The key to fixing the economy: it's not what you think, by @DavidOAtkins

The key to fixing our broken economy: it's not what you think

by David Atkins

With each new banking and finance scandal threatening to sequentially topple the world's economy, it is increasingly difficult for many to understand why nations do not take more action against their financial industries. Corruption and institutional inertia are usually cited as the culprits.

But the key to understanding the lack of significant reaction lies in an awareness of the inevitable consequences of globalization under our current regulatory systems. Digby highlighted earlier a concise--and accurate--summary of the problem from the report of one financial institution:

With labor now much more abundant in the global economy, the share of income going to capital should rise and the share going to labor should fall.
The stubborn and inalienable truth is that this assessment is deadly accurate. Globalization created a surplus of labor. Even middle-school students understand the supply and demand factors at work: in a global economy with billions of people desperate for work, unskilled and semi-skilled labor costs will be driven to the lowest common denominator. Some of the cost savings on labor will go toward creating cheaper goods with ever advancing technology, but a great deal of it will also go toward capital gains and shareholder returns.

But the simplistic mechanistic effects don't tell the entire story. As the capital of multinational corporations wins the long-term battle over national labor pools, corporations shed any patriotic loyalty they might have had to the nation states that spawned them. A new class of stateless global elites is created. Most of the productive energy of the brightest and most creative individuals increasingly diverts to the financial industry where the bulk of the money is actually to be made. The increased power of capital corrodes the responsiveness of governments to their people. Labor unions become marginalized and resented as they defend a narrowing band of increasingly government-based workers from the ravages of globalization. Older people hold onto even detestable jobs as a life raft. Younger people put an unhealthy emphasis on delaying the key markers of adulthood in order to stay in or return to educational systems until their late twenties or even mid-thirties, simply to grasp at the ever shrinking number of decent jobs that cannot be outsourced.

This is not how people were meant to live. The increasing power of capital perverts societies and creates a cultural malaise and yearning for simpler and easier times, rendering societies easy prey for the patriarchal, parochial and theocratic answers of the far right.

Politicians do their best to cope with the situation. Few dare tell the truth: that either the middle classes of industrial nations will be slowly ground into poverty, or the entire legal underpinning of the structures of corporations, banks and even nations themselves will need to change. Instead, politicians on the left attempt to mitigate the situation by expanding the safety net, enacting progressive tax rates and spending on government investment in infrastructure, while those on the right revel in the newly expanded power of wealth to corrupt democratic systems and expedite the transfer of wealth to the "betters" in society while scapegoating those unfortunate souls who happen to be drowning in the undertow. Both sides cooperate in expanding free trade, lowering the price of foreign goods and inflating asset and credit bubbles so as to disguise the downward pressure on wages.

But no matter the national culture and policy, the focus on assets over wages has produced increased income inequality in nearly every industrialized nation on the planet. This is true everywhere from hypercapitalist dystopias to Scandinavian social democracies. No matter what policies governments put in place, capital is winning the battle with labor. The only question at issue is the steepness of labor's decline.

Social democratic policies like progressive taxation are laudable and can mitigate the damage, but it's the economic equivalent of patching a leak without addressing the broken pipeline beneath it. That's not to say that social democratic policies like expanded safety nets and government investment aren't crucial in dealing with the problem: they certainly are. Stanching the bleeding and stabilizing the patient are necessary before more intensive surgery can begin. But without the surgery, the patient is unlikely to survive.

For the economies of industrialized nations to flourish, politicians must do more than simply treat the symptoms of income inequality with traditional Keynesian solutions. These are necessary but insufficient. In order to fix the problem, the root causes of the inequality must be dealt with. That means restructuring the undercurrents that create the income inequality in the first place.

But that would mean some truly radical changes. One of the first answers often cited is to simply roll back globalization through protectionist trade policies. Unfortunately, that would be catastrophic. Undoing free trade laws and enacting punitive tariffs on foreign goods would lead to global trade wars, driving up the prices of goods as each nation ironically attempts to protect its own manufacturing sector. That in turn would create a global economic collapse. In this regard the neoliberals are not wrong. There is little need or good to be done in expanding free trade laws, but there is significant damage that would entail from repealing the ones in place. To name but one example, the United States cannot afford to levy major tariffs on Chinese goods, as that would entail significant increases in the cost of basic standard of living. The Chinese in turn cannot afford to stop purchasing U.S. treasuries lest their economic bubble collapse, destroying China's government in the process. And with most of the rest of the world dependent on U.S. consumers and Chinese growth, no one else is keen to see a trade war arise, either.

Furthermore, in a global economy multinational corporations will simply continue to do what they already do today: play each nation off one another in a bid to make policy more favorable to themselves, in exchange for desperately needed "investment." This will occur with or without tariffs, as the jet setting elite don't particularly care which country they call home, or where they happen to park their stolen billions.

The only way out of this mess is to make governments and workers more powerful than multinational corporations. At this point in history corporations have the edge on nation-states. Nations dance to the tune of corporations as companies manufacture products in a global supply chain, using globalized energy resources. Governments attempt to enrich companies owned by shareholders in each nation-state, even as the workers in each nation-state are themselves left in the lurch. Wars are fought to ensure access to global energy supplies on behalf of international corporations.

While banning the multinational corporation itself seems impractical and logistically problematic, a coalition of nation states banding together to prevent global labor arbitrage and the theft of energy resources seems more practical.

International treaties enforcing basic wages and worker protections are also an important piece of the puzzle. But in order for them to work, there will need to be credible enforcement on a global scale.

Underdeveloped countries will need to speed along development in order to prevent exploitation by multinational corporations and corrupt politicians. That in turn will necessitate global conventions to limit theocracy and protect the right of women to family planning, including contraception and abortion.

International conventions limiting the power of capital will also be necessary. Taxes on capital gains will need to exceed taxes on labor, and laws should encourage long-term investing in stable companies and organizations over short-term quick profits. Taxes on short-term trading will need to boosted to discourage speculation, and they will need to be implemented at a global level in order to prevent companies from simply moving their trading to a more deregulated stock exchange.

All of these are daunting tasks that the Westphalian system is ill-equipped to handle. But without them, the middle class of industrialized nations is doomed by structural circumstance to slip into poverty, with or without the help of corrupt and sociopathic elites. It's not a question of if it happens, but simply how long it takes.

Solving these problems will take vision, trust, and a willingness to break free of outmoded conventions and assumptions about politics that have governed our lives since the 17th century.