Helping the Losers from Globalization

This continues with the theme of the day, the winners and losers from international trade (and continues a more general discussion on this issue). This is Nobel laureate in economics Michael Spence along with vice-president of the World Bank Danny Leipziger writing in the Financial Times:

Globalisation’s losers need support, by Danny Leipziger and Michael Spence, Commentary, Financial Times: The modern globalisation debate deals with many important issues... None is more important, however, than who benefits and who loses, absolutely and relatively, in both advanced and developing countries.

Sustained high growth is expanding in the developing world ... and is made possible by the ... growing integration of the global economy. So there is a lot at stake. Income inequality often rises in the growth process, however, and domestic policy is needed to mitigate the negative impacts on those who lose.

In China, the bottom 10 per cent of the income distribution has seen its income rise by 42 per cent in the past 10 years. The middle has grown by 115 per cent and the top 10 per cent by 168 per cent. ... Everyone has benefited but not equally. Similar patterns can be seen in other rapidly growing countries such as India.

A slightly different but related income distribution phenomenon can be seen in the US. In the past 20 years, productivity and real incomes have risen in the US, but the middle of the distribution has gained less than the lower tail and especially the upper tail. The middle grew at 0.4 per cent annually while the upper end grew at 1.25 per cent; small numbers that add up to large changes over a decade or two.

In the case of the US and other advanced economies, not all of this is due to globalisation. There is a shift in the industrial mix ... enabled by the global economy. But there are other drivers. Tax policy is one. Information technology is another. Some aspects of IT are labour saving – a domestic phenomenon that has little to do with outsourcing..., but which hurts some wage earners. A more recent phenomenon is ... services, where labour can be supplied without geographic proximity...

In developing and advanced countries there are growing protectionist voices. They must be controlled because the cost of disengaging..., especially among the poorer countries of the world, is simply too high. It is far better policy to capture the benefits of global markets and to look for domestic policies that reduce the costs in these distributional dimensions...

If we are to continue to have a highly efficient, flexible and innovative economy, there will be creative destruction and churn. That kind of dynamism needs to be underpinned by two legs: programmes that help individuals make employment transitions, and solid safety nets and assured access to basic services such as education and healthcare.

This access must not vary with the ebb and flow of economic activity and personal circumstances. To have an open economy we may need a more protective one than we have had in the recent past. It is a trade-off. The art in policy-making is to design these protections with minimal adverse impacts on mobility and efficiency, the underpinning of the job-creation engine. ...

We need to accommodate a rapidly changing economic mix as a result of technology and global market forces and to balance that with policies that make the growth and distribution of the benefits inclusive.

Elsewhere...

Dani Rodrik comments on Paul Krugman's NY Times article:

The point that trade policy cannot substitute for an adequate social policy is perfectly sensible. So is the argument that the need for social policy becomes greater when globalization exerts downward pressure on wages and creates new risks and anxieties. ...

Krugman's argument leaves unclear what the right trade policy should be. The questions of the day are not whether the U.S. should increase tariffs against Bangladesh, India, or Mexico (the three countries cited by Krugman), but whether it is a good idea for the U.S. to enter into new free trade agreements (with countries such as Panama and Peru), and whether Doha, with its current agenda, is worth the trouble.

Kevin Drum has a suggestion:

Trade Agreements....Jared Bernstein writes today about global trade deals that hurt (some) workers and tries to answer the $64,000 question: "What would you tell some guy who just lost his good, middle-class, union, high-wage and benefits job? What's your program to help him?"

Here's what I'd say to the guy in the question:

"We can't stop globalization, but we can take its benefits and plough them back into repairing the damage it has done to you. That includes access to quality health care for you and your family, expanding and keeping your pension safe, and some serious retraining.

This will mean letting the Bush high-end tax cuts sunset ... and using that revenue to help you. It will also mean major health care reform.

We'll also work to behind the scenes to pushback on the downsides of trade. We'll push the Fed to maintain truly tight labor markets, we'll put enforceable labor standards in our trade deals, and we'll pushback against countries that manage their currencies to keep our exports out."

Roughly speaking, this sounds great. I don't want to stop trade, which is fundamentally a good thing. I'd just like to make sure that we don't have one group that gets all the benefits while another group pays all the price.

My only problem with Bernstein's answer, then, is this: It's more or less the same answer we've been hearing for the past 15 years. Unfortunately, in case after case, after we end up voting for trade agreements based on promises of relocation assistance, retraining, etc., everyone somehow loses interest in the promises. ...

So, free trade supporter or not, I'm increasingly of the view that I'd like to see us fulfill some of these promises first, and then pass the trade agreements afterward. We've tried it the other way around for a long time, and it doesn't seem to work out so well.

Update: One more on this topic from today. From Project Syndicate, "Helping the Free-Trade Losers" by Etienne Wasmer and Jakob von Weizsacker discusses these issues in the context of the EU.

Comments

[save_the_rustbelt]

Mark is in great form today. Good work.

I'm with Drum, I don't see any help on the horizon, because the political right wants every person for themselves, and the political left cannot agree on any major solutions.

People who continue to be hurt are going to look to Sherrod Brown-type politicians. This will likely stall but not stop trade agreements.

If the long run the people being hurt are just going to get hurt, and those wringing their hands will continue to enjoy prosperity. The most interesting question is what will happen politically, especially as the injured head toward retirement with a major drop in their standard of living. Seniors tend to vote in high percentages.

[robertdfeinman]

Walmart has promised to promote compact fluorescent lamps (CFL) as a replacement for incandescent ones. This will help the US save energy. It's biggest supplier is GE. GE says that if it has to discontinue conventional bulbs it will make the CFL's in China thus putting American's out of work.

Here's my question: are there really that many workers in an automated bulb plant that it makes much difference if they are earning $1 or $10 per hour? I think that there must be other factors at work. I'm guessing these are financial not labor issues.

For example China could be offering GE incentives to build a new factory as well special tax breaks. In addition the level of corporate tax is probably lower and this shields earnings from being taxed in the US.

If there are non-labor factors at work then shouldn't they be part of the discussion about "free trade"? Allowing tax havens like Bermuda may be more important in determining corporate behavior than the differences in wages.

If Nike makes a sneaker in Indonesia for $1 and then "sells" it to it's subsidiary in Bermuda which marks it up to $100 because of the intellectual property value of the "swoosh" that it adds the raising of wages won't have much effect.

Everything is connected: labor, tax policies, patent and IP protection and supporting politicians with funds from special interests.

[Michael Chambliss]

No matter what social programs may be devised, the core issue remains—“retrain for what?” Under the pressures of global wage arbitrage, no area is safe, no matter how skilled. A high quality heart by-pass is a bargain in India.

A few things will have to happen to avoid a meltdown:
-We must overcome the arrogant belief that nobody is going to be a smart as we are.
-We must divide the language and metrics for capital measures and life-style measures. It is difficult to recognize, let alone address, am issue that cannot be articulated. Using capital metrics to address social concerns will always miss the point.
-We must recognize that increased levels of capital will not necessarily be invested in ways that bring local growth in goods & services, or for that matter, any goods & services growth anywhere. Capital increasingly serves growth only within the capital market. This leaves the vast majority of humanity who play no real role in the capital market wholly out of the game.
-We must recognize that the emperor is indeed partially naked and that certain levels of protection will be required for social stability until all major economies reach equilibrium.

[ken melvin]

What's the net and who gets it. Obviously, it's going to capital and ... corporate farmers? If it's not distributed, there's no net good, i.e., it's not valid.

[ken melvin]

"In China, the bottom 10 per cent of the income distribution has seen its income rise by 42 per cent in the past 10 years. The middle has grown by 115 per cent and the top 10 per cent by 168 per cent. ... Everyone has benefited but not equally. Similar patterns can be seen in other rapidly growing countries such as India."

Am I the only one reminded of the Dodge commercial of the car going over the cliff?

[save_the_rustbelt]

Mark:

I have a serious question about the practices of economists. This is not a slam, more a methodology question.

How did one of the brightest economists in the country miss this for so many years?

I'm a half-bright CPA and I had it figured out 5 years ago.

Some possibilities (my guesses):

Economists work on large aggregations of data from official sources, the data is homogenized and there is a serious time lag. (I think one of PK's links was to a 1999 paper using data ending in 1993 - very old data in the tech age).

Economists try to ignore anecdotal data, and I understand why (I actually passed stats in grad school, barely), but they are missing valuable clues. For example, exploding personal bankruptcy rates during a recovery (the Bushies and their cronies caught this and changed the law).

Economists (macro) tend to look at national data, regional trends go unspotted.

Am I close?

In Ohio one of the major newspapers does an annual survey on the health of the economy, and instead of asking economists they survey CPAs. I think they do this because CPAs, while lacking macro data, see almost real time financial results and real transactions.

No slam on economists, I appreciate Krugman's mea culpa, but I;m curious how this happens.

[Mark Thoma]

I only spent literally less than a minute searching the pkarchive, but this is the same message from Krugman over three years ago:

http://www.pkarchive.org/column/022704.html

People may just be hearing economists, but we've been saying these things for awhile.

[doomsday]

Robertdfeinman says:

"If there are non-labor factors at work then shouldn't they be part of the discussion about "free trade"? Allowing tax havens like Bermuda may be more important in determining corporate behavior than the differences in wages.

If Nike makes a sneaker in Indonesia for $1 and then "sells" it to it's subsidiary in Bermuda which marks it up to $100 because of the intellectual property value of the "swoosh" that it adds the raising of wages won't have much effect.

Everything is connected: labor, tax policies, patent and IP protection and supporting politicians with funds from special interests."

Well said. I have never written a "what he said" post before, but this one is too important and too overlooked.

As I understand it, the standard welfare economics answer to compensating losers from trade is that they are no different than losers from technological or other change, and we don't compensate them. So, why are losers from trade special, except perhaps for visibility?

Anyone care to take that one on?

Also, I recently heard a rumor that abolition of most IP rights is gaining a following among mainstream economists. Is that true?

[save_the_rustbelt]

My intent is not to slam Krugman, he is way ahead of most.

Even PK admits in one of your earlier posts that economists missed the impacts of the opening of China.

Could this just be something that no one could have anticipated? Did the world change so fast the old models were no longer valid? Are our (econ) methods out-of-date or too slow to respond? Do we need new models? Faster data? Are the economists not having enough influence on politicians? Too much?

I'm not asking frivilous questions, heck I supported NAFTA because I misread the impacts and thought NAFTA would move the rustbelt into more modern production, so mea culpa.

Lot's of people are suffering because too many of us were either wrong or slow. We shouldn't repeat that.

[Mark Thoma]

It's not the models - even fairly old ones tell you what happened. Anyone who predicted the rise of China (and India) to where they are today in the early 1990s could have plugged that prediction into the models to explain what was going to happen.

But it wasn't predicted, certainly not the explosive growth rates we've seen. I'll leave it to others to decide if that is a failing of economists, political scientists, nobody, everybody, some of us, or what.

[save_the_rustbelt]

Good answer. Not comforting, but a fair answer.

When economists do modeling do they do "what ifs" of unlikely (the rise of China) scenarios? The accounting equivilant would be doing budgets at probable, high and low numbers.

Is there a branch of economic historians who dissect these issues? I seem to remember a discussion about economic history being out of favor as an area of study.

We in the accounting profession have had multiple failures, and we try to dissect them to prevent reoccurences (and I'm not betting we will be completely successful).

[Mark Thoma]

To continue a bit, as it became clear that things were going to develop differently than anticipated - and what that meant for low-income workers - the political climate had changed dramatically.

Now that the political climate has changed again, somewhat anyway, and there's actually some hope of new "grand bargains" economists are starting to be more vocal about these issues.

I suspect many didn't think it was very useful to use up political capital on this issue when there were other places it could be spent more fruitfully, but with the change in the political climate that equation has changed. Now we are hearing a consistent message - there are winners and losers but net benefits overall, and the size of the losses, which are different and larger than we anticipated, make it imperative that we compensate the losers if we expect to keep the global trading system alive.

[Mark Thoma]

One more thought - I don't know if we fully anticipated the scale of change that digital technology would bring about either. (Maybe I can bring the scientists in on this prediction failure? Who knows - but I didn't anticipate blogging...)

I think this too has been more rapid an disruptive than anticipated (and this is intertwined with globalization).

[save_the_rustbelt]

Mark:

As always, you are a gentlemen.

Thanks for the schooling (I have the management consultant's mentality of always wanting to autopsy the past and find a way to fix things - drives my wife crazy).

Have a good evening.

[gordon]

Like Doomsday, I feel like cheering Robertdfeinman. Great stuff.

On the compensation issue Doomsday also raised, I thought the standard economic answer to compensation was that if A received a benefit greater than the cost to B, then A could afford to compensate B and still come out ahead. This would achieve Pareto optimality (everybody better off, nobody worse off). Except in the real world, the compensation usually gets forgotten.

This probably means that, in the real world in which we live, nothing will probably be done to compensate anybody until enough political steam builds up behind a straightforward high-tariff, anti-offshoring movement to frighten A into paying up. You don't have to be anti-trade to participate in a movement like that, just a strategic thinker.

[James Killus]

Allow me to mention my favorite example of prediction failure: the video phone.

Futurists, scienc fiction authors, and folks at the Bell System (back when there was a Bell System) were anticipating the video phone for decades, but the answer kept coming back, "Hey, I don't want to see and be seen by the person at the other end of the phone, so I won't pay anything for this service." And there matters sat for 30 or 40 years.

Then came cell phones, and then someone decided that it would be cool to put a digital camera in a cell phone, in part because it was easy, and then, after the cell phone-camera took off, we got some compression algorithms, plus cheaper video technology, and suddenly we had the video phone.

Post-mortem, I realized the Problem at the Beginning: video phones aren't for seeing who you're talking to; they're for see what that person is seeing. So the "portable" aspect was as important as the "video" aspect. And if you look at the old Max Headroom TV show, you realize that the somewhat more cumbersome remote video camera that Edison Carter was carrying around is actually what we got. But nobody figured it as a consumer product.

Predicting the future is hard. Heck, take it from somebody who's done it; predicting the past is hard. So no one loses any points for any given failure. It's only the failure to have contingency plans that really signals that peculiar mixture of arrogance and incompetence that lies somewhere between stupid and evil.

So, I am driven to ask, if free trade takes a hit, what's plan B?

[wjd123]

"Paul Krugman's column in today's NYT articulates what is becoming perhaps the dominant view among liberals and centrist Democrats (if we can call them that). Krugman makes the following points"--Dani Rodrik

Is Rodrik speaking for all liberal and centrists Democrats or just the ones that are economists?

If he is talking for Democrats in general and not just economist who happen to be Democrats, I don't see how his statement holds.

The logical consequences of such a general view would be that Democrats should accept free trade as practiced today for a shot at a stronger domestic social safety net, all the while weakening their position to do so.

That's a policy that allows trade to grow as fast or faster than it has grown in the last ten years.

According to Krugman growth in the last ten years has made changing trade policy harder to do.

So we are to go along with how trade is practiced today for the next ten years to make the problem even more intractable?

Krugman admits that he doesn't have a solution to labors plight over free trade except the domestic political solution of a stronger safety net.

His views would leave any leverage labor would have to turn international politics to it advantage in changing domestic policies, off limits.

International politics is the very leverage labor needs to change domestic policy that is anti-labor.

The consensus policy amounts to a creative failure on economists part to use leverage. Especially when they have an existing model in the EU of how to combine trade policy with improvements in political economies.

There are no members of the EU that aren't democracies. All of them allow for the free association of labor. These changes were necessary to gain membership and the greater trade that came with it.

The EU has used the allure of greater trade to change the political economies of countries that want to become members. For instance Spain and now the countries of Eastern Europe had to become democracies to gain membership. Also, EU rules add to civil rights and labor rights. This allows for labors position to improve rapidly in the political economy as it gains political strength.

Hands-off international trade is a policy that ties one of labor's hands behind it's back in the fight to change political economies and domestic policies that the consensus of economists want.

Changing domestic policies is what Krugman says he want to do. At the same time he is weakening those institutions that would fight for the very domestic changes he wants. I don't believe that is the dominate position among liberal and centrists democrats in general.

In the end a hands-off policy will be a losing position for labor because it gives up half the battle field--the international one--to corporate interests. Labor needs that battle field in order to bring about leverage for change.

[lonesome moderate]

The questions of the day are not whether the U.S. should increase tariffs against Bangladesh, India, or Mexico (the three countries cited by Krugman), but whether it is a good idea for the U.S. to enter into new free trade agreements (with countries such as Panama and Peru), and whether Doha, with its current agenda, is worth the trouble.

This reminds me of an article I saw not long ago about the Peruvian reaction to American reluctance to enter into a free trade agreement with them. The way that many Peruvians see it, this is a clear indication that they need to start exporting a lot more drugs to the USA. Only after a Latin country is perceived as being a high-profile "problem" for the USA are we willing to do business with it.

[baileyman]

The losers may start asking, if my government continues to tilt the economy against me, just what benefit do I actually receive from being a member in this USA club, or citizen of this country?

[cm]

baileyman: But then what? Where will you go (not necessarily as an individual, but the aggregate)? It would be in a way similar to when you had it with your job, but cannot find a better position, at least one where they would consider hiring you.

[baileyman]

Let's see, Ireland, former soviet states, former colonies, perhaps Vermont, there are examples of solutions out there.