Last week, Josh Barro of the New York Times observed the following:
Last year, Emanuel Saez — an economist from the University of California, Berkeley — made headlines with the finding that 95 percent of income gains from 2009 to 2012 accrued to the top 1 percent of earners. But this finding was not about the rich doing well; their incomes are actually growing a little more slowly than in the last two economic expansions.
Instead, it reflects the failure of most of America to recover at all, with real market incomes for the 99 percent rising just 0.1 percent a year. Higher corporate profits and higher stock prices have not translated into meaningfully higher wages.
The other trend is a long-term one: For four decades, even in stronger economic times, wage gains have not kept pace with economic growth. Wages and salaries peaked at more than 51 percent of the economy in the late 1960s; they fell to 45 percent by the start of the last recession in 2007 and have since fallen to 42 percent.
When the economy does grow, that growth disproportionately accrues to the owners of capital instead of to wage earners; and in the last few years, weak growth and abundant labor have made that pattern even stronger than normal.
People tell many different stories about why growth disproportionately accrues to the owners of capital instead of to wage earners. One of the stories that I find most compelling is that the past several decades have seen the rise of a globalized production system, and while this globalized production system has greatly improved the productive potential of some Americans, it has intensified the competition facing others. This will strike many of you as pretty obvious, but bear with me.
I didn’t write this book to make a statement about Chinese intentions. It’s about the recognition of an industrial revolution that we’re all living under, one by which all of us, including China, are affected. China is growing very rapidly today because it has aggressively embraced this industrial revolution. This kind of revolution favors de-verticalized, networked production. That means the main driver of causation in the world today isn’t the nation state, it’s the multi-firm, multinational production network. And so, I don’t think that China’s rise is about the rise of a self-contained economy. It’s about the enrichment of a country by aggressively embracing pieces of global production.
Some Americans rue the demise of U.S.-based manufacturing, partly—and understandably—because they worry about the Steinfeld, Edward S. (2010-07-08). Playing Our Game: Why China’s Rise Doesn’t Threaten the West (p. 113). Oxford University Press. Kindle Edition.
The follow-on from these new modes of production is that it facilitates certain things in advanced industrial economies. It makes it easier and cheaper for innovators in those economies to get their ideas put into products. They don’t have to go and work for some huge, vertically integrated company.
Secondly, in order for China to have participated so successfully in this revolutionary mode of production, it’s had to give up an awful lot of what we would consider control: control over rules, over people, over who’s staffing the government, over what state-owned entities are doing. So a lot of the surface manifestations of socialism are here, but my argument is that by growing through this phase of networked production, China has ended up gutting the socialist control system.
Steinfeld’s book is brilliant. And though it is focused on China, it sheds light on the dilemmas facing the U.S. and other advanced industrial societies. The following passage is drawn from Steinfeld’s book:
Some Americans rue the demise of U.S.-based manufacturing, partly—and understandably—because they worry about the disappearance of jobs. Partly, though, they worry more existentially that in its shift to a postindustrial economy, the United States is losing know-how, innovative capacity, autonomy, and power. This latter set of concerns for the most part misses the point. Modularity has blurred once-firm distinctions between manufacturing and services. Research and development and design-related activities in the past were inseparable from physical manufacturing. Hence, they were all previously treated as manufacturing. Today, many of these activities are carried out by highly specialized firms that do no physical manufacturing at all. The jobs appear as services, but they in fact claim the bulk of the profitability and power in the broader production chains they feed into. They often end up as the biggest repositories of know-how in the entire manufacturing process.
Those who control the know-how can liberate themselves from the more mundane aspects of production:
Why engage in physical manufacturing—product fabrication—if you can control the high-value rules and design parameters that those doing manufacturing must scramble to meet? Even if those manufacturers reverse engineer your designs—which they may be wary of doing if you are their primary customer—you will have already moved into new products or jumped across into new industries. After all, as a modular player, you have the option of operating on multiple smile curves simultaneously. You are free to do this precisely because you no longer have to invest in all the capital equipment, facilities, and infrastructure associated with product fabrication in any one industry. Somebody else—namely, China-based contract manufacturers—has done that for you.
There is risk involved in outsourcing these seemingly quotidian functions, as Clayton Christensen has warned. Firms that master downstream aspects of the production process can steadily move upstream, just as East Asian firms like South Korea’s Samsung has gone from being a contract manufacturer to one of the world’s more innovative firms. Yet Steinfeld notes that shedding downstream functions can allow elite firms to specialize in the most valuable parts of the production chain:
When producers were vertically integrated—that is, when they had invested in all the facilities and equipment necessary to make a single complete product—their fates effectively became tied to that product. They may have been inclined to innovate, at least in the sense of improving the product to meet evolving consumer preferences, but they would have resisted new technologies or ideas that might unseat the product entirely. To use management scholar Clay Christensen’s terminology, they would have engaged in “sustaining” but not “disruptive” innovation. In the era of modularity, however, everything is about disruption, especially for innovation leaders in places like the United States. As noted previously, a modular producer—a design house, for example—may innovate today in ways that knock out its previous innovation from yesterday. As long as it keeps moving and stays at the cusp of value creation, it remains not just a viable business but a business effectively in the driver’s seat.
As labor costs rise in China, and as firms place greater value on locating production facilities near their consumers, the U.S. manufacturing sector is experiening a modest revival, though not yet a very labor-intensive revival. The globalization of the production system has been a boon to innovators and to those who control the rules that govern production within multi-firm, multinational production networks, as well as to those who hold ownership stakes in the leading multinational business enterprises. Sean Starrs, a Canadian political scientist, recently noted the dominance of U.S.-based multinationals:
Once we analyze the world’s top transnationals, a startling picture of economic power emerges. For one thing, national accounts seriously underestimate American power, and seriously overestimate Chinese power.
So this is what I do in my research, some of which is published in International Studies Quarterly. I analyze the world’s top 2,000 corporations as ranked by the Forbes Global 2000, organize them into 25 broad sectors and then calculate the combined profit shares of each nationality represented. The extent of American dominance is stunning. Of the 25 sectors, American firms have the leading profit share in 18, and dominate (with a profit share of 38 percent or more) in an astounding 13 of these sectors — more than half. No other country even begins to approach this American dominance across such a vast swath of global capitalism. Only one other country, Japan, dominates a single other sector (trading companies), which happens to be one of the smallest of the 25. By contrast, American firms particularly dominate the technological frontier, including a whopping 84 percent of the profit share in computer hardware and software (despite China becoming the largest PC market in the world in 2011), 89 percent of the health care equipment and services sector and 53 percent of pharmaceuticals and biotechnology. Perhaps most surprisingly, American dominance of financial services has actually increased since the 2008 Wall Street crash, from 47 percent in 2007 to an incredible 66 percent profit share in 2013. In short, despite almost seven decades of increasing global competition and the rise of vast regions of the world (most of all East Asia), American transnational corporations continue to dominate the pinnacle of global capitalism, a phenomenon that national accounts miss.
One obvious reply to Starrs is that there mere fact that U.S. multinationals are flourishing means little for American power as such. Starrs insists that it does indeed matter:
Yes, because they are still ultimately owned by American citizens — of the top 100 U.S. transnational companies, on average more than 85 percent of their shares are owned by Americans. Thus, an incredible 42 percent of the world’s millionaires are American (as opposed to 4 percent Chinese), and more than 40 percent of the world’s household net worth is based in America. That the global share of U.S. GDP has declined to less than a quarter since the 2008 crash simply reveals how global American corporate power has become.
But this also drives increasing inequality in the United States, one of the defining issues of our age, from Occupy Wall Street to “The Hunger Games” to President Barack Obama’s 2014 State of the Union address. This is because the top 1 percent own 42 percent of Big Business, and as the latter increases its global power, so too does the wealth of American asset-owners — and thus inequality.
So where does this leave us? As Michael Beckley argues in “China’s Century?,” the emergence of global production and human capital networks concentrates innovative activity in the U.S. All countries that participate from these networks benefit in varying degrees, but the U.S. benefits from them disproportionately. But to say that the U.S. benefits disproportionately is to oversimplify matters, as American asset-owners, for reasons we’ve discussed, benefit far more than other Americans.
Center-left egalitarians generally favor taxing American asset-owners to finance human capital investments and transfer programs to better the lives of those Americans who haven’t gained in relative terms from the advent of globalized production networks. Some critics of this approach fret that while the U.S. has more “market power” than other advanced industrial societies, U.S. multinationals might choose to leave the U.S. for greener pastures if the tax and regulatory climate continues to deteriorate, and so the first priority should be to make the U.S. a more attractive destination for large-scale capital investment. My general view is that the problem facing the public sector is not a lack of resources, but rather institutional sclerosis and barriers to entry that prevent the emergence of innovative service delivery models. Some modest shift in the tax burden might be appropriate, but only in the context of substantial public sector reform. Moreover, it could be that “microeconomic” strategies, like easing zoning restrictions in high-productivity metropolitan areas that are home to large concentrations of asset-owners and easing occupational licensing restrictions, should be emphasized over “macroeconomic” strategies, like tax-financed redistribution, as the former could facilitate a more organic transfer of resources from asset-owners (the consumers of labor-intensive services) to labor (the providers of such services). And to the extent that we should rely on tax-financed redistribution, the case for emphasizing wage subsidies and work supports over in-kind transfers may well prove more politically attractive, leaving normative questions aside, than the alternative.