Must-read: Dean Baker: “The Elite’s Comforting Myth: We Had to Screw Rich Country Workers to Help the World’s Poor”

Must-Read: Dean Baker: The Elite’s Comforting Myth: We Had to Screw Rich Country Workers to Help the World’s Poor: “Roger Cohen gave us yet another example of touching hand-wringing from elite types…

…about the plight of the working class in rich countries…. Cohen acknowledges that there is a real basis for their rejection of the mainstream: they have seen decades of stagnating wages. However Cohen tells us the plus side of this story, we have seen huge improvements in living standards among the poor in the developing world. In Cohen’s story, the economic difficulties of these relatively privileged workers is justified by the enormous gains they allowed those who are truly poor. The only problem is that these workers are now looking to these extreme candidates. Cohen effectively calls for a more generous welfare state to head off this turn to extremism, saying that we may have to restrain ‘liberty’ (he means the market) in order to protect it. This is a touching and self-serving story. The idea is that elite types like Cohen were winners in the global economy. That’s just the way it. Cohen is smart and hard working, that’s why he and his friends did well. Their doing well also went along with the globalization process that produced enormous gains for the world’s poor. But now he recognizes the problems of the working class in rich countries, so he says he and his rich friends need to toss them some crumbs so they don’t become fascists.

We all should be glad that folks like Cohen support a stronger welfare state, but let’s consider his story… imagine that mainstream economics wasn’t a make it up as you go along discipline. The standard story in economics is that capital is supposed to flow from rich countries to poor countries…. Rich countries lend poor countries the capital they need to develop… [run] large trade surpluses with the developing world. In effect, the rich countries would be providing the capital that poor countries need to build up their capital stock and infrastructure, while still ensuring that their populations are fed, housed, and clothed. We actually were seeing a pattern of development largely along these lines in the early 1990s….

This pattern was reversed in 1997 with the U.S.-I.M.F.’s bailout from the East Asian financial crisis…. The countries directly affected began to run huge trade surpluses in order to accumulate massive amounts of reserves. Other developing countries also decided to go the same route in order to avoid ever being in the same situation as the countries of East Asia. From that point forward developing countries like China and Vietnam ran enormous trade surpluses. This implied huge trade deficits and unemployment for manufacturing workers in the United States and to a lesser extent Europe…. Cohen is giving us this impressive display of hand-wringing…. It’s very touching, but in the standard economics, it was hardly necessary. The standard economics would have allowed the pattern of growth of the early and mid-1990s to continue…. The fact that the textbook course of development was reversed, with massive capital flows going from poor countries to rich countries, was due to a massive failure of the international financial system…. The fact that manufacturing workers paid this price, and not doctors, lawyers, and other highly paid professionals, was by design….

It’s touching that folks like Roger Cohen feel bad for the losers from the process of globalization. But the story is that they didn’t just happen to lose, his friends designed the game that way.

Must-read: Wolfgang Munchau: “The Revenge of Globalisation’s Losers”

Must-Read: Wolfgang Munchau: The Revenge of Globalisation’s Losers: “A process once hailed for delivering universal benefit now faces a political backlash…

…The establishment view, in Europe at least, is that states have neglected to forge the economic reforms necessary to make us more competitive globally. I would like to offer an alternative view. The failure of globalisation in the west is in fact down to democracies failure to cope with the economic shocks that inevitably result from globalisation, such as the stagnation of real average incomes for two decades. Another shock has been the global financial crisis–a consequence of globalisation–and its permanent impact on long-term economic growth….

Voters’ insurrection is neither shocking nor irrational. Why should French voters cheer labour market reforms if it could result in the loss of their jobs, with no hope of a new one?… Germany’s acclaimed labour market reforms in 2003 succeeded in the short term because they raised the country’s cost competitiveness through lower wages relative to other advanced countries. The reforms produced a state of near full employment only because no other country did the same. If others had followed, there would have been no net gain. The reforms had a big downside. They reduced relative prices in Germany and pushed up net exports in turn generating massive savings outflows, the deep cause of the imbalances that led to the eurozone crisis. Reforms such as these can hardly be the recipe for how advanced nations should address the problem of globalisation….

Globalisation has overwhelmed western societies politically and technically. There is no way we can, or should, hide from it. But we have to manage the change. This means accepting that the optimal moment for the next trade agreement, or market liberalisation, may not be right now.

Must-read: Branko Milanovic: Global Inequality: A New Approach for the Age of Globalization

Must-Read: Branko Milanovic: Global Inequality: A New Approach for the Age of Globalization: “When: 03/29/2016 9:30 am – 11:00 am. Where: 1500 K Street Northwest, Washington, DC, United States…

…Please join the Washington Center for Equitable Growth on Tuesday, March 29 at 9:30a.m. for a presentation by Branko Milanovic on the findings of his new book, ‘Global Inequality: A New Approach for the Age of Globalization.’

‘Global Inequality’ is a comprehensive addition to the growing popular literature on inequality, expanding the scope of existing research in both time and space. Milanovic argues that inequality is historically not just an inverted-U shape, as Simon Kuznets claimed, nor a right-side-up U, as Thomas Piketty contends, but both.

The implications of Milanovic’s research for the current inequality debate pertain to the simultaneous decline of inequality between countries, as average incomes in the developing world grow rapidly, and the rise of inequality within countries, with the emergence of a global plutocracy and the stagnation or even decline of labor incomes for the middle class of developed economies. Milanovic connects all of these trends to the rise in globalization and pro-rich economic policies adopted around the world, and speculates about what sorts of forces might emerge to counteract the global trend, as they have in past periods.

Copies of ‘Global Inequality’ will be available for purchase at the event.

Registration and breakfast: 9:00 a.m. Presentation and discussion: 9:30 a.m. – 11:00 a.m. Welcome: Heather Boushey, Executive Director and Chief Economist, Washington Center for Equitable Growth. Featured author: Branko Milanovic, author, ‘Global Inequality: A New Approach for the Age of Globalization’; Senior Scholar, Luxembourg Income Study Center; Visiting Presidential Professor, Graduate Center, City University of New York. Discussant: Suresh Naidu, Assistant Professor of Economics and Public Affairs, Columbia University. Moderator: Marshall Steinbaum, Research Economist, Washington Center for Equitable Growth.

Must-read: Dani Rodrik: “More on the Political Trilemma of the Global Economy”

Must-Read: I find myself more on Martin Sandbu’s side than that of the very-sharp Dani Rodrik in this debate. This is largely, I think, because Dani remains at too abstract a level. The commitment of foreign trading partners to “openness”, whatever that turns out to mean in practice, enlarges domestic political and economic opportunities in some directions. But one’s own government’s reciprocal commitment to “openness”, whatever that turns out to mean in practice, restricts domestic political and economic opportunities in different directions. How much should a government and a people value the gains in the first set of directions? How much should a government and a people regret the loss in the second set?

These are questions that must be answered pragmatically. The devil is in the details. And ideologies–either Friedmanesque rants that globalization is always good or Trumpist rants that “we” are always outmaneuvred in trade deals by shifty foreigners–seem to me profoundly unhelpful here. And so the word “globalization” becomes an obstacle rather than an aid to thought…

Dani Rodrik: More on the Political Trilemma of the Global Economy: “Here are [Martin] Sandbu’s main points and my take on them…

…”if economic integration limits a national democracy’s room for manoeuvre, does it limit a national dictatorship’s opportunities any less?” I think Sandbu’s point is true for some dictatorships, but not all. Today the prevailing worry of progressives is that an oligarchy of financiers, investors, and skilled professionals has captured the polity and is using globalization as a way of imposing its policy priorities. What globalization does for these groups is actually to expand their political opportunities, rather than constrain them…. [In] a democracy… the electorate can decide on their own path… even when it may conflict what a narrowly based, internationally mobile elite want–and that is what hyper-globalization restricts….

“We should beware of conflating economic integration with technocracy.”… In practice, globalization is used to impose a particular technocratic set of rules serving the interests of particular groups. That it need not do so is a valid point for globalization in general, as long as don’t take it as far as hyper-globalization….

“Is [there] necessarily a loss of democracy when the rules are set internationally while most democratic institutions remain nationally rooted[?]… Negotiating rules together is an exercise of national self-determination, not its abrogation.”… As long as we are not trying to eliminate every transaction cost to international trade and investment, there are multiple models of globalization… leaving plenty of space for countries to devise their own social and economic arrangements….

The fact that an international rule is negotiated and accepted by a democratically elected government does not inherently make that rule democratically legitimate…. There are many ways in which globalization actually harms rather than enhances the quality of democratic deliberation. For example, preferential or multilateral trade agreements are often simply voted up or down in national parliaments with little discussion, simply because they are international agreements. Globalization-enhancing global rules and democracy-enhancing global rules may have some overlap; but they are not one and the same thing…. International commitments can be used to tie the hands of governments in both democratically legitimate and illegitimate ways…. The constraints really bind in the presence of a hyper-globalization/deep-integration model (a la Eurozone)…

Must-read: Paul Krugman: “Globalization and Growth”

Must-Read: Paul Krugman: Globalization and Growth: “Brad DeLong… arguing that the really big benefits of globalization come from technology diffusion…

…which make it a much more positive force than I suggest. I used to believe the same thing, and still find myself thinking along those lines now and then. But I’d argue that economists need to be, at the least, upfront about the argument’s limitations. First, it doesn’t come out of the models. As Brad says, the map is not the territory; but guesses about such things are, well, guesses. There was a time when everyone knew that import-substituting industrialization was the key to economic takeoff, based on loose historical reasoning (America and Germany did it!). Then developing countries tried it en masse, and the results weren’t great.

Furthermore, my sense is that nonstandard free-trade arguments tend to involve, often unintentionally, a kind of bait and switch. Economists love to talk about comparative advantage…. Somewhere Alan Blinder said that economists would almost all agree on the slogan ‘Yay free trade.’ But the seeming authority of the comparative-advantage case then ends up being carried over, illegitimately, to arguments for trade that have nothing to do with comparative advantage. Yes, there could be positive externalities associated with trade, but there could be positive externalities associated with lots of things, and Ricardian models don’t give us any special reason to think that the trade ones are more important.

So how would you test such arguments? Well, in a way we did carry out an experiment. In the early 1990s there was a widespread orthodoxy that ‘outward-looking’ development policies were much more favorable to growth than ‘inward-looking’ policies… the rapid growth of Asian economies, which had followed an export-oriented path rather than… import substitution… in the 50s and 60s. The question, however, was whether you would see dramatic acceleration of growth in other places, such as Latin America, when policy shifted away from inward focus. And the answer turned out to be, not so much. Look at Mexico, which did a radical trade liberalization in 1985-88, then joined NAFTA. It has seen a transformation of its economy in many ways; it has gone from an economy that didn’t export much besides oil and tourism to a major manufacturing export power. And the effect on development has been… underwhelming.

So Brad could be right; but the evidence is far from conclusive. I would still argue very strongly that it’s crucial to keep markets open for poor countries. But we should be cautious in our claims about the virtues of free trade.

Must-Read: Marshall Steinbaum: The Unseen Threat of Capital Mobility

Must-Read: Marshall Steinbaum: The Unseen Threat of Capital Mobility: “The Hidden Wealth of Nations: The Scourge of Tax Havens

…by Gabriel Zucman, University of Chicago Press, $20 (cloth). Out of Sight: The Long and Disturbing Story of Corporations Outsourcing Catastrophe by Erik Loomis, The New Press, $25.95 (cloth). Two new books link rising inequality to unseen forces: tax havens in economist Gabriel Zucman’s case, and overseas labor and environmental exploitation in historian Erik Loomis’s. The adverse consequences of the free movement of capital suffuse both narratives…. Both authors propose tariffs, capital controls, and international regulatory standards that would either re-erect national boundaries or threaten to do so–proposals that will strike many readers as misguided, out of touch with political reality, or both….

When the Rana Plaza factory collapsed in 2013, Loomis engaged in a memorable online dispute with Matthew Yglesias, who published a piece on the disaster headlined ‘Different Places Have Different Safety Rules and That’s Okay’…. Loomis’s and Zucman’s calls for re-erecting national boundaries and re-empowering democratically accountable regulators are implications of a much more successful model for explaining why inequality has risen so much within developed and developing countries than in Yglesias’ just-so story: capital has gained the upper hand over labor by creating and accessing outside options while eliminating those of its opponents. Both books are the product of careful reconsideration and critique of received wisdom in the fields each covers, and more casual commentators would be wise to take heed of their implications instead of peddling discredited objections to any check on international capital mobility.

In Which I Call for a More Optimistic Martin Wolf…

Live from Lima, Peru: Martin Wolf, can I get you to say something optimistic?

The last four times I have been in the same room with Martin Wolf, he has left me profoundly depressed. He has just done it again–by reminding me how many of the lessons of the 1930s have been lost, and how much the Federal Reserve needs to assume the role of global Kindlebergian hegemon that it is currently refusing. So I had a question to ask that I hoped would elicit an optimistic answer…

Alas! I did not get to ask it. But here it is:

Let me see if I can get you to agree with an optimistic view of emerging markets’ future–if and after we can resolve all the difficulties that Ken Rogoff calls the ongoing hangover of the debt supersupercyle…

Back before 1970 we had not just non-convergence but divergence: the Matthew 25:29 global economy, as the rest of the world grew much more slowly than the North Atlantic core plus the East Asian and Peripheral Europe convergence club. Since 1970 we have had China, and now India, plus on average not divergence but relatively stasis elsewhere. Does not this suggest that we would be seeing “convergencence” in the emerging world if not for the fact that China is bigfooting everybody else out of the niches for export-led convergence growth? And that the future looks relatively bright for emerging-market convergence as China transitions to a different growth model, and open up the export-led convergence growth space?

Can I get you to agree with that?