16 Sep 2020

The middle class pays for globalisation - Jeff Rubin

From Afternoons with Jesse Mulligan, 3:10 pm on 16 September 2020

The pandemic may bring a silver lining for the dwindling and economically-pressured middle-classes as economies are forced to become more self-sufficient, a top economist says.

Canadian economist Jeff Rubin' new book The Expendables: How the Middle Class Got Screwed by Globalization discusses how free market economics has been destroying the status of the middle-class while creating huge profits for corporations.

No caption

Photo: AFP / FILE

The expendables have paid the price for global supply chains that have catered for the interests of global elites while destroying their economic security and suppressed wages, he says.

Covid however has served to expose the nature of this relationship and could mainstream the idea that nation states need to be more economically self-sufficient to avoid being held to ransom by an economic model that couldn't even provide life-saving respirator masks during the emergency health response.

The 'expendables' have been sacrificed to the free market for decades, he says.

“They’re middle-class households, maybe went on a vacation, maybe put a little money away for the kids’ education. They’re becoming a rare and dying breed, at least in the OECD countries like New Zealand, Australia, Canada, the US, the UK, Germany.

“Not only are they a shrinking percentage of the population – and for the first time in North America they are no longer the majority – but they are also a shrinking percentage of the economy and household spending.”

He points out that in 1980 the middle-class accounted for 80 percent of household spending in the US. Today that figure is less than 60 percent. Seventy percent of baby-boomer are middle-class, while only Generation X and Z are less than 50 percent.

Middle-class incomes are also down, with people making one-fifth of the income gains they were making a decade ago. These people are falling into the category of the working poor. One in seven do so every four years, he says.

“When you fall out of the ranks of the middle-class, chances are, you’re not coming back.”

Moving high-quality and industrial jobs offshore has accounted for much of this trend.

“I think the most important single factor in the disappearance of the working-class in all of these countries, is the type of jobs those countries produce today – and perhaps more importantly, the type of jobs those countries no longer produce.

“In the hay day of the middle-class, the 50s, the 1960s, what happened was the middle-class workers produced the very things that they consumed.”

These products, including cars, fridges and washing machines, are no longer produced in their countries and the cheaper products imported back in are then out of reach of many workers because their spending capacity has been reduced in the process.

“Products instead are made through global supply chains in countries where wages are one tenth of what’s paid in OECD countries.

“That’s why we’ve seen one of the greatest mass migration of industrial manufacturing jobs to countries like China and Mexico. There have been lots of jobs created in countries like Australia and New Zealand, but they’ve virtually all been on the service side of the economy.”

The big winners from globalisation have really been the top 1 percent, he says. As a former economist for a major US corporate, he can see the cold logic of using an overseas manufacturing base to make profit, but also acknowledges the political and social consequences of doing so.

“I understand why shareholders would want to pay $1.50 per hour at a plant in Shanghai as opposed to the Californian minimum wage. But understand that when everybody does this a whole lot of people get left behind and when people get left behind they respond… These are the conditions that have led populist movements.”

The myths of the capitalist ‘free’ market, such as efficiency and job opportunities for all, the usefulness of Gross Domestic Product (GDP) as a measure wealth and economic health of a nation, have all been challenged by the Covid pandemic, Rubin says.

“I think there may be a silver lining here for the expendables, because I think what Covid-19 demonstrated was all the fallacies that we have come to accept about globalisation - that not only was globalisation beneficial, but perhaps more importantly inevitable.

“Globalisation doesn’t look so inevitable anymore. When you desperately needed global supply chains to provide you with an N95 respirator mask, or a ventilator, those supply chains failed you. Just in time, became ‘just too late.’

He points out Canadian and US companies based in China couldn’t get life-saving equipment out of factories there because these factories were commandeered by Chinese officials.

Jeff Rubin

Jeff Rubin Photo: Supplied

“So, if you really wanted your population to have life-saving goods you better make damn sure that you produce them yourself and in fact President Trump, using war-time measures authority ordered GM and Ford to turn mothballed auto-plants in Michigan into producing ventilators, much like in World War II when Ford produced bombers for the US Defence Department.”

Rubin thinks this is a turning point, because up until now calls for economic self-sufficiency has been pretty much restricted to the populous right, in Donald Trump, or the populous left, Bernie Sanders, who were basically reading from the same page on trade.

“Now I think the need for economic self-sufficiency and the need to protect yourself from the vagaries of global supply chains has gone mainstream and that may be a more formidable obstacle to globalists and their hopes of resurrecting those supply chains, than the popularist movement in the most protectionist president in the post-war period.”

He says Democratic Bernie Sanders would have taken the same protectionist approach had he not been side-lined by the party machine to make way for the less-than-popular Hillary Clinton.

“What’s changed is the whole critique of globalisation has gone mainstream, because Covid-19 has really opened our eyes to the reality of global supply chains.”

He says any restriction on free trade will lower GDP, but he says GDP is irrelevant unless it has a tangible effect on ordinary citizens in any country.

“My point is ‘why should I care?’ GDP has done fine, it is the real incomes of middle-class families that have not. In other words, the 1 percent to 5 percent of the population that have engorged themselves of all the spoils of GDP growth and while in theory, you could say that everybody would be better off with a bigger GDP because the gains to the winners could be redistributed to the losers, that’s not the way it’s actually worked out. The opposite has worked out.”

The reason that has been the case is that, when governments have tried to redistribute wealth using progressive taxation and other schemes, the mobility of capital allows corporates to hold nation states at ransom, threatening to relocate, with a loss in investment and jobs, if these policies are put in place, he says.

This poses a threat to GDP, but again, it doesn’t pose a threat to workers who don’t benefit from it in the first instance.

“If I’m a minimal wage earner 100 percent of my wage income is taxed. In my country if I’m a billionaire only 50 percent of capital gains is taxed. To me that’s a huge inequity…

“But yes, any call for a capital gains tax – and my country is the only G7 country that doesn’t have an inheritance tax – the immediate response will be that this will drive investment and production away… because capital is free to move. That’s what the ‘free’ in free trade really means.”

Open borders and immigration are also matters now being scrutinised as something particularly beneficial to corporate giants and exploitative oligarchs, where more strict immigration laws are not just the result of racism and xenophobia.

The exploitation of cheap labour means wages for unskilled workers can be driven down well below a liveable wage. Rubin says industrial plutocrats have been particularly supportive of open border policies, while trade unions and leftists like Bernie Sanders have taken a different view.

“There’s a reason why business organisations are pro-immigration, because it’s a source of cheap labour and historically immigrants have had an adverse impact on domestic wages. Not the domestic wages of doctors and lawyers, but those of unskilled workers.”

Rubin says there needs to be a better balance between the interests of GM’s shareholders and the company’s American workers, as there needs to be with all corporates and those workforces. The balance he says, was destroyed completely by the North American Free Trade Agreement.

Nafta was signed by Canada, Mexico, and the United States that created a trilateral trade bloc in North America, coming into effect in 1994.

He says the astronomical increase in profits by US corporates in recent years has dovetailed with the impoverishment of US workers and if inequality isn’t addressed, the situation will get worse.

Covid however, may now have positive effect in driving a new political economy acknowledging the destructive limitations of the corporate model that sees growth of GDP as the ultimate goal of economic policy.

“By reversing the trends in globalisation. By severing the global supply chains and by bringing back production of manufacturing jobs that we thought were gone forever, we just might see a silver lining for the expendables. Because, when you bring back production, you all of a sudden pay local wages and there’s no longer the threat of offshoring them to some sweat shop on the other side of the world.”

Get the RNZ app

for easy access to all your favourite programmes

Subscribe to Afternoons with Jesse Mulligan

Podcast (MP3) Oggcast (Vorbis)