Tuesday, January 11, 2011

Western Capital to China: Please Keep Wages Down

In today's issue of the Financial Times, there's a remarkably blunt warning that "Rising wages will burst China's bubble." True, China has enjoyed strong growth while most of the rest of the world has endured deep depressions. But don't be fooled by such superficial measures. On the question that really counts, China is in trouble: "The Shanghai market is at less than half its all-time high, significantly underperforming the other three members of the Bric group."

Like Japan in the immediate postwar period, the piece argues, China has so far seen "workers flooding into the cities from the countryside, depressing wages and setting off a virtuous cycle of rising profitability and rising investment. In the mid-1950s, Japanese labour had taken 60 percent of total value added. in the miracle years, this ratio fell to 50 percent." Miraculous indeed -- but alas, it couldn't last. By 1980, the labor share "had soared to a plateau of 68 percent. These gains had to be fought for. In the 1970s, Japan's now dormant union movement was in its heyday. Profit margins were squeezed, and in real terms the stock market went nowhere for a decade." Oh noes! And despite seemingly abundant reserves of cheap labor, the same disaster could befall China. "Can workers grab a larger share of the economic pie before the urbanization process is complete? In Japan they did. ... If China were to follow Japan, the next stage would be labour strife and inflation. The best way to avoid that outcome would be a radical tightening of the current super-easy monetary policy. But that would risk a serious slowdown and probably necessitate a large revaluation of the renminbi."

So there it is. The important question about China's future is the value of financial assets. And the great threat to asset-owners is the likelihood of rising wages, which will come about through increasing organizing among Chinese workers. The only way to prevent that is pre-emptive tightening, even at the cost of slower growth. The case for austerity is seldom made that bluntly, certainly not for the rich countries, but I don't think the underlying motivation is much different. It's also noteworthy that big revaluation of the renminbi is presented here explicitly as part of a program to hold down Chinese wages. In other words, China faces a choice between higher wages and a higher currency. To China-competing firms and workers in the rest of the world, either would be just as welcome. But for masters of the universe with Chinese stocks in their portfolio, they look very different indeed.

(Incidentally, these questions -- the relationship between profitability, investment, demand, inflation and the politically-determined division of output between labor and capital -- are largely ignored by mainstream macro, saltwater as well as fresh, but are right at the center of structuralist, Marxist, post-Keynesian and other heterodox approaches to macroeconomics. If only there were some economics department interested in supporting those approaches.)

EDIT: There was a link on a Something Awful thread sometime around March 20 that's sending a lot of traffic to this post. Unfortunately, not being an SA member, I can't see the thread. Anyone want to tell me what it was, in comments?


  1. And as if on cue, today's Times has the soft version, saying that the currency and higher wages are a problem because of inflation, and because the lower wage countries U.S. companies might go to aren't big enough to handle their manufacturing needs. (And the required aside that the one child policy is to blame for the drying up of the cheap labor supply). Thoroughly unsurprising, but the two side by side are kind of entertaining to read.

  2. Hear, Hear. So why not just impose trade barriers to cut off Western capital's access to cheap, exploitable labor?

  3. Because I agree with the author of the article, that if China's growth continues on its current trajectory, we'll see Chinese workers become increasingly assertive, and a rising wage share. The difference is I think that's a good thing.

    I also think the effect of trade with China on the US labor market is greatly exaggerated.

  4. @ Josh:

    You said: "Because I agree with the author of the article, that if China's growth continues on its current trajectory, we'll see Chinese workers become increasingly assertive, and a rising wage share." How long will that take?

    You said: "I also think the effect of trade with China on the US labor market is greatly exaggerated." How come?

    What about the work-place micro-politics: American workers are cowed by management's threats to move production to China, and elsewhere off-shore, so they don't organize or press demands.

    What about the macro-politics: Protectionism is a gut-level working-class issue that could win the left a lot of support.

    What about the moral argument: As a society we ban by law all sorts of labor abuses--child labor, unsafe workplaces, workers being imprisoned and beaten for organizing (at least not too much)--environmental abuses and so on. Isn't it a bit hypocritical (and self-defeating) to then turn around and farm out a huge part of our economy to countries that permit those very abuses?

    How committed a free-trader are you?


  5. Bill:

    Your first question is well-taken. If I'm going to continue making this argument, I need to learn a lot more about the Chinese economy and society. But, I think that there are very good historical precedents for thinking that the development of Chinese export industries will encourage worker militancy and a rising labor share. And there's at least some evidence that it's happening now. As one random anecdote, I happened to have lunch today with someone who's been doing fieldwork in rural China for the past few years, and he said that one of the main forms that inflation is taking in China right now is rising wages for migrant workers.

    On the employment and trade side, my argument is that the US does not face a balance-of-payments constraint, so a US government committed to full employment could raise demand to the necessary level without having to worry about the resulting trade deficit. This will remain true as long as the US continues to provide the world reserve currency and the deepest, most trusted financial markets, which looks likely to be the case for the foreseeable future. Of course we don't have such a government now. but I'd rather be fighting for that, rather than stoking hostility to China.

    On your last point -- well, political arguments are sensitive to the particular political contingency that you find yourself in. At this moment, I personally see a lot more political potential in arguing for, say, a massive program of green investment than in pushing for balanced trade. (The latter if anything tends to end up meaning support for austerity, since the one reliable way to move the current account toward balance is to depress incomes in this country, as we saw in 2008-09.) So I think an argument that trade is not the problem, is more politically useful than the opposite. That could change, obviously.

    And finally, I'm not a free-trader at all. I think, for many industrializing countries in particular, restrictions on trade and financial flows are essential. It's just the US's unique (or at least exceptional) position in the world trading system makes trade restrictions much less beneficial for us, and much more costly to the rest of the world.

  6. Mr. Tasker, from his bio, is more motivated to drum up investment in Japan than to protect greedy investors in China.

  7. Can't say I'm really interested in Tasker's personal motivations. The point is he wouldn't be making this argument, and the FT wouldn't be printing it, if the intended audience weren't frightened by the idea of rising Chinese wages.

  8. The SomethingAwful thread is essentially just a running discussion about every awful thing that is happening to the lower and middle class. NY Fed president William Dudley's apparently tenuous grasp of inflation was brought up and one user commented that "neoliberalism only understands one type of inflation," linking to your post.

  9. I was the one that linked it on SA and yes, it was related to certain terrible ideas about inflation. A good example would be that little discussion between Mike Konczal and Joe Gagnon, particularly this rather extreme assertion by Gagon:

    "Monetary policy works through the labor market. If inflation is too high, we throw people out of work to cool the economy and keep wages low. And if inflation is too low, you want to hire more people to get the economy going faster. If you look at wages there’s no worry about any future inflation."

    To complement your quote of Keynes,

    "Money, that is to say, cannot be readily produced; — labour cannot be turned on at will by entrepreneurs to produce money in increasing quantities as its price rises in terms of the wage-unit. In the case of an inconvertible managed currency this condition is strictly satisfied. But in the case of a gold-standard currency it is also approximately so, in the sense that the maximum proportional addition to the quantity of labour which can be thus employed is very small, except indeed in a country of which gold-mining is the major industry."

    Now if you assume that workers necessarily lack the ability to save, wages should be deflated to price-levels, and some permanent Walrasian equilibrium of asset prices, what Gagnon was saying starts to make a little bit of sense.

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