Gloves off on globalisation

Noah Smith in Bloomberg writes usually sensible stuff. His views on unconventional monetary policies are examples. See  here (ht: Amol Agrawal) and here.

I was shocked to read his latest piece on free trade and good trade. It was uploaded on the Bloomberg website in the early hours of Thursday here in Asia. Not that he spouts non-sense. That depends on the eye of the beholder (as always?). The shocking bit is that there is no hesitation in advancing protectionist arguments, anymore. They are brazening it out:

Basically, opening up trade with poor countries such as China can be dangerous. But liberalizing trade with rich countries such as Japan, South Korea and those in Europe has very little potential downside.

Trading with these countries — which also happen to be some of the U.S.’s most important geopolitical allies — will help American workers, not hurt them. [Link]

He cites a paragraph from the Paul Krugman op.- ed.

But it’s also true that much of the elite defense of globalization is basically dishonest: false claims of inevitability, scare tactics (protectionism causes depressions!), vastly exaggerated claims for the benefits of trade liberalization and the costs of protection, handwaving away the large distributional effects that are what standard models actually predict. I hope, by the way, that I haven’t done any of that; I think I’ve always been clear that the gains from globalization aren’t all that (here’s a back-of-the-envelope on the gains from hyperglobalization — only part of which can be  attributed to policy — that is less than 5 percent of world GDP over a generation); and I think I’ve never assumed away the income distribution effects….

Further interesting stuff:

… So the elite case for ever freer trade is largely a scam, which voters probably sense even if they don’t know exactly what form it’s taking….

… And if a progressive makes it to the White House, she should devote no political capital whatsoever to such things. [Link]

The problem is that the person he supports – Ms. Hillary Clinton – is part of that elite. She represents continuity. For all their supposed faults, Sanders and Trump have assessed that the old model has failed for American workers. One may or may not agree with them but they are at least being consistent. Krugman is trying to have his cake and eat it too, here, with his criticism of ‘elite preferences and elitist policies’ with support for a member of that elite group!

He does further hair-splitting here:

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. [Link]

You can figure out the nuanced logic, if any, that I may be missing here. It is a reminder, if one were needed, yet again of the virtue of staying ordinary. Krugman is ‘big’ and not ‘ordinary’ and hence, all these gymnastics.

Not that I am the only one who is unable to reconcile these conflicting statements. Thomas Palley has something to say on these new ‘self-discoveries’ on the part of mainstream economists.

[Parenthetically, check out this critique of Krugman’s new textbook by Lars Syll here].

His confusion and backpedalling are not new, however, William Greider notes that they were evident as early as in 2007:

By 2007, the facts were so visible and overwhelming, Krugman and other economists were compelled to alter their conclusions. “Fears that low-wage competition is driving down US wages have a real basis in both theory and fact,” he now announced in his Times column. It seems that organized labor was right, after all. “So there is a dark side to globalization,” Krugman wrote. But this time he had only a sheepish response to his own question. “What’s the answer?  I don’t think there is one, as long as the discussion is restricted to trade policy.”

Krugman’s New York Times column linked in the quoted paragraph above was based on his essay for VoxEU. ‘Economist’ too had weighed in on Krugman’s conundrum and his shift from a 1995 paper for the Brookings Institution to his (then) latest loud thinking on the benefits of free trade. Interesting that the ‘Economist’ seemed to dismiss Krugman’s scepticism on free trade but seven years later, one of its journalists behind the ‘Free Exchange’ blog fiercely defended Thomas Piketty. See link below. How times change?!

For a fascinating insight into how far Krugman has moved, you can read his piece (‘In praise of cheap labour’) for Slate in 1997 on the virtues of globalisation of production. He argues, correctly, that there are losers but the gains to the poor in the developing world far outweigh the losses.

I doubt if those arguments have become any less compelling. But, a very narrowly defined focus on the self-interest of the American middle class and their own personal political preferences (and ambitions) have shifted the arguments or the weights attached to the pros and cons of free trade.

Another person who became an apostate on free trade (or, offshoring) is Alan Blinder. He wrote a long piece for ‘Foreign Affairs’ in March/April 2006. He said he was forewarning the Americans about the threat to their jobs from the third Industrial Revolution where even services could be offshored. All that could be offshored through electronic ‘ports’ (on the computer) would be offshored, he argued. He did not have too many radical answers. He was not sure if being forewarned was the equivalent of being forearmed. His solutions were:

Avoid protectionist barriers against offshoring. Building walls against conventional trade in physical goods is hard enough. … But it is vastly harder (read “impossible”) to stop electronic trade. There are just too many “ports” to monitor.

Rich countries such as the United States will have to reorganize the nature of work to exploit their big advantage in nontradable services: that they are close to where the money is. That will mean, in part, specializing more in the delivery of services where personal presence is either imperative or highly beneficial.

The United States and other rich nations will have to transform their educational systems so as to prepare workers for the jobs that will actually exist in their societies. Basically, that requires training more workers for personal services and fewer for many impersonal services and manufacturing.

One other important step for rich countries is to rethink the currently inadequate programs for trade adjustment assistance. Up to now, the performance of trade adjustment assistance has been disappointing. As more and more Americans — and Britons, and Germans, and Japanese — are faced with the necessity of adjusting to the dislocations caused by offshoring, these programs must become both bigger and better.

Thinking about adjustment assistance more broadly, the United States may have to repair and thicken the tattered safety net that supports workers who fall off the labor-market trapeze — improving programs ranging from unemployment insurance to job retraining, health insurance, pensions, and right down to public assistance.

The above solutions are typically academic answers to practical problems. Their practicality is questionable and their impact even more so, not to mention their fiscal affordability.

His piece for Washington Post in 2007 – is a shorter version of that – and it has been widely circulated and re-discussed:

American workers will still face a troublesome transition as tens of millions of old jobs are replaced by new ones. There will also be great political strains on the open trading system as millions of white-collar workers who thought their jobs were immune to foreign competition suddenly find that the game has changed — and not to their liking.

That is why I am going public with my concerns now. If we economists stubbornly insist on chanting “Free trade is good for you” to people who know that it is not, we will quickly become irrelevant to the public debate. Compared with that, a little apostasy should be welcome. [Link]

William Greider at least acknowledges the dangers of ‘ruinous protectionism’ that he thinks that people like Krugman (and Blinder?) are embracing, explicitly or otherwise. He cites the German model as the middle ground:

The best evidence that a nation can both manage its industrial system strategically while participating fully and fairly in global trade is Germany. As an exporting nation with large trade surpluses in advanced technological goods, Germany’s actual experience refutes the lessons taught by orthodox trade theory and macroeconomics in the US. It sets high performance standards for labor relations and for social entitlements. Its goals for the nation’s industrial base accept that some production will be dispersed abroad but the companies must make sure the industrial core—good jobs, high wages and technological invention—remain in Germany.

Is this description still relevant and accurate? Even if it were the case, how long would it remain so is a question. Which one would give? Robust engagement with global trade or its internal industrial system with good jobs and high wages? Will Merkel’s migration policy upend both?

In contrast to Krugman and in fairness, Stiglitz comes across as more consistent. In this piece, he is not arguing against conferring benefits on workers in developing countries but he is sceptical of the argument/claim that winners from free trade (corporations in the developed world)  would compensate the losers (workers). He cites specific examples. His arguments against the harmonisation of taxes and regulations, on the right of corporations to sue the sovereign, the conduct of trade negotiations in secrecy and the advantages conferred on financial institutions to sell derivatives around the world are well made. It is well worth a read.

It is clear that we are entering a world where the West is obsessed with and is worried about low economic growth prospects. The Federal Reserve Board Open Market Committee blinked last night. European Central Bank and the Bank of Japan are paying banks to borrow and charging to deposit! Britain is threatening to eliminate cash so that people have to spend. IMF is planning to revise its global growth estimates lower for this year and next. Desperate times.

The Trump-Sanders phenomena have rattled mainstream elites – politicians, intellectuals and journalists – enough for them to take inequality seriously. They had acknowledged Thomas Piketty but attempted to dismiss him and his recommendations – a exorbitantly high tax rates for the wealthy. You can see some of the criticisms here, here, here, and here. A defence from a blog in ‘Economist’ (?!) is here.

Even before Piketty came up with his magnum opus, ‘Economics in the twenty-first century’, John Judis had made a case for a tax on the rich to arrest if not reverse inequality:

So government is limited, at least in the short term, to reduce pre-tax economic inequality. What it can do is extract through taxes and fees the surplus savings that accrue to the rich and very rich to fund common benefits for everyone else. It can’t necessarily reduce income inequality, but it can prevent a growing inequality in people’s standards of living. Imagine a large house where everyone lives in different size bedrooms, but everyone has equal access to a huge and wonderful living and dining room. [Link]

But, more than the intellectual challenge, the political existential threat posed by Trump-Sanders to the elite has woken them up to the pursuit of elite causes, at least temporarily and at least not as openly as before. The first and the easiest target to channel the anger is foreigners and hence, the direction of the ire at globalisation and towards trade with poor countries (e.g., Noah Smith’s article linked at the very top of this blog post).

Where does this leave India? India should factor into its calculation that external trade is unlikely to be a big growth driver as it used to be for East Asian economies. Further, India should develop a set of its own demands if developed countries impose protectionism on India. A case in point is the recent news that India had privately assured Americans that it would not compulsorily license generic drugs. It took almost a fortnight for the Ministry of Commerce to come out and deny that any such private assurance had been offered. Perhaps, the public revelation of a private assurance left it with no choice but to issue a denial. We will never know. But, such tactics are only likely to intensify in times to come.

As growth in the West tapered off in the 1980s, they resorted to two solutions: one was debt and the other was globalisation. They offshored production and pushed liberalisation of trade in services and intellectual property matters. There was some sort of a quid pro quo. China had a manufacturing boom and India, Philippines and other countries had a boom in services. Living standards in developing countries rose too even as profits in the West rose faster as did inequality. Those who were made better off in the West through free trade did not share their gains with the workers, prompting Stiglitz to declare emphatically that trickle-down economics was a myth. Now, the backlash will be faced by workers in the developing world.

Now, it is going to be only one way: push to open markets in developing countries for services but kiss good-bye to offshoring and outsourcing. It is going to be asymmetric free trade and it will be more blatant.

The restrictions on number of workers on H1B visas hurt Indian Information Technology (IT) firms. Then, the visa fees were hiked substantially and they would be in effect through 2025.

Notice how, as far back as in 2006, Blinder had picked India as the likely place to watch:

Contrary to current thinking, Americans, and residents of other English-speaking countries, should be less concerned about the challenge from China, which comes largely in manufacturing, and more concerned about the challenge from India, which comes in services. India is learning to exploit its already strong comparative advantage in English, and that process will continue. The economists Jagdish Bhagwati, Arvind Panagariya, and T. N. Srinivasan meant to reassure Americans when they wrote, “Adding 300 million to the pool of skilled workers in India and China will take some decades.” They were probably right. But decades is precisely the time frame that people should be thinking about — and 300 million people is roughly twice the size of the U.S. work force. [Link]

In order to see off Donald Trump, politicians and their intellectual ‘handmaidens’ have embraced the Trump agenda. Policymakers in the West are desperate to safeguard their vote banks and protect their electoral prospects. Hence, homage to concerns of their excluded middle-class, lower middle-class labour. They want to protect their electoral funding too. Hence, continued push for access to their corporations and their products – financial services, pharma, etc.

They have intellectual cover now. For India, to be forewarned is to be forearmed.

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