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The Globalization Disconnect

August 17, 2016

There has been a monster debate going on in economic circles as we try to assess the reasons for Brexit/Trump/Sanders and the developed world’s rejection of the directions in which the establishment wants to take us. There are many explanations, which try to spin answers to fit the authors’ own economic or political views; but it all goes back to my thesis that the benefits of globalization, like the future, are unevenly distributed. Those who have been on the short end of the distribution curve are pushing back.

In today’s Outside the Box, Stephen Roach, former chairman and chief economist of Morgan Stanley Asia and now a senior fellow at Yale University's Jackson Institute of Global Affairs, tackles the issue of widespread and growing public dissatisfaction – and not just in the US – with globalization.

Roach distinguishes between Globalization 1.0 – the surge in global trade and international capital flows that occurred in the late 19th  and early 20th  centuries – and version 2.0. Roach notes that “In contrast to Globalization 1.0, which was largely confined to the cross-border exchange of tangible (manufactured) goods, the scope of Globalization 2.0 is far broader, including growing trade in many so-called intangibles – once nontradable services.”

Not only the scope but also the means and the speed of globalization are now far different than they were for most of the 20th century. But sadly, the economics profession and policy makers have failed to keep up with the sweeping global changes that have displaced so many workers here and abroad. I’ll be addressing this key issue in some depth in my upcoming book, but today let’s focus on Roach’s suggestions for improvement.

I don’t have much to say on the personal front today, and not even much time to say it. My computer crashed in Montana on Monday morning, and it is only this afternoon that I have more than an iPad to work on. New downloads and drivers are taking many hours to install, and there seems to be a constant stream of new ones needed. But we are getting there.

Montana was fantastic – weather, views, food, and especially company. I missed the two weeks of 107 degrees here in Texas, and now it is just rainy and nice here. Many thanks to Darrell Cain for being a wonderful host. Now I just have to lose all the excess calories I picked up in Maine, NYC, and Montana. But sometimes the calories are worth it. I sat around much of the last two weeks, wrapping and icing my upper leg. I pulled my groin and upper quad rather severely, and it will be three or more months before I can really put much stress on it. Never quite had a tear this bad. It is getting better but slowly, emphasis on slowly, so I have been walking and sitting like an old man. And I know some of you might say that I am an old man, but I have never had to act like one. But time is my friend, and I will get back to full workouts one day soon. (I did not stress the leg in a workout, by the way. It was far more mundane – I just got my legs into a wrong position, and they decided to go in opposite directions from one another. But I probably should start yoga again.)

You have a great week. And take a few moments, if you aren’t already, to enjoy the Olympics.

Your worrying about uneven distribution analyst,

John Mauldin, Editor
Outside the Box

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The Globalization Disconnect

By Stephen Roach
Originally published on Project Syndicate, July 25, 2016

While seemingly elegant in theory, globalization suffers in practice. That is the lesson of Brexit and of the rise of Donald Trump in the United States. And it also underpins the increasingly virulent anti-China backlash now sweeping the world. Those who worship at the altar of free trade – including me – must come to grips with this glaring disconnect.

Truth be known, there is no rigorous theory of globalization. The best that economists can offer is David Ricardo’s early nineteenth-century framework: if a country simply produces in accordance with its comparative advantage (in terms of resource endowments and workers’ skills), presto, it will gain through increased cross-border trade. Trade liberalization – the elixir of globalization – promises benefits for all.

That promise arguably holds in the long run, but a far tougher reality check invariably occurs in the short run. Brexit – the United Kingdom’s withdrawal from the European Union – is just the latest case in point.

Voters in the UK objected to several of the key premises of regional integration: free labor mobility and seemingly open-ended immigration, regulation by supranational authorities in Brussels, and currency union (which has serious flaws, such as the lack of a fiscal transfer mechanism among member states). Economic integration and globalization are not exactly the same thing, but they rest on the same Ricardian principles of trade liberalization – principles that are falling on deaf ears in the political arena.

In the US, Trump’s ascendancy and the political traction gained by Senator Bernie Sanders’s primary campaign reflect many of the same sentiments that led to Brexit. From immigration to trade liberalization, economic pressures on a beleaguered middle class contradict the core promises of globalization.

As is often the case – and particularly in a presidential election year – America’s politicians resort to the blame game in confronting these tough issues. Trump has singled out China and Mexico, and Sanders’s opposition to the Trans-Pacific Partnership – the proposed trade deal between the US and 11 Pacific Rim countries – has pushed Hillary Clinton, the Democratic Party’s nominee, to adopt a similar stance.

In short, globalization has lost its political support – unsurprising in a world that bears little resemblance to the one inhabited by Ricardo two centuries ago. Ricardo’s arguments, couched in terms of England’s and Portugal’s comparative advantages in cloth and wine, respectively, hardly seem relevant for today’s hyper-connected, knowledge-based world. The Nobel laureate Paul Samuelson, who led the way in translating Ricardian foundations into modern economics, reached a similar conclusion late in his life, when he pointed out how a disruptive low-wage technology imitator like China could turn the theory of comparative advantage inside out.

Nor is it just a problem with an antiquated theory. Recent trends in global trade are also flashing warning signs. According to the International Monetary Fund, annual growth in the volume of world trade has averaged just 3% over the 2009-2016 period – half the 6% rate from 1980 to 2008. This reflects not only the Great Recession, but also an unusually anemic recovery. With world trade shifting to a decidedly lower trajectory, political resistance to globalization has only intensified.

Of course, this isn’t the first time that globalization has run into trouble. Globalization 1.0 – the surge in global trade and international capital flows that occurred in the late nineteenth and early twentieth centuries – met its demise between World War I and the Great Depression. Global trade fell by some 60% from 1929 to 1932, as major economies turned inward and embraced protectionist trade policies, such as America’s infamous Smoot-Hawley Tariff Act of 1930.

But the stakes may be greater if today’s more powerful globalization were to meet a similar fate. In contrast to Globalization 1.0, which was largely confined to the cross-border exchange of tangible (manufactured) goods, the scope of Globalization 2.0 is far broader, including growing trade in many so-called intangibles – once nontradable services.

Similarly, the means of Globalization 2.0 are far more sophisticated than those of its antecedent. The connectivity of Globalization 1.0 occurred via ships and eventually railroads and motor vehicles. Today, these transportation systems are far more advanced – augmented by the Internet and its enhancement of global supply chains. The Internet has also enabled instantaneous cross-border dissemination of knowledge-based services such as software programming, engineering and design, medical screening, and accounting, legal, and consulting work.

The sharpest contrast between the two waves of globalization is in the speed of technology absorption and disruption. New information technologies have been adopted at an unusually rapid rate. It took only five years for 50 million US households to begin surfing the Internet, whereas it took 38 years for a similar number to gain access to radios.

Sadly, the economics profession has failed to grasp the inherent problems with globalization. In fixating on an antiquated theory, they have all but ignored the here and now of a mounting worker backlash. Yet the breadth and speed of Globalization 2.0 demand new approaches to cushion the blows of this disruption.

Unfortunately, safety-net programs to help trade-displaced or trade-pressured workers are just as obsolete as theories of comparative advantage. America’s Trade Adjustment Assistance (TAA) program, for example, was enacted in 1962 for the manufacturing-based economy of yesteryear. According to a report published by the Peterson Institute, only two million US workers have benefited from TAA since 1974.

The design of more enlightened policies must account for the powerful pressures now bearing down on a much broader array of workers. The hyper-speed of Globalization 2.0 suggests the need for quicker triggers and wider coverage for worker retraining, relocation allowances, job-search assistance, wage insurance for older workers, and longer-duration unemployment benefits.

As history cautions, the alternative – whether it is Brexit or America’s new isolationism – is an accident waiting to happen. It is up to those of us who defend free trade and globalization to prevent that, by offering concrete solutions that address the very real problems that now afflict so many workers.

Stephen S. Roach, former Chairman of Morgan Stanley Asia and the firm's chief economist, is a senior fellow at Yale University's Jackson Institute of Global Affairs and a senior lecturer at Yale's School of Management. He is the author of Unbalanced: The Codependency of America and China.

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jack goldman

Aug. 19, 2016, 8:54 a.m.

In a way, education is a disease. The more educated a person is the fewer children they have and the less real work they do. Education is a negative indicator of net worth. Education segregation has replaced race segregation. This is why everyone wants a college degree, to be an elite. Would Mark Zuckerberg own Facebook if he never with to Harvard, met the Winklevoss Twins, and stole their business they were developing? No. The college educated people are parasites on worker bees and need more victims, globally, as well as more counterfeit currency. This is all tragically unsustainable. When it all falls apart there will be tears. The elites want the milk of civilization but not the cow, the work, the pain, the suffering. This is why educated people have so few children, they don’t want to pay. Real work is spiritual and we need to do more of our own real work and our own real suffering. Too many want to do too little for too much. Globalism is a disease. The cure is localism and simplicity. The elites are using globalism to feed on humanity. I don’t want to pay.

jack goldman

Aug. 19, 2016, 8:45 a.m.

There is another flaw in trade. Labor is taxed. That is why nations want “jobs” which is a euphemism for “taxes” which is a euphemism for theft, stolen from labor. Now machines create that wealth. There should be a machine tax so those creating wealth today, Facebook, Amazon, Netflix, Google, are taxed based on their use of machines, not labor. Why should laborers have to pay and machines get off tax free? This is why machines are taken better care of than our humans. Machines are not the wealth creators of our life, not humans. Humans are garbage, to be left to fester in ghettos. No one cares about humans. We care about machines, computers, cell phones, cars, more then our own children. A machine tax would solve that problem. There is too much corruption and the Clintons stand for immorality, corruption, and self gratifying sexual excess. Sad.

jack goldman

Aug. 19, 2016, 8:36 a.m.

Globalization is great for college graduates and horrible for low skill workers. College is grossly over priced and used as education segregation to sustain unequal incomes. When are college graduates going to work for less? Why is Clinton paid $300,000 for a speech but not me? When will the Israelis integrate? Why are Israelis allowed to have a homogenous “Jews Only” born a Jew society but not England or America or white people? Globalism is promoted by traders, Wall Street, governments, at the expense of children, families, renters, and employees, also known as Main Street, also known as losers. High school graduate white males have been devastated almost as badly as Democrats have devastated the black family. Too much government, too much integration, too much globalism is equally as bad as not enough, death by flood, or death by drought. Why have high school graduate whites been targeted for ethnic cleansing to please the globalists? It’s a social crime against humanity what globalism does to local cultures and local families. I have to protect myself.

Dallas Kennedy

Aug. 18, 2016, 9:52 p.m.

Comparative advantage theory is good as far as it goes, but it fails to account for the dynamic evolution of an economy—it’s static. Critics have made the case for “infant industry” protective tariffs on this basis. Historically, there’s been something to this, although the effect is undoubtedly been exaggerated by those critics.

One of the earlier commenters also pointed out the problem with the new era of fiat currencies, unknown to Ricardo, where no financial force arises to correct currency and associated imbalances, because money is no longer a “thing out there”—it’s a creature of thoroughly political central banks. The politics of Japan, east Asia, and China has been dominated by forced savings and consciously suppressed imports and consumption, with currencies that spent decades of being undervalued. The politics of the US, after around 1970, gradually became dominated by debt-fueled consumption. After 1998, the US also became dominated by monetary policy focused on artificially inflating asset prices, increasing inequality and favoring destruction of capital through yield-chasing and speculative manias.

None of this could happen with honest money. Unfortunately for Trump, Sanders, and the rest, a fiat currency system exists because it favors debtors, and the largest debtors are governments, followed by large banks. Adding more government isn’t the solution; it’s part of the larger complex of powerful debtor institutions expecting to be catered to by central banks. The rest of the world is following suit. Probably a grand bankruptcy of the West, with the mother of all financial crises that ends the dollar-based system, is the only thing that will end this insanity. Too many institutions and countries have a stake in current arrangements for anything else to turn things around.

Edward Baptiste

Aug. 18, 2016, 12:18 p.m.

Whatever it is.  In the Northeast, aside of cities like New York or Boston, there is much unemployment, discontent, excessive use of opiads and drugs.  Real estate and retail appears to be stagnant leading to a sort of malaise.  We appear to be losing more jobs to overseas than gaining some.  Zero rates of interest thus far is helping the stock indices reach for new highs and yet total debt including sovereign as well as personal debt climbs to such high levels that pundits exclaim will never be able to be repaid.

mike_bradley@mentor.com

Aug. 18, 2016, 9:04 a.m.

I’ve worked in high tech (software tools) since 1992.  Back then most/all development was done in the US.  First groups where hired in India to do development.  You could get ~6 Indians (generally fresh out of school) for the price of one US. 

Now, my industry has engineers in many foreign countries.  I don’t know the numbers but it is huge.  Since I’m customer focused, my pain is not in losing my job, but the increased difficulty in communication, time zone, and somewhat having to “manage” the offshore resources.  Since I never or rarely see those engineers, it can be difficult to interact with them.

The “manage” portion is never considered in the equation. 

From my standpoint, I blame US society for this.  It seems real schooling and hard work are beneath many in the US.  Even for decent paying jobs, many just don’t want to work anymore.  The ethics of the US have been usurped by watching media and gaming.

For now, there is no turning back.  Even if we wanted to move the engineering jobs back to the US, there are not enough native engineers here.  Even in the universities engineering schools are dominated by foreign nationals.

My latest skills involve interpreting poor English…  Yeah, I’ve had to become good at that…

donsoards@gmail.com

Aug. 17, 2016, 6:29 p.m.

The glory of free trade was the success of the Common Market.  What we weren’t told was that market was composed of “near equals” (maximum per capita income difference was England:Italy, a 2:1 ratio with everyone else in-between).  The US:China ratio was not “near equal”.  It was 5:1 or greater, giving China an absolute advantage.  Ouch!  Another three million good jobs down the drain.

I just had one of my knees partially replaced.  Good Luck with the back.