Globalization: Revisited

In a previous post, I discussed some of the virtues of globalization and the dangers of what I saw as increasing protectionism in the United States (see Globalization and Its Discontents).

A colleague of mine called my attention to a more recent article in Foreign Affairs on the topic (see A New Deal for Globalization). The article is authored by Kenneth Scheve (a political scientist from Yale) and Matthew Slaughter (an economist from Dartmouth). I do not know Kenneth personally, but I have met Matthew on several occasions and I am familiar with his work. In my opinion, Matt has done some excellent work at the interface of international business and international economics.

But that is neither here nor there. The issue at hand is their article. I quite liked the piece, and our opinions converge on many issues. Kenneth and Matthew likewise raise concerns about increasing protectionist sentiment in the U.S., and they agree that policymakers must address those issues.

I suggested that a well-implemented trade adjustment assistance (TAA) program might go a long way in addressing those challenges. I think they agree that TAA programs help, but they believe that TAA programs alone are not the solution. Practically, they argue, it would take too long to retrain displaced workers. That makes sense. As an alternative, they raise a novel solution – countering protectionist sentiment through changes in tax policy.

They write:

Given that globalization delivers tremendous benefits to the U.S. economy as a whole, the rise in protectionism brings many economic dangers. To avert them, U.S. policymakers must recognize and then address the fundamental cause of opposition to freer trade and investment. They must also recognize that the two most commonly proposed responses — more investment in education and more trade adjustment assistance for dislocated workers — are nowhere near adequate. Significant payoffs from educational investment will take decades to be realized, and trade adjustment assistance is too small and too narrowly targeted on specific industries to have much effect.

The best way to avert the rise in protectionism is by instituting a New Deal for globalization — one that links engagement with the world economy to a substantial redistribution of income. In the United States, that would mean adopting a fundamentally more progressive federal tax system. The notion of more aggressively redistributing income may sound radical, but ensuring that most American workers are benefiting is the best way of saving globalization from a protectionist backlash.

The economic gains from globalization are immense. In the United States, according to estimates from the Peter G. Peterson Institute for International Economics and others, trade and investment liberalization over the past decades has added between $500 billion and $1 trillion in annual income — between $1,650 and $3,300 a year for every American. A Doha agreement on global free trade in goods and services would generate, according to similar studies, $500 billion a year in additional income in the United States.

International trade and investment have spurred productivity growth, the foundation of rising average living standards. Gains from globalization have been similarly large in the rest of the world…lifting hundreds of millions of people out of poverty.

I absolutely agree.

They go on to argue that while the gains of globalization to the U.S. have been great, they view those gains as having been unevenly distributed. Specifically, they contend that globalization has resulted in a widening gap between rich and poor because poorer, low-skilled workers are at greater risk of having their jobs outsourced to low cost countries, resulting in decreased real wages for low-skilled workers compared to high-skilled workers (where real wages have been increasing).

They claim that the reason sentiment is becoming more protectionist is because:

Individuals are asking themselves, “Is globalization good for me?” and, in a growing number of cases, arriving at the conclusion that it is not.

I agree that more people now believe that globalization is not good for them. However, I have one minor quibble with their argument in this respect. Although it may be true that people believe that globalization is not good for them, it may not be the case that it is actually bad for them. The authors argue:

If workers in a sector such as automobile manufacturing lose their jobs, they compete for new positions across sectors — and thereby put pressure on pay in the entire economy.

While it is true that if workers lose their jobs in one sector they may have to look for jobs in others, it is not necessarily true that they put pressure on the pay of the entire economy as a result. This is true in a static world where the number of jobs and opportunities in the world are fixed; however, one job lost in the automobile industry might result in one ADDITIONAL job created in the robotics industry – a higher margin, higher value-added industry. In this scenario, if labor coming into an industry leads to greater innovation and greater future growth for that industry, it’s not necessarily clear that salaries will go down for all.

I raise a similar objection to those who argue that outsourcing jobs to developing countries necessarily leads to bad outcomes for those displaced workers. Generally, I believe that we tend to outsource low value-added activities. If we outsource low value-added activities to other countries, this may allow us the flexibility to re-deploy existing resources (people) to alternative, high growth, high value-added activities.

In Kenneth and Matthew’s defense however, they recognize that:

Economists do not yet understand exactly what has caused this skewed pattern of income growth and to what extent globalization itself is implicated, nor do they know how long it will persist.

In my opinion, determining this is the key!!

Nevertheless, they do offer one novel alternative solution to protectionism through tax policy. They offer:

…policymakers should remember that workers do not pay only income taxes; they also pay the FICA (Federal Insurance Contributions Act) payroll tax for social insurance. This tax offers the best way to redistribute income…A New Deal for globalization would combine further trade and investment liberalization with eliminating the full payroll tax for all workers earning below the national median…67 million workers would receive a tax cut of about $3,800 each.

At the end of the analysis, I think this is an interesting proposal, provided that it is a complement to (and not a substitute for) TAA and retraining programs. By the authors’ estimates, the total program would cost around $256 Billion per year to implement. But then again, with the potential gains from Doha alone around $500 Billion per year, it might just be worth a try.

I’ve simplified their arguments for the purposes of this blog, but for those of you interested, I would encourage you to read the entire piece.

More on this topic (What's this?)
Globalization Goes Bad
Globalization hits a brick wall
Read more on Globalization at Wikinvest
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