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Globalization and its new dissatisfactions by Joseph E. Stiglitz

Political

Globalization and its new dissatisfactions by Joseph E. Stiglitz

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Many neoliberal economists faced with growing support for populists in Europe and the US remain convinced that everyone really benefits from globalization; they just don’t know. But if the problem is one of psychology rather than economics, income data suggests that it is the neoliberals who would benefit from therapy.

NEW YORK – Fifteen years ago I wrote a little book called “Globalization and its Discontents” describing the growing resistance in developing countries to globalizing reforms. It seemed a mystery: people in developing countries were told that globalization would increase general well-being. Why had so many people become so hostile to her?

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The opponents of globalization in the emerging and developing countries are now joined by tens of millions in the industrialized countries. Opinion polls, including a careful study of Stanley Greenberg and his coworkers for the Roosevelt Institute, show that trade is a major cause of dissatisfaction for a large proportion of Americans. There are similar views in Europe.

How can something our political leaders – and many economists – have said make everyone feel better, so reviled?

One answer that is occasionally heard from neoliberal economists who advocated this policy is that people are better off. You just don’t know. Your dissatisfaction is a matter for psychiatrists, not economists.

But income data suggests that it is the neoliberals who might benefit from therapy. Large parts of the population in the developed world are not doing well: In the US, the bottom 90% have suffered from stagnant income for a third of a century. The median income of male full-time employees is lower in real terms (adjusted for inflation) than it was 42 years ago. In the lower range, real wages are comparable to their level 60 years ago.

The effects of the economic pain and upheaval that many Americans experience even show up in health statistics. For example, economists Anne Case and Angus Deaton, this year’s Nobel Prize winner, have shown that life expectancy among white Americans is falling.

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It’s a little better in Europe – but only a little better.

Branko Milanovic’s new book Global Inequality: A New Approach for the Age of Globalization offers some key insights and looks at the big winners and losers in terms of income in the two decades from 1988 to 2008. Big winners included the global 1%, the plutocrats of the world, but also the middle class in the emerging countries. The big losers – those who gained little or nothing – included the lowest and the middle and working classes in the advanced countries. Globalization is not the only reason, but it is one of the reasons.

Assuming perfect markets (which underlies most neoliberal economic analysis), free trade equalizes the wages of unskilled workers around the world. The trade in goods is a substitute for the movement of people. Importing goods from China – goods that require a large amount of unskilled labor to produce – reduces the demand for unskilled labor in Europe and the United States.

This force is so strong that if there were no transportation costs and the US and Europe had no other source of competitive advantage, such as in technology, it would eventually be like Chinese workers migrating to the US and Europe until wages became disparities completely eliminated. Unsurprisingly, the neoliberals never promoted this consequence of trade liberalization, claiming – you could say a lie – that everyone would benefit from it.

Globalization’s failure to deliver on the promises made by mainstream politicians has certainly undermined confidence in the “establishment”. And the government offers of generous bailouts to the banks that sparked the 2008 financial crisis, while citizens were largely left to their own devices, reinforced the view that this failure was not just a matter of economic misjudgments.

In the US, Republicans in Congress even turned down aid to those directly affected by globalization. In general, neoliberals, evidently concerned about negative incentive effects, have spoken out against welfare measures that would have protected the losers.

But they cannot have both: if globalization is to benefit most members of society, strong social protections must be put in place. The Scandinavians found that out a long time ago; it was part of the social contract that maintained an open society – open to globalization and technological change. Neoliberals elsewhere don’t have that – and now, with elections in the US and Europe, they have their chance.

Globalization, of course, is only part of what is going on; technological innovation is another part. But all this openness and disruption should make us richer, and developed countries could have put in place policies to ensure that the profits were spread widely.

Instead, they pushed for policies that restructured markets in a way that increased inequality and undermined overall economic performance; Growth even slowed as the rules of the game were rewritten to advance the interests of banks and corporations – the rich and powerful – at the expense of everyone else. The bargaining power of the workers was weakened; at least in the US, competition laws did not keep up with the times; and existing laws were inadequately enforced. Financialization continued and corporate governance deteriorated.

Well, as I explain in my recent book Rewriting the Rules of the American Economy, the rules of the game must be changed again – and that includes measures to tame globalization. The two new major agreements that President Barack Obama has pushed – the Trans-Pacific Partnership between the US and eleven Pacific countries and the Transatlantic Trade and Investment Partnership between the EU and the US – go in the wrong direction.

The main message of globalization and its dissatisfaction was that the problem is not with globalization, but with the way the process is being handled. Unfortunately, the management has not changed. Fifteen years later, the new discontent has brought this message to the advanced economies.

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