Globalization is supposed to have led to a bigger world economic pie. But it has also led to a re-distribution of the pie. Specifically, the bigger pie has been re-distributed in favor of profit rather than wages.

In the US, the share of corporate profits out of GDP are at their highest (10.3%) since the 1960’s and the share of wages are at their lowest (45.3%) on record (NY Times 8/28/2010). The share of wages in China, Japan, and Germany has also fallen in the last decade. In China, from about 54% in 1992 to less than 40% in 2006 (Economist 10/13/2007). In Germany, from 43% to 39%. And in Japan, from 46% to 44% (southcentre.org 2010).

Economists are more comfortable with growing the pie than dividing up the pie. But how the pie is divided actually significantly affects the health of the economy.

Although the wage shares of GDP in America and the three major export-dependent countries of China, Japan and Germany have been shrinking, the share of private consumption has not followed the same footsteps. Specifically, the share of private consumption in America has been rising while the shares of private consumption in the three export-dependent countries have been falling. In America, the consumption/GDP ratio has gone up in the last decade from about 66% to about 70%. (newsneconomics.com 10/27/2010) On the other hand, China’s share of consumption went down from 47% to 37% (Economist 10/13/2007), Germany from 60% to 56% and Japan from 58% to 56%. (southcentre.org 2010).

Such divergent consumption trends may be puzzling until one realizes that the US consumption binge was funded exactly by the consumption fast in the three export-dependent countries. We can trace this curious relationship to the influx of cheap labor into the globalized market from China and Eastern Europe from the 80’s.

Multinational corporations in the US, Germany and Japan figured out the way to keep their profit growing was to outsource their mature products to cheap-labor countries such as China and East Europe by exporting capital and technology and importing the finished goods into the multinational corporations’ home markets and foreign markets. The cheap labor in the global pool made it possible to keep the wages of domestic labor low in the outsourcing countries. This is accomplished by weakening the domestic labor unions and substituting cheaper part-time labor for more expensive full-time labor. In Japan, for example, the percentage of part-time or temporary employees hit a record 33.4%, compared with 21% a decade ago. (WSJ 1/16/2007). The same scenarios were repeated in Germany and the US. In China and East Europe, wages were rising due to outsourced demand but still lagged far behind profits.

When wages are too low to provide enough purchasing power to absorb the rapidly expanding output, the surplus output must be exported. And the only country that was willing to buy these exports was the US. While the declining wage share in the US was in no position to buy all these surpluses, it is the only country that can borrow freely because it can print dollars that the export-dependent countries are ready to accept as reserve currency. In other words, the exporting countries were willing to accept IOUs in dollars and sell their exports on credit to the US.

For a time, this arrangement worked out great and made Greenspan, the US housing market and the US finance markets look great. Even US wage earners who got a small share of the pie were happy with the low prices of imported goods and the home equity loans from the inflated value of their homes. But it drove the personal saving rate down to negative level (see Bubble Saving), led to a great housing boom and bust, and the eventual collapse of the asset securitization market.

To get out of this global imbalance, China and Japan are supposed to boost their domestic consumption and America is supposed to boost its saving. But unless the share of wages in China, Japan and America goes up, China and Japan cannot boost their domestic consumption and America cannot boost its personal saving. And there is little incentive for America to save if foreign countries are willing to provide cheap credit to it by recycling the proceeds from their trade surpluses.