Globalization—how did they get it so wrong?

There is perhaps no more cherished an idea within mainstream economics than that everyone benefits from free trade and, more generally, globalization. They represent the solution to the problem of scarcity for the world as a whole, much as free markets are celebrated as the best way of allocating scarce resources within nations. And any exceptions to free markets, whether national or international, need to be criticized and opposed at every turn.

That celebration of capitalist globalization, as Nikil Saval explains, has been the common sense that mainstream economists, both liberal and conservative, have adhered to and disseminated, in their research, teaching, and policy advice, for many decades.

Today, of course, that common sense has been challenged—during the Second Great Depression, in the Brexit vote, during the course of the electoral campaigns of Bernie Sanders and Donald Trump—and economic elites, establishment politicians, and mainstream economists have been quick to issue dire warnings about the perils of disrupting the forces of globalization.

I have my own criticisms of Saval’s discussion of the rise and fall of the idea of globalization, especially his complete overlooking of the long tradition of globalization critics, especially on the Left, who have emphasized the dirty, violent, unequalizing underside of colonialism, neocolonialism, and imperialism.*

However, as a survey of the role of globalization within mainstream economics, Saval’s essay is well worth a careful read.

In particular, Saval points out that, in the heyday of the globalization consensus, Dani Rodrick was one of the few mainstream economists who had the temerity to question its merits in public.

And who was one of the leading defenders of the idea that globalization had to be celebrated and it critics treated with derision? None other than Paul Krugman.

Paul Krugman, who would win the Nobel prize in 2008 for his earlier work in trade theory and economic geography, privately warned Rodrik that his work would give “ammunition to the barbarians”.

It was a tacit acknowledgment that pro-globalisation economists, journalists and politicians had come under growing pressure from a new movement on the left, who were raising concerns very similar to Rodrik’s. Over the course of the 1990s, an unwieldy international coalition had begun to contest the notion that globalisation was good. Called “anti-globalisation” by the media, and the “alter-globalisation” or “global justice” movement by its participants, it tried to draw attention to the devastating effect that free trade policies were having, especially in the developing world, where globalisation was supposed to be having its most beneficial effect. This was a time when figures such as the New York Times columnist Thomas Friedman had given the topic a glitzy prominence by documenting his time among what he gratingly called “globalutionaries”: chatting amiably with the CEO of Monsanto one day, gawking at lingerie manufacturers in Sri Lanka the next. Activists were intent on showing a much darker picture, revealing how the record of globalisation consisted mostly of farmers pushed off their land and the rampant proliferation of sweatshops. They also implicated the highest world bodies in their critique: the G7, World Bank and IMF. In 1999, the movement reached a high point when a unique coalition of trade unions and environmentalists managed to shut down the meeting of the World Trade Organization in Seattle.

In a state of panic, economists responded with a flood of columns and books that defended the necessity of a more open global market economy, in tones ranging from grandiose to sarcastic. In January 2000, Krugman used his first piece as a New York Times columnist to denounce the “trashing” of the WTO, calling it “a sad irony that the cause that has finally awakened the long-dormant American left is that of – yes! – denying opportunity to third-world workers”.

The irony is that Krugman won the Nobel Prize in Economics in recognition of his research and publications that called into question the neoclassical idea that countries engaged in and benefited from international trade based on given—exogenous—resource endowments and technologies. Instead, Krugman argued, those endowments and technologies were created historically and could be changed by government policies, including histories and policies that run counter to free trade and globalization.

Krugman was thus the one who gave theoretical “ammunition to the barbarians.” But that was the key: he considered the critics of globalization—the alter-globalization activists, heterodox economists, and many others—”barbarians.” For Krugman, they were and should remain outside the gates because, in his view, they were not trained in or respectful of the protocols of mainstream economics. The “barbarians” could not be trusted to understand or adhere to the ways mainstream economists like Krugman analyzed the exceptions to the common sense of globalization. They might get out of control and develop other arguments and economic institutions.

But then the winds began to shift.

In the wake of the financial crisis, the cracks began to show in the consensus on globalisation, to the point that, today, there may no longer be a consensus. Economists who were once ardent proponents of globalisation have become some of its most prominent critics. Erstwhile supporters now concede, at least in part, that it has produced inequality, unemployment and downward pressure on wages. Nuances and criticisms that economists only used to raise in private seminars are finally coming out in the open.

A few months before the financial crisis hit, Krugman was already confessing to a “guilty conscience”. In the 1990s, he had been very influential in arguing that global trade with poor countries had only a small effect on workers’ wages in rich countries. By 2008, he was having doubts: the data seemed to suggest that the effect was much larger than he had suspected.

And yet, as Saval points out, mainstream economists’ recognition of the unequalizing effects of capitalist globalization has come too late: “much of the damage done by globalisation—economic and political—is irreversible.”

The damage is, of course, only irreversible within the existing economic institutions. Imagining and enacting a radically different way of organizing the economy would undo that damage and benefit those who have been forced to have the freedom to submit to the forces of capitalist globalization.

But Rodrik and Krugman—and mainstream economists generally—don’t seem to be interested in participating in that project, which would give the “barbarians” a say in creating a different kind of globalization, beyond capitalism.

 

*Back in 2000—and in a series of articles, book chapters, and blog posts since then—I have attempted to rethink the relationship between capitalist globalization and imperialism. Marxist economist Prabhat Patnaik has also made the case for the continuing relevance of imperialism as an analytical construct for understanding and challenging effectively the logic and dynamics of contemporary capitalism.

Beyond Trump and free trade

Now that President Trump has begun carrying out his campaign pledges to undo America’s trade ties, formally withdrawing the United States from the Trans-Pacific Partnership and announcing he will start to renegotiate the North American Free Trade Agreement, it’s time to analyze what this means.

As it turns out, I’d already started to do this before the election, with a series of posts (e.g., here, here, here, and here) on Trump and the mounting criticism of the trade agreements the United States had signed (such as NAFTA) or was in the process of negotiating (the TPP).

It’s clear Trump’s decisions—which he claims are a “Great thing for the American worker”—challenge the view of economic and political elites, as well as those of mainstream economists (such as Brad DeLong), in the United States and around the world that everyone benefits from free trade.*

But, we now know, there has also been a growing counter-narrative, that not everyone has gained from growing international trade and trade agreements, which have generated  unequal benefits and costs. What’s interesting about this alternative story, at least when it comes to NAFTA, is that critics on each side argue the other side is the one that has benefited: U.S. critics that Mexico has gained, and just the opposite in Mexico, that the United States has captured the lion’s share of the benefits from NAFTA.

Here’s the problem: workers on both sides of the border have lost out, and their losses are mostly not due to NAFTA.

We know, for example, that the wage share of national income in the United States has in fact declined after NAFTA was implemented (in January 1994)—from 45.1 percent of gross domestic income to 42.9 percent. But we also have to recognize workers have been losing out since at least 1970, when the wage share stood at 51.5 percent.

Much the same has been happening in Mexico, where (according to the research of Norma Samaniego Breach [pdf]), the wage share (the dark green line in the chart above) has been falling since 1978—and continued to fall after NAFTA was put into place. And, as Alice Krozera, Juan Carlos Moreno Brid, and Juan Cristóbal Rubio Badan have shown, economic and political elites in Mexico, much like their U.S. counterparts, have mostly ignored the problem of inequality and resisted efforts to raise the minimum wage and workers’ share of national income.

The fact is, while NAFTA did propel a large increase in trade between Mexico and the United States, it “did not cause the huge job losses feared by the critics or the large economic gains predicted by supporters” (according to a 2015 study commissioned by the Congressional Research Service [pdf]).

The bottom line is, eliminating or renegotiating NAFTA—including in the manner Trump is proposing—is not going to help the working-classes in either Mexico or the United States. It is merely a diversion from the real changes that need to be made, to which the political and economic elites as well as mainstream economists in both countries stand opposed.

 

*The only real debate within mainstream economics is between neoclassical economists who argue free trade generates the most efficient outcomes, within and between countries (regardless of whether countries run trade surpluses or deficits), and their critics (such as Jared Bernstein) who argue that trade deficits lead to a loss of jobs (e.g., in U.S. manufacturing), and thus require interventions of the sort Trump is proposing to change the pattern of international trade.

China syndrome

There are two sides to the recent China Shock literature created by David Autor and David Dorn and surveyed by Noah Smith.

On one hand, Autor and Dorn (with a variety of coauthors) have challenged the free-trade nostrums of mainstream economists and economic elites—that everyone benefits from free international trade. Using China as an example, they show that increased trade hurt American workers, increased political polarization, and decreased U.S. corporate innovation.

The case for free international trade now lies in tatters, which of course played an important role in the Brexit vote as well as in the U.S. presidential campaign.

On the other hand, invoking the China Shock has tended to reinforce economic nationalism—treating China as an unitary entity, a country has shaken up world trade patterns, and disregarding the conditions and consequences of increased trade with other countries, including the United States.

source

Why has there been an increasing U.S. trade deficit with China in recent decades? As James Chan explained, in response to an August 2016 article in the Wall Street Journal,

Our so-called China problem isn’t really with the Chinese but rather our own multinational companies.

As I see it, U.S. corporations have made a variety of decisions—to subcontract the production of parts and components with enterprises in China (which are then used in products that are later imported into the United States), to purchase goods produced in China to sell in the United States (which then show up in U.S. stores), to outsource their own production of goods (to sell in China and to export to the United States), and so on. The consequences of those corporate decisions (and not just with respect to China) include disrupting jobs and communities in the United States (through outsourcing and import competition) and decreasing innovation (since existing technologies can be used both to produce goods in China and sell in the expanding Chinese consumer market), thereby increasing political polarization in the United States.

The flip side of the story is the accumulation of capital in China. Until the development of the conditions for the development of capitalism existed in China, none of those corporate decisions were possible—not by U.S. corporations nor by multinational enterprises from other countries, all of whom were eager to take advantage of the growth of capitalism in China. Which of course they then contributed to, thus spurring the widening and deepening of capital accumulation within China.

source

It should come as no surprise, then, that there’s been an upsurge of strike activity by workers in the fast-growing centers of manufacturing and construction within China—especially in the provinces of Guandong, Shandong, Henan, Sichuan, and Hebei.

According to Hudson Lockett, China this year

saw a total of 1,456 strikes and protests as of end-June, up 19 per cent from the first half of 2015

The problem with the China Shock literature, which has served to challenge the celebration of free-trade by mainstream economists and economic elites in the West, is that it hides from view both the decisions by U.S. corporations that have increased the U.S. trade deficit with China (with the attendant negative consequences “at home”) and the activity by Chinese workers to contest the conditions under which they have been forced to have the freedom to labor (which we can expect to continue for years to come).

It’s our responsibility to keep those decisions and events in view. Otherwise, we risk the economic and political equivalent of the China Syndrome.

Uncertainty and the election

Mark Tansey, “Coastline Measure” (1987)

The pollsters got it wrong again, just as they did with the Brexit vote and the Colombia peace vote. In each case, they incorrectly predicted one side would win—Hillary Clinton, Remain, and yes—and many of us were taken in by the apparent certainty of the results.

I certainly was. In each case, I told family members, friends, and acquaintances it was quite possible the polls were wrong. But still, as the day approached, I found myself believing the “experts.”

It still seems, when it comes to polling, we have a great deal of difficult with uncertainty:

Berwood Yost of Franklin & Marshall College said he wants to see polling get more comfortable with uncertainty. “The incentives now favor offering a single number that looks similar to other polls instead of really trying to report on the many possible campaign elements that could affect the outcome,” Yost said. “Certainty is rewarded, it seems.”

But election results are not the only area where uncertainty remains a problematic issue. Dani Rodrik thinks mainstream economists would do a better job defending the status quo if they acknowledged their uncertainty about the effects of globalization.

This reluctance to be honest about trade has cost economists their credibility with the public. Worse still, it has fed their opponents’ narrative. Economists’ failure to provide the full picture on trade, with all of the necessary distinctions and caveats, has made it easier to tar trade, often wrongly, with all sorts of ill effects. . .

In short, had economists gone public with the caveats, uncertainties, and skepticism of the seminar room, they might have become better defenders of the world economy.

To be fair, both groups—pollsters and mainstream economists—acknowledge the existence of uncertainty. Pollsters (and especially poll-based modelers, like one of the best, Nate Silver, as I’ve discussed here and here) always say they’re recognizing and capturing uncertainty, for example, in the “error term.”

Even Silver, whose model included a much higher probability of a Donald Trump victory than most others, expressed both defensiveness about and confidence in his forecast:

Despite what you might think, we haven’t been trying to scare anyone with these updates. The goal of a probabilistic model is not to provide deterministic predictions (“Clinton will win Wisconsin”) but instead to provide an assessment of probabilities and risks. In 2012, the risks to to Obama were lower than was commonly acknowledged, because of the low number of undecided voters and his unusually robust polling in swing states. In 2016, just the opposite is true: There are lots of undecideds, and Clinton’s polling leads are somewhat thin in swing states. Nonetheless, Clinton is probably going to win, and she could win by a big margin.

As for the mainstream economists, while they may acknowledge exceptions to the rule that “everyone benefits” from free markets and international trade in some of their models and seminar discussions, they acknowledge no uncertainty whatsoever when it comes to celebrating the current economic system in their textbooks and public pronouncements.

So, what’s the alternative? They (and we) need to find better ways of discussing and possibly “modeling” uncertainty. Since the margins of error, different probabilities, and exceptions to the rule are ways of hedging their bets anyway, why not just discuss the range of possible outcomes and all of what is included and excluded, said and unsaid, measurable and unmeasurable, and so forth?

The election pollsters and statisticians may claim the public demands a single projection, prediction, or forecast. By the same token, the mainstream economists are no doubt afraid of letting the barbarian critics through the gates. In both cases, the effect is to narrow the range of relevant factors and the likelihood of outcomes.

One alternative is to open up the models and develop a more robust language to talk about fundamental uncertainty. “We simply don’t know what’s going to happen.” In both cases, that would mean presenting the full range of possible outcomes (including the possibility that there can be still other possibilities, which haven’t been considered) and discussing the biases built into the models themselves (based on the assumptions that have been used to construct them). Instead of the pseudo-rigor associated with deterministic predictions, we’d have a real rigor predicated on uncertainty, including the uncertainty of the modelers themselves.

Admitting that they (and therefore we) simply don’t know would be a start.

The politics of Trumping free trade

Late last month, I argued Donald Trump doesn’t know what he’s talking about when it comes to international trade. But his attacks on free trade are in fact resonating among working-class voters. That, and the fact that the polls show the presidential election much closer in recent weeks than anyone expected, has finally made others sit up and take notice.

And now we’re witnessing the free-trade, anti-Trump backlash.

Thomas B. Edsall cites the same Peter Goodman article I did last week, which included this astute observation:

Across much of the industrialized world, an outsize share of the winnings has been harvested by people with advanced degrees, stock options and the need for accountants. Ordinary laborers have borne the costs and suffered from joblessness and deepening economic anxiety.

But then Edsall goes all in with the mainstream economists who, as part of their unchanging mantra, celebrate free international trade.* He cites, as one example, Erik Brynjolfsson, an economist at M.I.T.’s Sloan School of Management:

No nation can succeed by trying to protect the past from the future. We will succeed by having the confidence to embrace competition, and leveraging our comparative strengths, which are numerous. We have the largest, most productive and most technologically advanced economy that’s ever existed on this planet. The more open the world economy is, the more we have an opportunity to leverage our many strengths.

My sense is that mainstream economists are doubling down on their free-trade argument, forgetting about the “ordinary laborers [who] have borne the costs and suffered from joblessness and deepening economic anxiety,” for two major reasons.

First, they fervently believe in free trade, because their models are designed to ignore the unequal costs and benefits of international trade. That is, the “gains from trade” that supposedly accrue to everyone are literally baked into their models. And they’re afraid to admit that some gain, and many others lose, under existing international trade regimes and agreements. They’re afraid because admitting the unequal outcomes opens the door to intervening and creating patterns of trade that might actually help workers and other losers within the current arrangements. They’re also fearful of incurring the wrath of other mainstream economists, who attack any exceptions to the free-trade mantra with a vengeance (as even Paul Samuelson discovered).

Second, mainstream economists are doubling down on their defense of free trade because they’re willing to say anything and everything to attack Trump. Just the fact that Trump has had the temerity of criticizing free-trade agreements, such as the North American Free Trade Agreement and the Trans-Pacific Partnership, thereby creating (in the eyes of mainstream economists) the specter of protectionism, has led them to cast aside all caution and reinforce their uncritical support for free trade. (Edsall even invokes the long-discredited idea that the Smoot-Hawley Tariff Act was “one of the principle causes” of the first Great Depression to make the case.) But, of course, in their determination to oppose the Republican candidate, mainstream economists also dismiss the indignities and injuries many of Trump’s supporters have suffered in recent decades.**

International trade is not the only thing hurting American workers. It’s probably not even the major factor. Decades of stagnant wages, rising inequality, outsourcing, and job-displacing technological change created by their employers are, in my view, even more important. But mainstream economists’ and pundits’ all-out defense of free trade, their refusal to recognize the unequal benefits and costs of globalization, and their determined efforts to let employers completely off the hook are among the important reasons that, against all odds, Trump is only 5-6 points behind in the national polls.***

 

*It should come as no surprise that, according to the International Monetary Fund, the World Bank, and the World Trade Organization, the solution to the problems of international trade is. . .more trade.

**Many of Clinton’s supporters have also been harmed by U.S. economic policies, including international trade agreements.

***I wrote this post before the revelation of the 2005 Trump tape and the Wikileaks publication of the emails concerning Hillary Clinton’s speeches. Given the media coverage of the two events (plus whatever happens in the Sunday debate), my guess is the new polls will register a much larger lead for Clinton—and there will be much less discussion of international trade (or economics of any sort) in the weeks ahead.

Trumping free trade

Donald Trump doesn’t know what he’s talking about. But he owned Hillary Clinton during the first part of Monday’s debate. And his attacks on free trade are in fact resonating among working-class voters.

That, and the fact that the polls show the presidential election much closer at this stage than anyone expected, has finally made others sit up and take notice.*

I weighed in back in July, trying to move the debate beyond the free trade-protectionism terms in which it has been framed. Now, we have Peter Goodman, who understands that “Trade is under attack in much of the world, because economists failed to anticipate the accompanying joblessness, and governments failed to help.”**

Goodman makes a number of good observations—about the role “libraries full of economics textbooks” played in promoting free trade and the fact that, even if manufacturing plants returned to the United States, “robots would probably capture most of the jobs.”

But what really interests me about Goodman’s article are the comments from readers. Here is a small sample:

From Mitch Gitman (in Seattle)—

Economists failed to anticipate the job losses stemming from unleashing a Hobbesian race to the bottom on the global economy?! I think they all knew full well, but they weren’t so concerned because it wasn’t their jobs being lost. Just like these economists don’t belong to the generations that are going to be bearing the brunt of the environmental impacts of this sudden race to burn all the fossil-fuel resources that our only planet has taken hundreds of millions of years to accumulate.

Economists are supposed to be the professionals who are smart enough to see the big picture, but economists have to pay the bills too. And there was never going to be a demand for an economist with the simple common sense to see the really big picture, that being able to buy marginally cheaper goods at Walmart is the classic case of knowing the price of everything and the value of nothing.

Bill Maher had a great line from his commentary at the end of last Friday’s episode of his HBO show “Real Time.” To people who ask, “Why doesn’t our economy work for people like me?” His response: “Because it’s not designed to.”

From Kate Flannery (in New York)—

At it’s barren heart, it’s not about trade, it’s about profit at any cost to the public good or just simply human life.

We wouldn’t need lower cost consumer goods, if people had decent income to purchase what they need or want in a sustainable way. Products that are cheap, but fall apart after a year is not the way life should be, nor is it environmentally just.

Every economic lie and political spin about the glories of globalization is just that – a lie to enable corporations and the rich to have even more. American agricultural giants wanted more markets for their horrible products, sending corn into Mexico, a country that didn’t need it. This drove Mexican farmers out of business and destabilized workers who fled north to find work, or crowded into cities to become slave workers for corporations at minimal wages. And that’s just one small example of its immoral and devastating effects.

Globalization and its attendant trade are a main contributor to environmental degradation around the globe as well.

The whole idea of glorious trade and globalization and all the rest, is just a monumental lie serving to enrich the few at the expense of the many. It’s been sold to the public at extraordinary cost. But people are waking up and realizing that those we elect to protect and serve the interests of society have only their self interests and those at the top of the food chain – corporations and finance – are just hollow men and women.

It’s about profit. Nothing else.

And LindaP (in Boston)—

It breaks my heart that the city where I grew up –Fall River, MA, the Spindle City– is a Trump stronghold. It is against the self-interest of those supporters, but as one who lived through the shut down of a city and the hopelessness that ensues, I (kinda) get it.

On hot summer vacation days in the ’60s, we kids would walk through the city. Factory windows would be open. The clack and whir of sewing machines and other manufacturing equipment was as familiar as crickets in the evening. Both my parents — my entire family, actually — worked in those mills.

No one was rich, living in three-deckers and saving up for the American Dream of owning a home, which many went on to do. In those neighborhoods of three-deckers there was cleanliness, pride of place, community, and a real knowledge (not false hope) that you could progress and make a better life for your family. No one was looking to live in a gilded tower — just a nice home, good schools, a living wage, and a better life for ones children.

Then the mills went dark, one by one. Everyone I knew who made their lives in those jobs had to move on. There were still other union jobs to get in the late 60s, so we survived. By the time my parents retired, I saw opportunity dry up for those behind them.

The loss of manufacturing allowed poverty, addiction, and a true hopelessness to take hold. Maybe you have to live it to know how devastatingly true that is.

There’s more wisdom in those comments, about the causes and consequences of free trade, than one will find in Trump’s speeches and the libraries full of mainstream economics textbooks—or, for that matter, in the revised policy positions on Hillary Clinton’s web site.

 

*Clearly, the Brexit vote has also had an impact.

**To be clear, mainstream economists are the ones who failed to anticipate the negative effects, and both Democratic and Republican governments failed to help workers.

Cartoon of the day

Special mention