Economists these days are buzzing about addressing globalization’s problems, and particularly a growing income inequality in the United States that’s taken us back to 1928 levels — a particularly foreboding statistic, given 1929’s banner economic news.
This has long been an issue on the left, but recent economic data, and the rising power of protectionist or anti-globalization lobbies, has finally brought Republican types into into the conversation. Chief example: In the latest Foreign Affairs, a former Bush economic advisor calls for a “New Deal” that essentially bribes lower-income workers to stop opposing new trade deals.
(T)he time has come for a New Deal for globalization — one that links trade and investment liberalization to a significant income redistribution that serves to share globalization’s gains more widely. … (T)o be politically viable, efforts for further trade and investment liberalization will need to be explicitly linked to fundamental fiscal reform aimed at distributing globalization’s aggregate gains more broadly.
Mathew Slaughter and his co-author Kenneth Schleve call for what they deem a “radical” move: essentially eliminating the regressive payroll tax for people making less than $33,000, and raising the cap on where this part of the tax stops growing for high-income types.
From the outside, this doesn’t sound like a bad idea; but it’s hardly radical. The payroll tax is among the most regressive forms of taxation we have, hitting low-income relatively harder, and ceasing to be a factor for every marginal dollar made over $90,000. Changing this, despite the arguments of righties like the Heritage Foundation, would not bankrupt small businesses or ruin social security. But it’s hardly revolutionary.
Economist Dani Rodrik, a left-leaning critic of what he calls “globalization’s cheerleaders” has a far more radical idea: change the rules of trade deals so that governments can go back to creating a basic social safety net for their citizens.
Rodrik argues persuasively that the problem with globalization is not limited simply to rising income inequality (which is just one symptom, in any case), but to the fundamental problem that it removes important economic powers from a government’s hands. Welfare systems are harder to operate, income redistribution programs become difficult, even dealing with currency and capital flows are tricky. That’s not always a bad thing, but without government social programs or income redistribution policies, you tend to get… well, exactly what even those Republicans like Slaughter are beginning to worry about.
From a paper of Rodrik’s here:
The greatest risk to globalization …. lies in the prospect that national governmentsâ€™ room for maneuver will shrink to such levels that they will be unable to deliver the policies that their electorates want and need in order to buy in to the global economy.
The soft underbelly of globalization is the imbalance between the national scope of governments and the global nature of markets. A healthy global economic system necessitates a necessarily delicate compromise between these two. Go too much in one direction, and you have protectionism and autarky. Go too much in the other direction, and you have an unstable world economy with little social and political support from those it is supposed to help.
Rodrik’s policy prescription would bring trade deals far beyond simple market-opening swaps:
When rich and poor nations come together to negotiate the rules of the game, they should stop thinking in terms of exchanging market access: â€œI will open my markets in x, if you open yours in y.â€ They should consider instead exchanging policy space: â€œI will allow you to protect your national social compact, if you allow me to engage in development strategies that conflict with WTO and IMF rules of good behavior.â€ The challenge is to design procedures that enable the use of policy space for socially desirable purposes, while limiting it for beggar-thy-neighbor purposes.
He concedes that this might be mistaken for protectionism in places, and might easily be abused. But it’s a suggestion worth taking seriously, as the world begins looking at effects of globalization that go beyond simple aggregate, often unequally distributed income growth.