Globalization and Work: Have We Learned Anything Yet?
"Winners could compensate losers" is a hollow mantra.
Posted June 19, 2017
In Economics 101, we learn that international trade can benefit all countries. Around 1800, England had a comparative advantage in raising sheep and producing wool, while Portugal had a comparative advantage in growing grapes and making wine. If each followed its comparative advantage in production and traded with the other the product it had a relative advantage in, the people of both countries could consume more of both wool and wine.
So began the argument for free trade that was laid out conceptually by Adam Smith in the 18th century and demonstrated more rigorously by David Ricardo in the 19th. And ever since, the virtue of freer international trade has been one of the few things that economists across a broad spectrum of political views have tended to agree on.
But even a good introductory economics textbook, and certainly all books for more advanced students, lays out some qualifications. Among the most important is that if individuals take time to acquire relevant skills and if they cannot move costlessly across country borders or into new occupations, then although trade may raise total goods consumed in any two countries that engage in it, it is likely to have both its winners and its losers in each of them. In Ricardo’s example, for instance, some expert shepherds might be out of work in Portugal as that country’s market fills with English woolens. Some English wine sellers who made high profits due to wine’s scarcity in their country would have to settle for lower profits or find another line of work.
Recognizing that there are usually both winners and losers from trade, economists long ago set out to prove not that trade always benefits everyone, which they recognized to be false, but rather that trade benefits countries sufficiently so that, at least in principle, those residents of the country who are harmed by it lose less than those who benefit gain. The implication is that the winners gain enough to fully compensate the losers, while still coming out ahead. For example, the loss of some manufacturing jobs by U.S. workers in today’s globalizing world is more than made up for by the benefits to far larger numbers of U.S. consumers in the form of less expensive goods from other countries, so in principle the beneficiaries could be taxed to fund adequate compensation to the harmed workers and would still remain better off with than without the trade and tax. For greatest long-term benefit, some of the tax proceeds would be used to train the job-losing workers or to subsidize companies willing to hire and train them. Support for globalization would be far broader were such systematic compensation of losses by gains to be implemented.
The important point is that for generations, economists have been saying that freer trade is a good thing because the winners can in principle compensate the losers, but the large majority of these economists have never insisted that the compensation be carried out in fact. This made it easy for politicians to falsely assert that free trade is “in everyone’s interest,” without owning up to its mixed impact.
The connection to current U.S. politics is immediate. In recent decades, most Democrats joined Republicans in peddling free trade, along with financial deregulation, as policies that raise aggregate GDP, and did so without seriously worrying about the impact on ordinary people. In 2016, both Hillary Clinton and most mainstream Republicans were tainted by their association with a business-as-usual assumption that globalization and deregulation are good for ordinary Americans. This surely contributed to the surges of support for candidates appealing explicitly to working class voters (Sanders and Trump) and to the eventual defeat of the party fielding the more “mainstream” candidate (Clinton).
Of course, too many voters got things disastrously wrong, thanks to a desperate willingness to believe that a wealthy real estate developer would truly care about America’s working class. It was a mistake to which large doses of “dog whistle” (under the radar race-based) messages contributed mightily.
But that is another story. My point here is that it would be a great loss to the majority of Americans were the major parties to fail to learn from 2016 that policies that might in principle increase GDP in the short run will not assure support from the large majority in the longer term. Restoring a great society in which government works with markets to maximize the welfare of the largest possible number of Americans depends on a repudiation once and for all of the notion that what’s good for GDP is good for every American. Economic analysis actually supports the subtler view that not everyone wins from policies of free trade, and it’s the responsibility of economists to speak up now, rather than to adopt poses of policy neutrality.
Beyond globalization and jobs may lurk an even larger long term issue of automation and what it will mean for the distribution of economic well-being. By the middle of the last century, John Kenneth Galbraith was already warning that we were on the verge of a leisure society in which most people would not have to work long hours in order for the goods and services consistent with a high standard of living to be produced. The question is: will our social and economic institutions rise to the challenge of sharing both leisure and the wherewithal to enjoy a high quality of life, or will we, by acceptance of libertarian rhetoric, end up in a world in which the potential boons of robotics, nanotechnology, etc., engineer both mass unemployment (or underemployment) and mass poverty? Focusing on GDP rather than the messy facts of winners and losers would be a recipe for just such a disaster.