« "Libertarians and the Welfare State" | Main | links for 2008-06-08 »

Saturday, June 07, 2008

"This Global Show Must Go On"

Tyler Cowen on globalization:

This Global Show Must Go On, by Tyler Cowen, Economic View, NY Times: The last 20 years have brought the world more trade, more globalization and more economic growth than in any previous such period in history. ... More than 400 million Chinese climbed out of poverty between 1990 and 2004... India has become a rapidly growing economy, the middle class in Brazil and Mexico is flourishing, and recent successes of Ghana and Tanzania show that parts of Africa may be turning the corner as well.

Despite these enormous advances, however, there is a backlash against globalization... Ordinary people often question the benefits of international trade, and now many intellectuals are turning more skeptical, too. Yet the facts ... show that the ... doom and gloom simply isn’t warranted. ...

The globalization process has had its bumps, of course, as reflected recently by rising commodity prices... Countries like China have become richer so fast that global production of energy and food have been unable to match the pace. But rapid economic growth is the right direction, even if some of the remaining poor are suffering from high food prices. ...

Trade advocates focus on the benefits of goods arriving from abroad, like luxury shoes from Italy or computer chips from Taiwan. But new ideas are the real prize. By 2010, China will have more Ph.D. scientists and engineers than the United States. These professionals are ... are creators, whose ideas are likely to improve the lives of ordinary Americans, not just the business elites. ...

We urgently need new biotechnologies, a cure for AIDS and a cleaner energy infrastructure, to name just a few. Trade is part of the path toward achieving those ends. A wealthier China and India also mean higher potential rewards for Americans and others... A product or idea that might have been marketed just to the United States and to Europe 20 years ago could be sold to billions more in the future.

Those benefits will take time to arrive, but trade with China has already eased hardships for poorer Americans. A new research paper by Christian Broda and John Romalis ... has shown that cheap imports from China have benefited the American poor disproportionately. In fact, for the poor, discounting in stores such as Wal-Mart has offset much of the rise in measured income inequality from 1994 to 2005.

Despite all these gains, the prevailing intellectual tendency these days is to apologize for free trade. A common claim is that trade liberalization should proceed only if it is accompanied by new policies to retrain displaced workers or otherwise ameliorate the consequences of economic volatility.

Yes, the benefits of a good safety net are well established, but globalization is not the primary source of trouble for most American workers. Health care problems, bad schools for our children or, in recent times, bad banking practices have all produced greater disruptions — and these have been fundamentally domestic failings.

What’s really happening is that many people, whether in the United States or abroad, are unduly suspicious about economic relations with foreigners. These complaints stem from basic human nature — namely, our tendency to divide people into “in groups” and “out groups” and to elevate one and to demonize the other. ...

One approach is to appease these sentiments by backing away from trade just a bit, or by managing it, so as to limit the backlash. Giving up momentum, however, isn’t necessarily the right way forward. ...

It is wrong to play down the costs of globalization, but the reality is that we’ve been playing down its benefits for a long time. Politicians already pander to Americans’ suspicion of foreigners. There is no need for the rest of us to jump on this bandwagon. Instead, we need more awareness of the cosmopolitan benefits of trade and the often hidden — but no less real — gains for ordinary Americans. ...

I agree on the benefits from trade. But I would quarrel with the conclusion concerning the net impact on the welfare of middle and lower income households. Because I believe that the net impact is more negative than Tyler indicates (both from new technology and from globalization, the effects of which are difficult to disentangle), I am more convinced than he is that maintaining political support for increased openness will require that the gains from trade and technological change be shared more equitably, and that economic risk be dispersed across a much broader swathe of the population through risk transfer mechanisms such as enhanced social insurance.

We can, as Tyler is doing, try to convince people they are wrong in their beliefs:

Gallup Daily: Negative Economic Ratings Hold Steady: ...[C]onsumer views of the economy ... rate among the worst Gallup has measured in any polling it has done historically. The latest Gallup Poll Daily tracking update [polling conducted June 4-6] finds 44% of Americans rating current economic conditions as poor and 86% saying the economy is getting worse. The most negative ratings thus far this year are a 47% poor rating and an 88% getting worse score.

But I don't think they are going to be convinced by the Wal-Mart argument. Over the longer run, I share the view that education is a key factor in determining how well we will be able to compete in the world economy, and that we need to do everything we can to maintain open access to quality educational opportunities for middle and lower income households. I agree wholeheartedly that we need to fix health care, and that "bad banking practices" have been a problem. These are structural issues that I hope we can address and fix, but that will take time. However, at present we also need to listen to what people are telling us and address their concerns, and they do not believe that the economy as it is currently functioning is working for them. Telling people they just don't understand how much trade benefits them is just as likely to produce a negative backlash as it is to convince people that their views are wrong.

Update: See the follow-up discussion in response to comments from Brad Delong, and there is more from Tyler Cowen.

    Posted by on Saturday, June 7, 2008 at 02:07 PM in Development, Economics, International Trade, Social Insurance | Permalink  TrackBack (0)  Comments (48)


    TrackBack URL for this entry:

    Listed below are links to weblogs that reference "This Global Show Must Go On":


    Feed You can follow this conversation by subscribing to the comment feed for this post.