I was reminiscing this morning about how globalization and free trade were sold as a “win-win” situation for us. But, here we sit with a financial system in shambles, incredibly high total debt levels and an auto industry on the verge of collapse. As far as I can see I see nothing but losers from globalization. Sure, globalization brought us lower and cheaper prices on consumer goods and it also provided incredible amounts of cheap money that created the economic bubble that has burst. Has globalization increased our wages? Has it increased employment in the U.S.?
Globalization has artificially inflated our living standards.
Globalization has given us a boatload of cheap money mostly from China. China invested hundreds of billions of dollars in the U.S. through the purchase of U.S. Treasury Securities, Fannie Mae and Freddie Mac Securities. This flood of money allowed for lower interest rates which provided U.S. consumers (us) a way to leverage everything and provide us with cash. We used this cash and cheap debt to purchase lots of low cost items shipped here from China. Globalization has provided cheap money and cheap consumer goods.
Globalization has meant more jobs leaving the U.S. for countries with lower labor costs and standards. Basic economic theory of “competitive advantage” says that when one trading partner can produce a product more cheaply than its trading partners, trade still provides benefits to both nations. This sounds good in theory but there is a major caveat to this theory: while it may increase the incomes and profit margins of multi-national companies, it can still reduce the income of most workers including high tech industry workers.
A briefing paper by the Economic Policy Institute established two key findings related to globalization and wages:
1) In 2006, the impact of trade flows increased the inequality of earnings by roughly 7%, with the resulting loss to a representative household (two earners making the median wage and working the average amount of (household) hours each year) reaching more than $2,000. This amount rivals the entire annual federal income tax bill paid by this household.
2) Over the next 10-20 years, if some prominent forecasts of the reach of service-sector offshoring hold true, and, if current patterns of trade roughly characterize this offshoring, then globalization could essentially erase all wage gains made since 1979 by workers without a four-year college degree.
Globalization in this current form is not sustainable because it supports a downward pressure on wages, encourages and requires insatiable consumption of resources and cheap consumer goods. But the financing of the consumption, particularly by us, is not by higher incomes/wages but by higher amounts of debt. Globalization was sold to us as “the next best thing since sliced bread”. Sure producers can lower their costs and in return lower their prices. But how do American workers make-up for the lower wages that they must accept in order to remain employed? Lower prices for consumer goods is obviously not enough.
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