-Caveat Lector- from: http://www.washingtonpost.com/wp-srv/style/longterm/books/chap1/returnofdepres sioneconomics.htm <A HREF="http://www.washingtonpost.com/wp-srv/style/longterm/books/chap1/returnof depressioneconomics.htm">Books & Reading: Chapter One</A> ----- The Return of Depression Economics By Paul Krugman W.W. Norton. 176 pp. $23.95 Chapter One: July 1, 1997 Compare prices for this book Find local bookstores More book shopping Save money with NextCard Visa Hong Kong's elite may have been sleeping off the festivities of the previous night; but there was no break for the construction crews working frantically on Hong Kong's grandiose new convention center, trying to finish it in time to accommodate the annual joint meeting of the International Monetary Fund and the World Bank. Hosting this meeting—a pompous affair that attracts thousands of well-heeled camp followers, from industrialists to investment analysts—was a proud moment for Hong Kong: it symbolized the economic success not only of the city itself but of China and indeed of Asia as a whole. Overlooking the construction site was a sleek modern tower, the New World Harbor Hotel. Inevitably, some of its guests rechristened it the New World Order Hotel. How could they resist? The speechwriter who had George Bush proclaim that New World Order, oblivious to the Hitlerian echoes, may have had a tin ear. Yet he did have a point: truly, the world of the 1990s was one that would hardly have seemed possible even a few years earlier. Consider, for example, what happened (or more precisely what didn't happen) in the first few minutes of that July day, when Hong Kong itself was finally returned to Chinese rule—as a "Special Autonomous Region," to be sure, yet nonetheless finally and irrevocably a part of the People's Republic. Was anyone concerned? Well, some people worried that the handover would eventually lead to an erosion of civil liberties in the city-state; but nobody worried that Beijing was about to impose socialism. On the contrary, while China might have occupied Hong Kong, ideologically Hong Kong had conquered China: a government that had once sent anyone suspected of bourgeois attitudes to hard labor in the countryside was now dedicated to Deng Xiaoping's creed that "to grow rich is glorious." And as a result, the transfer of power that day seemed to proclaim the triumph not of socialism but of capitalism—a system so successful, so dominant, that even the People's Army posed no threat to business as usual. Nobody knew it at the time, but the summer of 1997 would turn out to have been a sort of high-water mark for the New World Order. Capitalism's successes were not as solid as they seemed; over the next eighteen months a series of financial disasters would put much of the world's prosperity at risk and raise again some old questions about a system that relies on the invisible hand to direct private interest to public ends. But let us forget for a while about the hard lessons soon to be learned, and look at the world as it seemed to be on that day in July. Capitalism Triumphant This is a book about economics; but economics inevitably takes place in a political context, and one cannot understand the world as it appeared in that golden summer without considering the fundamental political fact of the 1990s: the collapse of socialism, not merely as a ruling ideology, but as an idea with the power to move men's minds. That collapse began, rather oddly, in China. It is still mind-boggling to realize that Deng Xiaoping launched his nation on what turned out to be the road to capitalism in 1978, only three years after the Communist victory in Vietnam, only two years after the internal defeat of radical Maoists who wanted to resume the Cultural Revolution. Probably Deng did not fully realize how far that road would lead; certainly it took the rest of the world a long time to grasp that a billion people had quietly abandoned Marxism. In fact, as late as the early 1990s China's transformation had failed fully to register with the chattering classes; in the best-sellers of the time, the world economy was an arena for "head to head" struggle between Europe, America, and Japan—China was thought of, if at all, as a subsidiary player, perhaps part of an emerging yen bloc. Nonetheless, everyone realized that something had changed, and that "something" was the collapse of the Soviet Union. Nobody really understands what happened to the Soviet regime. With the benefit of hindsight we now think of the whole structure as a sort of ramshackle affair, doomed to eventual failure. Yet this was a regime that had maintained its grip through civil war and famine, that had been able against terrible odds to defeat Germany's original New Order, that was able to mobilize the scientific and industrial resources to contest America's nuclear superiority. How it could have ended so suddenly, not with a bang but with a whimper, should be regarded as one of the great puzzles of political economy. Maybe it was simply a matter of time—it seems that revolutionary fervor, above all the willingness to murder your opponents in the name of the greater good, cannot last more than a couple of generations. Or maybe the regime was gradually undermined by the stubborn refusal of capitalism to display the proper degree of decadence: I have a private theory, based on no evidence whatsoever, that the rise of Asia subtly but deeply demoralized the Soviet regime, by making its claim to have history on its side ever less plausible. A nasty, unwinnable war in Afghanistan certainly helped the process along, as did the evident inability of Soviet industry to match Ronald Reagan's arms buildup. But never mind: whatever the reasons, in 1989 the Soviet empire in Eastern Europe suddenly unraveled, and in 1991 so did the Soviet Union itself. The effects of that unraveling were felt around the world, in ways obvious and subtle. And all of the effects were favorable to the political and ideological dominance of capitalism. First of all, of course, several hundred million people who had lived under Marxist regimes suddenly became citizens of states prepared to give markets a chance. Somewhat surprisingly, however, this has in some ways turned out to be the least important consequence of the Soviet collapse. Contrary to what most people expected, the "transition economies" of Eastern Europe did not quickly become a major force in the world market, or a favored destination for foreign investment. On the contrary, for the most part they had a very hard time making the transition: East Germany, for example, has become Germany's equivalent of Italy's Mezzogiorno, a permanently depressed region that is a continual source of social and fiscal concern. Only now, a decade after the fall of Communism, are a few countries—Poland, Estonia, the Czech Republic—starting to look like success stories. And Russia itself has not only failed to make a convincing transition to the market; by borrowing substantial sums, in effect with its decaying nuclear arsenal as collateral, it has managed to turn itself into a surprisingly powerful source of financial instability for the rest of the world. But let's reserve that story for Chapter 7. Another direct effect of the collapse of the Soviet regime was that other governments that had relied on its largesse were now on their own. Since some of these states had been idealized and idolized by opponents of capitalism, their sudden poverty—and the corresponding revelation of their previous dependency—helped to undermine the legitimacy of all such movements. When Cuba seemed a heroic nation, standing alone with clenched fist confronting the United States, it was an attractive symbol for revolutionaries across Latin America—far more attractive, of course, than the gray bureaucrats of Moscow. The shabbiness of post-Soviet Cuba is not only disillusioning in itself; it makes painfully clear that the heroic stance of the past was possible only because of huge subsidies from those very bureaucrats. Similarly, until the 1990s North Korea's government, for all its ghastliness, held a certain mystique for radicals, particularly among South Korean students. With its population literally starving because it no longer receives Soviet aid, the thrill is gone. Yet another more or less direct effect of Soviet collapse was the disappearance of the many radical movements that, whatever their claims to represent a purer revolutionary spirit, were in fact able to operate only because Moscow provided the weapons, the training camps, and the money. Europeans like to point out that the radical terrorists of the seventies and eighties—Baader—Meinhof in Germany, the Red Army Brigades in Italy—all claimed to be true Marxists, unconnected with the corrupt old Communists in Russia. Yet we now know that they were deeply dependent on Soviet-bloc aid, and as soon as that aid vanished, so did the movements. Most of all, the humiliating failure of the Soviet Union destroyed the socialist dream. For a century and a half the idea of socialism—from each according to his abilities, to each according to his needs—served as an intellectual focal point for those who disliked the hand the market dealt them. Nationalist leaders invoked socialist ideals as they blocked foreign investment or repudiated foreign debts; labor unions used the rhetoric of socialism as they demanded higher wages; even businessmen appealed to vaguely socialist principles when demanding tariffs or subsidies. And those governments that nonetheless embraced more or less free markets did so cautiously, a bit shamefacedly, because they always feared that too total a commitment to letting markets have their way would be seen as a brutal, inhumane, anti-social policy. But who can now use the words of socialism with a straight face? As a member of the baby boomer generation, I can remember when the idea of revolution, of brave men pushing history forward, had a certain glamour. Now it is a sick joke: after all the purges and gulags, Russia is as backward and corrupt as ever; after all the Great Leaps and Cultural Revolutions, China has decided that making money is the highest good. There are still radical leftists out there, who stubbornly claim that true socialism has not yet been tried; and there are still moderate leftists, who claim with more justification that one can reject Marxist-Leninism without necessarily becoming a disciple of Milton Friedman. But the truth is that the heart has gone out of the opposition to capitalism. And that is the essence of the New World Order. For the first time since 1917, we live in a world in which property rights and free markets are viewed as fundamental principles, not grudging expedients; where the unpleasant aspects of a market system—inequality, unemployment, injustice—are accepted as facts of life. As in the Victorian era, capitalism is secure not only because of its successes—which, as we will see in a moment, have been very real—but because nobody has a plausible alternative. This situation will not last forever. Surely there will be other ideologies, other dreams; and they will emerge sooner rather than later if the Great Recession persists and deepens. But in that glorious summer of 1997 capitalism, for the first time in eighty years, ruled the world unchallenged. The Taming of the Business Cycle The great enemies of capitalist stability have always been war and depression. What George Bush—who, to his misfortune, never had much interest in economics—really meant by the New World Order was not so much the triumph of capitalism as the supposed emergence, after the 1991 Gulf War, of an international system that would prevent future wars. Tell it to the Bosnians or the Rwandans. But the collapse of the Soviet Union did leave the United States with such an overwhelming monopoly of military power that it is hard to see how a major war could erupt in the foreseeable future. What about depression? The Great Depression came pretty close to destroying both capitalism and democracy, and led more or less directly to war. It was followed, however, by a generation of sustained growth in the industrial world, during which recessions were short and mild, recoveries strong and sustained. By the late 1960s the United States had gone so long without a recession that economists were holding conferences with titles like "Is the Business Cycle Obsolete?" The question was premature: the 1970s were the decade of "stagflation," economic slump and inflation combined; and as I mentioned in the introduction, the two energy crises of 1973 and 1979 were followed by the worst recessions since the 1930s. But by the 1990s the question was being asked again; as unemployment fell year after year, as stock prices seemed to rise without limit, more and more pundits declared that we had indeed entered a new age of economic stability. In that golden July of 1997 Foreign Affairs published an article entitled "The End of the Business Cycle?" whose conclusion basically dropped the question mark. To much greater fanfare, in the same month Wired published Peter Schwartz and Peter Leyden's enthusiastic "The Long Boom: A History of the Future." Neither article, if read closely, claimed that the future would be free from occasional setbacks; but both did claim that the days of really severe recessions, let alone worldwide depressions, were behind us. How would you make up your mind about something like that, other than by noticing that the economy has not had a major recession lately? To answer that question we need to make a digression into theory and ask ourselves what the business cycle is all about in the first place. In particular, why do market economies experience recessions? Whatever you do, don't say that the answer is obvious—that recessions occur because of X, where X is the prejudice of your choice. The truth is that if you think about it—especially if you understand and generally believe in the idea that markets usually manage to match supply and demand—a recession is a very peculiar thing indeed. For during an economic slump, especially a severe one, supply seems to be everywhere and demand nowhere. There are willing workers but not enough jobs, perfectly good factories but not enough orders, open shops but not enough customers. It's easy enough to see how there can be a shortfall of demand for some goods: if manufacturers produce a lot of Beanie Babies, but it turns out that consumers want Furbys instead, some of those Beanie Babies may go unsold. But how can there be too little demand for goods in general? Don't people have to spend their money on something? Part of the problem people have in talking sensibly about recessions is that it is hard to picture what is going on during a slump, to reduce it to a human scale. But I have a favorite story that I like to use, both to explain what recessions are all about and as an "intuition pump" for my own thought. (Readers of my earlier books have heard this one before.) It is a true story, although in Chapter 41 will use an imaginary elaboration to try to make sense of Japan's malaise. The story is told in an article by Joan and Richard Sweeney, published in 1978 under the title "Monetary Theory and the Great Capitol Hill Baby-sitting Co-op Crisis." Don't recoil at the title: this is serious. During the 1970s the Sweeneys were members of, surprise, a baby-sitting cooperative: an association of young couples, in this case mainly people with congressional jobs, who were willing to baby-sit each other's children. This particular co-op was unusually large, about 150 couples, which meant that there were plenty of potential baby-sitters, but also that managing the organization—especially making sure that each couple did its fair share—was not a trivial matter. Like many such institutions (and other barter schemes), the Capitol Hill co-op dealt with the problem by issuing scrip: coupons entitling the bearer to one hour of baby-sitting. When babies were sat, the baby-sitters would receive the appropriate number of coupons from the baby-sittees. This system was, by construction, shirkproof: it automatically ensured that over time each couple would provide exactly as many hours of baby-sitting as it received. But it was not quite that simple. It turns out that such a system requires a fair amount of scrip in circulation. Couples with several free evenings in a row, and no immediate plans to go out, would try to accumulate reserves for the future; this accumulation would be matched by the running down of other couples' reserves, but over time each couple would on the average probably want to hold enough coupons to go out several times between bouts of baby-sitting. The issuance of coupons in the Capitol Hill co-op was a complicated affair: couples received coupons on joining, were supposed to repay them on leaving, but also paid dues in baby-sitting coupons that were used to pay officers, and so on. The details aren't important; the point is that there came a time wh en relatively few coupons were in circulation—too few, in fact, to meet the co-op's needs. The result was peculiar. Couples who felt their reserves of coupons to be insufficient were anxious to baby-sit and reluctant to go out. But one couple's decision to go out was another's opportunity to baby-sit; so opportunities to baby-sit became hard to find, making couples even more reluctant to use their reserves except on special occasions, which made baby-sitting opportunities even scarcer ... In short, the co-op went into a recession. Okay, time out. How do you react to being told this story? If you are baffled—wasn't this supposed to be a book about the world economic crisis, not about child care?—you have missed the point. The only way to make sense of any complex system, be it global weather or the global economy, is to work with models—simplified representations of that system which you hope help you understand how it works. Sometimes models consist of systems of equations, sometimes of computer programs (like the simulations that give you your daily weather forecast); but sometimes they are like the model airplanes that designers test in wind tunnels, small-scale versions of the real thing that are more accessible to observation and experiment. The Capitol Hill Baby-sitting Co-op was a miniature economy; it was indeed just about the smallest economy capable of having a recession. But what it experienced was a real recession, just as the lift generated by a model airplane's wings is real lift; and just as the behavior of that model can give designers valuable insights into how a jumbo jet will perform, the ups and downs of the co-op can give us crucial insights into why full-scale economies succeed or fail. If you are not so much puzzled as offended—we're supposed to be discussing important issues here, and instead you are being told cute little parables about Washington yuppies—shame on you. Remember what I said in the introduction: whimsicality, a willingness to play with ideas, is not merely entertaining but essential in times like these. Never trust an aircraft designer who refuses to play with model airplanes, and never trust an economic pundit who refuses to play with model economies. As it happens, the tale of the baby-sitting co-op will turn out to be a powerful tool for understanding the not at all whimsical problems of real-world economies. The theoretical models economists use, mainly mathematical constructs, often sound far more complicated than this; but usually their lessons can be translated into simple parables like that of the Capitol Hill co-op (and if they can't, often this is a sign that something is wrong with the model). I will end up returning to the baby-sitting story several times in this book, in a variety of contexts. For now, however, let's consider two crucial implications of the story: one about how recessions can happen, the other about how to deal with them. First, why did the baby-sitting co-op get into a recession? It was not because the members of the co-op were doing a bad job of baby-sitting: maybe they were, maybe they weren't, but anyway that is a separate issue. It wasn't because the co-op suffered from "Capitol Hill values," or engaged in "crony baby-sittingism," or had failed to adjust to changing baby-sitting technology as well as its competitors. The problem was not with the co-op's ability to produce, but simply a lack of "effective demand": too little spending on real goods (baby-sitting time), because people were trying to accumulate cash (baby-sitting coupons) instead. The lesson for the real world is that your vulnerability to the business cycle may have little or nothing to do with your more fundamental economic strengths and weaknesses: bad things can happen to good economies. Second, in that case, what was the solution? The Sweeneys report that in the case of the Capitol Hill co-op it was quite difficult to convince the governing board, which consisted mainly of lawyers, that the problem was essentially technical, with an easy fix. The co-op's officers at first treated it as what an economist would call a "structural" problem, requiring direct action: a rule was passed requiring each couple to go out at least twice a month. Eventually, however, the economists prevailed, and the supply of coupons was increased. The results were magical: with larger reserves of coupons couples became more willing to go out, making opportunities to baby-sit more plentiful, making couples even more willing to go out, and so on. The co-op's GBP—gross baby-sitting product, measured in units of babies sat—soared. Again, this was not because the couples had become better baby-sitters, or that the co-op had gone through any sort of fundamental reform process; it was simply because the monetary screwup had been rectified. Recessions, in other words, can be fought simply by printing money—and can sometimes (usually) be cured with surprising ease. And with that let us return to the business cycle in the full-scale world. The economy of even a small nation is, of course, far more complex than that of a baby-sitting co-op. Among other things, people in the larger world spend money not only for their current pleasure but to invest for the future (imagine hiring co-op members not to watch your babies but to build a new playpen). And in the big world there is also a capital market, in which those with spare cash can lend it at interest to those who need it now. But the fundamentals are the same: a recession is normally a matter of the public as a whole trying to accumulate cash (or, what is the same thing, trying to save more than it invests) and can normally be cured simply by issuing more coupons. The coupon issuers of the modern world are known as central banks: the Federal Reserve, the Bank of England, the Bank of Japan, and so on. And it is their job to keep the economy on an even keel by adding or subtracting cash as needed. But if it's that easy, why do we ever experience economic slumps? Why don't the central banks always print enough money to keep us at full employment? Before World War II, the answer seems fairly straightforward: policy was ineffective because policymakers didn't know what they were doing. Nowadays practically the whole spectrum of economists, from Milton Friedman leftward, agrees that the Great Depression was brought on by a collapse of effective demand and that the Federal Reserve should have fought the slump with large injections of money. But at the time this was by no means the conventional wisdom. Indeed, many prominent economists subscribed to a sort of moralistic fatalism, which viewed the Depression as an inevitable consequence of the economy's earlier excesses, and indeed as a healthy process: recovery, declared Joseph Schumpeter, "is sound only if it [comes] of itself. For any revival which is merely due to artificial stimulus leaves part of the work of depressions undone and adds, to an undigested remnant of maladjustment, new maladjustment of its own which has to be liquidated in turn, thus threatening business with another [worse] crisis ahead." Such fatalism vanished after the war, and for a generation most countries did try actively to control the business cycle, with considerable success; recessions were mild, and jobs were usually plentiful. By the late 1960s many started to believe that the business cycle was no longer a major problem; even Richard Nixon promised to "fine-tune" the economy. This was hubris; and the tragic flaw of full-employment policies became apparent in the 1970s. If the central bank is overoptimistic about how many jobs can be created, if it puts too much money into circulation, the result is inflation; and once that inflation has become deeply embedded in the public's expectations, it can be wrung out of the system only through a period of temporarily high unemployment. Add in some external shock that suddenly increases prices—such as a doubling of the price of oil—and you have a recipe for nasty, if not Depression-sized, economic slumps. But by the middle of the 1980s inflation had fallen back to tolerable levels, oil was in abundant supply, and central bankers finally seemed to be getting the hang of economic management. Indeed, the bad things that happened seemed, if anything, to reinforce the sense that we had finally figured this thing out. In 1987, for example, the U.S. stock market crashed—with a one-day fall that was as bad as the first day's fall of the 1929 crash. But the Federal Reserve pumped cash into the system, the real economy didn't even slow down, and the Dow soon recovered. At the end of the 1980s central bankers, worried about a small rise in inflation, missed the signs of a developing recession and got behind the curve in fighting it; but while that recession cost George Bush his job, eventually it responded to the usual medicine, and the United States entered into another period of sustained expansion. By the summer of 1997 it did indeed seem that the business cycle, if it had not been eliminated, had at least been decisively tamed. Much of the credit for that taming went to the money managers: never in history has a central banker enjoyed quite the mystique of Alan Greenspan. But there was also a sense that the underlying structure of the economy had changed in ways that made continuing prosperity more likely. The Wired Age You don't have to like the magazine Wired, or even read it (those clashing colors and typefaces!), to regard it as a sort of quintessential publication of the nineties, with its fascination with technology, its breathless style—things! are changing! so fast! that we have to use lots!! of exclamation points!!!!—and, of course, its libertarian politics. Why did these attributes form a natural, if often unreadable, package? Let's take a look at the information technology revolution and ask what it meant—not only to the reality of capitalism but to the way it was perceived. In a strict technological sense you could say that the modern information age began when Intel introduced the microprocessor—the guts of a computer on a single chip—back in 1971. By the early 1980s products that put this technology to highly visible use—fax machines, video games, and personal computers—were becoming widespread. But at the time it didn't feel like a revolution. Most people assumed that the information industries would continue to be dominated by big, bureaucratic companies like IBM—or that all of the new technologies would eventually go the way of the fax machine, the VCR, and the video game: invented by innovative Americans, but converted into a paying product only by faceless Japanese manufacturers. By the nineties, however, it was clear that the information industries would dramatically change the look and feel of our economy. It is still possible to be skeptical about how large the actual economic benefits of information technology really are. Certainly the payoff in terms of measured productivity has been rather elusive; equally certainly that measurement understates the true gains; but whether the understatement is any worse than it was for previous technologies is anybody's guess. What cannot be denied is that the new technologies have had a more visible impact on how we work than anything in the previous twenty or thirty years. The typical modern American worker, after all, now sits in an office; and from 1900 until the 1980s the basic appearance of and working of a business office—typewriters and file ca binets, memos and meetings—was pretty much static. (Yes, the Xerox machine did do away with carbon paper.) Then, over a fairly short time, the whole thing changed: networked PCs on every desk, e-mail and the Interact, videoconferencing and telecommuting. This was qualitative, unmistakable change, which created a sense of major progress in a way that mere quantitative improvements could not. And that sense of progress helped bring with it a new sense of optimism about capitalism. Moreover, the new industries brought back what we might call the romance of capitalism: the idea of the heroic entrepreneur who builds a better mousetrap, and in so doing becomes deservedly wealthy. Ever since the days of Henry Ford, that heroic figure had come to seem ever more mythical, as the economy became increasingly dominated by giant corporations, run not by romantic innovators but by bureaucrats who might just as well have been government officials. In 1968 John Kenneth Galbraith wrote, "With the rise of the modern corporation, the emergence of the organization required by modern technology and planning and the divorce of the owner of capital from control of the enterprise, the entrepreneur no longer exists as an individual person in the mature industrial enterprise." And who could be enthusiastic about capitalism that seemed more or less like socialism without the justice? The information industries, however, shook up the industrial order. As in the nineteenth century, the economic story became one of remarkable individuals: of men (and, at least occasionally, women) who had a better idea, developed it in their garage or on their kitchen table, and struck it rich. Business magazines actually became interesting to read; and business success came to seem admirable, in a way that it hadn't for more than a century. And this provided fertile ground for free-market ideas, even the libertarianism of Wired. Thirty years ago, defenders of the free market, of the virtues of untrammeled entrepreneurship, had an image problem: when they said "private enterprise," most people thought of General Motors; when they said "businessman," most people thought of the man in the gray flannel suit. In the 1990s the old idea that wealth is the product of virtue, or at least of creativity, made a comeback. But what really made that summer of 1997 such a time of optimism was the remarkable spread of prosperity—not merely to the advanced nations (where, indeed, the benefits were not as widely spread as one might have wished) but to many countries that not long ago had been written off as economically hopeless. The Fruits of Globalization The term "Third World" was originally intended as a badge of pride: Jawaharlal Nehru coined it to refer to those countries that maintained their independence, allying themselves neither with the West nor with the Soviet Union. But soon enough the political intention was overwhelmed by the economic reality: "Third World" came to mean backward, poor, less developed. And the term came to carry a connotation not of righteous demand but of hopelessness. What changed all of that was globalization: the transfer of technology and capital from high-wage to low-wage countries, and the resulting growth of labor-intensive Third World exports. It is a bit hard to remember what the world looked like before globalization; so let's try to turn the clock back for a moment, to the Third World as it was less than a generation ago (and still is, in many countries). In those days, although the rapid economic growth of a handful of small East Asian nations had started to attract attention, developing countries like the Philippines, or Indonesia, or Bangladesh were still mainly what they had always been: exporters of raw materials, importers of manufactures. Small, inefficient manufacturing sectors served their domestic markets, sheltered behind import quotas, but these sectors generated few jobs. Meanwhile, population pressure pushed desperate peasants into cultivating ever more marginal land, or into seeking a livelihood in any way possible, such as homesteading on the mountains of garbage found near many Third World cities. Given this lack of other opportunities, you could hire workers in Djakarta or Manila for a pittance. But in the mid-1970s cheap labor was not enough to allow a developing country to compete in world markets for manufactured goods. The entrenched advantages of advanced nations—their infrastructure and technical know-how, the vastly larger size of their markets and their proximity to suppliers of key components, their political stability and the subtle but crucial social adaptations that are necessary to operate an efficient economy—seemed to outweigh even a ten- or twentyfold disparity in wage rates. Even radicals seemed to despair of reversing those entrenched advantages: in the 1970s demands for a New International Economic Order were centered on attempts to i ncrease the price of raw materials, rather than to bring Third World countries into the modern industrial world. And then something changed. Some combination of factors that we still don't fully understand—lower tariff barriers, improved telecommunications, the advent of cheap air transport—reduced the disadvantages of producing in developing countries. Other things being the same, it is still better to produce in the First World—stories of firms that moved production to Mexico or East Asia, then decided to move back after experiencing the disadvantages of the Third World environment at first hand are actually quite common—but there were now a substantial number of industries in which low wages gave developing countries enough of a competitive advantage to break into world markets. And so countries that previously made a living selling jute or coffee started producing shirts and sneakers instead. Workers in those shirt and sneaker factories are, inevitably, paid very little and expected to endure terrible working conditions. I say inevitably because their employers are not in business for their (or their workers') health; they will of course try to pay as little as possible, and that minimum is determined by the other opportunities available to workers. And in many cases these are still extremely poor countries. Yet in those countries where the new export industries took root, the twenty or so years leading up to that golden summer of 1997 were a time of unmistakable improvement in the lives of ordinary people. Partly this is because a growing industry must offer its workers a somewhat higher wage than they could get elsewhere just in order to get them to move. More important, however, the growth of manufacturing, and of the penumbra of other jobs that the new export sector created, had a ripple effect throughout the economy. The pressure on the land became less intense, so rural wages rose; the pool of unemployed urban dwellers always anxious for work shrank, so factories started to compete with one another for workers, and urban wages also began to rise. In countries where the process had gone on long enough—say, in South Korea or Taiwan—average wages actually started to approach what an American teenager could earn at McDonalds. (In 1975 the average hourly wage in South Korea was only 5 percent of that in the United States; by 1996 it had risen to 46 percent.) The benefits of export-led economic growth to the mass of people in the newly industrializing economies were not a matter of conjecture. A place like Indonesia is still so poor that progress can be measured in terms of how much the average person gets to eat; between 1968 and 1990 per capita intake rose from 2,000 to 2,700 calories a day, and life expectancy rose from forty-six years to sixty-three. Similar improvements could be seen throughout the Pacific Rim, and even in places like Bangladesh. These improvements did not take place because well-meaning people in the West did anything to help—foreign aid, never large, shrank in the 1990s to virtually nothing. Nor was it the result of the benign policies of national governments, which, as we were soon to be forcefully reminded, were as callous and corrupt as ever. It was the indirect and unintended result of the actions of soulless multinational corporations and rapacious local entrepreneurs, whose only concern was to take advantage of the profit opportunities offered by cheap labor. It was not an edifying spectacle; but no matter how base the motives of those involved, the result was to move hundreds of millions of people from abject poverty to something that was in some cases still awful but nonetheless significantly better. And once again, capitalism could with considerable justification claim the credit. Socialists had long promised development; there was a time when the Third World looked to Stalin's five-year plans as the very image of how a backward nation should push itself into the twentieth century. And even after the Soviet Union had lost its aura of progressiveness, many intellectuals believed that only by cutting themselves off from competition with more advanced economies could poor nations hope to break out of their trap. By 1997, however, there were role models showing that rapid development was possible after all—and it had been accomplished not through proud socialist isolation but precisely by becoming as integrated as possible with global capitalism. Skeptics and Critics Not everyone was happy with the state of the world economy in the summer of 1997. While the United States was experiencing remarkable prosperity, other advanced economies were more troubled. Japan had never recovered from the bursting of its "bubble economy" at the beginning of the decade, and Europe was still suffering from "Eurosclerosis," the persistence of high unemployment rates, especially among the young, even during economic recoveries. Nor did everyone in the United States share in the general prosperity. The forces of technological change and globalization had made it easier than ever before to grow truly rich, and raised the demand for highly skilled workers in general; but they had reduced the demand for the less skilled. Inequality of both wealth and income had increased to levels not seen since Great Gatsby days, and by official measures real wages had actually declined for many workers. Even if the numbers were taken with a grain of salt, it was pretty clear that the American economy's progress had left at least 20 or 30 million people at the bottom of the distribution slipping backward. Some people found other things to be outraged about. The low wages and poor working conditions in those Third World export industries were a frequent source of moralizing—after all, by First World standards those workers were certainly miserable, and these critics had little patience with the argument that bad jobs at bad wages are better than no jobs at all. More justifiably, humanitarians pointed out that large parts of the world were completely untouched by the benefits of globalization: Africa, in particular, was still a continent of ever-deepening poverty, spreading disease, and brutal conflict. And as always, there were doomsayers. It became particularly fashionable in 1996 or so to insist that global supply was outrunning global demand and that a day of reckoning was inevitable. But those who made this argument rarely had a good explanation of why growing incomes would not be spent, or why any shortfall in demand could not be easily handled, baby-sitting-co-op fashion, simply by increasing the money supply. (It turned out not to be that easy, after all, but for reasons the critics had never explained.) Anyway, there are always people predicting a new Great Depression; why should they have been taken more seriously in 1997 than at any other time? Finally, even sensible people wondered whether the news was really good enough to justify the ever-rising U.S. stock market. In December 1996 Alan Greenspan famously warned the financial markets of the risks of "irrational exuberance"; stocks retreated briefly, then resumed their climb. So it was not an entirely happy world on the day that Hong Kong reverted to China. But the prospects for the world economy in general, and for capitalism in particular, seemed better that day than they had been in living memory, better than anyone could have imagined a decade or two earlier. The next day, July 2, Thailand devalued the baht, and the Asian financial crisis began. ©Copyright 1999 Paul Krugman ----- Aloha, He'Ping, Om, Shalom, Salaam. Em Hotep, Peace Be, Omnia Bona Bonis, All My Relations. Adieu, Adios, Aloha. Amen. Roads End Kris DECLARATION & DISCLAIMER ========== CTRL is a discussion and informational exchange list. Proselyzting propagandic screeds are not allowed. Substance—not soapboxing! These are sordid matters and 'conspiracy theory', with its many half-truths, misdirections and outright frauds is used politically by different groups with major and minor effects spread throughout the spectrum of time and thought. That being said, CTRL gives no endorsement to the validity of posts, and always suggests to readers; be wary of what you read. CTRL gives no credeence to Holocaust denial and nazi's need not apply. Let us please be civil and as always, Caveat Lector. ======================================================================== Archives Available at: http://home.ease.lsoft.com/archives/CTRL.html http:[EMAIL PROTECTED]/ ======================================================================== To subscribe to Conspiracy Theory Research List[CTRL] send email: SUBSCRIBE CTRL [to:] [EMAIL PROTECTED] To UNsubscribe to Conspiracy Theory Research List[CTRL] send email: SIGNOFF CTRL [to:] [EMAIL PROTECTED] Om
