Tuesday, 13 December 2016

The Case Against Globalisation Reparations

There are a lot of column inches currently being devoted to an increasingly popular idea: That the benefits of globalisation and free trade haven’t been sufficiently broadly spread and something must be done.

This has been variously conceived in the form “globalisation’s losers”, “Rust Belt rebellion” and “back row kids” and has been placed at the centre of the anti-establishment wave sweeping developed economies. Without wanting to antagonise the no doubt well-meaning authors of such pieces, however, I’m not at all convinced that at this stage addressing national inequality using globalisation reparations frame is a good guide for public policy.

For an example of this argument, see Gavyn Davies recent column in the FT (emphasis mine):

“Economists have now recognised these dangers, and a new consensus has started to emerge. There has been (almost) no change in the overwhelming belief that free trade and globalisation are good things for society as a whole. But it is now much more widely accepted that the losers from these changes can be more numerous, more long lasting and more politically assertive than previously thought.
The new consensus holds that the gains from globalisation can only be defended and extended if the losers are compensated by the winners. Otherwise, pockets of political resistance to the process of globalisation will begin to overwhelm the gainers, even though the latter remain in the majority.”

I think this consensus, if it is such, is not only unhelpful but potentially highly economically and socially corrosive. To see why, you need first to look at what we mean by globalisation losers.

There is little doubt that the most immediate impact of opening up global trade, in particular the emergence of China as a global trade power from the 1990s, was disruptive and ultimately helped drive the dismantling of large sections of the manufacturing base of the developed world. As the FT’s Matt Klein illustrates, although a great deal of US manufacturing jobs would likely have been lost to technological advancement the impact of import competition has also been significant – in the no import competition model Klein suggests the manufacturing workforce could be some 19% bigger than it is today.

But even acknowledging the significant disruptive influence of opening up global trade on huge swathes of domestic industries and communities that relied on them, compensation for globalisation losers remains a poor framework to guide public policy. Where it is useful is in adjusting future approaches to positive supply shocks from free trade, ensuring that re-training programmes are available for affected employees, providing incentives for corporates to re-locate to affected areas, that targeted investment in communities to build long-term assets are considered as well as direct transfers such as unemployment benefits.

Perhaps most importantly, policy needs to insure that income shocks don’t create a vicious cycle of lower asset prices leading to negative equity/high indebtedness and effectively trapping people into poverty.

Yet there is a reason why the rust belt has got its name. In short, these policies weren’t in place early enough to prevent the decline of former industrial towns and cities. Moreover, there is also a consensus among economists that, absent significant import tariffs and quotas providing a substantial self-imposed negative supply shock creating a worse problem than the one you’re trying to solve, there is no way for the US to bring back these manufacturing jobs.

Indeed, large parts of the so-called rust belt are already a fair way into the transition out of industrial decline and integrating well into the modern services economy. The "Rust Belt" states have seen significant net job gains over the past decade, and while the unemployment rate is (on average) somewhat higher than the national average the participation rate in most rust belt states is above the national average in all save Pennsylvania.

That is not to suggest these regions don’t have problems, only that the practical problems they have – urban/rural disparities, poverty, education gaps – are common to a number of areas and communities outside of de-industrialised areas. What proponents of the globalisation reparations argument seem to suggest is that, rather than address those as issues of national importance, we should instead privilege industrial towns because they appear to be angriest about their relative status change.

I am simply not convinced that putting relative status above actual need in a hierarchy of concerns for public policy is either sensible or desirable. And, moreover, it privileges a certain type of disenfranchisement – the decline of the factory worker and their perceived place in the American mythos – over other disadvantaged communities who have long been fighting to close a status and income gap that remains one of the biggest indictments of policy to date.

Indeed, the closing of that gap between the white working class and traditionally marginalised groups may have made that status anxiety all the more acute. And the answer surely cannot be to reopen it simply in order to buy off hostility by the most vocal to globalisation and free trade at the cost of better policy for everyone. Still less is it an argument for pushing back against openness to trade and migration now that the initial costs have already been experienced - guaranteeing only that they will be less able to partake in the benefits of a faster growing, ever-more-integrated global economy.

Doing so would be to compound rather than learn from the mistakes of the recent past.