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Book Review:
Wealth and Democracy: A Political History of the American Rich.
By Kevin Phillips. Broadway, 473 pp.
The argument of Kevin Phillips’s provocative and disturbing new book could almost be rendered as a cliché: the rich get richer and the poor get poorer. According to Phillips, the very rich in the U.S. have gotten much richer over the past two decades while virtually everyone else has gotten a good deal poorer, despite the widely publicized financial gains of the 1980s and ‘90s.
The evidence Phillips marshals in support of his thesis is convincing and disturbing. Under the heading "The United States Leads in Inequality" he observes that "those in the top fifth in the U.S. make 11 times more than those in the bottom fifth." In 1997 the top 1 percent of the population held 40.1 percent of total household wealth. The only comparable moment in American history was in 1929, prior to the stock market crash and the Great Depression, when the top 1 percent held 44.2 percent of household wealth.
Despite the rhetoric of both the Democratic and Republican parties heralding the U.S. as a republic of stockholders, Phillips observes that "middle-class families held (just) 2.8 percent of the total growth in stock market holdings between 1989 and 1998, but accounted for 38.7 percent of the rise in household debt." And although the "pro-wealth policies of the right have enjoyed sustained low- and low-middle-income support, particularly among religious voters enlisted by cultural facets of conservatism," these households have lost ground precipitously.
Why has the net worth of median-income families stagnated or depreciated? Consider that while a family’s "minuscule stock ‘portfolio’ or pension fund interest had grown by $2,600 or even $6,100," the family’s typical "debt load for college, health insurance, day care, and credit cards had jumped by $12,000." The Wall Street Journal in 1999 noted the disparity between the very rich and everyone else with growing concern: "Nearly 90 percent of all shares were held by the wealthiest 10 percent of households." And the top 1 percent still own approximately 45 percent of all privately held stock.
Even these numbers fail to tell the whole story. Citing figures from the Bureau of Labor Statistics, Phillips notes that by the mid-’90s "only 26 percent of employees in the bottom 10 percent had health insurance provided by their companies, down from 49 percent in 1982. For mid-range employees, 84 percent had coverage in 1996, down from 90 percent in 1982."
This at a time when the pay ratio of the top corporate CEOs to the hourly wages of production workers soared from 93 times that of workers in 1988 to 419 in 1999.
The "upward redistribution of wealth" which Phillips charts has more often than not been aided by political power. "From the nursery years of the Republic, U.S. government economic decisions in matters of taxation, central bank operations, debt management, banking, trade and tariffs, and financial rescues or bailouts have been keys to expanding, shrinking, or realigning the nation’s privately held assets." Robert Reich, secretary of labor in the first Clinton administration, memorably criticized the hypocrisy of the wealthy and powerful who condemned government assistance for the poor while pocketing their own corporate welfare. The data Phillips cites bear out Reich’s observation. Though the principles of risk-taking and adventurous entrepreneurship were publicly lauded as fueling the engines of wealth in the ‘80s and ‘90s, the creation and protection of corporate wealth owed more to the influence of "friends in high places" than to the inveterate courage of entrepreneurs.
Phillips, a contributing columnist for the Los Angeles Times and a former Republican political strategist, is no stranger to issues of wealth and political power. His previous study, The Politics of Rich and Poor (1990), laid the groundwork for what the Economist called "a personal, populist radicalism." Perhaps it would be more accurate to characterize Phillips’s perspective as economic progressivism. While not a radical populist, Phillips is concerned about the consequences of that "fusion of money and government" which can be described as "plutocracy."
Placing the American experience in a larger context, Phillips considers three earlier economic powers: Britain, the Netherlands and the Spanish Hapsburg Empire. Those who have read Phillips’s The Cousins’ Wars (1999) will be familiar with his ability to draw together a web of historical correspondences to serve his thesis, though this strategy is less successful in Wealth and Democracy, tending to diffuse the core argument. He does, nonetheless, succeed in drawing a parallel between the decline of those imperial powers and the present situation, observing that in their twilight they (like the U.S.) came to value finance over industry and commerce. Owning came to take the place of creating.
Today’s global economy only makes the situation more volatile and perilous -- not least for the millions of working men and women whose economic fate lies at the mercy of vast international financial markets in which short-term gains for stockholders can win out over the long-term stability of communities.
That Phillips’s central arguments become, at times, lost in a clutter of redundant data and sometimes irrelevant digressions does not, finally, take away from the book’s significance. It especially deserves to be read by leaders of religious institutions, scholars and religious laypeople. Wealth and Democracy raises two particular concerns for these audiences, the first (explicitly) regarding the health of the democratic experience itself, the second (by extension) related to the role of the church in this democracy.
Corruption and graft -- the manipulation of political processes by moneyed special interests -- feed cynicism and undercut the popular trust necessary for democracy to thrive. If the U.S., as Arthur Schlesinger Sr. once observed, has become "a government of the corporations, by the corporations and for the corporations," how can it be saved from a cynicism that inevitably erodes people’s fundamental confidence in democratic institutions?
Phillips argues that meaningful economic reform (such as that which occurred in the 1830s under Andrew Jackson’s leadership, in the progressivism of Theodore Roosevelt and in Franklin D. Roosevelt’s New Deal) is the only effective means of combating such cynicism. Carefully scripted public relations campaigns orchestrated by the White House will not undo the damage done by wealth’s undue influence over the nation’s political processes.
The second concern remains even more intractable. The church seems to have largely abandoned its prophetic office with reference to American economic policy. The reason for this is unclear. Is it because many religious groups are too preoccupied with sexuality, sexual misconduct or other issues of individual morality, or their own institutional survival? Or have churches allowed their own financial interests to compromise them? What is clear is that this compelling and provocative book has much to say to religious leaders concerned about the integrity of democracy in America and about the integrity of the church in its public commitments
-- Michael Jinkins
Michael Jinkins teaches at Austin Presbyterian Theological Seminary in Austin, Texas. This article appeared in The Christian Century, October 9-22, 2002, pp. 45-47. Copyright by The Christian Century Foundation; used by permission. Current articles and subscription information can be found at www.christiancentury.org. This material was prepared for Religion Online by Ted and Winnie Brock.
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Barry Ritholtz presents several graphs showing "critical evidence on the decline of the middle class" in recent years, and then remarks:
One final note: Despite the overwhelming data, some people dispute that the middle class has been struggling or that they have suffered any sort of set back in income or purchasing power.The Brookings Institution's Scott Winship maintains that "conventional accounts of how the broad middle is doing systematically overstate economic insecurity." If one wants to argue exactly how far the Middle Class has fallen behind, and make the claim that the MSM has overstated it, well, that is a legitimate debate. I think its a losing argument, but, hey, its hardly incredible to say conventional wisdom overstates something.
On the other hand, the American Enterprise Institute fallaciously makes the less than credible or honest claim that there has been "considerable improvement in material well-being for both the middle class and the poor … over the past three decades."
This is the sort of statement that you expect from a group that has given up any pretense towards reality. The AEI has moved from intellectually bankrupt to utterly dishonest, and I assume anything I read from them, on any subject, are willful lies, misinformation and propaganda.
As an asset manager, I cannot risk falling into an alternative universe that diverges form reality. That is the sand box AEI plays in. As such, I have been forced to SEQUESTER their nonsense, as their detachment from the real world is an expensive and potentially dangerous money loser for anyone who reads their foolishness. I mostly ignore their idiocy, and suggest you do the same.
DrDick said in reply to R...
WTF?! Dude, we warned you about that brown acid. As numerous economists have pointed out, the decline of the middle classes in the US is a direct consequence of increasing rent seeking by the rich, who are also paying a record low level of taxes.
http://blogs.lclark.edu/hart-landsberg/files/2011/07/change-since-1979-300.gif
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The central thesis of this book is that those who own capital, or who can control its allocation, are in a much better economic position than those who have to work for a living. Writing this book during the Clinton years, the authors were speaking with respect to the USA. It is now 13 years later, and their thesis still holds, except it is applicable to the entire world. The financial meltdowns across Asia and Latin America at the turn of the century, followed by crises in the USA and parts of the Middle East more recently have all underscored the power of capital over labor. Now, throughout the world, central banks and by extension, commercial banks, run the economies of nations, states and cities. My only complaint about this book is its minimal reference to the works of Karl Marx and Lenin, two individuals who foresaw much of what has happened after WWII.
How ironic it is to go back to this book written in 1997 and see the entire dynamic of outsourcing and globalization analyzed before it became evident to the rest of us. Even today, however, it is not obsolete because they not only predicted the events but also demonstrated why globalization would have this consequence. They also provide a critical analysis of reengineering which demonstrated the technique as little more that an excuse for downsizing jobs and wages. Even now this book is a must read on globalization.
I've read just about everything there is to read in main stream economics. Although I've poured over the works of Hayek, Keynes, Marx, Smith, Ricardo, etc... this book touched me like no other.
The plain language of the mechanics of the devaluation of labor was sobering. Althought written in 1997, its message is even more relevant today. People working harder for less, buying into the free market myth, but living the reality.
The fact is capital moves much faster than most people can adapt. Forcing people to periodically start over again as jobs are lost. Such negative competition is assisting the small minority of anonymous large investors, but in the process also hollowing out the middle class. Forcing people to work several jobs, or incur debt simply to maintain their economic status. At some point the middle class will reach its limit and its decline will effect both the market and politics.
I highly recommend this book. It's insightful, well written, and thought provoking.
Luc REYNAERT (Beernem, Belgium)
I agree with the main statement of the authors that today those who earn their living from work are coming out losers: shrinking wage growth, problematic pension and healthcare insurance coverage, decline in health and safety protection.
Keynes' ultimate nightmare has arrived: industrial capitalism has been replaced by financial capitalism.
This is reflected in corporate as well as governmental policies.
To hide actual tendencies corporate America has invented newspeak: displacement for firing or re-engineering for big lay-offs. The workers are not only laid off, but even their Social Security System is privatized, offering huge management fees to financial institutions.
The policies of the Fed are purely financial, because bankers as creditors don't want te be paid back by inflated notes. It secures also an environment of high real intrest rates. But when the financial sector gets in trouble, it asks the government (all the tax payers) to step in, e.g. the bailout of the savings and loan industry.
The authors castigate rightly supply-side economics as a policy of lowering tax rates for the rich and at the same time as a money-raising vehicle for the GOP.
They show clearly that small businesses are not the cornerstone of job creation.
The position of the US work force is also beleaguered by powerful trends in world capitalism with the rise of India and China and their cheap labour force.
The authors prescribe sensible measures to reverse the trend: public investment (infrastructure), improved education and research and development.
But I don't believe that these measures can stop the immensely powerful shift that is taken place from the US/European markets to Asia. Ultimately, the economic world centre will be replaced by a new one, probably China.
A very revealing and necessary book. Not to be missed.
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January 07, 2008Martin Hutchinson is the author of "Great Conservatives" (Academica Press, 2005) -- details can be found on the Web site www.greatconservatives.com
Germany looks like a counterexample
Tata Motors' emergence as front-runner to buy Jaguar and Land Rover from the ailing Ford brings one question uppermost to a commentator sitting at a wealthy Western desk: Precisely which economic sectors can be relied upon in the future to provide jobs for Westerners at wages higher than are obtainable in the Third World? Will there continue to be opportunities to improve Western living standards, or are those living standards destined to descend to some kind of population-weighted average between Boston and Benin?Tata is a typical and highly capable example of that new breed: the third world multinational company. Part of the multi-industry Tata Group, over a century old, from which it had access to both capital in its formative years and steel currently, it has established itself as the premier manufacturer of light trucks in India and as one of the top three automobile manufacturers. At the bottom of the market, it has announced plans to being out a 100,000 rupee (about $2,500 currently) automobile, which if successful will undercut its major competition by more than 30% and greatly expand the market for automobiles among the still impoverished Indian people.
Conventional Western business analysts have no problem with Tata manufacturing mini-cars for the Indian market, or indeed for developing country markets in Africa and elsewhere. They imagine that Tata is able to use its comparative advantage of cheaper labor to squeeze costs out of the manufacturing process, thus achieving what in the West would be an impossibly low price. They point knowingly to the expensive environmental features that the new automobile will lack, and imagine smugly that the it will be both tiny and of low quality, adequate for the noble impoverished of the Third World, but not seriously to be imagined as competition on the roads of London, New York or Stuttgart.
The announcement that Tata is to buy Land Rover and Jaguar has thus caused a considerable amount of cognitive dissonance. Land Rover and Jaguar are both icons of British automobile manufacture, hand crafted by generations of British skilled labor. Admittedly in the 1970s Jaguar's quality control became so poor that Jaguars rivaled the Moskvich or the Yugo for frequency of repairs, but since 1979 or so quality has improved and the marque has established a cherished if not particularly profitable niche among the luxury automobiles of the world. Moreover, would Western buyers shell out the substantial cost of a Jaguar if they knew it had been manufactured in India; after all, how could the quality be relied upon?
Such thinking betrays a limited understanding of modern automobile manufacturing. Fifty or eighty years ago, you could reasonably contrast mass produced automobiles such as the Ford Model T or the Morris Oxford with luxury automobiles such as Mercedes and Rolls Royce. The former were manufactured on assembly lines to relatively low tolerances, whereas the latter were hand built one by one, with parts being filed down to precision so that everything fit precisely. Mass produced automobiles rattled, luxury automobiles didn't; it was as simple as that.
With the advent of automated manufacturing, this distinction has disappeared. The only differences between a cheap automobile and a luxury automobile today are materials and gadgetry; the manufacturing process is the same. Both Mercedes and Ford are made by robots. The only exceptions are a few models such as Aston Martin and Maserati, where production volumes are so small that it's not worth buying a full set of robots, so highly skilled craftsmen remain cheaper.
In such a world, Tata is just as capable of manufacturing Jaguars as Ford; it can use the same computerized manufacturing techniques, merely substituting cheaper Indian labor for the expensive and recalcitrant British workforce. To the extent that expensive automobiles still require more labor than cheap ones, it is in such areas as finishing, skills that can quickly be learned by an intelligent and diligent Indian community. As for marketing, Tata will have a substantial domestic market among the emerging Indian wealthy, for whom British nostalgia still represents quality – a lingering and very valuable dividend from the Empire – while internationally it can either play down its national origin or start a marketing campaign based on the vast fleet of Jaguars no doubt owned by the Maharajah of Patiala in the 1930s. Design and research can through modern communications easily be subcontracted to Western boutiques, but after a few years' Indian experience with the marque there will be every possibility of carrying out those functions also using Indian labor.
In summary therefore, there is no sector of the automobile industry that cannot be mastered by an Indian manufacturer of adequate skill in modern manufacturing and inventive marketing. Since Indian labor costs less than a tenth of British, German or U.S. labor, it is likely if the ethos of globalization and free trade remains that after a moderate period of transition the vast majority of automobiles, cheap, mid-priced and expensive will be designed, manufactured and marketed from India, China or similar economies that retain large skilled workforces and relatively low wage rates.
The idea that, by subcontracting manufacturing to a low-wage-cost country, a wealthy country might be extinguishing its own business contravenes David Ricardo's 1817 Doctrine of Comparative Advantage. This states that every product should be manufactured in the country where its comparative costs of manufacture are lowest, and that both rich and poor countries gain from enabling this. However, Ricardo's theorem assumes a static world. In reality the world was not quite static even in 1817, and it has been growing progressively less static ever since.
In Ricardo's time, it might have taken a Third World manufacturer a couple of generations to acquire not only the manufacturing techniques but also the design, control and marketing know-how of its Western counterpart. Today however, with modern business education, widespread travel and ubiquitous communications, that process can be accomplished in well under a decade. Hence the calculus of comparative advantage changes quickly once outsourcing and technology transfer are undertaken, generally substantially to the disadvantage of the wealthier country's workforce.
The example of the automobile sector strongly suggests that there are few manufacturing businesses in which Western workforces are truly competitive in the long run. In some areas, such as pharmaceuticals, conventional wisdom has held that new drug advances come only from the well funded laboratories of the majors, or from entrepreneurial biotech companies that rely on the uniquely innovation-friendly California environment to thrive.
However companies such as the Indian Dr. Reddy's and the Eastern European Pliva and Richter Gedeon suggest that innovation can easily come from out-of-the-mainstream areas.
The belief in large research and development facilities may have been a 1950s fantasy; it is notable that Bell Laboratories, the quintessential such operation, has been progressively downsized and is now owned by the French Alcatel.
Nevertheless, the education facilities of advanced countries represent a huge physical and intellectual capital, which appears likely to continue paying dividends. Virtual communication across the Internet remains less effective than physical communication over a coffee in the Faculty Lounge, and this is unlikely to change. At the very sharp end of innovation therefore, it seems likely that the most skilled Westerners will continue to give their countries a comparative advantage against emerging markets. However, there is no guarantee that these research-intensive sectors are likely to support the entire Western population, far from it. They are highly cyclical, benefiting hugely from an active stock market and venture capital market. Further there is no evidence that innovation itself, as distinct from the fruits of recent past innovations, is significantly expanding as a percentage of output -- indeed, research expenditure has if anything declined.
A number of service sectors also seem likely to survive. Financial services, like Scotch whisky manufacture, require ample supplies of cheap capital, which would normally give an advantage to wealthier countries. That advantage has been squandered by the decade of excessively low interest rates worldwide, which both eliminated the comparative financing cost advantage of rich countries and forced their citizens' savings rates down to derisory levels. At this stage, the rich world's banking systems are in trouble while developing countries have piled up record levels of foreign exchange reserves. It thus seems likely that the financial services business will also migrate to cheap-labor markets, although possibly to a lesser extent than automobiles.
At the bottom of the scale, there are a wide range of services that are location dependent, so impossible to outsource. A haircut in Boston will be essentially identical to one in Bangalore, but will cost much more and employ a correspondingly better-paid barber. Construction by definition takes place where facilities are being constructed. Hotel and retail services are also location-dependent, hence can employ large numbers of low-skill workers in rich countries at wages far above those available in Africa.
Since the majority of location-dependent jobs in Western countries are low-skill it therefore follows that if governments wish to protect local living standards, they need to discourage low-skill immigration. Except in Japan, they have not been doing so; both in the EU and the United States low-skill immigration, frequently illegal immigration, has got completely out of control and is immiserating the working classes. The Economist and the Wall Street Journal calling for looser immigration laws are like Reform Bill-era Whig grandees calling for the workhouse; their urgings are theoretically driven by aristocratic concern for the poor, but in practice betray a complete lack of understanding of what the poor actually want and need.
From the summary above, it is pretty clear that income levels in the West are converging with those in the more competently run emerging markets. The bad news is that in the years ahead this is likely to happen through an absolute decline in Western living standards. The populations of India and China greatly exceed those of all the rich countries put together. Further, as discussed above, the greater part of Western economies is vulnerable to low-wage competition. Thus the economic histories of a high proportion of the Western population under 30, except the very highly skilled, will involve repeated bouts of unemployment, with job changes involving not a move to higher living standards but an angry acceptance of lower ones.
By 2030, it is possible that the median real income in the United States and Western Europe may be no more than 50-60% of its level today.
A number of factors will exacerbate this trend. High low-skill immigration will introduce domestic as well as international competition for low and medium skill jobs, thus quickening the decline in their wage levels. The gigantic baby factories of the poorest Third World countries will provide an ugly Malthusian competition at the very bottom, forcing living standards down still further.
Expansive governments will employ ever higher proportions of Western populations in unproductive ways, thus increasing exponentially the burden on their unfortunate taxpayers and quickening the exit of jobs.
The solution oddly enough lies among the very poorest countries, sub-Saharan Africa, Bangladesh and the worse run areas of Latin America. If their governance can be brought up to an acceptable standard, they too will participate as recipients in the outsourcing of Western industry. However in becoming richer they will inevitably reduce their rate of population growth, as well as increasing demand for Western luxury goods, a sector that seems likely to migrate only slowly to lower-wage countries. Once the world competes once again on a level playing field, with high quality education and infrastructure as available in Bangladesh as in Baltimore, and no gigantic surplus mob of the unskilled, living standards will begin to increase in tandem worldwide, with both the ex-rich countries and ex-poor countries benefiting. However, until the Malthusian pressure from low-end overpopulation is broken, that desirable point will not be reached.
Thus a combination of improving governance and population control at the very bottom and enlightened economic and social policy in rich countries could both raise world growth rates and slow the convergence of Western living standards with the Third World. This would lessen the drop in Western living standards that must occur before equilibrium has been reached. One is not optimistic however that enlightenment will win out.
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The Washington DC political process revealed October 23, 2002
Format:Hardcover
In 1992 Robert B. Reich joined his friend Governor Bill Clinton's Presidential election campaign. Dr. Reich intended to explore a new territory -- a nation where Government subsidized the training of young and displaced workers for modern *better* jobs. Upon President Clinton's election Dr. Reich was appointed Secretary of Labor, a Cabinet post that Dr. Reich held until after President Clinton's successful re-election. "Locked In The Cabinet" chronicles Dr. Reich's workers' advocacy.Dr. Reich was an able Labor Secretary with tangible accomplishments (e.g., a minimum wage increase and enactment of the Family and Medical Leave Act). He supported NAFTA while *strongly* advocating Federal subsidies to train new and displaced United States' workers -- ***better jobs for all Americans***.
"Locked ..." chronicles idealism, hard work, personal sacrifice, salesmanship, compromise and frustration. Dr. Reich brought his workers' agenda to Washington at a time when the poor and middle class had lost employment and real income for two decades. During his four years as Labor Secretary, Dr. Reich increasingly saw his workers' agenda tabled as other, more powerful constituencies (e.g., Wall Street and the military) got priority. Dr. Reich did not achieve his workers' agenda -- his agenda remains tabled today.
Dr. Reich is an *extremely* intelligent man and an able author. "Locked ..." is his story told with a sharp and depreciating wit. Dr. Reich's strong wit occasionally obscures his message: Continuity of Government is each Administration's goal and everybody must support the Administration, yet politics hinders 'team play' by dissecting, analyzing and criticizing *every utterance*. One day you are 'locked in'. If something happens the next day you are 'locked out'.
I believe that after his resignation Dr. Reich wrote "Locked In The Cabinet" to place his experiences in perspective. I highly recommend this serious book both for its wit and also for its important message.
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This is the Fight of Our Lives
by Bill Moyers
Keynote speech
Inequality Matters Forum
New York University
June 3, 2004http://www.commondreams.org/views04/0616-09.htm
"The middle class and working poor are told that what's happening to them is the consequence of Adam Smith's 'Invisible Hand.' This is a lie. What's happening to them is the direct consequence of corporate activism, intellectual propaganda, the rise of a religious orthodoxy that in its hunger for government subsidies has made an idol of power, and a string of political decisions favoring the powerful and the privileged who bought the political system right out from under us."
-- Bill Moyers, Keynote speech, June 3, 2004Excerpt:
You just can't make this stuff up. You have to hear it to believe it. This may be the first class war in history where the victims will die laughing.
But what they are doing to middle class and working Americans -- and to the workings of American democracy -- is no laughing matter. Go online and read the transcripts of Enron traders in the energy crisis four years ago, discussing how they were manipulating the California power market in telephone calls in which they gloat about ripping off "those poor grandmothers." Read how they talk about political contributions to politicians like "Kenny Boy" Lay's best friend George W. Bush. Go on line and read how Citigroup has been fined $70 Million for abuses in loans to low-income, high risk borrowers - the largest penalty ever imposed by the Federal Reserve. A few clicks later, you can find the story of how a subsidiary of the corporate computer giant NEC has been fined over $20 million after pleading guilty to corruption in a federal plan to bring Internet access to poor schools and libraries. And this, the story says, is just one piece of a nationwide scheme to rip off the government and the poor.
Let's face the reality: If ripping off the public trust; if distributing tax breaks to the wealthy at the expense of the poor; if driving the country into deficits deliberately to starve social benefits; if requiring states to balance their budgets on the backs of the poor; if squeezing the wages of workers until the labor force resembles a nation of serfs -- if this isn't class war, what is?
It's un-American. It's unpatriotic. And it's wrong.
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January 07, 2008
Tata Motors' emergence as front-runner to buy Jaguar and Land Rover from the ailing Ford brings one question uppermost to a commentator sitting at a wealthy Western desk: Precisely which economic sectors can be relied upon in the future to provide jobs for Westerners at wages higher than are obtainable in the Third World? Will there continue to be opportunities to improve Western living standards, or are those living standards destined to descend to some kind of population-weighted average between Boston and Benin?
Tata is a typical and highly capable example of that new breed: the third world multinational company. Part of the multi-industry Tata Group, over a century old, from which it had access to both capital in its formative years and steel currently, it has established itself as the premier manufacturer of light trucks in India and as one of the top three automobile manufacturers. At the bottom of the market, it has announced plans to being out a 100,000 rupee (about $2,500 currently) automobile, which if successful will undercut its major competition by more than 30% and greatly expand the market for automobiles among the still impoverished Indian people.
Conventional Western business analysts have no problem with Tata manufacturing mini-cars for the Indian market, or indeed for developing country markets in Africa and elsewhere. They imagine that Tata is able to use its comparative advantage of cheaper labor to squeeze costs out of the manufacturing process, thus achieving what in the West would be an impossibly low price. They point knowingly to the expensive environmental features that the new automobile will lack, and imagine smugly that the it will be both tiny and of low quality, adequate for the noble impoverished of the Third World, but not seriously to be imagined as competition on the roads of London, New York or Stuttgart.
The announcement that Tata is to buy Land Rover and Jaguar has thus caused a considerable amount of cognitive dissonance. Land Rover and Jaguar are both icons of British automobile manufacture, hand crafted by generations of British skilled labor. Admittedly in the 1970s Jaguar's quality control became so poor that Jaguars rivaled the Moskvich or the Yugo for frequency of repairs, but since 1979 or so quality has improved and the marque has established a cherished if not particularly profitable niche among the luxury automobiles of the world. Moreover, would Western buyers shell out the substantial cost of a Jaguar if they knew it had been manufactured in India; after all, how could the quality be relied upon?
Such thinking betrays a limited understanding of modern automobile manufacturing. Fifty or eighty years ago, you could reasonably contrast mass produced automobiles such as the Ford Model T or the Morris Oxford with luxury automobiles such as Mercedes and Rolls Royce. The former were manufactured on assembly lines to relatively low tolerances, whereas the latter were hand built one by one, with parts being filed down to precision so that everything fit precisely. Mass produced automobiles rattled, luxury automobiles didn't; it was as simple as that.
With the advent of automated manufacturing, this distinction has disappeared. The only differences between a cheap automobile and a luxury automobile today are materials and gadgetry; the manufacturing process is the same. Both Mercedes and Ford are made by robots. The only exceptions are a few models such as Aston Martin and Maserati, where production volumes are so small that it's not worth buying a full set of robots, so highly skilled craftsmen remain cheaper.
In such a world, Tata is just as capable of manufacturing Jaguars as Ford; it can use the same computerized manufacturing techniques, merely substituting cheaper Indian labor for the expensive and recalcitrant British workforce. To the extent that expensive automobiles still require more labor than cheap ones, it is in such areas as finishing, skills that can quickly be learned by an intelligent and diligent Indian community. As for marketing, Tata will have a substantial domestic market among the emerging Indian wealthy, for whom British nostalgia still represents quality – a lingering and very valuable dividend from the Empire – while internationally it can either play down its national origin or start a marketing campaign based on the vast fleet of Jaguars no doubt owned by the Maharajah of Patiala in the 1930s. Design and research can through modern communications easily be subcontracted to Western boutiques, but after a few years' Indian experience with the marque there will be every possibility of carrying out those functions also using Indian labor.
In summary therefore, there is no sector of the automobile industry that cannot be mastered by an Indian manufacturer of adequate skill in modern manufacturing and inventive marketing. Since Indian labor costs less than a tenth of British, German or U.S. labor, it is likely if the ethos of globalization and free trade remains that after a moderate period of transition the vast majority of automobiles, cheap, mid-priced and expensive will be designed, manufactured and marketed from India, China or similar economies that retain large skilled workforces and relatively low wage rates.
The idea that, by subcontracting manufacturing to a low-wage-cost country, a wealthy country might be extinguishing its own business contravenes David Ricardo's 1817 Doctrine of Comparative Advantage. This states that every product should be manufactured in the country where its comparative costs of manufacture are lowest, and that both rich and poor countries gain from enabling this. However, Ricardo's theorem assumes a static world. In reality the world was not quite static even in 1817, and it has been growing progressively less static ever since.
In Ricardo's time, it might have taken a Third World manufacturer a couple of generations to acquire not only the manufacturing techniques but also the design, control and marketing know-how of its Western counterpart. Today however, with modern business education, widespread travel and ubiquitous communications, that process can be accomplished in well under a decade. Hence the calculus of comparative advantage changes quickly once outsourcing and technology transfer are undertaken, generally substantially to the disadvantage of the wealthier country's workforce.
The example of the automobile sector strongly suggests that there are few manufacturing businesses in which Western workforces are truly competitive in the long run. In some areas, such as pharmaceuticals, conventional wisdom has held that new drug advances come only from the well funded laboratories of the majors, or from entrepreneurial biotech companies that rely on the uniquely innovation-friendly California environment to thrive.
However companies such as the Indian Dr. Reddy's and the Eastern European Pliva and Richter Gedeon suggest that innovation can easily come from out-of-the-mainstream areas.
The belief in large research and development facilities may have been a 1950s fantasy; it is notable that Bell Laboratories, the quintessential such operation, has been progressively downsized and is now owned by the French Alcatel.
Nevertheless, the education facilities of advanced countries represent a huge physical and intellectual capital, which appears likely to continue paying dividends. Virtual communication across the Internet remains less effective than physical communication over a coffee in the Faculty Lounge, and this is unlikely to change. At the very sharp end of innovation therefore, it seems likely that the most skilled Westerners will continue to give their countries a comparative advantage against emerging markets. However, there is no guarantee that these research-intensive sectors are likely to support the entire Western population, far from it. They are highly cyclical, benefiting hugely from an active stock market and venture capital market. Further there is no evidence that innovation itself, as distinct from the fruits of recent past innovations, is significantly expanding as a percentage of output -- indeed, research expenditure has if anything declined.
A number of service sectors also seem likely to survive. Financial services, like Scotch whisky manufacture, require ample supplies of cheap capital, which would normally give an advantage to wealthier countries. That advantage has been squandered by the decade of excessively low interest rates worldwide, which both eliminated the comparative financing cost advantage of rich countries and forced their citizens' savings rates down to derisory levels. At this stage, the rich world's banking systems are in trouble while developing countries have piled up record levels of foreign exchange reserves. It thus seems likely that the financial services business will also migrate to cheap-labor markets, although possibly to a lesser extent than automobiles.
At the bottom of the scale, there are a wide range of services that are location dependent, so impossible to outsource. A haircut in Boston will be essentially identical to one in Bangalore, but will cost much more and employ a correspondingly better-paid barber. Construction by definition takes place where facilities are being constructed. Hotel and retail services are also location-dependent, hence can employ large numbers of low-skill workers in rich countries at wages far above those available in Africa.
Since the majority of location-dependent jobs in Western countries are low-skill it therefore follows that if governments wish to protect local living standards, they need to discourage low-skill immigration. Except in Japan, they have not been doing so; both in the EU and the United States low-skill immigration, frequently illegal immigration, has got completely out of control and is immiserating the working classes. The Economist and the Wall Street Journal calling for looser immigration laws are like Reform Bill-era Whig grandees calling for the workhouse; their urgings are theoretically driven by aristocratic concern for the poor, but in practice betray a complete lack of understanding of what the poor actually want and need.
From the summary above, it is pretty clear that income levels in the West are converging with those in the more competently run emerging markets. The bad news is that in the years ahead this is likely to happen through an absolute decline in Western living standards. The populations of India and China greatly exceed those of all the rich countries put together. Further, as discussed above, the greater part of Western economies is vulnerable to low-wage competition. Thus the economic histories of a high proportion of the Western population under 30, except the very highly skilled, will involve repeated bouts of unemployment, with job changes involving not a move to higher living standards but an angry acceptance of lower ones.
By 2030, it is possible that the median real income in the United States and Western Europe may be no more than 50-60% of its level today.
A number of factors will exacerbate this trend. High low-skill immigration will introduce domestic as well as international competition for low and medium skill jobs, thus quickening the decline in their wage levels. The gigantic baby factories of the poorest Third World countries will provide an ugly Malthusian competition at the very bottom, forcing living standards down still further.
Expansive governments will employ ever higher proportions of Western populations in unproductive ways, thus increasing exponentially the burden on their unfortunate taxpayers and quickening the exit of jobs.
The solution oddly enough lies among the very poorest countries, sub-Saharan Africa, Bangladesh and the worse run areas of Latin America. If their governance can be brought up to an acceptable standard, they too will participate as recipients in the outsourcing of Western industry. However in becoming richer they will inevitably reduce their rate of population growth, as well as increasing demand for Western luxury goods, a sector that seems likely to migrate only slowly to lower-wage countries. Once the world competes once again on a level playing field, with high quality education and infrastructure as available in Bangladesh as in Baltimore, and no gigantic surplus mob of the unskilled, living standards will begin to increase in tandem worldwide, with both the ex-rich countries and ex-poor countries benefiting. However, until the Malthusian pressure from low-end overpopulation is broken, that desirable point will not be reached.
Thus a combination of improving governance and population control at the very bottom and enlightened economic and social policy in rich countries could both raise world growth rates and slow the convergence of Western living standards with the Third World. This would lessen the drop in Western living standards that must occur before equilibrium has been reached. One is not optimistic however that enlightenment will win out.
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