And, as you might imagine, manages to get it really rather wrong.
He then says:
Productivity has risen because capital has sought out the cheapest labour possible to substitute for that bought in the US. That cheap labour – mainly Chinese in the US case – has forced down US labour rates. But the return to capital has grown enormously – reflected in the supposed productivity curve, which does actually reflect substitution of labour.
So, labour is much worse off as a result of free trade where capital can move and labour cannot.
Well, no, his chart does not show that labour is much worse off. It shows that of the gains which that capital mobility seems to have encouraged, much of the gains have gone to capital. Not all of them, but much of them.
And, if we sidestep the known problems with US income statistics (household size has declined substantially over those decades, something not accounted for, meaning that income per person in the household has risen much more strongly than shown. Further, that the real hourly wages are cash compensation, not total compensation. Leaving out, crucially, medical insurance which is a substantial and major (and rising!) portion of total US labour compensation) we might leave it at that.
Mobility of capital is a bad thing for the labour in the places where the capital mobilises from.
But should we leave it like that? No, actually, we shouldn\’t.
What else has happened over that same time period?
World poverty is falling. Between 1970 and 2006, the global poverty rate has been cut by nearly three quarters. The percentage of the world population living on less than $1 a day (in PPP-adjusted 2000 dollars) went from 26.8% in 1970 to 5.4% in 2006 (Figure 1).
The mobility of capital seems to be hugely beneficial to those people in places where the capital moves to.
So, which should we be rooting for? That globalisation means that the hard working labourers in our own country/ies don\’t get much of the benefit but that the poorest of the poor are brought up out of destitution in the greatest reduction of poverty in the history of our species?
Me, I\’ll go for the latter really.
But, there\’s one more thing!
A really rather important thing. Ritchie is assuming that capital has in fact left the US over this time period. Which is an interesting question: has it in fact done so?
Recall our basic stuff about trade economics. The balance of payments. If you run a trade deficit you must, by definition, be running a capital surplus. That is, that the balance must balance.Conversely, still in order to balance, if you are exporting capital, in aggregate, you must also be running a trade surplus.
So, what has the US trade balance been over this period? For that will be the inverse of the capital account.
Hmm. What\’s that? The US trade balance has been in deficit since 1976 you say? That thus the US has been importing capital since 1976, definitionally?
That capital hasn\’t in fact left the US? Has, in fact, entered the US?
All of which really rather leaves Ritchie\’s argument in something of a mess. There hasn\’t been the capital flight which he assumes has led to the reduction in labour wages, he\’s grossly overstating said reduction (apologies, failure to rise) of such wages and finally, even if everything he said were in fact true it does seem a really rather national form of socialism to insist that the poorest of the poor foreigners getting richer is a bad idea if the incomes of the richest, but \”our\”, \”national\”, working class on the planet only rise slowly as a result.
My favouritest part of the whole thing though?
But they also have no innovation of investment base left either. Free riding the system has left them financially, intellectually, and socially bankrupt. France and especially Germany took a different route. And it’s paying dividends.
Germany has been running trade surpluses over these decades, meaning that Germany really has been exporting capital over these decades. And yet, Germany is used as the example of how much better things would be if the US hadn\’t been exporting capital (which it wasn\’t anyway).
Me, I put all this confusion down to the fact that Ritchie doesn\’t in fact know enough economics to realise that the balance of payments must balance.