Full text of my New Republic interview

[This is the full text of my interview with Vincent Bevins. An edited version was published in The New Republic.]

 

Let's start with the obvious question. Does the elephant graph explain the victory of Brexit and Trump? Are globalization's losers rebelling against the system that has been in place since the 1980s?

Yes, I think that it largely does explain Brexit and Trump. Why? Because it shows in very stark terms that people in the lower parts of rich countries’ income distributions have seen fewer benefits of globalization compared both to the people in Asia (against whom they often compete in global supply chains) and compared to the people in their own countries’ tops of the distributions. You just cannot undo these two facts. The first (the rise of Asia and China in particular) is plain to everyone; the second is implicit in the rise of inequality in almost all OECD countries between 1980 and up to the financial crisis. So I think the facts, displayed in the “elephant chart”, are incontrovertible.

What is a matter of discussion is whether the primary cause for these facts was globalization or not. The other two “contestants” are technological change (that helped more skilled workers to the detriment of the less skilled) and economic polices like reduction of tax rates.

My opinion is that all three factors played a role, but that both technological change and economic polices responded to globalization. The nature of recent technological progress would have been different if you could not employ labor 10,000 miles away from your home base. Economic polices too would have been different if you had relatively closed economies of the 1960s and 1970s with capital controls.

I agree with Dani Rodrik when he sees globalization as fundamentally reducing the field of feasible economic policies for each nation-state. This seems to me obvious when you consider how much more similar economic polices across the world are today than, say prior to the 1980s. Today, most countries have abandoned capital controls, almost all currencies are convertible, tariff rates are much lower, the role of foreign capital much greater, government subsidies to industries negligible compared to what they used to be.

And why? Because we have created an international economic architecture that takes globalization not only as given but as a desirable objective in itself. And I agree with that.

You agree how? You think globalization is a desirable objective?

Yes, I agree with it as I consider desirable any policy that is “inclusive” in the sense that it opens the field of action to greater number of participants. This is not an instrumental view of globalization. It does not say, globalization is better because it raises incomes (which, I think, on balance, it does). It says globalization is better because it reduces obstacles between people in the world. I think that ideologically one you can be against globalization only on two grounds: one is “localism” where one cares only about his or her narrow community and does not want to interact with the rest of the world, another is “nationalism” which more violently opposes “us” to “them”. An example of the former would be religious communities, an example of the latter would be North Korea. 

The problems with globalization arise from the fact that gains from it are not (and can never be) evenly distributed. There would be always those who gain less than some others, or those who lose even in absolute terms. But to whom can they “appeal” for redress? Only to their national governments because this is how the world is politically organized. Thus national government have to engage in  “mop up” operations to fix the negative effects of globalization. And this they have not done well, led as they were by the belief that the trickle-down economics will take care of it. We know it did not.

So rich world governments, in say the US and Western Europe, failed to “mop up” globalization's mess, and then discontent with the global system rose? What could they have done to clean up the mess?

Perhaps it is easy to say it with hindsight, but they could have argued for trade pacts that would pay more attention to workers’ standards rather than to the protection of intellectual property rights and patents. The skewed nature of these treaties obviously reflected domestic, and even global, power relationship between capital and labor. In other words, we should have had more ILO and less MIGA and WTO. Rich countries, and especially the US, could have paid more attention to the quality of education and tried to not only equalize access to the best schools but make public schools’ quality similar to the quality of private schools. You may say that it is a generally desirable policy that has little to do with globalization: I agree, but I also think that it would have reduced the number of “losers” because it would have enabled larger swaths of the population to successfully complete globally.

During the US election, a rather strange and heated debate took place between liberals that insisted the rise of Trumpism could be blamed on 'economic anxiety' or on racial resentment, as if it had to be one of the two. How would you theorize the relation between economic motivations for voter rebellion and other perhaps complementary causes for the huge transformations we saw in 2016? Do economic problems cause racism or nativism to emerge, for example? Historically how has this usually worked when inequality gets out of control?

I really do not think that the causality runs one way only: either from economic problems to racism, or from racism to economic problems. I think that the two work together. But I think that it was always wrong to blame support that Trump has received only on racism or misogyny. By doing this, one commits two mistakes: first, writes off that portion of the population as “irredeemable” since their racism or misogyny makes them impervious to any rational argumentation; and second, entirely plays down economic factors and thus fails to propose any change in economic policy. The view that nativism alone was responsible for the rise of right-wing populism in the US, or even more bizarrely the view held by some that the “losers” in rich countries should not complain because they are better off than workers in China, were just wrong answers to a very real problem.

 

This kind of an interpretation has received strong pushback in the United States since Trump's victory, with mainstream Democratic supporters calling it either hopelessly leftist or tantamount to rationalizing away racism. Others point to the fact that many rich people supported Trump (as admittedly often supported other Republican candidates). What do you make of this criticism?

I do not understand the pushback. Do they really believe that Trump, Brexit, Le Pen, the rise of many right-wing populist parties in Europe etc. have nothing to do with economics? That suddenly all these weird nationalists and nativists got together thanks to the social media and decided to overthrow the established order? People who believe  this remind me of  Saul Bellow’s statement that “a great deal of intelligence can be invested in ignorance when the need for illusion is strong”.

Can you briefly explain those two types of forces that you say often lead to reductions in inequality when the gap between rich and poor gets especially large, the benign and the malign? What are they, and what is the causal mechanism that leads the explosions in inequality to lead to one or another?

I divide the forces that reduce inequality into malign and benign. The principal malign force in the modern era was war. It reduced inequality not only through destruction of physical assets but also through increase in taxation that was necessary to maintain war effort and to raise mass armies. The role of war in that respect is quite well known.

The benign forces that reduced inequality in rich counties between either the New Deal or the end of WW2, and the 1980s were mass education, trade unions, socialist political parties, high taxes and social transfers, and technological progress in the instances where it was pro-poor, that is where it helped low-skilled labor more that high-skilled.

I do not think that many of these forces will remain operative in the near future. For example, trade unions have been decimated, not only by anti-labor legislation  but also by the movement away from massive factories that brought large numbers of workers together in one place (the so called “Fordism”) to much more skill-heterogeneous service sectors with much smaller sizes of units.

Mass education will not play the same role either: it was a force for equalization when rich countries moved from 6 or 7 years of average education to 13 today, but from 13 years of education, you are not going to move to 20. So this is where quality of education rather than mass education becomes crucial.

Finally, I do not think that yet higher taxes and transfers are any longer accepted by the majority of the electorate. This may be due to a much more skeptical view that today’s generations have of government’s ability to use money effectively.

It is for these reasons that I believe that the key benign forces to reduce inequality in the future will consist in equalization of endowments. This means first, better access to high quality education for all so that the returns to education become more equal, and second, what I call “deconcentration” of capital ownership. The latter implies tax incentives to promote wider ownership of capital and includes also the schemes such as Employee Stock Ownership Plans.

If wage gaps between workers become less, and distribution of income from capital becomes more equal, then you can achieve relatively equal outcomes even without greater government role in redistribution of current income. If this is not done, the danger is that with the heavily skewed distribution of property that exists today in literally all rich economies, any increase in the capital share of national income translates directly into greater inequality in personal incomes. Then you either let inequality get worse or you need to increase redistribution of current income for which, as I said, there is no political appetite any more. You will be thus left without instruments to offset underlying increase in inequality,

 A lot of people on the US left are now yelling, "Bernie would have won!" and it seems that one way to read this phenomenon, using your book, is that they're arguing that we had a chance to counter-act this high-inequality moment with the 'benign forces' you describe, but that now with Trump voters may have unleashed malign forces, through attempts to de-globalize, or perhaps through trade wars or a real war. Does this interpretation make sense to you?

Yes, the interpretation does make sense to me although neither I nor anybody else can prove that Bernie would have won. But, as many people have written, this election took place at the time when many voters wanted to see a candidate for change, and Hillary Clinton was indeed a candidate for change in the fact that she is a woman, but practically in nothing else. And it seems that for many people that was not enough.

One of the more striking parts of your book is when you argue that the world's last great period of globalization and inequality actually came to an end because that inequality led to World War I, which itself destroyed globalization, lives, and property, bringing inequality back down. But you use the unexpected trio of Lenin, Hobson, and Ferguson and the 'imperialist competition' theory to explain the relationship. But this theory isn't very widespread, right? Why do you find it convincing?

There are, of course, almost as many theories explaining the World War I as theories explaining the fall of the Western Roman Empire. The imperialist theory was one of the first since it was formulated in parts even before the war started, and in parts during and just after the war. I find it persuasive because it puts the economic forces ahead of the others, such as political or military, and thus agrees both with I tend to believe in general (priority of economics) and more importantly with what was the spirit of that time. That time, say from 1870 to 1914, was just like ours, the time of huge technological progress and massive commercialization (or you may call it “commodification”) of labor, land etc. combined with globalization. It was an “economics time” par excellence.

In the barest possible terms, the Hobson-Lenin thesis is that high domestic inequalities implied lack of domestic aggregate demand (because the marginal propensity to consume of the rich is lower than that of the poor), and the excess savings looked for investment opportunities which they found only in overseas territories. Then, in other to protect their capital, whether directly invested there or in the form of government bonds, the capitalists called upon their countries’ military resources. We thus get the use of force to exact repayment of the debts (the “gunboat diplomacy”) in Tunisia, Egypt, Venezuela or, even better, to directly control territories, that is to create colonies. As Hobson wrote at the turn of the 20^th century, “the tendency of investors is to work toward political annexation of the countries which contain their investments”. 

Every powerful country in the 19^th or early 20^th century did that: not only England and France, but also Germany, Russia and the United States. Austria-Hungary did the same except it did it in Europe. It is this competition for the conquest of territories (resources and cheap labor) across the world, or to paraphrase AJP Taylor, “for the mastery of the world”, which led to the War.

The important part of the theory is that it shows how international conflict can be caused by purely domestic forces. This is why I discuss it in the context of the Kuznets waves, for it is, I argue, indeed high inequality that (indirectly) unleashed the malign forces of war which ultimately curbed its further increase. This will be, I hope, the lesson useful to remember now and in the future. It is not some kind of blind “blood and soil” imperialism that is often at the origin of the conflict, but imperialism which is responding to the well-defined interests of certain classes. Classes which in turn use the state power to further these interests.

In the book you say that, “Rising inequality indeed sets in motion forces, often of a destructive nature, that ultimately lead to its decrease but in the process destroy much else, including millions of human lives and huge amounts of wealth.” This is true outside of just World War I, correct?

I think World War I in the previous answer is probably the best example. But the role of economic interests in provoking conflict is endless, from military conquests in the ancient and medieval worlds that were motivated by the desire to get cheap labor through enslavement to, for example, US sugar manufacturers that, angry at Cuba’s nationalization, provoked the political estrangement of the two countries for more than half a century. So, the argument that economic interests often stand behind foreign policy moves is not, I believe, hard to make: we can read about it practically daily in the discussions of what Trump and people around him might or might not do in function of their pure economic interests. And then going from these economic interests to showing that often they become more acute under conditions of high inequality, simply because the stakes are greater, seems to me to be but an additional step.

So could we be entering another phase of history in which we experience chaos unleashed indirectly by inequality?

It would be too simplistic to say that income or wealth inequality alone unleashes the chaos. As argued in my book, inequality is one of key enabling factors, it is the background against which the economics and politics work. Inequality makes conflicts, both domestic and international, sharper and one should not forget that creation of a foreign conflict to better mask domestic conflict is a well-proven and much used tactic.

Right, the classic strategy of using outsiders or division to distract from domestic problems, arguably the classic tool in the demagogue's toolbox. Re-reading your book after Trump and Brexit, I remembered your short essay, “For whom the wall fell,” in which you showed that only 10% of post-communist countries successfully transitioned to capitalism and more democracy. Among liberal cosmopolitans in the US now, there seems to be the belief that a third major threat to their way of life – in addition to Brexit and Trump – is the rise of Putin and right-wing populism or neofascism  in Eastern Europe. Is it perhaps unsurprising that this would appear in these regions? Maybe these are other losers of the age of globalization rebelling against the dominant order, or do you disagree?

Yes, the rise of the right-wing populism (although I would not go as far as to call it  neo-fascism) in Eastern Europe, and especially in Russia, is a matter of concern. I must admit that I am not altogether surprised since I always thought that the revolutions of 1989 were nationalist revolutions first and democratic revolutions second. They were revolutions of national emancipation: for the “independent” countries against the Soviet Union which imposed on them the puppet governments, and for the then-republics of the Soviet Union, Czechoslovakia and Yugoslavia, against what each of them saw as an unfair deal or domination by the others. Russia under Yeltsin for example (when Russia was still part of the USSR) followed an entirely secessionist policy.

On top of that, you had in Russia, broadly speaking a failure of new capitalism to increase incomes and to create a broader middle class. Nationalism plus economic failure and exceedingly unequal distribution of wealth plus the feeling of humiliation after the end of  the Cold War provide an almost ideal breeding ground for the growth of aggressive and authoritarian nationalism. This is what we now have in Russia.

But this does not explain Poland which is, by far, the most successful country in transition to capitalism. You can explain Poland (and Hungary, and Slovakia) only if you realize that the 1989 revolutions had a large nationalist and clericalist component.

So it would make sense, from a very narrow economic perspective, to understand why Russia and other postcommunist countries would be less happy about the current order? Is the opposite true, that people in places like London, and New York, and California, may not know how well they've had it? You wrote in your book that a full half of the increase in US personal income inequality can be explained by New York, the San Francisco Bay Area, and Washington State. Historically, are the winners usually aware of their privilege sitting at the top of the pyramid, or is myopia common?

I think that myopia is very common, especially when you believe that what you have is fully deserved and that you are not only richer but morally superior. It was Hayek of all people who many years ago noticed that one of possibly fatal weaknesses of capitalism as actually practiced is that it tends to ascribe moral virtue to economic success. Let me quote him: “it bodes ill for the future of the market order that [identifying success with virtue] seems to have become the only defense of it which is understood by the general public.” If you believe this then you cannot understand anyone who questions the existing order; he must appear to you either as a brute or a villain.