Trading Barbs: A Primer on the Globalization Debate

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Letter Writer:

Steve DeHoff, a staff consultant at the Cincinnati office of Stress Engineering Services Inc.

Date Posted:

Jan. 2, 2008

Letter:

I enjoyed this summary of the debate over globalization. I have both personal experience in analyzing and making globalization decisions as a former P&G purchasing manager,and I have spent a great deal of the past two-plus years studying the topic from a history/theory/data point of view in order to aid plastic industry clients as a consultant.

Some observations:

First, I agree with most of the exposition of fact. Second, I am in agreement with those in favor of continuing globalization. Third, I believe strategic adjustments in how globalization has been and is being implemented are needed. The implementation is clumsy even if the theory is sound.

My own fact investigations would add the following apparent facts to the discussion. First, rising income inequality occurred in the 19th century globalization experience the same as this experience and from the same basic causes—expansion of total labor supply to low wage sources ("Late 19th Century Globalization Backlash," Williamson). Second, in both the 19th century and current instances, a look at average U.S. GDP growth rates shows the growth rate trend broadly decelerating from peaks circa 1850-60 and circa 1960 over the duration of the episode and coincident with the rising income inequality. The 19th century GDP broad growth trend bottomed finally in the depression. Third, both Ricardo and Smith contain passages clearly pointing at falling real wages associated with international trade of survival goods and/or deficient growth rates that seem to support the observed outcomes. Fourth, time charting average GDP growth against income inequality curves (Saez) shows the minimum of inequality coincident with the maximum of average GDP growth. Fifth, a trade deficit implies by definition an expanded labor force and depressed wages (we are hiring labor other than our own for only our own demand), and a trade surplus implies a tight labor market and higher wages (we are meeting demand greater than our own with only our own labor).

Union membership seems to have an interesting correlation to trade surplus vs. trade deficit over time that supports the fifth point. Unions require a tight labor market.

I confess puzzlement that I see little to no discussion of what appears to me to be falling average GDP growth rate trends in both globalization periods. GDP growth broadly accelerated on average from 1790 to mid-19th century. Similarly, it broadly accelerated from the depression until the ‘60s or so. It slowly decelerated across the entire Industrial Revolution and is doing so now as well, particularly since the 1970s. I think this data, particularly in the context of inverse changes in income inequality, is saying something to us. It is clear from decisions with which I was involved at P&G and with evidence from my limited research that the costs of globalization are largely not borne by those gaining the benefits.

What is the level of demand for a free lunch? In terms of theory, benefits accrue to mobile elements, while costs accrue to stationary elements. I particularly liked this article's noting of the need for labor mobility equal to that of capital but also of the probable impossibility of achieving labor mobility for a variety of reasons. I agree fully that we are unlikely to ever generate the required level of labor mobility, meaning there is a structural and permanent advantage associated with mobile capital that, absent policy fixes, leads to high inequality or a breakdown in globalization that ultimately hurts everyone. It seems to make sense to me that policy should align more of the costs to those achieving the benefits, given the theory, the accepted facts, and the apparent additional fact that globalization slowly decelerates average economic growth in labor scarce economies such as ours over time while imposing the benefits to mobile capital and the costs to immobile labor. Further, we should strongly foster the mobility of skill and location of the labor force. We need to deal both with what people know how to do as well as getting them physically to the inevitably different location of the reconfigured work.

There is a need for a step change as well in education. This is a total disconnect between the current view of primary and college education as an increasingly inaccessible private good and the indicated, and broadly agreed, policy need to sharply increase the education of the U.S. populace. Making globalization broadly successful through increased education is a public good of the highest order. Causing those who gain from globalization to directly participate in its costs by supporting the mobility needs of the labor force their globalization decision sets in motion would slow the globalization train to those choices that make true sense while assisting those who must otherwise bear only costs to accrue, ultimately, some of the benefit.

I have no question that globalization benefits in total outweigh its costs. Finally, I note a tendency in many economic writings, including this one, to worry about the economic benefit of globalization to humans worldwide. This is admirable. However, the constitution of the United States does not contain any provision in it supporting the management of the common good of the world. Rather, it requires what is best for the people of the United States. What is good for the people of the U.S. and the world can be the same only if policy causes a more equitable distribution of the benefits and costs within our own country. Otherwise, I am quite certain the outcome of this globalization episode will be similar in some fashion to the previous one, where a very few got the benefits and most got the costs. The previous globalization episode terminated in World War I.

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