The way to effectively handle the economic challenges of the 21st century: Reaping their benefits while minimizing their harm.

The effects of Liberalization and Globalization, Statistics from https://ourworldindata.org/ by Max Roser

“[P]overty is a crime. I do not mean that it is a crime to be poor. Murder is a crime; but it is not a crime to be murdered; and a man who is in poverty, I look upon, not as a criminal in himself, so much as the victim of a crime for which others, as well perhaps as himself, are responsible. That poverty is a curse, the bitterest of curses, we all know…” - The Crime of Poverty by Henry George

April 1, 1885

2016 was the year of Anti-Globalization. At least in the western world. Populists ran on protectionist platforms, promising to create jobs by ending outsourcing and trade. Immigration also recieved backlash, and populist movements explicitly were based on reducing immigration.

The main drivers of criticism against both immigration and free trade are that it reduces domestic jobs by either outsourcing them or assigning them to immigrants while lowering wages. Exit polls show Trump supporter’s pessimistic view on the state of the national economy and their disagreement with globalization and immigration.

Interestingly though, the state of the economy was not the most important issue for Trump voters; immigration and terrorism were. Meanwhile, economy, after foreign policy, was the most importan concern for Clinton voters. This might be due to the fact that “ 63% of white working class respondents said they were satisfied with their personal financial situation compared to just 40% of black working class respondents.”

But America’s middle and lower class’s problems predate Globalization and just simply pinning their causes on it is disingenous.

These pictures are from Emmanuel Saez

Productiviy growth outgrew median household income since the late 1970s. Income growth of the bottom 99% has been nearly stagnating since the 1970.This is before Chinas economic reforms and rapid growth even began.

The failure of wealth and income (re)distribution in the states far predates the global impact of China’s exports.

On the other hand, data indicates that tax policy correlates far more with how inequality is developing than the trade deficit or outsourcing.

Tax cuts for the rich have been Republican core policies for decades. But historically tax cuts in the US “have been accompanied by increases in federal outlays rather than cutbacks” and as such are “likely to reduce, not increase, national income in the long term.” (Brookings, 2014). On a global scale “Cross-country studies generally find very small long-term effects of taxes on growth among developed countries(Slemrod 1995)”.

Additionally, politicians that enact tax cuts are also likely to deregulate bussinesses, Wall Street and Banks, further increasing inequality.

All in all, the causes of the tremendous income inequality in the US are way too many to explain here. But “ difference across countries rules out technical change/globalization as the sole explanation” (Saez, 2014).

On the contrary: The inequality growth in the Anglosphere is not necessarily parralleled in Western countries affected by globalization.

E.g. while the Top 1% income share has risen sharply in the US, UK and Canada over the last decades, it has remained relatively constant in France Japan and Sweden.

Still, Trade effects income inequality. But the effects are far more nuanced than the populists want you to believe. Because, while the vast majority actually profits, the most disenfranchised don’t.

First off, it’s not globalization that’s the main driving force behind job loss. It isn’t even immigration. It’s automatization.

This doesn’t mean that free trade doesn’t destroy jobs though or doesn’t cause inequality.

In fact, two Swedish economists already predicted such negative side-effects of globalization in the 1930s.

Ironically enough though, the way we can handle all three problems, migration, automatization and free trade (or rather their negative effects) is largely the same. From an article concerning this topic published, by the World Economic Forum :

There are decisive conclusions we have to draw from this.

On the plus side for globalization we have:

Globalization and free trade provide net benefits to their participants, as in both GDP growth and income growth

It has improved the global human rights situation

Trade liberalization (ironically) incentivizes companies to act more socially responsible

The latter two should be taken with a grain of salt though. The WEF is often critisized by leftis groups and the reasoning behind the second claim is shaky.

We can still explicitly name two reasons causing negative side-effects though:

“Decaying” skills that become useless in a modernizing world

Lack of physical mobility (inability to move to metropolitan areas)

These are the same problems that prevent adjustment to automatization, modernization and the service based economies we now live in. It is important that we realize who is effected the most by them.

A 2014 paper by Deloitte economists details the effect technology has on the job market:

As such technological advancement both creates and destroys jobs.

The problem is, it disenfranchises those who lack the education to adjust to new job requirements.

We already experience this. It’s no coincidence that those with a lesser education level were more likelyto vote Trump.

This is not because they are more stupid as some smug liberals might want you to believe. It’s because rural, uneducated people are those who are hurt the most by the current economic developements.

These is especially problematic because they damage those who are already unprivileged. Education is important to handle modernization. But the parent’s education level is a huge predictor of the childrens education level and educational mobility is low. Therefore already unpriviliged families risk falling into a downward spiral.

Additionally, it’s no coincidence that there was a rural/urban divide visible in the election results. Rural education is collapsing. Young people are faced with the decision to either flee their homes to pursue higher education or stay and face the engative consequences of modern economic developements.

This makes any long-term adaptation to new technology incredibly difficult. It creates a vicious cycle, a brain drain in rural communities and an ever-increasing divide between urban and rural populations.

The Trump administrations promises will not help with these problems. Coal is dead. It is not competetive. Apart from the fact that it is unethical. Many jobs in the primary and secondary sectors (e.g. concurrent manufactoring and mining jobs) just can’t be saved. They are simply not competetive enough and it’s irellevant wether immigration or trade will be restricted.

Therefore, the GOP platform doesn’t offer solutions to the problems the rural working class faces. It can neither delay the loss of their jobs nor prevent it.

Clinton’s platform actually would have helped though as the Democrats both realized the necessity of a transition to either a clean-energy or service based economy for the rural working class and the necessity to help educating them in these sectors.

In the end, a transition to clean energy is necessary. It is necessary to save working class communities and it is obviously necessary to fight climate change.

Debunking Trump’s climate policy would be too much for this article, but I’ve written an article on the non-economic consequences of his action here:

The consequences of Trump’s climate policies and the US’s diplomatic isolation

The plan needs to be the same for all sectors similar to coal mining: Fast (re)education and infrastructure spending. Especially important would be ending the ridiculous tertiary education tuitions and costs that exist in the US.

“By John Uebersax — I created this work entirely by myself.”, CC BY 3.0, https://en.wikipedia.org/w/index.php?curid=23644087

As education is only becoming more important and necessary, the US’s way of making it so costly will become unsustainable. The high cost of tertiary education in the states furthers inequality and divide and decrease social mobility.

The current state of the US education system is catastrophic. Education costs have soared but education productivity has stagnated. “Federal loans have increasingly gone to the worst-performing colleges” and “there has been a decline in bureaucratic efficiency” of primary and secondary educational isntitutions. Teachers are treated horrendously, paid badly and good students are deterred from entering teaching as an occupation.

Education Reform and improvement are strictly necessary in order to adapt to globalization and education and prevent further growth of inequality and polarization.

Increasing educational and geographical mobility while increasing funding of competetive sectors would enable the US and other Western countries to adapt to the consequences of automatization and globalization. Unfortunately, the current policies of conservative parties like the Tories or the GOP have proven themselves to be inadequate responses to these changes. Supply-side economics, protectionism and tax cuts appear to not stimulate the economy or help the 99%.

Clinging to low-tech jobs is no long-term solution to the challenges we face. Income inequality needs to be adressed at a national level by providing universal coverage of education and other basic services. Enacting protectionist policies like tariffs do not decrease inequality or help the 99%.

American consumers would be worse off by enacting tariffs while producers would be better off . Tariffs increase inequality and the cost of protectionism is paid by the consumer. Decisive statement from the above article:

“Therefore, despite the naive proclamations from Trump about “making America great again” with protectionism and tariffs, the economic analysis above demonstrates that protective tariffs make the country imposing them worse off, on net, and that proposition is supported by 200 years of economic theory and hundreds of empirical studies. That is why economists almost universally support free trade and oppose tariffs and trade protection — because economic analysis and empirical evidence clearly show that there are always net economic losses from protectionism.”

As such we can conclude that free trade and market economics are the best way to create jobs and economic growth, supported by education and investment in competetive industries. Then it is the country’s duty to fairly distribute the income by regulations, welfare and progressive taxes, maybe even accompanied by policies like a negative income tax or universal basic income.

In such a way we can reap the benefits of modernization and globalization like economic growth, lower prices and a global decrease in poverty while mitigating it’s harms to those at risk. It is the voter’s duty to elect politicians who are willing to enact such policies and reject those who will only worsen the situation, especially populists like Donald Trump.

Contemporary populist movements, neither from the left (Sanders, Corbyn), nor from the right (Trump, Tories), offer adequate solutions on how to handle free trade and modernization.

But “radical centrism” will not be a solution either and we should not delve into false equivalencies between the left and the right. As stated above, left-wing solutions like progressive taxation, lower college tuitions and welfare are both necessary and ethical.

A rational left is the way to go. In the last few decades the free market, technology, education, urbanization and trade have pulled large parts of China, India and the rest of the world out of poverty. People in Western countries must not forget that there are billions of other people as well, most of them tremendously benefitting by the economic developement of the last decades. By enabling growth, market and trade liberalization help end poverty. The effect is even stronger when inequality is low.

But this trade must be fair. “Africa is still cruelly punished by tariffs”. Domestically “ monopolies and restrictive practices” can prevent growth in developing countries while internationally subsidies and tariffs put them at a disadvantage by eliminating their comparative advantages. Fair trades is just as important as free trade.

Looking at Europe far further in the past, transatlantic trade, when combined with political reform, was the major indicator of Europe’s success in modern history and there is no reason to believe that this cannot be achieved in contemporary countries. On the contrary, many have already done so.

We still have long way to go, but it is going up. Because of trade. Because of markets. Because of innovation. Because of growth. Because of capitalism.

Now how to apply this to our own countries? In the end there are a few systems which can be seen as role models in this process. The German Social Market Economy, the expanded Eco-Social Market Economy or the Nordic model for example.

But we should not go to divisive on the categorization of these ideologies. Combining Neo-Liberal thought on trade, housing policies and the centrist’s pragmatic handling of the minimum wage with Social Democratic progressive taxation, welfare and access to public services e.g. will net way more benefits than searching for ideological purity and fanatically clinging to certain movements. Curbing carbon-emissions with policies like carbon-taxes and renewable energy investments is becoming necessary as well.

Additionally not every country is the same. America faces other issues and has other priorities than Germany or China. But our ethics should not changed and evidence doesn’t change either.

Fair, free trade and automatization are mutually beneficial to every participant if all participating countries possess political safety-mechanisms that are able to equally distribute the resulting economic growth and support those disenfranchised by the changes while enforcing rules in order to minimize environmental damage.

You can follow me on Twitter here: https://twitter.com/alf_3d0

Maybe I’ll make some YouTube Videos about this here: Channel

Some self-advertisement: The consequences of Trump’s climate policies and the US’s diplomatic isolation.

Thanks for reading

-Alfredo