ON THE SUPPOSED "MYTH" OF THE BENEFIT OF FREE MARKETS / GLOBALISATION

It is disappointing to note the numerous one-sided criticisms in the press flaying the US on the issues of "free markets", "globalisation", and/or "free trade". The prejudiced diatribes from Ms Roy and others on this subject often fail to enlighten readers on the big picture, and at the same time do not provide any proposals for alternative ideologies that are guaranteed to work in a democratic system. For instance, no comments are made on why Communist ideologies failed in the former USSR in spite of the apparent benefits in terms of lower poverty rates and income inequality. To provide some balance to this issue, we briefly address below some of the main criticisms we have seen to date.

INCOME DISPARITY

It is undeniable that ways and means to increase the income of the poor must be found in every country. In the United States, it is well-known that income disparity between the richest 1% and the poorest 20% of earners has continued to widen dramatically over the years. However, that statement masks various other facts. For instance, post-tax average income for the lowest 20% of earners essentially remained flat in the period of 1979-1997. Post-tax average income for all other income brackets actually grew over the period 1979-1997, ranging from ~6% all the way up to 157% for the richest 1% of the population. In other words, the rich got richer but the poorest really did not get poorer, and those in between also grew richer, in the US economy.

Consistent with the above is the increase in median household income for all groups except Hispanics (includes individuals of Mexican- and / or Latin American origin), in the 1967-2000 period. Median household income for Hispanics began to increase steadily only in the mid-to-late 90s. The lower median income for Mexican- / Latin-Americans and the highest median income for Asian and Pacific Islanders (not Whites), fairly correlates with the degree of higher education.

Women-to-men earnings ratios in the US have also been steadily increasing in the past 2 decades.

The data cited above shows that the free market economy in the US (a) did not make the earnings situation worse for its population, (b) in fact improved the quality of life for the great majority, (c) substantially improved the earnings power for women and most minorities, and (d) generally rewarded higher skills and education with higher income, as one may expect.

POVERTY

Official poverty rates for minority African-Americans have been dropping significantly since a high of >50% in 1959 to ~ 22% in 2000 - which is significant evidence that the US economy has indeed helped in improving the quality of life of African-Americans who were previously disadvantaged and subjugated. Poverty rates of Hispanics have been relatively unchanged (fluctuating up and down) while those for other groups have decreased and remained around the 8-12% mark in recent years (not substantially higher than China's poverty rates even before its "liberalisation" began).

Poverty rates were substantially lower for individuals with at least a high school diploma and even lower for individuals who had a college degree, and the same has been true for unemployment rates, as expected. The bottomline is education or the lack of it is one of the topmost indicators of lower poverty and unemployment. Poverty reduction efforts must therefore be focused on providing more education aid to the poor and targeting the kind of education that would allow the poor to be rehabilitated into areas which affords them maximum probability of sustained higher income.

Poverty rates were significantly higher for families with predominantly women households, indicating that attempts to bring down poverty need to focus partly on providing ways and means for single women and their children to be more successful in society.

It has been argued especially by conservatives that the highest earners in the population usually invest in new businesses and thus create new jobs, which in turn benefits lower-end earners. As is widely known, this is only partly true. The fact of the matter is that to ensure long-term poverty reduction it does not make sense to continue to lower taxes for the richest tax bracket unless clear proportional increases in investment are seen from those individuals or groups. Indeed, post WWII experience suggests higher taxes for the richest may not necessarily be a bad idea for the US economy.

UNEMPLOYMENT / LAYOFFS

Layoffs are often cited as being a terrible aspect of the US "free market" economy. For all the criticisms against the free market US economy and job losses in manufacturing, the overall unemployment rate in the US has generally varied in the last several decades between 3% to 9% with the exception of a spike to the 10-11% neighborhood during the recession in the early 80s.

Misleading statements on the "net" job losses in manufacturing attributed to trade deficits arising from NAFTA and WTO, ignore the creation of hundreds of percent more new jobs in various other sectors of the economy partly driven by the information technology revolution. In other words, the skill sets and the areas of concentration of jobs made a shift towards services from manufacturing, with a significant net job growth of millions inside the US in the decade of 1989-1999. Incidentally, average hourly earnings (corrected for inflation) grew nearly 3% in the US in the 1989-1999 period, with the earnings gains much higher in the services industry (where the new jobs were created) and the earnings losses concentrated in the utilities and manufacturing industries which lost most of the jobs to countries overseas (which gained jobs from the US as a result).

Moreover, arguments that the labour force is not really mobile are only partly true considering that with the transition to the information-technology-centric economy, jobs can be performed at remote locations worldwide allowing "free markets" to include apparent mobility in labour.

Mr Chomsky is evidently of the opinion that "real" growth occurred in the US only in the period between WWII to the 70s. Even if this were to be true, which is not the case, it must be noted that the unemployment rate in the US during that period, which hovered between ~3-7 % is very similar to the unemployment rate in the US in the bulk of the 90s. (Real US GDP growth is captured in this link.) Indeed, linked to the economic growth in the US, crime rates have been falling. Property crime rates continued to drop significantly since the 70s. Violent crime against men also has been dropping, while violent crime against women started dropping significantly only in the mid- to late-90s. Overall violent crime levels which had been relatively unchanged (with ups and downs) until the early 90s, dropped nearly 40-50% by the end of the last century.

Minority-owned small businesses and small businesses owned by women grew much faster in number in the United States from 1992 to 1997 than all firms taken together, generating significantly higher revenue growth as well for those firms. In particular, states like California, New York, and Texas which have been significant leaders in the economic growth of the U.S. had the highest percentages of minority- and women-owned firms. This should also dispel concerns that minorities or women (who are traditionally disadvantaged in most nations) suffer in a "free market" economy because they are more disadvantaged to begin with.

Research done in 1996 in the US on the reasons why people did not work indicate childcare and illness as the largest contributors to unemployment then. Additionally, nearly 1 in 5 of unemployed people were either retired or in school. Social Security and Medicare payments available to retirees in the US may offset trends towards poverty in that segment to a limited extent.

Arguments are being made by some that jobs in every sector in a country should at least be maintained over time - as evidence for a beneficial free market economy. This statement is inconsistent with the notion of a free market. Free markets do not and CANNOT assume any one sector should sustain itself indefinitely. Like the evolution of species, markets also evolve over time. They have a life cycle of their own - introduction, growth, maturity and death - and those market sectors that succeed in the long-term (longer growth and/or maturity phases) are those that are evolutionarily stable (i.e. have a sustainable demand environment). Creating artificial short-term demand in business is the equivalent of artificially changing the environment of an evolving species in the short-term to select a particular strain, without knowing if that strain is an evolutionarily or developmentally stable species in the long-term, possibly in a different environment. In times of great change, what governments can and should do, is to develop programs for the education, training and re-training of employees, to make their assimilation into the evolving economy less painful.

At the risk of sounding prosaic, on a topic which is probably one of the most discussed on earth, we would like to ask the following. If an industry is outmoded or defunct or just cost inefficient due to the emergence of new technologies or labor markets, should a country continue to support that industry perpetually just for preserving jobs, regardless of whether products from that industry are competitive or in demand? Ultimately, demand determines the viability or need for any business and that demand is set by the end customer. Customers (individuals or businesses) buy products optimizing value and cost. Thus, free markets have to be such that businesses can aim to lower costs and optimise profits. To do anything else would be no different than asking the head of a household to spend as much as possible just to please unsatiable members of the household, regardless of whether the household earns enough to afford that lifestyle! It would be interesting to study how many households on earth would be able to live like that for extended periods.

The fact is that the possible benefits of a democratic, free market economy, just like the possible benefits of a socialist, regulated economy, depend entirely on the characteristics of the population that makes up the respective economies. For countries toying with the idea of globalisation, it is important to be educated on how benefits, challenges or failures can arise in an era of globalisation (especially learning from the former USSR), because with the expanding reach of the internet, labor and financial capital, globalisation is more or less inevitable. Clearly, countries that control population growth and increase the skill-level of their workforce through a very strong focus on education are the ones most likely to benefit long-term from globalisation.

A basic principle in human life is that you reap what you sow. If countries and individuals do not "invest" in education, they cannot reap the rewards of globalisation. Obviously not every country will reap the rewards of globalisation, for demand is ultimately finite for most products and services. Free trade may not be desirable for every country; however nor is migration to a dictatorial, and presumably socialistic, economy! Mr Chomsky's comment that citizens of some Latin American countries are disillusioned with democracy and would rather go to a dictatorial military regime is an oversimplification that assumes somehow that a dictatorial regime would benefit its citizens more! Not that the evidence for this is compelling.

There is likely to be no debate across the world that income inequality has to be reduced. However, this goal should be rephrased as the need to increase the income for the poorest. There are many ways to drive towards this goal and examples include responsible taxation, higher government investment in public projects, greater ownership of companies by ALL employees using stock option or stock grants (something that has become more popular in the US since the 90s), etc. At the same time, income equality for all is neither a practical or sensible goal. This would be no different than demanding all students in a class get graded equally, all universities get ranked equally, all investors be provided the same return irrespective of their investment, all teams playing in a competition be ranked the same, all scientists be recognized to be equally capable, all writers to be equated in their caliber, and so on. Some income inequality is inevitable and desirable as long as there is inequality in the talents and capabilities from one human being to another.

Finally, Ms Roy feels thankful that India, with its "fragile economy" and "complex social base" has so far not bought into the US way of life. Really? Well, even if this were true, we would first need to understand what the implication of the phrase "complex social base" is. Is it the fact that India has people from multiple religions? The US has that. Is it that India has people from different castes (same religion)? The US has not only that but people from numerous countries as well. And the US is as successful a democracy as democracies get. There is a lot more than meets the eye in this phrase "complex social base" that cannot be swept off the table in as easy a fashion as Ms Roy has done.

-TR/KK

PART III
» Rhetoric vs Reality: Universal Law #3 For Some US Critics

PART II
» The Algebra of Infinite Illogic

PART I
» Enduring Blames: Uncle Sam & The Goddess of Big Tirades