by Michael Lind
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BY FAR THE most important form of arbitrage strategy employed by Western-based corporations has been global labor arbitrage. In 2003 the economist Stephen Roach popularized the term:
In an era of excess supply, companies lack pricing leverage as never before. As such, businesses must be unrelenting in their search for new efficiencies. Not surprisingly, the primary focus of such efforts is labor, representing the bulk of production costs in the developed world; in the US, for example, worker compensation still makes up nearly 80% of total domestic corporate income. And that’s the point: Wage rates in China and India range from 10% to 25% of those for comparable-quality workers in the US and the rest of the developed world. Consequently, offshore outsourcing that extracts product from relatively low-wage workers in the developing world has become an increasingly urgent survival tactic for companies in the developed economies.10
In 2012, the McKinsey Global Institute (MGI) concluded that from 1980 to 2010 1.7 billion workers joined the global labor force.11 In a 2019 report, MGI downplayed global labor cost arbitrage, claiming that it accounted for only 18 percent of goods trade. MGI derived this low number by redefining labor arbitrage as “exports from countries whose GDP per capita is one-fifth or less than that of the importing country.” By this offshoring-friendly definition, if a firm shuts down a factory in the US (GDP per capita in 2017: $59,500 in purchasing power parity) and opens a factory with much cheaper workers in China ($16,700) or Indonesia ($12,400) or Venezuela ($12,100), the resulting exports to the US market are “not from a low-wage country to a high-wage country.”12 In contrast with MGI, the Nobel laureate economist Michael Spence claims that “labor arbitrage has been the core driver of global supply chains for at least three decades—with significant distributional and employment effects.”13
According to the Commerce Department, between 1999 and 2009 US multinational corporations cut 864,600 workers in the US while adding 2.9 million workers abroad. Fifty-seven percent of the foreign hiring by nonfinancial companies was in Asia, with multinationals adding 683,000 workers in China and 392,000 workers in India. In the same period, multinationals cut capital-investment spending in the US by 0.2 percent a year, while increasing it abroad by 4 percent a year.14 These foreign workforces included much low-wage labor on goods and services for export, or reexport, to the US or Europe. The global profits of many Western managers and investors depend in large part on the labor of poor women in foreign sweatshops, as Delia Aquilar observes: “From the maquiladoras in Mexico . . . to assembly plants and export processing zones [EPZs] in Central America, the Caribbean, and the Pacific Rim, to subcontractors and garment sweatshops in global cities and in nations of the periphery, it is women’s labor that allows and guarantees maximum profitability for the corporate elite, a tiny minority of the world’s inhabitants.”15
The economist David Autor and several coauthors have shown that “the China shock”—the flood of Chinese imports into the US following China’s entry into the WTO—did far more damage to US manufacturing employment than the previous consensus had held, destroying 2 million to 2.4 million net jobs in manufacturing and manufacturing-related industries between 1999 and 2011 and contributing to the “employment sag” in the US in that period.16 A study in 2013 by Michael W. L. Elsby, Bart Hobijn, and Aysegul Sahin concluded that “increases in the import exposure of US businesses can account for 3.3 percentage points of the 3.9 percentage point decline in the US payroll share over the past quarter century.”17
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AMONG MULTINATIONAL FIRMS, Apple in particular has mastered the arts of tax, regulatory, and labor arbitrage. Through subcontractors, Apple employs Chinese workers to assemble most of its iPhones and iPads for wages and under working conditions that would be illegal in the US or any Western democracy. According to Konstantin Kakaes in MIT Technology Review, producing every single component of the iPhone in the United States, in addition to assembling it in the United States, would at most add $100 to the cost of the device.18 But while domestic production would not seriously inconvenience American consumers, American labor costs might cut into Apple’s profit margin, which in 2010 was 59 percent of the final sales price of its iPhone 4, with labor costs in China accounting for only 1.8 percent.19 In 2017, Apple’s iPhone X, which cost $357.50 to make and sold for $999, gave Apple a gross profit margin of 64 percent.20
To avoid taxation, according to a US Senate subcommittee in 2013, Apple has used a variety of tax arbitrage tricks, including the establishment of a subsidiary in Ireland:
That subsidiary, Apple Operations International, has no employees and no physical presence, but keeps its bank accounts and records in the United States and holds its board meetings in California. It was incorporated in Ireland in 1980, and is owned and controlled by the US parent company, Apple Inc. . . . Exploiting the gap between the two nations’ tax laws, Apple Operations International has not filed an income tax return in either country, or any other country, for the past five years. From 2009 to 2012, it reported income totaling $30 billion.21
When Ireland changed its tax laws in 2015, Apple responded by secretly shifting some of its subsidiaries to another international tax haven, the Isle of Jersey.22
Adam Smith would not have been surprised. In The Wealth of Nations he wrote: “The proprietor of stock is properly a citizen of the world, and is not necessarily attached to any particular country. He would be apt to abandon the country in which he was exposed to a vexatious inquisition, in order to be assessed to a burdensome tax, and would remove his stock to some other country where he could carry on his business, or enjoy his fortune more at his ease.”23 Nor would Smith have been surprised by the centrality of labor arbitrage in the modern global economy:
Our merchants and master manufacturers complain much of the bad effects of high wages in raising the price, and thereby lessening the sale of their goods both at home and abroad. They say nothing concerning the bad effects of high profits. They are silent with regard to the pernicious effects of their own gains. They complain only of those of other people.24
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IMMIGRATION ALONG WITH offshoring can be used as a form of global labor arbitrage. Instead of bringing jobs to low-wage workers abroad, employers can encourage the importation of low-wage workers to their home countries to suppress wages, deter unionization, and weaken the bargaining power of native and immigrant workers alike.
Some Western countries have had formal policies of encouraging unskilled, low-wage immigration, like the US with its exploitative guest worker programs in agriculture and West Germany with its Turkish Gastarbeiter (guest workers). But for the most part, unskilled immigration has been the incidental result of other policies. In the United States, most legal unskilled immigrants have been low-income Mexicans and Central Americans who come on the basis of US family reunification laws, in addition to 12 million or so illegal immigrants, mostly from the same nearby countries. In Europe, asylum laws and refugee policies are the chief source of unskilled immigration. And some European countries have privileged immigration from former colonies. Whatever the particular regime, in every Western country the low-skilled immigration issue tends to pit the managerial elite against substantial elements of the working-class, native majority.
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IN GOVERNMENT, THE result of the half-century neoliberal revolution from above has been to weaken two institutions that amplified the political power of the mid-twentieth-century working class—mass-membership political parties and legislatures.
“The age of party democracy has passed,” Peter Mair wrote in Ruling the Void: The Hollowing of Western Democracy (2013). “Although the parties remain, they have become so disconnected from the wider society, and pursue a form of competition that is so lacking in meaning, that they no longer seem capable of sustaining democracy in its pre
sent form.”25 What were once national federations of local parties with mass membership in many countries have become little more than brand labels used by small groups of politicians, donors, and campaign strategists.
In the United States, the McGovern-Fraser Commission reforms of 1971 sought to democratize the structure of the Democratic Party by replacing nominating conventions dominated by state and local power brokers with citizen primaries. These reforms shifted power from the old white working-class base of the New Deal Democrats to a new Democratic elite, which, while more racially diverse, for the most part was still largely white but far more affluent, educated, culturally liberal, and skeptical of government intervention in markets. On both sides of the Atlantic, the crumbling of mass party federations has created a new politics centered on candidates who are self-funded or adept at raising money or are mass-media celebrities like Arnold Schwarzenegger, Jesse Ventura, Donald Trump, and Beppe Grillo.
In Europe, the erosion of national democracy has been accelerated by the conversion of the European Common Market, a loose trading bloc, into the European Union (EU), a pseudofederal state with its own parliament and its own court and its own executive, the European Commission. Tripartite arrangements among business, labor, and government have not been replicated at the supranational level.26 The EU displays a chronic bias in favor of business and finance and against organized labor, reflecting the greater ability of investors and corporate managers to lobby and organize across national boundaries. In countries like Italy and Greece, EU bureaucrats allied with bankers and other elite economic groups have several times insisted on governments headed by probusiness technocrats and have dictated promarket reforms reflecting the interests of foreign investors as a condition of aid.27
Meanwhile, in both Europe and the US, judiciaries insulated from voters have usurped much of the former authority of legislatures. The US Supreme Court, whose prestige had been enhanced by its interventions in the post-1945 civil rights revolution, has set itself up as an unelected superlegislature, decreeing that policies in one area after another, from regulation of abortion and marriage to campaign finance regulation, belong in the realm of inviolable constitutional rights and must be determined by life-tenured, unelected federal judges, rather than democratic legislatures or citizen initiatives.28
The transfer of power from democratic legislatures to courts has not been limited to the United States. “Over the past few years the world has witnessed an astonishingly rapid transition to what may be called juristocracy,” Ran Hirschl wrote in 2004, explaining: “Conflicts involving contentious political issues are treated as primarily legal questions rather than political ones, with the concomitant assumption that national high courts, instead of elected representatives, should resolve them.” Hirschl argues that the major motivation for juristocracy is to shield elites from democratic majorities, by means of “a strategic tripartite pact between hegemonic, yet increasingly threatened, political elites seeking to insulate their policy preferences from the vicissitudes of democratic politics; economic elites who share a commitment to free markets and a concomitant antipathy to government; and supreme courts working to enhance their symbolic power and institutional position.”29
Counter-majoritarian, rights-based liberalism, pushed too far, becomes antidemocratic liberalism. Many of the institutions important to citizens in democracies are subtly altered or delegitimated in a society in which communal interests must be justified exclusively in terms of this or that individual right. Churches and clubs and families, to name three examples, are impossible to justify on the basis of contracts among rights-bearing individuals, as though they were mere business partnerships. So are institutions like labor unions that magnify working-class power by existing in a third realm of collective bargaining between individual rights and majority rule and can function only if membership is more or less compulsory. It is also difficult for a rights-based philosophy to legitimize the nation-state as a community that can demand loyalty and sacrifice from its members.
Reliance on courts instead of legislatures to shape public policy has shifted power from working-class voters to overclass judges. In the US, appointees to the Supreme Court and the federal judiciary tend to have the most elite social and educational backgrounds of any group in government. They often share the combination of social liberalism and free market economic conservatism that is common in the college-educated Western overclass but unpopular among most voters. The same US federal judiciary that has struck down restrictions on abortion and in favor of gay rights has also consistently ruled against labor unions and struck down legislated limits on allowable political donations by corporations and rich individuals.
Long-overdue victories ending unjust discrimination on the basis of race, sex, and sexual orientation could have been achieved by electoral coalitions to enact democratic legislation, without the imposition by elite judges of libertarian preferences in all spheres of public policy. Government by judiciary tends to be a dictatorship of overclass libertarians in robes.
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IN THE REALMS of civil society and culture, an elite-driven revolution from above has occurred as well as in the realms of the economy and government. Secularization and declining church attendance have decimated the ability of denominational institutions to represent the interests and values of working-class believers.
Scholars like Robert D. Putnam have documented the collapse of the once-flourishing network of American mass-membership civic federations like United Way and the American Legion.30 Overall, the shift of the center of gravity from local chapter-based membership associations and church congregations to foundations, foundation-funded nonprofits, and universities represents a transfer of civic and cultural influence away from ordinary people upward to the managerial elite. Many of today’s so-called community organizations are not so much grass roots as AstroTurf (an artificial grass). A contemporary “community activist” is likely to be a university graduate and likely as well to be rich or supported by affluent overclass parents, because of the reliance of nonprofits on unpaid interns and staffers with low salaries. Success in the nonprofit sector frequently depends not on mobilizing ordinary citizens but on getting grants from the program officers of a small number of billionaire-endowed foundations in a few big cities, many of them named for old or new business tycoons, like Ford, Rockefeller, Gates, and Bloomberg. Such “community activists” have more in common with nineteenth-century missionaries sent out to save the “natives” from themselves than with the members of local communities who headed local chapters of national volunteer federations in the past.
The social scientists Theda Skocpol, Rachael V. Cobb, and Casey Andrew Klofstad have documented an important cause of the decline of civic groups—the withdrawal of political elites from membership in cross-class organizations, in favor of working for nonprofit organizations or joining nonprofit boards whose staffs and members tend to belong to the college-educated overclass. In the words of Skocpol, Cobb, and Klofstad, “American elites . . . went from joining membership associations along with fellow citizens from many walks of life, toward joining boards and coordinating committees that left them in the position of doing public-spirited things for or to ordinary citizens (emphasis in the original).”31
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IN 2006 THE billionaire Warren Buffett told the commentator Ben Stein, “There’s class warfare, all right, but it’s my class, the rich class, that’s making war, and we’re winning.”32
The triumph of technocratic neoliberalism over democratic pluralism is not the work of a conspiracy or a cabal. The libertarian economist James Buchanan did not meet with the Beat poet Allen Ginsberg halfway between Mont-Pèlerin and Haight-Ashbury in the 1960s to plot a transfer of power in all three realms of politics, economics, and culture from working-class majorities to the university-credentialed overclass in the US and other Western nations.
But the effec
t of many simultaneous campaigns, each led, staffed, and bankrolled by college-educated overclass reformers, each trying to demolish one wing of the building, was to bring down the whole structure of the post-1945 cross-class settlement in the US and similar Western democracies. When the dust from the collapse cleared, the major institutions in which working-class people had found a voice on the basis of numbers—mass-membership parties, legislatures, trade unions, and grassroots religious and civic institutions—had been weakened or destroyed, leaving most of the nonelite population in Western countries with no voice in public affairs at all, except for shrieks of rage.
CHAPTER FIVE
The Populist Counterrevolution from Below
WHEN A DESTRUCTIVE forest fire breaks out, the question “How did it start?” has two answers. One has to do with what literally started the fire—a spark from a lightning strike, a poorly tended campfire, or the gasoline can of an arsonist. The other answer identifies the reason why dead wood and other tinder was allowed to accumulate over a long period of time in quantities sufficient to enable a single flame to ignite a conflagration.
