Self-Sufficiency and Decoupling
posted by Frank Pasquale
I was recently reviewing some of David Singh Grewal’s work, including this excellent essay on Keynes and globalization. Grewal’s book on Network Power was very insightful, and his examination of Keynes promises to advance economic debates long stalled in stale orthodoxies. Grewal describes Keynes’s intellectual evolution from ardent free trader to skeptic, giving this explanation for the shift:
[W]hile Keynes cited many reasons for limiting economic globalization, including for the sake of what we now call the ‘policy space’ available to governments to intervene in the economy, it was international peace that was his foremost concern. Because globalization allows economic relations to form above and outside the state, there is no obvious route to a solution if things go awry (as might be expected) in complex chains of production and investment that cross national borders.
Grewal argues that current global imbalances are underwritten by the “novel combination of globalized finance and a world reserve currency that can be inflated at will.” His diagnosis reminds me of Manuel Castells’s prophetic dissection of dangerous uses of American financial power in the book The Economic Crisis and American Society—a work that, sadly, is as relevant today as it was when it was published in 1980.
As I read Grewal’s piece, I kept thinking about the idea of “decoupling.” In a “good decoupling” scenario, the US would not exploit its status as global reserve currency provider (nor would China manipulate its currency). The US would no longer demand such a disproportionate share of oil and other resources, concentrating instead on the types of green energy and infrastructural improvements that could bring us closer to energy self-sufficiency. China would empower its citizens to save less and consume more, in part by using the resources it currently parks in US T-bills in order to underwrite a genuine social safety net.
But what we instead seem to be in is a “bad decoupling” scenario, where a powerful transnational elite’s fate is unmoored from that of an increasing percentage of “disposable people.” That’s what Gary Shteyngart powerfully and zanily imagines in his novel Supersad True Love Story, a Dr. Strangelove for our time. The book’s ideas have already percolated into the legal and finance blogosphere, and I recently heard Jacob Weisberg of Slate compare it to the dystopian masterpieces of Orwell and Huxley.
As I said of Brave New World in my 2002 article discussing the tiering of access to health care, we don’t need fiction to imagine this scenario—we can see it, in embryo, around us. I remember reading Michael Lind’s book The Next American Nation as a relatively positive outlook and vision; he’s now outlining the “bad decoupling” scenario in almost despairing tones in a recent Salon essay on offshoring:
The richest few don’t need the rest of us as markets, soldiers or police anymore. . . .The offshoring of industrial production means that many American investors and corporate managers no longer need an American workforce in order to prosper. They can enjoy their stream of profits from factories in China while shutting down factories in the U.S. And if Chinese workers have the impertinence to demand higher wages, American corporations can find low-wage labor in other countries.
What about markets? Many U.S. multinationals that have transferred production to other countries continue to depend on an American mass market. But that, too, may be changing. American consumers are tapped out, and as long as they are paying down their debts from the bubble years, private household demand for goods and services will grow slowly at best in the United States. In the long run, the fastest-growing consumer markets, like the fastest-growing labor markets, may be found in China, India and other developing countries. . . .
[M]any of the highest-paid individuals on Wall Street have grown rich through activities that have little or no connection with the American economy. They can flourish even if the U.S. declines, as long as they can tap into growth in other regions of the world. . . . [J]ust as much of America’s elite is willing to shut down every factory in the country if it is possible to open cheaper factories in countries like China, so much of the American ruling class would prefer not to hire their fellow Americans, even for jobs done on American soil, if less expensive and more deferential foreign nationals with fewer legal rights can be imported.
Lind’s ideas would not be as provocative as they sound if we had better ways of measuring economic productivity and well-being. By all means production should occur in “efficient” locations. But if the comparative advantage of a country derives from environmental devastation, a cowed and desperate labor force, and currency manipulation, cheap products can’t compensate for the inevitable increase in the political and economic power of those who gut the standard of living in the developed world, and barely raise it in the developing world.
Of course, there are some barriers to a race-to-the-bottom style of globalization. Even China faces discontent; Sharon LaFraniere reports that “2,000 people rioted at a hospital after reports that a 3-year-old was refused treatment [and died] because his grandfather could not pay $82 in upfront fees.” A recent book asks “how unequal can America get before it snaps.” Despite hosting more and more American legal work, India has been steadfastly protectionist about its own attorneys:
By global standards, the glittering prize of practising law in New York [and much of Asia] is fairly accessible to anybody with the brains . . . . But there is one determined outlier among fast-growing Asian economies: India, the only big country that is closed to foreign lawyers in any capacity. A powerful lobby—ranging from hundreds of thousands of small (often husband-and-wife) practices to a handful of leading partnerships—resists change.
Foreigners who tried venturing into the Indian market are still reeling from a decision in December by the Bombay High Court which deemed illegal the “liaison offices” that some outsiders had opened. The Indian government said (rather half-heartedly) that it would appeal against this ruling. But the climate in which law-related work could be undertaken by outsiders has gone from difficult to prohibitive. Reena Sengupta, a London-based consultant, says she used to see foreign-owned legal-research operations in India where beds, not desks, greeted the visitor; such was the keenness to dispel the impression that law was being practised. Now those offices have simply closed.
The Indian government appears to understand the logic behind economist Alan Blinder’s diagnosis of the increasing “offshorability” of jobs. Regardless of whether they’ve read his book, many Americans also understand the plausibility of Shteyngart’s dystopia—or the frighteningly realistic “depression economics” that Brad DeLong is now describing. Perhaps behind all the mass irrationality about mosques and anchor babies is an inchoate but real fear that our leaders have no plan to deal with (and might in fact profit from) massive dislocations in the American economy.
August 19, 2010 at 7:16 pm
Posted in: Culture, Economic Analysis of Law, International & Comparative Law, Law and Inequality, Sociology of Law, Trade, Uncategorized
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Responses (8)
A.J. Sutter - August 19, 2010 at 11:16 pm
1. “By all means production should occur in ‘efficient’ locations”: Why? Why not have it be ‘inefficient’ so that it might be of better quality, employ more people and/or be more embedded in the community in which consumption will occur, for example?
2. “how unequal can America get before it snaps”: No less important a question is, if it snaps, how will it do so? America’s divisions aren’t only along class lines, but along ethnic and social ones. E.g., will religious white blue collar Tea Partiers in the East feel solidarity with religious Hispanic blue collar people in the Southwest, just because the same economic forces are victimizing them? American politics are very different from what they were during the Depression. (Well, mostly: back then some were convinced we had a Jewish President, today a Muslim one …)
Brett Bellmore - August 20, 2010 at 7:36 am
“The US would no longer demand such a disproportionate share of oil and other resources”
I’m pretty sure that, rather than “demanding” a disproportionate share of resources, we buy them. Whether we SHOULD be buying them is a separate question, of course, but there’s no “demanding” involved.
Frank Pasquale - August 20, 2010 at 7:52 am
AJ: Yes on 1; I need to take a look at the Setiya article “Efficiency as a Vice.” As for 2: On target again; one of the scariest books out there is Ben Friedman’s Moral Consequences of Economic Growth (which could be titled “immoral consequences of economic stagnation,” given its repeated stories of nativism and racism arising out of economic desperation.)
Brett: I like the word “demand,” given the simultaneous connotation of economic power (supply and demand) and faint suggestion of military capacity willing to back it up. As a recent article relates,
“The National Defense Council Foundation has pegged the U.S. military subsidy to protect the flow of oil from the Persian Gulf at about $50 billion a year. A RAND report last year estimated 12-15 percent of the annual defense budget could be saved “if all concerns for securing oil from the Persian Gulf should disappear.””
http://www.miller-mccune.com/politics/we-fight-for-the-oil-we-need-to-fight-for-the-oil-19936/
I think Andrew Bacevich’s clearheaded analyses of US foreign policy also make this case in less numerical, more humanistic terms.
john chung - August 20, 2010 at 11:06 am
more on wealth and inequality:
http://www.businessinsider.com/us-wealth-inequality-2010-7
A.J. Sutter - August 20, 2010 at 11:11 pm
Don’t be scared by Friedman, his thesis is nonsense (my apologies if he was a Lieblings-prof of yours). See my detailed review on Amazon (look in the 2-star category). Friedman’s occasional boss Derek Bok also pokes more gaping holes in it in his The Politics of Happiness (2010). And don’t forget that a black man was elected President despite its being the middle of an economic disaster. But Friedman’s argument being fallacious doesn’t negative that nativism, racism and economic desperation are indeed all balled up in the current American situation.
Brett Bellmore - August 21, 2010 at 9:02 pm
So, we’re not only paying for the oil, rather than demanding it, we’re paying to keep it available to others, too… This is about as opposite of “demand” as we could get, and still wind up with any oil.
The problem with “demand” is that it none of it’s denotations strictly apply to a situation where you’re buying a product in a market, from suppliers who are free to sell to somebody else.
A.J. Sutter - August 21, 2010 at 10:57 pm
Brett, I suspect Frank might be making a denominative verb from economics jargon; the word “demand [n.]” in its economics sense is based on the desire of a buyer to buy a commodity or service, and its ability to pay for it, rather than on the willingness of anyone to sell to it. And even the usual denotations of “demand [v.]“, such as “to ask for urgently or peremptorily,” are unrelated to the willingness to comply on the part of the person of whom the demand is made (cf. your remark about being free to sell to someone else.). [Sources: Alfred Marshall, Principles of Economics (1920), Book III; The American Heritage Dictionary of the English Language, 3rd ed. (1996); Wikipedia, "Demand (Economics)," citing Sullivan & Schiffrin, Economics: Principles in action (2003)@ 79.]
A more substantive issue with Frank’s remark is that “disproportionate” isn’t a sufficient way to analyze the environmental or commodity pricing aspects of “decoupling.” If the US demand [n.] for oil were more proportionate to the US share of global population, but were, say, double its current amount in absolute terms, that could still create (or exacerbate) environmental problems and raise the price of oil to the stratosphere. The use of metrics based on percentages — e.g., “carbon intensity,” efficiency improvements, percentage-based inter-country comparisons, “dematerialization of the economy” through increasing the percentage of GDP based on services, etc. — is a convenient way to mask the growth of a country’s appetite for natural resources.
Frank - August 22, 2010 at 5:01 pm
I agree with both of AJ’s points in comment 7. Also, the review of Ben Friedman is devastating and certainly ought to be read by anyone citing his work. Come to think of it, the underlying statistical method is something I should have been suspicious of to start with. Humans aren’t atoms, and the sorts of very broad statistical generalizations Friedman is making ought to inspire a great deal of suspicion.
Economic contraction must be interpreted by those experiencing it. As my posts on green energy have suggested, I think that contraction in US energy use could be interpreted very positively, as a way of setting the world economy on sounder ecological footing, and acknowledging the universal destination of human goods (to use a phrase from Catholic social thought). But books like Friedman’s can be used by media mavens to explain (and perhaps even justify) more xenophobic demands for endless growth in the overdeveloped world.
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