IMF Blames Fall of Middle Class on Globalization and Technology

This sort of orthodoxy-reinforing narrative is deeply frustrating, particularly since the research side of the IMF, unlike the program side, often does very good work.

One of the big problem of reports like this is they never consider the question that income distribution is a function of political and social arrangements, and in particular, the rights of capital versus labor. It is hardly an accident that labor stopped sharing in the benefits of productivity gains in the mid 1970s, well before globalization and technology would have played much of a role. The big culprit was loss of labor bargaining power, which become official policy due to Volcker committing the Fed to creating more labor slack to keep inflation as close to his preferred target of zero as possible, and the Reagan/Thatcher “free market” fetish.

Now in fairness, some of the problems with a report like this are the difficulty of unpacking critical issues. For instance, as we’ve discussed regularly, the amount of offshoring of jobs that took place was considerably more than was justified by profit concerns. Direct factory labor is a small percentage of wholesale product cost; savings there are offset by greater managerial, finance, and transport costs, plus higher risks. In others words, offshoring and outsourcing are often, if not mainly, a transfer from low level workers to management rather than a bona-fide plus to the business. So while it is narrowly correct to say that globalization has been a big driver of middle class losses, analyses like that are misleading because they focus on proximate causes, not ultimate causes.

This report also misses another increasingly recognized driver of inequality, which is the lack of anti-trust enforcement which in turns leads to monopoly and oligopoly rent extraction. And it ignores a huge transfer from ordinary citizens to the capital-owning classes via subsidies. The banking industry is a huge example, where as we’ve written repeatedly, its operations are purely extractive (the cost of periodic crises greatly exceeds the value of the enterprises) and it enjoys such large subsidies that it should not be regarded as private enterprise. Banks should be regulated as utilities.

Similarly, an op ed in Links today describes the magnitude of subsidies extracted by WalMart: roughly $50 per American household per year. That is equivalent to 1/4 of its 2014 pre-tax profits, and an even higher percentage of its US pretax profits.

Read the entire article