Wednesday, December 10, 2008

Globalization Done Wrong-How Free Marketeers Are Robbing American Workers

The title says it all for me. In a recent Economic Policy Institute email, I was alerted to this new book on our sinking economy.

Check out Josh Bivens book, Everybody Wins Except for Most of Us. I haven’t read it yet myself, but the following summary is incredibly easy to understand and eye opening:

On one side are voters anxious about globalization and its impact on their ability to make a good living. On the other are economists, policy makers, and pundits who maintain that trade is good for the economy and that the only problem it raises is that its large benefits are too broadly diffused throughout the population for any single voter to notice ... resting their effort heavily on the suggestion that “all economists believe” globalization is good for American workers.

The problem for this approach is that those worried about … their living standards have a better grasp of the underlying economics. Open the international trade textbook and one will find two key predictions about this global integration: it can indeed harm the majority of American workers, and it actually does have a natural constituency—the most economically privileged Americans. Not for nothing is economics called the dismal science.

The impact of the rise of trade in services, a sector once thought to be largely insulated from global competition, is starting to come into focus. Offshoring of service work potentially gives globalization a much larger lever with which to affect domestic labor market outcomes.

Take a look at this: This book finds that the annual losses to a full-time median-wage earner in 2006 total approximately $1,400. For a typical household with two earners, the loss is more than $2,500. These losses are as high or higher than other economic costs commonly presented as much more damaging to American families, such as the cost of health care, spikes in gasoline and fuel oil prices, the cost of a child’s four-year college education, or the funds needed to remedy a possible shortfall in the future of Social Security.

(Everybody Wins Except for Most of Us is) a good summary of the textbook predictions of what happens to most workers living in a rich country when its economy integrates with a much poorer global economy. But if you raise the point that trade redistributes income and creates some winners but many losers, a point predicted by standard economic theory and proven in empirical studies—you’re made to feel somewhat unseemly, that you and those people you’re concerned about should have stayed in school longer or have studied something different or just been smarter.

THIS TOO: In other words, when trade makes software engineers richer, that’s economics. When it makes Americans without a four-year college degree (the large majority of workers) poorer, that’s their own failure to adapt to the New Economy. And when trade agreements prohibit a country from copying the technology it buys, that’s good business. But if agreements required that each country protect the most basic rights afforded to its workers, that would be protectionism.

The trade story is not win-win but rather good news-bad news: good news for national incomes, bad news for many if not most individuals and families, because their income is redistributed away from them and up the income ladder.

The only criterion by which economists can make firm, value-free judgments about economic policies and trends is what is called the Pareto principle. Pareto optimality results only when an economic change makes one person better off without harming anybody else.

Another appropriate reform of globalization as currently practiced concerns the utterly non-trade-related clutter (generally originating in demands from the corporate sector). Commitments to enforce U.S.-style intellectual property laws, the restructuring of financial sector regulations, and detailed protections of investor rights against expropriation (defined liberally at times to include any government policy that hurts profits) constitute the lion’s share of these agreements. They also rightfully point out the irony: if you want free trade, why do you need all these agreements and protections?

The years following World War II saw an embrace of Keynesian macroeconomics. The enduring lesson of this age was that allowing business cycles to run their course was wasteful, not palliative, and that responsible governments should use policy tools to fight downturns. In the first three decades of the postwar era, macroeconomic policy alone was able to smooth out much of the risk and volatility faced by American households.

To deal with a harm as large and widespread as globalization has wrought (and has the potential to inflict in coming decades), we need to think more broadly about public policy that re-links aggregate and individual prosperity, a policy that uses all the levers available to a government genuinely concerned about economic security for its citizens: social insurance, public investment, fairer economic rules, and redistribution when other tools fail to provide egalitarian outcomes.. The growing gaps in income levels are not just the result of the rich getting richer faster, which they have; it’s also the result of the middle and the bottom falling.

1 comment:

  1. Thanks for the excerpt.

    "When it [free trade] makes Americans without a four-year college degree (the large majority of workers) poorer, that’s their own failure to adapt to the New Economy."

    The problem is you almost need inside information to find out which industry and career path to choose from so you can become a "winner". I'm beginning to think we should start avoiding the "hot" career fields. The only thing that happens is that a glut of applicants crowd into these fields, causing an eventual collapse in wages and salaries.