The story we’re told about the rich getting richer, the poor getting poorer, and the middle class getting squeezed is more complicated than the version you get from the politicians — or from the former economists who practice politics in the pages of the New York Times. But there is income polarization, and wages in the middle are stagnating. If you want to know why, don’t go reading Paul Krugman’s latest column. Read the label on a jar of Nutella.
The OECD Trade Policy Papers series this week published a report with the titillating title “Mapping Global Value Chains,” using Nutella, the delicious hazelnut-and-cocoa spread, as a case study. Like Leonard Read’s famously cosmopolitan No. 2 pencil, Nutella is the product of a vast, global network, a spontaneous order through which international, cross-cultural, and cross-lingual cooperation emerges with no central authority in charge of it. The corporate headquarters of the Ferrero Group, which manufactures Nutella, is in Alba, Italy. The sugar comes from producers in Brazil and from France, which also contribute vanillin to the process. The hazelnuts come from Turkish producers, the cocoa from Nigerians, the palm oil from Malaysians. The factories are in Brantford, Stadtallendorf, Belsk, Vladimir, Lithgow, Poços de Caldas, and Los Cardales. Of course, those are only the producers near the end of the process — before them come the makers of the machinery they use, the producers of the steel used to make that machinery, the roughnecks bringing up oil that will make the diesel that powers the trucks and ships that move those 250,000 tons of Nutella around the world, the bankers who financed these endeavors, etc.
Admirers of the orangutan should note that as of 2014 Nutella will be made exclusively with palm oil that is “100 percent segregated,” whatever that means, and certified as a-okay by the Roundtable on Sustainable Palm Oil, because of course there is a Roundtable on Sustainable Palm Oil. Palm-oil cultivation is hard on orangutans, and it is natural that we should feel some sympathy for them: We have 97 percent of our DNA in common with the gentle, solitary creature.
Nutella is a product of a truly global economy, and as a model of human cooperation, it is beautiful. But it is not without its costs. Such spontaneous orders are by their nature unpredictable; they create opportunities and crises at the same time. In business, entrenched market incumbents are the firms with the most to gain and the most to lose from unforeseen developments. When he was running Microsoft, Bill Gates used to say that he wasn’t afraid of Oracle or Apple but lost sleep over the prospect of a kid beavering away in his garage with the next out-of-left-field thing, which could (and, eventually, would) knock the crown off Microsoft’s head. In fact, Microsoft got knocked around by both ends of the market — from the upstart Google, which as of the close of the third quarter was bigger than Chevron, and from Apple, the most valuable company in the world. Google and Apple both took advantage of new forms of commerce developing online, and Microsoft’s once dominating position was substantially diminished.
In the nation-state market, the United States and its middle class were in roughly the same position as Microsoft at the turn of the century. We were not yet really hurting, but the new developments that would change our economic trajectory already were in place. We would lose some market share to polished boutique firms such as Canada, to low-price startups such as China, and to longstanding majors such as Germany. We were the ultimate market incumbent.
When it comes to income polarization, the explanation we usually hear is a story about politics. But it’s a story about Nutella. Incomes are going up at the top and stagnating or declining at the middle and lower end of the spectrum, but — and this is critical to understanding our challenge — the high incomes at the top do not cause the lower incomes at the bottom, nor vice versa. There is no such thing as “national income” or “income distribution.” There is no bucket labeled income the contents of which are ladled out by the government or by the statistical aggregation we call “the economy.” If people at the top made less money, that would not free up money for everybody else. Nor is income polarization mainly the result of our tax system or other public policies. (What is unusual about the U.S. tax code is not that the rich are taxed so lightly but that the middle class are taxed so lightly.) Income polarization is increasing in the United States and in similarly laissez-faire countries such as Australia, in super-capitalist bastions such as Singapore, in European welfare states such as Sweden and Denmark, in union-heavy manufacturing powerhouses such as Germany, in young countries such as Israel, and in old countries such as Japan. Income polarization is increasing practically everywhere in the developed world.
The integration of global markets means that returns to successful entrepreneurship, managerial excellence (real or perceived), sought-after skills, etc., are very high and growing. Imagine the case of the CEO of a business worth $1 million: If through administrative skill or innovation he adds 50 percent to the value to the business, he has created $500,000 in new wealth. Now consider the case of the CEO of a business worth $400 billion, as ExxonMobil is. If a CEO through administrative skill or innovation adds a mere 0.5 percent to the value of the enterprise, he has created $2 billion in new wealth. Scale matters: To be the third-largest car dealer in Muleshoe, Texas, is one thing; to be the third-largest car dealer in Houston is another; to be the third-largest car dealer in Texas or the United States still another, and to be the third-largest one in the world quite another thing. High-income American workers by and large are the ones with the skills (or plain dumb luck, who knows?) to thrive in the very large markets we are creating. For them, globalization is an opportunity — as the rest of the world gets richer, its people want iPhones and flights on Boeing aircraft — and if they use U.S. airport lounges, they will encounter Nutella, which is ubiquitous in them. People growing wealthier employ more engineers and architects, they create work for medical specialists, play more video games, read more books, etc. Which is great for sought-after professionals, programmers, and entertainers, along with the marketing people who help turn their skills into money, the administrative assistants, their landlords, the people who dry-clean their clothes, etc.
For those not similarly well-situated, global economic cooperation is a problem. Nutella creates jobs in high-wage and low-wage countries alike, and it even manufactures in high-wage countries such as Canada and Germany, in part to be close to its final customers. But if you work in the back office of a bank, it does not much matter where you are — your product doesn’t spoil, doesn’t require shipping, and doesn’t have to be physically in hand to be consumed. If you work in a job like that, you are now in much more direct competition with a very large market full of relatively low-wage overseas competitors than were Americans during the short-lived golden age that persisted from the end of World War II to the turn of the century. The big market is not an opportunity for you; it’s a burden. No doubt European sugar producers wish that they did not have to compete with the Brazilians for Ferrero’s business — and no doubt the Brazilians are equally grateful that they have a shot at that competition. In the end, it leaves us all better off — we have more plentiful Nutella, and we have Honda Civics that are better cars than could be had at any price in the 1950s. People in relatively poor countries get to eat and have houses and medical care, and they get to do something other than work in subsistence agriculture — which means that American workers have to compete with them. There’s no turning back the economic clock — but, if you could, would you really want to?
— Kevin D. Williamson is roving reporter for National Review.