Saturday, November 6, 2010

Globalization is destroying the American Dream

Globalization is a great idea--with modern technology reducing the barriers to trade and commerce between regions and countries allowing economies to take advantage of whatever uniqueness and efficiencies those areas can contribute. But for the U.S. the current picture of globalization is driven by the "efficency" of lower labor costs. Wages/labor costs are unique in that they represent two conflicting elements in business models--as a cost they raises the price of a product, as a wage they represent potential demand. Keeping that relationship in balance is crucial to a vibrant economy. Before the advent of modern technology a company/corporation had an investment in it's region/country. It was in a relatively closed market for both labor and consumption with, in fact, the labor as consumer. So it was in the best interest of a company to maintain some adequate wage level so that it could sell its products. And, in a related way, the taxes that an entity paid went into the local economy and had a long term benefit for the taxpayer. With the advent of modern technology and the consequent reduction in barriers to globalization a company/corporation was no longer in a closed market. That relationship of labor as consumer was broken and those corporate entities were no longer tied to a region/country. As a multinational corporation it could sell enough product worldwide so that it no longer had an investment in the wage level of any particular region and,in fact, sought the cheapest labor available. The consequence was that as wages went down so did prices and/or profit margins increased. And in the short term as those prices went down more product was sold. But the long term effect was that as wages went down so did demand--as wages represent the ability to buy any product. But is wasn't just a reduction in wages, it was a wholesale migration of jobs to those areas offerring lower wages. As wages represent demand the lowering of wages represents a lowering of demand and lost jobs meant the complete loss of demand.( A recent analysis by EPI indicated that the U.S. has a deficit of 11,000,000 jobs caused by these recession.) The U.S. responded to this loss by racheting up debt and establishing asset bubbles which has ultimately resulted in our current situation.
A major point  in conservative business philosophy is to reduce the power of labor and reduce the wage level.  As indicated this can result in short term profitability but damages the long term economic health of any country. But, as also indicated, multinationals are no longer tied to any countries economic health.
The relationship between wages, taxes, regulation, productivity is a complex interactive one and this is a pretty simplistic model but when you support conservatives you support this model.