Too Late to Compensate Free TradeâÂÂs Losers
CAMBRIDGE â It appears that a new consensus has taken hold these days among the worldâÂÂs business and policy elites about how to address the antiĂÂglobalization backlash that populists such as Donald Trump have so ably exploited. Gone are the confident assertions that globalization benefits everyone: we must, the elites now concede, accept that globalization produces both winners and losers. But the correct response is not to halt or reverse globalization; it is to ensure that the losers are compensated.
The new consensus is stated succinctly by Nouriel Roubini: the backlash against globalization âÂÂcan be contained and managed through policies that compensate workers for its collateral damage and costs,â he argues. âÂÂOnly by enacting such policies will globalizationâÂÂs losers begin to think that they may eventually join the ranks of its winners.âÂÂ
This argument seems to make eminent sense, both economically and politically. Economists have long known that trade liberalization causes income redistribution
and absolute losses for some groups, even as it enlarges a countryâÂÂs overall economic pie. Therefore, trade deals unambiguously enhance national wellbeing only to the extent that winners compensate losers. Compensation also ensures support for trade openness from broader constituencies and should be good politics.
Prior to the welfare state, the tension between openness and redistribution was resolved either by largeĂÂscale emigration of workers or by reĂÂimposing trade protection, especially in agriculture. With the rise of the welfare state, the constraint became less binding, allowing for more trade liberalization. Today the advanced countries that are the most exposed to the international economy are also those where safety nets and social insurance programs â welfare states â are the most extensive. Research in Europe has shown that losers from globalization within countries tend to favor more active social programs and laborĂÂmarket interventions.
If opposition to trade has not become politically salient in Europe today, it is partly because such social protections remain strong there, despite having weakened in recent years. It is not an exaggeration to say that the welfare state and the open economy have been flip sides of the same coin during much of the twentieth century.
Compared to most European countries, the United States was a latecomer to globalization. Until recently, its large domestic market and relative geographical insulation provided considerable protection from imports, especially from lowĂÂwage countries. It also traditionally had a weak welfare state.
When the US began opening itself up to imports from Mexico, China, and other developing countries in the 1980s, one might have expected it to go the European route. Instead, under the sway of Reaganite and marketĂÂfundamentalist ideas, the US went in an opposite direction. As Larry Mishel, president of the Economic Policy Institute, puts it, âÂÂignoring the losers was deliberate.â In 1981, the âÂÂtrade adjustment assistance (TAA) program was one of the first things Reagan attacked, cutting its weekly compensation payments.âÂÂ
The damage continued under subsequent, Democratic administrations. In MishelâÂÂs words, âÂÂif freeĂÂtraders had actually cared about the working class, they could have supported a full range of policies to support robust wage growth: full employment,
collective bargaining, high labor standards, a robust minimum wage, and so on.â And all of this could have been done âÂÂbefore administering âÂÂshocksâ by expanding trade with lowĂÂwage countries.âÂÂ
Could the US now reverse course, and follow the newly emergent conventional wisdom? Back in 2007, political scientist Ken Scheve and economist Matt Slaughter called for âÂÂa New Deal for globalizationâ in the US, one that would link âÂÂengagement with the world economy to a substantial redistribution of income.â In the US, they argued, this would mean adopting a much more progressive federal tax system.
Slaughter had served in a Republican administration, under President George W. Bush. It is an indication of how polarized the US political climate has become that it is impossible to imagine similar proposals coming out of Republican circles these days. The effort by Trump and his Congressional allies to emasculate former President Barack ObamaâÂÂs signature healthĂÂinsurance program reflected Republicansâ commitment to scaling back, not expanding, social protections.
TodayâÂÂs consensus concerning the need to compensate globalizationâÂÂs losers presumes that the winners are motivated by enlightened selfĂÂinterest â that they believe buyĂÂin from the losers is essential to maintain economic openness. TrumpâÂÂs presidency has revealed an alternative perspective: globalization, at least as currently construed, tilts the balance of political power toward those with the skills and assets to benefit from openness, undermining whatever organized influence the losers might have had in the first place. Inchoate discontent about globalization, Trump has shown, can easily be channeled to serve an altogether different agenda, more in line with elitesâ interests.
The politics of compensation is always subject to a problem that economists call âÂÂtime inconsistency.â Before a new policy â say, a trade agreement â is adopted, beneficiaries have an incentive to promise compensation. Once the policy is in place, they have little interest in following through, either because reversal is costly all around or because the underlying balance of power shifts toward them.
The time for compensation has come and gone. Even if compensation was a viable approach two decades ago, it no longer serves as a practical response to
globalizationâÂÂs adverse effects. To bring the losers along, we will need to consider changing the rules of globalization itself.
QUESTIONS:
a. According to Rodrik, why is it that "trade deals unambiguously enhance national wellbeing only to the extend that winners compensate losers?" Explain completely.
b. Rodrik draws a historical link between globalization and the "welfare state." Explain this link.
c. Rodrik mentions a previous proposal by Scheve and Slaughter called "A New Deal for Globalization." What was the essence of this proposal? What has become of it?
d. What is the "time inconsistency" problem and why is it relevant for Rodrik's argument?
e. In your opinion, what is one weakness in Rodrik's argument? Explain.
