Want a Financial Crisis? Impose 'Fairness'

In the early 1990s I worked as a private consultant and interpreter for American business people visiting the former USSR. My employers, many of whom became my personal friends, were looking for business opportunities, which at the time seemed abundant — even to me. I knew that government corruption existed, but the real scope of the disastrous legacy of Soviet socialism was only revealed to me when our travels exposed me to situations and facts I would not have otherwise known. To make matters worse, government corruption, incompetence, and the attempts to take advantage of my American friends were disguised with the fig leaf of fairness, caring for the workers, and protecting their wages. It was practically a matter of habit; sometimes I wondered if the crooks themselves knew where the cynicism ended and the caring began.

None of the proposed joint ventures came through because of government officials’ absurd demands for kickbacks combined with the requirements of Western-style wages for the workers at a time when the average cost of living in Ukraine was about $50 a month for a family of four. Like children on Christmas Eve, the bureaucrats were holding their breath in anticipation of foreign gifts, exorbitant junkets, no-show jobs, and ready-made factories with salaries equaling those in Europe and the U.S., without realizing that cheap local labor and low maintenance were their only edge and their only chance in the world economy.

In the meantime, factories continued to close, in part because no one wanted to buy their crude products designed for the Soviet market. The economy was crumbling, half of the country’s workforce was unemployed, and even a monthly wage of $50 would have been an improvement, at least until things would pick up.

It was then that we visited the unsmiling woman director of the local sewing factory with a proposal to make jeans from the locally made hemp cloth for a Californian store chain. Keeping a poker face, she gave us a production cost estimate per item that equaled their retail price in an American thrift store. That made no sense, given that in local terms the cost was higher than her average worker’s weekly earnings. She was lying and we diplomatically asked her to reconsider. The director, who in Soviet times used to be the equivalent of a U.S. congresswoman, looked us sternly in the eye and repeated that such was the real cost and it was final. We didn’t even get to the part where we could gripe about the quality of her products.

At least she didn’t ask for a cushy job for her niece right up front like some others did. Every encounter was different; the attitude was almost always the same. One by one the frustrated Americans went home empty-handed, leaving the local officials complaining about the greedy Yankees. I sincerely hope that the business climate has improved since I left the country. But at the time, the solicitations of kickbacks aside, the indignation at the prospect of capitalist exploitation seemed genuine — at least on the part of former party bosses.

The gap between Western and local wages was painful and incomprehensible to most Soviets, whom the fall of the Iron Curtain suddenly exposed to the real world. Whatever inequality existed between them and the party elites was now dwarfed by the wealth of American middle-class visitors. The bureaucrats seemed to resent the fact that private U.S. citizens, obviously standing on a lower societal rung because they didn’t hold privileged government jobs, could easily travel around the world, launch projects without any government supervision, act like equals with anyone they spoke to, and pay for a single dinner with a few guests at the local restaurant costing almost as much as their betters in the local government earned in a whole month.

The money the Americans paid me was a pittance by their standards but it was generous by ours, and I was grateful for it. I didn’t hate them because they were “rich”; I was happy for them. They were lucky to be born in a free country that followed a normal path of development fit for human beings. It wasn’t their fault that I was born in a country that mutilated itself with inhuman social and economic experiments that made us so poor. America didn’t degrade us; our own government did, by throwing our potential into the bottomless pit of an irrational utopia.

The only way to close the gap, I thought, was to abandon the unworkable Soviet system and adopt the American model. It would be a long project but well worth the effort. Certain others believed that the gap should be closed by cutting America down to size. I knew such people; their attitude was a mix of hurt self-esteem, jealousy, and irrational collectivist selfishness, which had been cultivated for generations by the official propaganda. That was to be expected. What I didn’t expect was to find a similar attitude inside the United States.

I had previously believed, in my parochial Soviet ignorance, that the spectacular failure of forced equality in my country would serve as a repellent for the rest of the world, making sure that people would stop solving problems by bringing everyone down to the lowest common denominator. Little did I know.

The self-righteous campaigners for “fairness” use a clever trick to advance their ideas. They shock fellow Americans with statistics of how outrageously low wages in the third world are, without adding that prices on the local markets are low in the same proportion and that people might be able to get by on a dollar a day. That’s what my own family’s budget was at one time — and we weren’t dressed in rags and we didn’t starve. Living was cheap as long as one wasn’t considering imported goods or foreign travel. Of course, a pair of black market Levis equaled a month’s wages.

In the absence of the free market — the only reliable instrument of price creation — prices and wages were determined by the government. Everything was state-subsidized, which may sound like a great idea to all those who don’t realize that state subsidies come from their taxes.

The Soviet tax system was a mystery wrapped in an enigma. Under Stalin, taxes were integrated into the state-run economy by default and the workers didn’t actually “pay” them. The government simply kept everything according to its needs and gave the workers the rest — just enough to eat and buy simple clothes. On top of that, in the 1960s, Khrushchev introduced a flat income tax of about 10 percent, which was deducted automatically, without any need to file tax returns. The exact combined income tax was unknown due to a complete lack of transparency, but according to some estimates, it was as high as 95 percent. Such camouflaged taxation allowed the official propaganda to describe taxpayer-subsidized services — health care, education, and housing — as “free gifts” from the benevolent party and the government, for which the people had to be eternally grateful. I remember that formulation, taught to me in the state-run school named after V.I. Lenin.

At a closer look, however, the “gifts” turned out to be economic traps, restricting people’s choices in health care, education, and housing. Even moving to another city was an almost insurmountable problem. Such government “largesse” turned people into slaves of the state. Little wonder it resulted in a third world-type poverty.

But the international income gap is not set in stone. When some Asian countries admitted that their poverty was the consequence of archaic political and economic systems, they remodeled themselves and embraced capitalism. It caused a torrent of sob stories in the Western media, in which well-paid journalists championed “economic equality and justice” by blaming local and Western entrepreneurs of running sweatshop economies. Armies of smug armchair egalitarians participated in well-funded, professionally orchestrated boycotts against companies like Nike that dared build factories in the area and give jobs to poor Asian families.

It almost seemed they didn’t like the fact that the Asians made an effort to improve their lot instead of begging and demanding aid from richer nations like the rest of the third world did. But the Asians knew better. Today, such formerly poor countries as Hong Kong, Singapore, and South Korea enjoy median household incomes that are twice as high as those in the former Soviet republics, which continued to protect their labor. They achieved it not by accumulating grievances and demanding entitlements, but by releasing their potential through free enterprise and technological advancements. And others are on the way.

Even the Chinese communists have come to the realization that, instead of exporting “the workers’ paradise” they would be better off exporting consumer goods. Seeing that their experiments in “fairness” resulted in disastrous poverty, they scaled back forced equality and jump-started a new semi-capitalist economy by entering into a symbiotic relationship with the arch-capitalist America. The last thing China needs right now is for the U.S. to turn into a China, which would be a giant step backwards for both nations.

In the past, Marxist state-run economies had to rely on the capitalist free market to determine the true cost of their own products. Today, as major capitalist economies themselves are falling under the spell of anti-market regulations, the true cost of their own products is also becoming unclear, causing an unsustainable growth of wages and cost of living. This leaves the least regulated economies of the upstart capitalist nations as the only reliable gauge of the true cost of labor and products.

The more realistic foreign wages may seem scandalously low to Americans who don’t cringe at $4 for a grande latte. Quite a few of them enjoy sitting at Starbucks in the company of like-minded comrades — each holding a cup of overpriced coffee — and complaining about the “unfairness” of this economy, the income gap, big corporations taking advantage of low-wage foreign laborers, and the outsourcing of American jobs. They would surely be surprised to learn that the amount they’re paying for one grande latte may actually be the true cost of their own day’s work and in a truly fair economy, it would also be a fair daily wage. But they could still go to Starbucks — in a fair economy, a cup of coffee might also cost about ten cents, in addition to a forty cent lunch. And — best of all — low domestic wages would bring those outsourced jobs back!

They might be even more surprised to learn that the “evil” corporations are their best allies, both politically and culturally, being some of the biggest champions of state-regulated entitlement programs and labor wage hikes, thus making the $4 coffee at Starbucks affordable to the masses. Proponents of forced economic equality like to explain corporate support of government entitlements as evidence that such programs are actually good for business — otherwise why would these “mega-monsters of predatory capitalism” encourage entitlements?

But the truth is much more cynical: anti-market measures give big companies an unfair advantage over smaller competitors and upstarts who can’t afford to have a lobbyist in Washington and who will choke on higher wages, taxes, and entitlements, while large corporations can swallow the extra cost more easily, as economies of scale allow a smaller price increase on their products.

Corporations are neither demons nor angels; they are merely playing by the rules given to them by the government, which keeps “correcting” the action to make it more “fair” by inventing new rules and tampering with the score in the middle of the game. The rules may be always changing, but the goal does not. And the primary goal of any business organization is profit. So the players must keep adapting to the changing field conditions in order to benefit the shareholders. And if trying to make the best of a rigged game is turning them into monsters, the fault is not so much with the players as with those who have corrupted the game by fixing it.

So the next time a proponent of “fairness” gripes about the rich getting richer and the poor getting poorer, we should agree wholeheartedly — adding that the reasons for the shrinking middle class and the stagnant economy are government regulations born of the dream of forced economic equality, which in real life results in a rigged game, arrested upward mobility, and a more rigid class structure.

The same argument applies to the champions of forced global equality. Since the productivity of labor cannot be redistributed globally, the only option within their reach is a global redistribution of wages, which they see as a variable they know how to control and some have made careers out of it. Instead of leveling the playing field by reducing the government dictate and by promoting liberty, opportunity, and property rights in developing nations — which is the only fair, realistic, and moral solution to poverty and stagnation — the collectivists are now proposing the imposition of a global minimum wage.

This is as practical as legislating a greater rainfall in the Sahara Desert, or establishing international quotas on floods, pestilence, and volcano eruptions. The only thing that is certain to start growing as a result of this measure will be the power of the coming global government, whose first major task will be to tackle a self-inflicted global crisis.

Coming soon: “The Fallacy of ‘Economic Equality'”