What have been the effects of neoliberal reforms in India? It's a broad question and there's no simple answer. However, if we are concerned about fairness and justice, we should be looking at the impact on the agricultural sector, which employs 600 million people and not just at the glossy BPO and IT sectors which are miniscule by comparison.
I'm still studying the impact, but the following report sheds some light on this:
http://nceus.gov.in/Executive_Summary_08082007.pdf
"In the last several years, the growth rate of agricultural wages has declined and there are evident signs of agrarian distress in many areas which specially affect marginal and small farmers. There is now a clear need to address this sector (i.e. agricultural labourers, marginal and small farmers) in a focused way. "
14 comments:
how efficient are those 600 million people? In the US, 3% of the work force is able to produce food for the rest and more than that.
Exactly -- I agree with Krishnaswami -- if you want to improve productivity, you have to make agriculture less labor intensive and more technology and capital intensive, which inevitably means moving hundreds of millions of people out of agriculture, and also means large landholdings becoming the norm. We should not expect agriculture to employ more than 5% of our population in the long-term. And if you don't prioritize manufacturing and services, you will have nowhere to move those surplus agricultural workers to. On a semi-serious note: I propose making a systematic list of all those who have either voted against reforms in these areas, or adamantly opposed those reforms in public fora. Then we can keep the list handy for the inevitable time in the future when the angry, unemployed former farmers will be looking for people to lynch. :)
There are responses at two levels. Again, I feel the comments here reduce to sloganeering without an understanding of real issues.
Also see my forthcoming post on this issue, coming soon.
0) You want to improve productivity? The best way to do so (as confirmed by study after study, World Bank, India's own govt, experience elsewhere) would be to empower these people. Basic health, education, opportunity. Write off the huge debt the farmers face. Much of this debt is unpayable, they'll have to be paid sooner or later by some govt. Tamil Nadu has taken some measures in this regard where the DMK has written off 7000 crores of debt. They were not going to get that money anyway.
This point was also made by Joseph Stigler in Making Globalization Work. Much of the debt everywhere is immoral and impractical. Why should anyone pay it? To take an analogy. Look at what happenned to Argentina when it defaulted on the IMF debt. It grew at 8 percent. That's no joke.
In contrast, leaving these people on the mercy of market forces is virtual murder. They don't have opportunities to move somewhere else, otherwise they'll already have moved. They don't have shock absorbers and price stabilization funds to protect against market forces - virtually indispensable in the west. Even though the govt.'s own commission and tons of other people say there ought to be a fund. Farming is becoming so unviable in India that 40% of farmers have expressed a desire to quit farming. But unless we take measures to give these people other options, it's immoral and unrealistic to say - reduce the people involved in agriculture.
Keep in mind even the most optimistic estimates of growth of manufacturing sector cannot absorb the big shift from agriculture. As a side note, even in manufacturing, during 1990 to 2002, real wages fell 22 percent, while labour productivity shot up 84 percent. That's also evidenced in the Reagan "miracle" era and subsequent experience in the US. For the last 25 years, the real wages for the bottom 40% of the US population have either stagnated or declined, while the US leads in the world in labour productivity and the number of hours worked/day (in the developed world).
1) Why should the goal be productivity/efficiency at all? The goal of subsistence agriculture is not "productivity". They don't know how. They have no opportunity. No credit. No education. No health services.
The immediate goal should not be productivity, but empowerment. This is not just a moral, but a pragmatic argument. Compare above.
OK, let's tackle this systematically, as you seem to be confusing several distinct phenomena.
1. Let's start with the American example of increased productivity and decreased real wages. Economists generally agree that there are only 3 ways to increase real wages: (a) Increase productivity. (b) Constrain the labor supply. (c) Wealth transfers from one group of workers to another (note that this will not change real wages in the aggregate, only their distribution). Similarly, there are only 2 reasons for low wages: (a) Low productivity (this may not have anything to do with the performance of individual workers, as low factor productivity is also caused by bad institutions, bad infrastructure, undeveloped markets and pricing mechanisms, etc, as in many developing countries which flirted with left-wing policies). (b) Excess labor supply (the old Malthusian issue).
Now, let's look at the U.S. It is almost certain that rising inequality is the result of lower marginal taxes and lower subsidy spending (for things like education); i.e. incomes and wealth at the top will grow faster than incomes and wealth at the bottom if redistribution mechanisms are minimal, for a variety of reasons. However, this does not explain the drop in real wages. For that, you have to look at the labor supply. The reason manufacturing wages have fallen in the U.S. is that the global manufacturing labor force has increased massively over that period, as China, Malaysia, Vietnam and other countries have entered global manufacturing supply chains. If not for high productivity, wages in the U.S. would in fact have fallen even further. The excess labor supply in manufacturing has also had a knock-on effect on other unskilled jobs in services, producing declining real wages in big-box retail, for example. We can test the correlation between productivity and wages by looking at areas where the U.S. has not yet had to face significant competition from new participants in global trade: financial services, strategic management, the entertainment industry. Salaries in these fields have in fact risen tremendously in real terms over the past 30 years, although in the longer term the U.S. will experience decreasing real wages even in these fields as India and China begin to compete more effectively in them. American manufacturing workers were overpaid a generation ago, because of artificial labor shortages caused by the absence of much of the world's population from competitive global manufacturing: India, China, the Soviet Union, etc, etc. This gave unions the power to negotiate wages far higher than workers would have been able to command in an open global market. Let's be frank: People with a mere high school education were temporarily able to afford four-bedroom suburban houses, two or three cars per family, family vacations, etc etc. This was never going to be sustainable once workers elsewhere entered the marketplace. They are now paying the price in rising manufacturing unemployment, which is essentially acting as a mechanism for transferring workers from higher-paid to lower-paid jobs (in non-unionized factories and in services) and thus correcting labor prices. This is a perfectly rational process, and is the only guarantor of American long-term economic health. In France, where this process is being retarded by government interference in the labor market (and where, incidentally, per-hour productivity is actually higher than in the U.S.), the attempt to preserve unionized sinecures has resulted in high unemployment among new entrants to the labor force, as it has prevented new jobs from being created. Looking at India, we can see how rising wages in the IT sector are the result of both improving productivity and short-term labor supply constraints. The major problem the U.S. faces is in fact insufficient improvements productivity because of insufficient investments in education, which have made it difficult for workers to improve their skills and move up the economic food chain. This is why their standard of living is falling.
2. Now, let's look at India more closely. Clearly, a long standing problem for us has been excess labor supply. We are not going to be able to solve this problem for a long time. So we have only three options: maintain the status quo, orchestrate wealth transfers (which is essentially what you propose) or improve productivity. Let's start with debt repudiation, which is one form of wealth transfer. A simple hypothetical case of sovereign debt repudiation first, as this is what happened in Argentina: I am Bankerman 1, a commercial banker managing funds contributed by all kinds of investors in the expectation of a good risk-rewards ratio. You are Borrowerman (a representative of your country's government), and you need capital for some grandiose scheme or the other. First of all, I doubt whether you are very familiar with how financial analysis and credit analysis actually works. So let's just simplify things tremendously and say that in order to assess the likelihood of repayment, I'll be using the discounted cash flow method to value your proposed investments, and calculate the net present value of my future returns. Now, ordinarily, once I see how little value your proposed use of my capital will add (let's say it's a poorly conceived and planned public sector steel plant which will soon become a white elephant), I will make haste to make tracks. :) However, I have political pressure on me to make the loan in the interests of improving relations with your country. I also am offered partial loan guarantees by my government, which, while not eliminating the risk entirely, do mitigate it. So I lend you the money on a 10 year basis. (In practice, there are far more parties to the transactions, including your own banker, who will perform underwriting and advisory functions for you in your attempt to raise capital, in return for a significant fee. The debt is usually syndicated to spread the risk around, so usually Bankerman 1 is actually dozens of different banks and other financial institutions such as pension funds and insurance companies; some of the debt may also be held by retail investors.) Now, you go ahead and spend the money in ways that are far from wise. Some of it is also diverted not just for good old-fashioned graft, but also for populist political patronage -- paying the construction workers higher than market prices, for example, as a vote getter, or setting up a medical clinic for their use. Now, in theory, this is your right, because, for the moment, it is your money to do with as you wish. You will, however, have to pay it back with interest to its real owners, and you are making it less and less likely that you will be able to do so. Anyway, 8 years pass. Now it's clear to everyone that there's no way you can repay the loan. So you come back to Bankerman 1 and ask for another loan that you can use to pay off the first one. In other words, you are refinancing. Your creditworthiness is now lower (i.e. your risk assessment has gone up, unsurprisingly, based on your track record), so the interest rate on the new loan is actually higher than on the old one. But what do you care? It's not really a debt for you personally; it's the taxpayers who will have to pay the price for your gross mismanagement. Perhaps Bankerman 1 obliges you. Perhaps he turns off the tap and you get the money from Bankerman 2 instead. It doesn't matter. The cycle continues. You might do this, as Brazil did in the 1970s and 1980s, for quite some time. Usually, because the risk is higher, the new loans will also be more short-term than the old ones. Eventually, of course, the bankers decide that your risk levels are now too high, and refuse to send any more money your way. Since, as you put it, you have no hope of paying anyway, you default, and leave the investors holding worthless bonds or loan agreements. Their balance sheets suffer, which means there will be less money for the pensioners, the insurance policyholders, the retail depositors, etc. Of course you will grow at a higher rate -- you just helped yourself to an infusion of free money. :) It's like my running a business with $500 in capital, then stealing $1500 in capital from my neighbor, and therefore growing the business faster. :) I would not however call it the moral approach. :) You may argue that the lenders' terms were unfair. But no one forced you to borrow. No one forced you to spend the money in ways that made repayment impossible. No one forced you to run deficits so that you needed to incur sovereign debt in the first place. Debt repudiation is not a magic wand. There is always a price to be paid by someone, somewhere. In the old days, you paid a price too -- investors had long memories, and the tap would stay shut for future borrowing needs. Argentina, for example, has a long history of defaults going back to the nineteenth century, and investors retaliated by refusing to subscribe to future debt issues. Where possible, they also seized assets in lieu of repayment. Nowadays, with deeper and more liquid capital markets and far greater appetite for risk, investors have shorter memories and are more forgiving. So you might get away with this sort of thing to an extent. But that doesn't make it moral. :) Turning to private indebtedness, I understand that you want to make these people's lives better. But these problems are in fact caused by decades of lousy banking laws, which are what has forced these farmers to borrow from moneylenders at extortionate rates. If you want a long-term fix, you have to allow private, for-profit formal banking institutions to replace informal credit arrangements. The moneylenders are able to charge high rates because thet have no meaningful competition. For-profit private microfinance schemes have proven effective in solving this problem. Government credit schemes have been a bit like sub-prime loans in the U.S.: extensions of credit with very poor diligence, resulting in inevitable arrears and defaults.... In the meantime, who is going to now pick up the tab for debt cancellation? You do realize that this is not really free money, right? It has been siphoned off from other sectors of the economy, which could have put it to better long-term use.
3. One last thing: I'm not saying they can all be absorbed by manufacturing. I said manufacturing and services, and the latter category is a particularly vast one. Nor am I suggesting that they will get higher wages, just that their labor will be put to more productive use that way. Wages don't depend on productivity alone, but also on labor supply, and so we should expect real wages for unskilled workers in India to remain low for at least two generations. But higher productivity will at least act as a check on wage declines caused by increased supply. Maintaining the status quo, or coming up with ways to keep these people in agriculture and actually subsidize low productivity, will simply produce disaster. The choices for the next few decades for the unskilled aren't between subsistence and prosperity. They are between immiserisation in agriculture and subsistence-level wages in manufacturing and services. Please note that Indian private industry has so far taken the path of capital and technology intensive manufacturing, rather than labor intensive manufacturing. And one strong reason for this has been our labor laws and the politicization of unions. Again, I will give you an example, one which has just become a minor news item. Bajaj's Akurdi plant is closing down, and the media hasn't really devoted much space to understanding why. Some of this is of course the downturn for scooter and motorcycle manufacturers. But there is another reason. Bajaj has a third factory at Chakan. Akurdi traditionally operated in the same way as most public sector manufacturing units. It was grossly overmanned with a flawed work culture, workers were paid more than they were actually worth, 20% were daily wage earners, 80% skilled workers. Rajiv Bajaj, on returning from B-school in the U.S. in the early 90s, decided that Akurdi was unreformable because of labor laws and union power, so he built Chakan, emphasizing a totally new workforce and work culture: 80% diploma engineers, 20% skilled workers. The engineers were paid more, but their productivity was so much higher that costs were actually lower. :) In 2000, Bajaj made 1 million vehicles with 22,000 workers. At Chakan levels, it could have made 1.8 million vehicles with 7,000 workers. Chakan was Rajiv Bajaj's solution not just to low productivity, but to low productivity coupled with rigid restrictions on hiring and firing workers, work hours, etc. Bajaj made hefty VRS payments to halve its workforce between 2000 and 2005, under our labor laws. They actually paid workers to get lost! Just think if they'd been able to terminate employees the way employers can in the U.S., how much more they could have invested in R&D, optimizing operations, and other investments that would actually expand the business and amke it more competitive, instaed of throwing the money away. Now, if we want employers to hire more of our less skilled workers, we better fix our labor laws. We are actually motivating industry to spend more upfront on capital and technology, just so they don't have to deal with labor issues.
And I know whereof I speak, because I know plenty of entrepreneurs who've chosen to get into services rather than manufacturing because of the laws and unions, even though some of the manufacturing businesses they considered offered higher prospective returns. This is because risk is always factored into the investment decision, and labor market rigidity and the political clout of unions present formidable problems during downturns. The root of many of our policy problems lies in Indira Gandhi's move to the left after her electoral losses in the 1967 election, which forced her to ease out pro-market voices like then-Agriculture Minister C. Subramaniam (Father of the Green Revolution) and then-Planning Minister Ashok Mehta. India was just beginning to embrace decontrol and liberalization in the mid-sixities. Then, in 1969, she was forced to move even further to the left after the Congress split to keep her minority government in office until 1971 with Communist backing (a parliamentary scenario not dissimilar to today's, I might add). Many of our worst policy decisions date from this era, such as bank nationalization (by some estimates, the resource cost of poor macroeconomic policy since bank-nationalisation may be as high as Rs. 125 trillion measured in 1994 rupees).
Karan:
Thanks for your very detailed response. I prefer these types of discussions, because they are a learning experience for me and allow all the relevant aspects to be discussed.
I've also left a comment here at Srini's blog, if you want to discuss that.
I would like to make some observations first. I notice that we agree on many observed facts, but you see it being caused differently than I do and have different solutions.
A lot of this can be explained in terms of the framework of the thinking. It represents the emphasis of different priorities, which are mostly implicit in the discussions. We give things different names or labels.
One of the ways in which I and you differ is: "this is the way the system is and we have to work within this". And I say, "I don't agree, here's why. We can both do more within the system and change the system itself".
In other words, the question is not "what", but "how"?
I'll illustrate this in my points below.
1. Your first para. I'm a little unclear here, why are there 3 ways to increase wages but only 2 ways to decrease? In other words, why's not an option corresponding to (c) - that is - regressive distribution of income and taxation, not a cause of low wages? That's a cause of inequality, but isn't it a cause of decline of wages too? And why can't it be improved in those terms?
Your next para, to me, illustrates the points in my preface well. You say that:
People with a mere high school education were temporarily able to afford four-bedroom suburban houses, two or three cars per family, family vacations, etc etc. This was never going to be sustainable once workers elsewhere entered the marketplace.
Why? These people are asking: why should we be forced to sacrifice, when profits are zooming? To put in another way, why not correct this using wealth redistribution, like taxation, infrastructure, education, health? (point (c)). You're quite correct it's a "rational" by-product, but if you have a lunatic system, you would have rational outcomes which are lunatic.
We can look at it another way. The US economy is growing in real terms. The bottom 40% have declining wages. The top 1% or 0.1% or 10% have hugely increasing incomes. Why should it be so? Is it a law of nature? You call it "overpaying of labour". Why not call it an "overpaying of investors?" Incidentally, overpaying of investors is increasing, but the pay of labour is decreasing. To the left, it seems a clear case of "class warfare". Especially at a period where successive US govts. are virulently anti-union.
Let's look more closely at your position. Allow me to summarize (if I'm doing so wrongly, please correct me). You say US labour didn't stand a chance when labour from elsewhere entered the marketplace. They had to work more, or else.
Why? Why does this system conveniently have the effect of disempowering workers and empowering managers? And probably unrelated, more profits for the upper class and less income for the working class? Also unrelated possibly, is the big tax breaks for the rich. And less regulation of capital and draconian immigration laws.
Is it unreasonable to expect that your quality of life will be maintained, when your economy is growing (incidentally a majority of people in the US believe that their children will not live as well as they have - that's stunning)? Is it unreasonable to have the notion that you'd like to have medical coverage when you're sick? Is it unreasonable to be allowed to form unions to articulate your needs?
Again, there was responses at two levels:
a) Can anything be done within the system? How about some more progressive taxation? Expansion of health services? Repeal the draconian anti-labour laws? (only 7% of US labour in the private sector is now unionized). Regulate capital flow?
b) Can we change the system itself? Similar questions arise, which go together with the above issues. Why not reform the Fed Reserve? Why not dismantle NAFTA? Or the WTO?
Your comment on France is interesting. The situation you describe is quite typical of Europe - where they have higher wages, but much higher unemployment (I didn't know that France had such high productivity, but if it does, it only bolsters my point). Again, we differ on the causes.
Amartya Sen, in his book, Development as Freedom, posits a different reason (along with many political ones). The European Central Bank. He doesn't mention labour unions. Interestingly, a similar diagnosis is made by Joseph Stigler and Noam Chomsky.
The European Central Bank is an extremely opaque and "conservative" (actually very reactionary and elite - not unlike Reagan-Bush policies) institution. Even right-wing commentators in the US criticize it regarding these issues. It focuses exclusively on inflation and disregards unemployment. The policies which it follows makes it really difficult for governments to tackle unemployment. It has no accountability and transparency. That has very little to do with labour laws. That's also a big reason for the miserable growth of Europe. I must say, I don't know very much in detail about this, so if you have any info, I'm open to discussion.
2. India: I see that I've mixed up debt by a nation and debt by the poor. Apologies for that. Let me address these in turn.
a) Argentina: You provide a decent summary of what happenned. Again, the difference is the framework. Joseph Stigler makes an interesting point. Why should the problem be seen as "overborrowing"? Why not "overlending"? Certainly, international investors with their sophisticated analysis tools are in a better position to estimate risk than the dumb governments? In this view, the morality of the problem is seen for what it is: an impoverished third world country refusing to pay an odious debt which was imposed at a time of crisis: transition from dictatorship to a relative democracy. Keep in mind that the neoliberal policies started in 1983, when the Argentinian dictatorship ran up a huge debt, just as they were leaving power (see Naomi Klein's work on "Disaster Capitalism" for more details). If the situation was so bad, why did IMF give an A+ grade to Argentina in credit-worthiness? Shouldn't it have advised it to cut down on loans?
You say: Debt repudiation is not a magic wand. There is always a price to be paid by someone, somewhere. Right, that's my point. The investors should pay the price. They already got big interest on their investment. Why should the country pay it? Especially when the debt was started by dictators who fled the country taking all the money?
Again, this is a basic prioritization issue. Are the rights of investors more important or the rights of the poor majority to have a decent life?
b) Debt by the poor.
Do you have any quantification of how private banks would help? And places where they have been implemented?
More observations. Rural banks in the country have been decreasing substantially and expanding to the middle class. Probably the credit crisis in the rural areas is unrelated to this.
I have no problems with any solution as long as its getting money to the poor.
Microfinance is just a tool and a very minor one at that. In Bangladesh, Grameen Bank and all its affiliates just account for 0.6% of credit.
I do realize debt repudiation by the govt. is not free money. It gotten from taxes. It's basic redistribution. Of course, if you murder the bottom 20% of the population then you'll have more money for others. That doesn't make it right.
Hi Anand, I'll be happy to address your points in a little bit -- they essentially boil down to a misunderstanding of the long-term efficacy of redistribution, and a of how the relative scarcity of unskilled and skilled workers affects wage distribution. I'm waiting for you to address my points on trade first though: https://www.blogger.com/comment.g?blogID=4684731015419651639&postID=3240141953261368469
Hi Anand:
A lot of different issues to untangle in a single post. :) I think for now (given time constraints at present, as I've had a late night out and need to get to bed in a few minutes) I'll tackle the questions you posed about the U.S. economy. I agree that you can add option 3 to the list if you like. Just keep in mind that it can't change wages in the aggregate, only their distribution. My contention is that even real wages in the aggregate, and at the high end, are set to stagnate in the U.S. in the future. But let's put that aside, and examine the underlying reasons for the growing inequality of incomes in the U.S.
There are roughly 6.6 billion people in the world. Most of those people (especially in developing countries) have neither the education nor the skills to compete for high-end jobs in areas like wealth management or specialized legal services. But almost all of them can be trained fairly easily to do blue-collar jobs and even many white collar jobs. Many of these folks have really entered the global economy only over the past 30 years. Obviously this basic difference in labor supply for high-end and low-end jobs means that real wages for low-end jobs are declining in the U.S., while those for high-end jobs are not, as yet. Obviously there is a case for massive investments in education in these countries, so that a greater share of the labor supply can be directed at higher-end jobs. There, are, however, limits to this approach which have nothing to do with fiscal or institutional constraints. In the U.S., for example, which even today has one of the world's best educational systems, less than 30% of each cohort obtains a bachelor's degree; even among white Americans, only 34% do. Inability to afford college actually accounts for a relatively small percentage of this, especially among white Americans. A lot of people simply do not have the ability or the motivation to earn college degrees. More importantly, many college educated workers are also not adding unique value, and will experience wage stagnation as foreign workers begin to compete with them in a big way, and as the automation revolution continues. There are plenty of people, for example, who can do word processing, basic accounting work, programming, newspaper reporting, etc. These people are, for the most part, interchangeable -- they do not, as individuals, add unique value -- and so they too can expect wage stagnation.
Truly elite workers, however (top-performing CEOs and fund managers, truly exceptional scientists, artists, musicians, actors, etc) are irreplaceable. Let me give you some examples of why this is so. First, performers: Two hundred years ago, if you wanted to watch a Shakespeare play in England, you would have to watch a bunch of local actors or the occasional touring group. If you wanted to watch, say, a superstar like David Garrick perform, you would have to journey to London. This created employment for scores of relatively mediocre actors, especially in provincial centers or rural areas, while restricting most punters' access to the best. It was the same for great singers, musicians, dancers, etc. The income gap between the very best and the average performer was also relatively small, simply because the best of the best weren't able to access the widest possible audience. Obviously, with the advent of recorded media, the performing arts have over the past 100 years gradually entered what economists Robert Frank and Philip Cook have termed a "winner-takes-all" mode. Full-time employment is no longer as easy to come by and doesn't pay very well, for most would-be actors, stand-up comedians, musicians, etc. For those who succeed, on the other hand, in creating demand for themselves as individual performers (whether through talent or marketing or both), the rewards have become phenomenal. That's because this isn't generic category demand, it's category-independent demand for a specific performer who offers unique value. There are people who rarely watch movies but who watch every film starring their favorite actors and actresses. The worker has essentially turned himself into a brand. This is why Tom Cruise has been able to incrementally raise his fee per movie from $2 million (Top Gun, 1986) to $70 million plus 20% of the profits (War of the Worlds). It's the same with music, studio arts, newspaper cartoonists, etc. In journalism, too, there are a small handful of workers who have created unique demand for their individual services (star columnists, star reporters whose bylines have become bywords, TV news anchors). Now, we may argue about the individual talents of Tom Cruise or Eminem or Katie Couric or columnists like Thomas Friedman. (Personally, I don't have a high opinion of any of them.) But they appeal to millions of consumers in ways in which others in their fields do not, and that is why they are paid accordingly.
In the financial sector, star performance is actually more straightforwardly quantifiable. Jack Meyer, for example, who headed the Harvard Management Company from 1990 to 2005, turned an endowment of $4.8 billion into $25.9 billion, with an annualized return of 21% over 15 years. There are only a handful of fund managers in the world who can consistently produce results like that. Now, it's true that Meyer and his top underlings got paid millions of dollars each year; here, however, is Mohamed El-Erian's description of how their remuneration system worked: "We have a comp system that pays a relatively low salary, that links the bonus to performance, subject to a clawback. So if you outperform your index, you earn a certain amount of money. But you don't get all that money immediately. Some of it is clawed back, and you only get it if you continue to perform well. The reason is that we are looking for long-term performance." There was a big outcry among Harvard professors and others about Jack Meyer's compensation, which is one of the reasons he left to start his own firm in 2005. They missed the point that he and a small handful of other people had effectively multiplied Harvard's capital five-fold through extremely sophisticated portfolio management. This wasn't like running an index mutual fund, where returns essentially reflect index performance. As Businessweek put it: "Meyer wasn't brilliant just on the upside. Apart from devising an aggressive, highly diversified strategy to not just maximize returns, he also sharply reduced the risk of sizable losses. His "model portfolio" called for sinking just 26% of Harvard's money into conventional U.S. equities and domestic bonds. All the rest was scattered much further afield, from real estate to foreign equities to massive holdings of timber, including a $600 million forest in New Zealand. Thanks to this diversification, Harvard was barely buffeted during the savage bear market of 2001-02, when Nasdaq lost more than 80% of its value. In contrast, Harvard Management was down a mere 2.7% in 2001 and just 0.5% in 2002." Businessweek estimated that Meyer and his associates essentially added $12.2 billion in value during the period he was in charge. In my opinion, he deserved every penny of his compensation; less than one hundred people worldwide can do what he did, on such a scale and over such a time frame. It's the same with star CEOs, or star surgeons, or star athletes, or star litigators: When a company is defending a $500 million lawsuit, it will willingly pay millions to a top litigator to increase its chances of winning. And surely you can imagine the tremendous virtuosity and strategic vision it requires to successful lead a behemoth like GE or IBM?
Now, one can argue that outliers ("superstars") should be excluded. (Although, remember, there is a great deal of hue and cry about them, especially from people on the Left in the U.S.) One can then argue that the wage differential between an average heart surgeon and an average factory worker should be reduced. As I said, supply issues come into play. The best way to decrease wages of high-end workers is to increase the supply of them. The problem is that, even if we don't take the superstars as a benchmark, most workers aren't able to do what the high-end workers do. In most cases in the U.S., this isn't because of lack of opportunity. Most of the low-end American workers in manufacturing and services who are currently experiencing wage stagnation didn't actually attend resource-starved inner city schools, after all; most of them grew up in small towns and suburbs, where access to schooling is fairly equitable for all residents and schools are usually of reasonable quality. For example, I once had an American room-mate who was a nurse. Her boyfriend, a high school graduate, had a part time job in a beer factory. He didn't want to work full-time because he liked boating and fishing for recreation. He wasn't young and immature either -- he was around 25 at the time, and had been out of school for 7 years. His girlfriend was trying to push him to earn a two year Associate degree, so he could qualify for the police force. He wasn't interested, and they broke up. Now, he wasn't some deprived inner city youth; he'd grown up in a suburb and attended a pretty decent school. He just wasn't motivated to have a high-powered career -- or even a low-powered one. :) He was happy just holding down a job, without much concern for career planning or upward mobility. Now I personally do not think such specimens should receive the benefits of progressive taxation; I think they should bear the full burden of their economic decisions, and of their lack of ability and/or application. :) It's entirely possible that he has since been downsized due to automation or offshoring. But I have no sympathy for his lack of career planning or ambition. He has every right to live by a different set of values -- but he must take the economic consequences himself, and not impose them on others through taxes. Many of the white-collar workers who have been displaced by automation and outsourcing are of similar calibre -- they lack the drive to work the truly high-end jobs, and have either only high school diplomas or, at best, second-rate degrees from second-rate colleges.
I agree that the U.S.'s immigration policies are draconian. I would go further and call them an unjustifiable trade barrier, a form of protectionism in the labor market similar to others' protectionism in goods and services. I hope you realize, though, that the most vociferous supporters of the U.S. caps on immigration have always been worker lobbies, i.e. unions? Even the first time that the U.S. went draconian on immigration (the early 1920s), it was union pressure that forced the changes. You do also realize that free movement of labor would also cause U.S. real wages to decline even further? i.e., would bring about global wage equilibrium in each category even faster?
The immigration restrictions also impact skilled workers, not just unskilled ones. I myself, for example, am leaving the U.S. in a few weeks to work in wealth management and private equity in Bombay because I don't have the patience to wait 6-8 years for a green card and be tied to a single employer throughout that time (especially as, in the financial industry, sticking to a single employer for more than 3-4 years is rather unusual, unless you are in a very senior role).
Neverthless, I believe that the wages of skilled workers in the U.S. are also headed for stagnation, for two reasons:
1. Most of these people provide professional services: medical, legal, financial, educational, managerial, scientific, recreational. As the purchasing power of others in the economy declines, demand for their services (which in most cases is quite elastic) will also be affected.
2. They too will face overseas competition at lower wage rates. The stagnation of wages in the U.S. IT sector is just a small preview of what is to come. In Bombay, for example, there are now many large rooms filled with Bloomberg terminals where Indians are trading various financial instruments on global markets on behalf of overseas accounts. Obviously, over the next 10 years, this is going to begin to impact the wages of American traders of securities, commodities, etc, and of American fund managers. There are also plenty of Indians now conducting research and producing write-ups for pitchbook assembly (pitchbooks are used by i-banks to woo new clients for their underwriting and advisory services); this is obviously going to impact the wages of American i-banking associates over time. So it's not as if these workers will be immune from wage stagnation; it just hasn't hit them yet. Again, the superstars will be exempt, although even in this case, more people from developing countries will certainly join their ranks.
I have no ethical or philosophical problems with such inequality in the U.S, frankly, because with the exception of minority kids in inner cities, and immigrants who are beyond school-going age, reasonable opportunities are available to all. Only 10% of the population are ever really going to be high achievers. And far less than 1% are going to be superstars. Both these groups deserve the rewards they receive from the market. This, by the way, is in keeping with the Lee Kuan Yew philosophy of meritocracy coupled with unapologetic elitism. In developing countries, it isn't so simple, because of lack of educational opportunity. And so I would fully support expansion of education. Just primary education, or even secondary education, isn't enough though, as neither really equips you for truly high-end employment. We also need a massive expansion of higher education, and we can't afford massive misallocation of resources on useless curricula and subpar faculty, as at most (almost all) of our publicly funded universities. This is why deregulating higher education is so important an issue to me (plus the fact that I have a PhD and once considered a career in academia in India precisely because I think human resource optimization is the most essential thing, but had no desire to be exploited by the government by being paid a laughable salary and given little control over course content or student selection).
The debates on other forms of redistribution go back a long way. There are many objections to progressive taxation and the like on economic grounds, but my own primary objections are ethical and philosophical, and revolve around my firm belief in the sanctity of private property. Let's take a hypothetical example. Three men survive a shipwreck. One of them happened to be carrying plenty of food in his cabin, and has the presence of mind to retrieve most of it before the ship sinks. They end up on a desert island. Now the guy with the food has a greater chance of surviving till they are rescued if he hoards the food, right? He may decide to hoard it, and the other two may die just before the rescuers arrive. Fine, no ethical problem for me there. Or he may decide to share it. That's fine too. But what if the other two said: "Hey, this is a crude majoritarian democracy, and we all have to abide by majority decisions. We are the majority, and we have decided that we have a right to take an equal share of your food." Let's say he refused. And so they then said, "We have voted and passed a law. You are refusing to obey the law. Therefore we will just enforce it anyway and coerce you." And then they just took one-third of his food each by force. Now I would find this morally indefensible; this, frankly, is the morality of redistribution through progressive income taxes, wealth taxes, capital gains taxes, etc. It is also the morality of nationalization, which is just a fancy word for state-sanctioned theft. Redistribution through voluntary contributions (through private foundations or charities, for example) is fine with me.
Nevertheless, I don't object to the wealthy paying higher absolute amounts in income taxes than the poor, providing the rate is the same for all. (Even at the same rate, absolute amounts of tax are higher for those whose incomes are higher.) Personally, I think taxes on income and wealth run counter to the spirit, indeed the very essence of capitalism, which is to encourage the productive investment of capital so as to increase capital. I'd rather tax consumption than investment. Otherwise you are penalizing people just for earning more, even if they are leading thrifty lives and reinvesting their disposable income. I actually have a theory that the low savings rates in the West can be correlated to the way their tax system has evolved. :)
For a Jack Meyer, there's also a Jeffrey Skilling working in, and a product of, the same system - taking down many other people with him.
Let's take a hypothetical example. Three men survive a shipwreck. One of them happened to be carrying plenty of food in his cabin, and has the presence of mind to retrieve most of it before the ship sinks. They end up on a desert island. Now the guy with the food has a greater chance of surviving till they are rescued if he hoards the food, right? He may decide to hoard it, and the other two may die just before the rescuers arrive. [..]
Doesn't this simplistic example ignore certain real-life um realities like, who or what caused the ship to sink? Why did only one guy "happen" to hoard food? Did he really pay for that food he hoarded in the first place, or was entitled to it?
It also assumes that the food being hoarded is limited and will only allow one person to survive till help arrives. I'd think a more apt analogy would be what if the guy had hoarded plenty of food to feed three people till help arrived? Would he be able to morally defend his position by not letting the other two people have some food to survive when it would not affect his own chances of survival?
I'd love to put Bill Gates on an island by himself and then see if he still manages to create the same wealth that he has now. Sure, a body needs a brain, but it also needs a heart, and arms and legs to function properly. Yes, the brain needs a steady supply of glucose, but that doesn't mean brain can survive without other limbs.
I guess the drug of Ayn Rand really takes a long time to wear off. ;)
Hi All,
Interesting discussion.
I feel certain factors are missed out here. Please consider the huge subsidy provided by the US government to its farmers, exports of weapons by the US, and global oil politics. I am trying to look for exact numbers for these factors.
The US, in my opinion, is a skewed economy, especially when we talk of US agriculture. We should also note the cultural differences, population, people's empowerment, etc., into consideration when we compare US and Indian agriculture.
Further, what is the use of productivity if only a few reap the benefits and millions go hungry? Productivity definitely needs to be improved, but in a systematic phased manner, to realistic levels.
This is a topic dear to my heart. Will write more in a few days with some numerical facts.
Thanks,
Kiran
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