Analysis

What’s Tearing the Middle Class Apart?

The responsibility for the growing despair, indignity and rapidly eroding pay in the world’s advanced economies shouldn’t be laid to globalization, automation or technology.

The closing day of the World Economic Forum in Davos, Switzerland, January 20, 2017.
GIAN EHRENZELLER/AP

DAVOS – Protectionism. There’s no other word, phrase or idea that rolls off the tongue more at the annual World Economic Forum in Davos. Never mind what the panel’s about, somebody will always warn about that worst of evils – which is a synonym for trade restrictions or any policy move that tries to slow down or constrain the processes of globalization.

Why does Davos Man – be it a politician, regulator, academic, journalist or businessperson – love that word so much? Among other things, because it’s a straw man they can position at the center of the room and hold the debate to its left and right.

From the right, they’ll explain that economic theory and reality have shown for centuries that free trade is a tremendous economic and social driver, responsible for much of the improvement in the quality of life throughout history.

From the left they’ll say that globalization and free trade destroyed millions of middle-class jobs in the developed nations, depressed wages and sowed widespread financial insecurity.

It’s a convenient discourse from both perspectives. They’re both right, and both look enlightened and relevant. On the one hand, obviously, open international trade is a tremendous driver of progress. But it’s also clear that it crushed entire industries and groups of workers throughout the West.

This discussion has been going on in Davos for decades and reached its peak this year with the election of Donald Trump as president of the United States.

Trump rode on a campaign against globalization, against international trade and, mainly, against what he called “horrible” trade agreements that allowed China and Mexico to take Americans’ jobs.

For Davos Man, there is nothing quite so convenient, and politically correct, as trashing Trump and explaining that the biggest danger is “protectionism” – that the United States will build great barriers to trade that will wind up making imported goods and services more expensive.

No wonder Chinese President Xi Jinping was a star of the show, after he said that restricting global trade is like a man imprisoning himself in a dark room: he’s safe from the wind and rain, but misses out on the light and air he needs to learn and develop.

Focusing the debate on the question of “Globalization – yes or no; protectionist quotas – yes or no” is the best way to avoid discussing why the globalization and free trade that economists love so much led to eroding pay and less dignity than before for tens of millions of middle-class people.

The winners and their loot

The answer, of course, is that globalization and free trade almost always really do create economic value for the trading countries. But it’s a process in which there are winners and losers – and the question is what the winners do with their loot.

The figures for inequality and, especially, the concentration of massive amounts of wealth in the hands of the few (the 0.1%), show that most of the economic growth and prosperity in the last 40 years has concentrated among very few people. Why? At Davos, they’d like us to believe this is the nature of the free market, and that in order to guarantee growth, we have to “motivate” the brightest and best.

They have been selling these ideas to the public for decades.

Amusingly, or ironically, the place that best proves the fairy tale is Davos – the biggest social club in the world. Here, the people who set the rules in the markets (politicians, regulators, sometimes academics and journalists) meet with the managers of the biggest companies in the world, who spend their time influencing the rules of the game, openly through lobbyists or, covertly, through ideas.

The responsibility for middle-class despair in the West doesn’t lie with globalization, automation, technology or education, but the ones who wrote the rules of the game: who gets the opportunities and how the fruits of growth are shared.

The greatest proof is that there are countries where globalization and technology have created vast gaps between the 0.1% that bought the government and drained off most of the prosperity, and the countries where the middle class hasn’t been torn asunder quite so violently.

One economist who has been saying this for 20 years is Joseph Stiglitz, the best-selling author of “Globalization and its Discontents” (2002) and “Making Globalization Work” (2006).

I heard him speak earlier this month at the annual conference of social sciences and economics, where he talked with four other Nobel prize winners: Angus Deaton, Robert Shiller, Edmund Phelps and Roger Myerson.

Sitting in front of hundreds of economists, the five didn’t natter about trade yes or no, globalization yes or no – but what the rules should be, so that the fruits of growth, globalization and trade reach everyone, not just the talented, the strong, the violent and the well-connected.

Deaton stressed the importance of taking on the “rent-seekers,” which is economic jargon for the ones behind economic concentration, the ties between big money and government, for stifling competition, etc. He also underscored a concept Stiglitz has been stressing for months: Strengthening antitrust enforcement to prevent the concentration from exacerbating the inequality and dampening growth.

When we met at Davos, I asked Stiglitz if he didn’t think the lively discussion on globalization and trade agreements was a diversion from discussing the rules of the game in the markets and, specifically, the influence big business had over writing the rules.

What disappointed him, Stiglitz said, is the acknowledgement that globalization doesn’t work but that there’s no broader discussion of why a global economic system doesn’t work.

Ironically, a report prepared ahead of the WEF – analyzing the risks the global economy faces – named inequality as the No. 1 risk, but nobody’s been discussing what could be done about it, Stiglitz said.

Rewriting the rules

He has written books about the price we pay and will continue to pay for doing nothing about inequality, the factors behind it and what can be done about the widening gaps in society, Stiglitz said: The laws were rewritten in the Reagan era, in the 1980s, in a manner that contributed to inequality; now they need to be rewritten again.

Davos, however, is populated by people who profited from the rewritten rules and don’t want to rethink the subject – and fail to see the cognitive dissonance.

Stiglitz said that in his book “Making Globalization Work,” he described how economic theories explain how globalization would obviously hurt unskilled workers in the West. If there’s something he doesn’t understand, it’s why anybody is surprised at the inevitable frustration.

The United States could easily emulate the Scandinavian nations’ protective social networks, notes Stiglitz. The snag lies in right-wing ideology in the United States, which believes in trickle-down wealth. The left was just as opportunistic, saying that U.S. politics requires money – which means tapping corporate giants and rich people, so they can’t look too leftish; they’d best sit tight and hope all will be well.

Some on the left didn’t think it would be okay, or that a little more education would solve everything, but they figured worker retraining was key – have enough trained workers and that would inherently provide social security. But that didn’t work.

Actually, the rules of market economics need rewriting, Stiglitz insists.

He’s rather surprised that they still invite him to Davos, despite his insistence on talking about rent seekers and illicit ties between big money and government. He’s very lonely in talking about that at Davos. Everybody may agree that inequality is a problem and that globalization creates losers, but, he presses, has anybody wondered what to do about it?

Behind us sat a former Republican senator who lost the election two years ago, became a lobbyist and today is an investment banker advising mainly companies aspiring to sweetheart regulation.

Money and government

Stiglitz and some of his colleagues, though, are expending more and more intellectual energy on the topic of the ties between money and government, and how interest groups shape the rules of the game.

Bernie Sanders also flew that flag with his social democratic model. As did Trump, the purported drainer of swamps, who promptly stuffed his cabinet with swamp dwellers who made their money from sweetheart regulation.

The people of Davos had lined up behind Hillary Clinton and her husband Bill, seeing Trump as a threat. They’re changing their tune, though.

Now they’re saying he could be great for business. They are terrified of corporatism (the sociopolitical organization of a society by major interest groups, or corporate groups) – of Trump deciding which industries and companies to boost, and which to throw under the bus of the market and competition.

Also, Davos Man doesn’t believe that Trump is really going to turn his back on the 0.1%. That was campaign bravado. Now it’s business.