Globalization and Rising Inequality: A Big Question and Lousy Answers

While freer trade makes everyone collectively richer, the impacts are unequal. There are winners and losers, and even among the winners there are some who gain a great deal and some who gain very little. The precise relationship between expanded globalization and rising income inequality remains in dispute, but economists now generally accept that freer trade, immigration and investment, along with technology, have played some significant role in the growing gap between the rich and poor and the shrinking middle class in the United States.

For many years, I have listened to economists offer the same remedy: the collective benefits of trade are so large – Americans as a whole are are some $1 trillion better off as a consequence of decades of growing globalization, according to the most widely cited study – that the winners should compensate the losers. Those whose incomes are rising – the bankers, the consultants, the business executives, and others whose market value has been enhanced by globalization – should be taxed to help out the factory or construction workers who are losing out to lower-wage competition. Such help could take many forms, from unemployment insurance to job retraining programs to wage subsidies that help close the gap between better-paid manufacturing jobs and the lower-paid service jobs that laid-off workers are most likely to find.

But at a fascinating conference yesterday at the Peterson Institute for International Economics entitled “Ethics and Globalization,” Bill Galston of Brookings posed a question: What happens if the winners from globalization refuse to compensate the losers, or compensate them inadequately? This, he pointed out, is precisely what has happened over the last generation in the United States as lower-skilled workers have lost jobs or seen their wages fall in part as a result of global competition. And, Galston continued, if we know that the winners have no intention of compensating the losers, then don’t we have an obligation to think about “second best” policies that might help spread the gains from globalization?

The challenge produced startlingly little in the way of sensible responses from the assembled experts. Ann Krueger, the former deputy managing editor of the International Monetary Fund, raised the usual alarm bells, warning that any effort to restrict imports or otherwise protect American jobs would send the country careening back to the horse-and-buggy era. Galston wasn’t suggesting protectionism, but the default response of too many economists is still to raise that specter, even though there has been surprisingly little new protectionism in the wake of the financial crisis.

Arvind Subramanian of Peterson had a more interesting response. He pointed out that the rapid economic growth triggered in China, India, and other emerging markets as a result in part of globalization has unquestionably reduced global inequality, even as it has increased inequality within the United States and other advanced economies. And he was quite candid in noting that, as an “international cosmopolitan,” he is not terribly concerned if, for example, Chinese exchange rate policies displace American workers. What worries him is that workers in countries poorer than China will be hurt. Not much comfort here for the losers in the United States. Subramanian did suggest that globalization has created the need for bigger social safety nets, but then noted that those reaping most of the benefits – corporations and highly skilled individuals – are increasingly adept at avoiding the taxes that might pay for these programs.

The only slightly encouraging signal came on a separate panel from Michael Froman, the top White House adviser for international economic affairs who is considered a front-runner to be the next U.S. Trade Representative. As I explain in the current issue of World Politics Review (subscriber only), the Obama administration has quietly developed an ambitious trade agenda, including the Trans-Pacific Partnership, a proposed U.S.-European free trade agreement, and new talks on services and information technology liberalization at the World Trade Organization. Froman said that the only way these and other trade initiatives can move forward is if we recognize and respond to the distributional consequences of freer trade. Many of the Obama administration’s core policy ideas – more progressive taxation, increased infrastructure investment, expanded college access, job retraining, attracting foreign investment – can be seen as efforts to spread the benefits of globalization more widely. But most of these initiatives have won little support in Congress.

The Peterson Institute conference was subtitled “The Tradeoffs Underlying Our Policy Choices.” The dictionary definition of a trade-off is “the relinquishment of one benefit or advantage for another regarded as more desirable.” The question about the the current form of globalization remains: more desirable for whom?