Globalization and inequality

Globalization review from Thursday

• What is it?• Why has it happened?• Is globalization something new or part of a longer

trend?• Why is there a backlash?• How and why does globalization undermine local

culture• Does it increase or decrease poverty?• Does it increase or decrease inequality?• What are the “dark sides” of globalization?– Case study of the rise of global finance and its volitility

Today’s argument

• The Liberal is concerned with global growth• The Econ. Nationalist is concerned with

American power (relative power)• The socialist/ social democrat/ Marxist is

concerned with income distribution in the U.S.• How does globalization impact growth, power,

and income distribution In the U.S.?

American workers are the most productive in the world…..

Did Globalization make Americans better off?

• Women’s earning power increased• Minorities saw incomes rise and poverty rates

drop• 1965-75 African American earnings rose…• Came to a halt• And no substantial increase since….

The Trickle down effect is working….

All groups saw their incomes rise…

But Globalization may undermine the American Dream

• Tech. progress• Globalized trade• Competition of low-wage workers overseas• Growing immigration into the US• Decline of manufacturing• Weakening of the labor movement• Weakened leverage against employers…

And numbers don’t tell the whole story: Income Distribution has favored people at the top

• Like a rowboat chasing a speedboat

• Rise in average incomes skewed by inequality

Decline in real wages

Rise of Temporary workers and “portfolio employment”

Last hiredFirst fired…

Growth of a low wage work force

• Between 1975 and 1990, the percentage of low wage employees in the total work force grew by 142 per cent, from 17 per cent to 40 per cent

Rising inequality in the U.S.

• Since 2001…– Decline in household income– Stagnating wages– Any rise in wages results from putting in more

hours– Rising poverty in single-parent families

Distribution of wealth in the U.S.

The Escalators

A Distributive Justice perspective….

• It is the nature of capitalism to push labor costs (wages) down as far as possible

• But this contradicts the necessity for capitalism to sell goods and services

• Low wages constrict consumption and eventually…..

• Produce crisis

A Class economy, not a national economy

• American industries no longer compete against other “national” industries

• The stateless corporation?

What has held the U.S. together?

• It all starts with finance……

CGlobalization of Finance and current financial crisis

The globalization of Finance• Cross-border lending has exploded in the last 20 years• High tech and global• growth of securitization, non-banks, and alternative markets as well as

mutual funds phenomenal –

• A firm that wants to borrow money has broad range of choices

• Investors can buy re-packaged pieces of risk • spread their holdings across different countries, • different industries, • different time periods.

• .

The Globalization of finance is scary

• Financial markets are subject to volitility• And crises are increasingly damaging• Even if there are no changes in underlying

economic conditions!• Creditors have all the power• And sometimes that power is psychological

The current crisis started in the U.S.

• Declining dollar value willingness of other nations to buy U.S. debt + economic inequality in the U.S. + Iraq war = perfect storm

• Fed keeps interest rates low easy money rise in the national debt - continued willingness of others to finance U.S. debt heightened optimism + deregulation

US Structural Deficits and declining dollar value

Decline in real wages

$3 Trillion War…..Hidden cause of Financial Crisis?

In response……The Fed Cuts interest Rates…..

And That led to…And That led to…

National Debt Clock

Lots of credit heightened optimism

Around the same time, finance was deregulated resulting in “irrational exuberance” unbridled greed, and corruption

Growth of finance industry

Follow the crisis….• 1. Housing values remain stable for 100 years to 1995• 1995-2005 Housing prices double +• 2. Wage stagnation and income inequality +• 3. Deregulation of financial markets

• 4. Easy money easy mortgages as bets on in housing prices + Run of CDOs

and derivatives + borrowing to buy them (betting on in value) + rating fraud + easy insurance (AIG) highly leveraged banks

Housing supply overwhelms demand housing prices fall + mortgage defaults

CDOs lose value + Bank stock prices fall credit drys up

How can we understand the “bailout?”

• Should we protest it?• Should we support it?• Will it make any

difference?• Answers depend on

which theoretical perspective we embrace

(extreme) Liberal view: Let the market solve the problem

Privileged position of private businesses?

• If private finance and easy credit lead to growth, governments have little choice--- they support

• business enjoys a “privileged position” under capitalism “because public functions in the market system rest in the hands of businessmen.”

• So governments have to offer them benefits to stimulate the required performance

Primary stock holders in the Federal Reserve

• Primary stock holders of the US Federal Reserve• * BNP Paribas Securities Corp.

* Bank of America Securities LLC* Barclays Capital Inc.* Cantor Fitzgerald & Co.* Citigroup Global Markets Inc.* Credit Suisse Securities (USA) LLC* Daiwa Securities America Inc.* Deutsche Bank Securities Inc.* Dresdner Kleinwort Securities LLC.* Goldman, Sachs & Co.* Greenwich Capital Markets Inc.* HSBC Securities (USA) Inc.* J. P. Morgan Securities Inc.* Merrill Lynch Government Securities Inc.* Mizuho Securities USA Inc.* Morgan Stanley & Co. Incorporated* UBS Securities LLC.

Government manages the affairs of the ruling class---capitalists

Or is the Bailout an economic nationalist policy?

Or will it “save” (repair) liberalism?

• Credit is crucial to success of a liberal capitalist economy

• Market failures are inevitable

• Governments must intervene to prevent or soften market failures for growth to progress. Government Bailouts

Governemnt De-regulation

The Global Fallout

Global Trade decline 1929 and 2009

Global stock market fall 1929 and 2009

Must the Bailout, stimulus, and re-regulation be international?

Will the US come to the rescue and again take on the role of global hegemon

Everyone Chill Out!

III Got this!I Got this!

Who is the Lender of last resort?• The IMF? • Resources increased by $500 billion $40 billion

from China (loan) (not confirmed)– $100 billion from Japan and EU (promised before

G20)– Still need $260 billion…..

• $10 billion promise from Canada• $4.5 billion promise from Norway• $100 billion promise from U.S.

• Mexico has already requested $47 billion line of credit

• Will the IMF become a global Central Bank?

IMF voting power: US can still veto

Lender of Last Resort? The Fed and Central Bank coordination

Counter-cyclical lending?

Dollar strengthened as world’s reserve currency?

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Taking in the world’s distressed goods?

• Now it’s toxic assets• U.S.Promise not to close its market• Other G20 countries promised too• Are bail-outs of domestic industries acts of

protectionism?

Is the US is an unconscious Hegemon?

• Was the US always an unconscious hegemon?• Does the world really need a hegemon in

Kindelberger’s sense? • Will international institutions do the trick?• Or will everyone keep their markets open

because they have learned that it is the best thing to do?