are one of the only very prominent ones that recognizes the problems of globalization properly.

    The problems are obvious to those who encounter the victims on a daily basis, but they are not so obvious to those who look upon political-econonomic theory to excuse their own vices.

    I would argue that this problem is at the core of the ‘we’ problem that has destroyed our political system. It has been obliterated.

    I have ideas why, and I’ve stated them elsewhere, but they’re based in evolutionary psychology rather than economics.

    But sometimes, our instincts lead us to answers that data cannot, and in this case, Jared, you are right!

    I wish there were more of you in the economics field.


  6. Dave says:

    I regret that I don’t check this blog more regularly. I need to do that.

    So let me tell you my theory on this. What is my theory based upon? Talking to people, observation, a basic education is psychology and science, and lots of reading.

    So people generally have an innate sense of fairness because of our tribal history. It is built into our evolutionary psychology. That basic sense of fairness tells us that when we hire people abroad, that we should pay them the same wages that people here are payed.

    I think most people have that instinctive sense of fairness and morality. However, some economists began branding this kind of morality as ‘self righteous’ and others branded it as just ignorant.

    But CEOs began to accept the argument (against their better judgement) that it was ok. But this mechanism is primitive. Once it is switched, it cannot discriminate between us and them. So the CEOs have come to accept that ALL people can live in squalor and poor conditions as part of a moral system.

    Most citizens never accepted this idea to the extent that CEOs did.

    Disgusting!


  7. Perplexed says:

    -”…Pre-globalization, there were workers and industries extracting economic “rents” that got squeezed out of the system by more trade.”

    Or were these “rents” just a “leveling” out of the playing field with regard to information asymmetries as Eugene Palma suggests? Is there a good reason for excluding Palma’s work from this discussion?

    https://www.repository.cam.ac.uk/bitstream/handle/1810/241870/cwpe1111.pdf;jsessionid=5F7B9C9B48323030828999826D263087?sequence=

    “Palma focuses on the ability of the top earners in society being able to capture rents while at the same time denying rents to wage earners. While its often viewed that union contracts result in ‘rents’ for workers that would be ‘efficient’ to eliminate, it may also be possible that what are viewed as ‘rents’ in terms of wages, may instead be a ‘leveling’ of the playing field with regard to information asymmetries of information. If an organization with an information advantage negotiates individually with each employee, they can only enter into contracts with those will work for the ‘market’ rate or less. With more information of the ‘market’ rate, they can ‘out-negotiate’ with information constrained employees, contracting with them for less than the ‘market’ rate price if it were widely known. So while paying the ‘market rate’ at the highest end, their overall cost is weighted average of those at the market rate combined with those below it. It’s price discrimination in reverse; with the company capturing the difference in a form of ‘rents’ that can be used to increase profits or to spread amongst ‘management’ level employees as a ‘reward’ for loyalty without exceeding industry ‘market averages’ for costs. Those most skilled at doing this should have the highest paid managers and/or the highest gross profits. It may well be that instead of capturing ‘rents,’ the unions are preventing the companies from capturing rents from the workers.”

    So much of this story point to rents and how they are distributed that the only surprising thing is the degree to which that discussion is relegated to the “back burner” by leading academics. It makes Palma really stand out as an exception.

    -”…where market outcomes, including those generated by globalization, continuously concentrate more wealth at the top of the scale.”

    Isn’t there enough evidence already that this story of “market outcomes” being responsible for this redistribution is a myth perpetuated to serve the primary beneficiaries of the status quo which is unsupported by “scientific evidence”? How much damage has and continues to be done by claiming this is a result of marginal products? Maybe the “science” of economics should reconsider its ongoing support of this religion.


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