Bill Clinton, Globalization, And Channeling Economic Forces

Photo by Johnathan Ciarrocca on Unsplash

In a Washington Post interview with David J. Lynch, author of a new book on globalization, former President Bill Clinton reflects on the backlash to globalization and how many of the working class have felt “stymied” in recent times. He further argues that “You’ve got two choices. You can pretend there’s going to be no change. If you do, you’ll lose more jobs than you gain. Or you can make change your friend.”

I agree thoroughly with the assessment that underlying economic forces will not go away and must be channeled. However, I would go further. As revealed in my book, Abandoned: How Republicans And Democrats Have Deserted The Working Class, The Young, And The Working Dream, under no president in recent decades has government turned significant resources to programs that would most enable upward mobility and a greater sharing of wealth with those classes. Neither industrial policy, whereby the government tries to pick winning industries, nor tariffs will do the job. Programs oriented directly toward their upward mobility—wage subsidies, education, apprenticeships, and a more equal sharing of pension and housing subsidies—are the most effective way to support those left behind by globalization or, more importantly, technology—both then and now, the primary economic force at play. 

Below, I lay out how the dominant policies of “wealth for the wealthy and consumption for the masses” are, at one level, rational and have been pursued even in autocratic societies. They do increase capital investment and provide resources that enable large segments of the public to purchase the products made possible by innovations. Pursued to excess, as in the United States, they lead to neglect of upward mobility and wealth building, including in human capital and knowledge.

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As the industrial age progressed, national governments increasingly focused on promoting business wealth and capital formation. The binary debate between capitalism and communism often centered on whether private individuals or the state should own equipment, plant, and other physical capital. Framing the debate this way, the capitalist perspective emerged victorious, but that’s an oversimplification. What truly prevailed was an understanding of the necessity for competition and the issues that arise when decision-making becomes overly concentrated in the hands of a few. Beyond any equity concerns, monopolists and oligarchs, whether in government or the private sector, create obstacles to competition and new ideas, thereby weakening the strength of society as a whole. That’s why even countries like Russia and China abandoned the communist notion of concentrating nearly all ownership within the government.

Economies of scale drive much of the debate over ownership of capital because they foster both growth and the concentration of wealth and power. Henry Ford recognized the link between individual incomes and productivity when he boasted that his car would be "so low in price that no man making a good salary will be unable to own one." If only wealthy individuals could purchase his cars, the economic growth potential enabled by economies of scale in his gigantic plants would not be realized. Fewer cars would be produced, and the average cost and resources required to manufacture each would be much higher.

Over the past few decades, we have transitioned from the industrial age to a technological and information age that has magnified economies of scale. Many of the growth “industries” in the modern economy have minimized manufacturing, production, transportation, and distribution costs, resulting in even lower marginal costs relative to average costs than Henry Ford’s cars.

Consider pharmaceutical drugs, software, technology, social media, movies, and other forms of entertainment and information. How much does it cost for drug manufacturers to produce one more pill? For Hollywood producers to allow one more person to watch a movie? For Microsoft, Apple, or Facebook to make software available to one more person? In many cases, it costs almost nothing, aside from marketing and legal expenses. It doesn't cost much to "transport" one more pill to Pilar, movie to Movilla, or software to Sofia.

As opportunities for economies of scale expanded in the latter part of the 20th century and the early 21st century, so too have the possibilities for higher worldwide, rather than just national, growth by allowing more people to purchase more new products. If the costs of pills or movies can be shared among 100 million people instead of 10 million, then global economic output can grow rapidly when 90 million more individuals can afford to buy the product. The growth and increasing power of multinational companies are a natural consequence of these forces, and for better or worse, these forces will not be regulated away.

As a result, many modern capitalists now look for their buyers among a global population of 8 billion, rather than just the U.S. population of 340 million. When creating products with significant economies of scale—sometimes even at the click of a mouse—the new entrepreneur still requires customers whose incomes increase enough to purchase these new goods and services. It's simply less essential for those customers to live in the United States or any specific country.

Does this imply that income becomes distributed more unequally? It partly depends on whom you count and which measure you utilize. Almost no one anticipated, even a few decades ago, the rise of billions of middle-class individuals in China, India, and elsewhere—a remarkable achievement for their people but also one made possible by the international order fostered by Pax Americana after World War II. Still, it's also feasible for market incomes to increase for U.S. entrepreneurs and their workers in Bengaluru or elsewhere, but not for large segments of the U.S. population. Thus, these expanding economic opportunities boost national and global income but can easily result in gains being concentrated more heavily among capital owners, highly educated individuals, and workers abroad.

At the same time, a growing economy requires an increasing stock of equipment, plant, and other real and financial capital. Unfortunately, many countries, such as the U.S., have become increasingly dependent on the wealthy to save for society. For one reason, consumption by the wealthy is somewhat less efficient. That is, smaller economies of scale exist when the wealthy spend their money on luxury goods and services, such as servants, yachts, or multiple vacation homes. Consider this from a societal perspective. For a given cost, societal growth is generally better enhanced when production and consumption favor mass-produced items available to the broader public. Additionally, as a practical matter, today's affluent individuals cannot consume all their income. Instead, they double down on identity-reinforcing efforts that still involve saving and investing. They seek even more status and power through wealth accumulation and entrepreneurship—after all, that’s what they excel at—or through philanthropic efforts that involve endowments.

Thus, absent democratic concerns, economic forces lead governments to focus on wealth accumulation by the wealthy and consumption among the masses. The growth in capital investment and widespread consumption helps drive growth. The U.S. government has largely adopted this strategy by directing a substantial portion of its revenue growth, principally derived from increased economic income, toward these efforts for nearly fifty years.

At this point, however, many classes in the U.S. and abroad have begun to resist their relative decline in market income and power. The Republican and Democratic parties in the U.S. deceive themselves when they believe they can continue on their current trajectory and then just add some industrial policy and tariffs—inevitably distributed arbitrarily—to create barriers that hinder these underlying economic forces.

The government can’t legislate away economies of scale and technological progress, regardless of their distributional impact on different workers. Only a stronger emphasis on inclusive and shared ownership of real, financial, and human capital enables a country to efficiently and equitably harness the full potential of its citizens, along with the opportunities generated by capital formation and the economies of scale that arise from widespread consumption.