The tripwires of globalization

Many lose, few benefit, people get angry. What's so hard to understand?

By Andrew Leonard
March 20, 2006 10:00PM (UTC)
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An article by one-time Salon contributor James Surowiecki appeared in Saturday's Guardian arguing against the rising tide of political opposition to foreign investment in the world's wealthiest countries. He cites the usual suspects, the vitriolic resistance to the Chinese attempt to buy Unocal and Dubai's abortive U.S. port takeover, but also notes similar instances in the U.K. and Europe.

Surowiecki makes some good points about how foreign investment, which brings dollars and jobs into a country, is generally a good thing for the already developed world. But then he notes that "Paradoxically, people in the west are simultaneously unhappy with outsourcing, which involves companies sending capital and jobs out, and unhappy with foreign investment, which involves companies bringing capital and jobs in."


This isn't as strange or seemingly contradictory as Surowiecki makes it out to be. What people are unhappy about isn't specifically outsourcing or foreign investment, but the clear and present reality that the average person is not obviously benefiting from free trade.

A good explanation of the widespread unease can be found in today's Wall Street Journal account of an interview with Treasury Secretary John Snow. Snow, reports the Journal, "said the administration intends to publicly challenge perceptions that typical workers and families haven't benefited much from the economic expansion. The extent to which the expansion has been broadly shared is 'the new sort of battle line in the political arena,' he said."

As evidence, Snow pushed statistics that purport to show that after-tax income per person and per-person net worth have both grown since George Bush took office. But, as the Journal notes, Snow's averages obscure what is really happening.


"Census Bureau data show median family income -- half of families have income greater than the median, half have less -- fell 3.6 percent from 2000 through 2004. Incomes for the poorest families fell even further. The only group to gain was the family at the 95th percentile -- that is, richer than 95 percent of all families."

Left-wing critics of unregulated free trade have long pointed out that there is theoretical and empirical evidence that trade can lead to increasing income inequality within a nation. So even if an economy as a whole is growing, the unequal distribution of the benefits of that growth can mean that most people -- especially those at the lower end of the income scale -- may be worse off.

The push-back against this apparent debacle -- only 5 percent of U.S. families are experiencing income growth! -- is the theory that globalization results in lower prices and increased productivity, which are to the advantage of everyone. Perhaps no one articulates this more clearly than economist Catherine Mann, who has argued, with respect to the information technology sector, that the benefits from the globalization of IT hardware and software in terms of low prices for such things as IT hardware outweigh or compensate for the pressure on jobs. In other words, that cheap P.C. your company just bought you -- thank globalization for its incredibly low price.


Mann's argument is not popular among IT workers who are unemployed or who have seen their incomes fall or stagnate since the dot-com boom. And when one looks at the income figures cited by the Journal, or the fact that average wages are increasing at a far slower rate than during any economic recovery since World Word II, it's not hard to understand why.

If Democrats are looking for a real issue to crusade upon as the midterm elections approach, they could hardly do better than tackle this problem head-on. But rather than simply blast even more heated rhetoric about "outsourcing" and "foreigners" moving in on the U.S. economy, the view here at How the World Works is that they would best serve the nation's interest by focusing on the nuts and bolts of how to help average families.


Even Mann notes that "it is imperative that adjustment assistance be made available to the white collar workers hurt by international competition." But there's much more that can be done without taking the step that's far more fraught with risk of engaging in trade wars and protectionism. Thomas Palley, the economist mentioned here on Thursday, has a concise and compelling brief on outsourcing in Foreign Policy in Focus, published three weeks ago.

"With regard to national competitiveness, countries need to invest in education that raises worker productivity," writes Palley. "There is also a need for job loss assistance and active labor market policies that help displaced workers cope with income losses and obtain training that prepares them for productive future employment. In the United States there is a special need to attend to the problem of health insurance, which is currently a job cost, since premiums are tied to employment. This crisis is exemplified by General Motors, where the cost of each car includes $1,500 of worker health insurance. Health insurance coverage needs to be detached from jobs, and this suggests a national health plan financed out of general tax revenues."

This is such an easy, home-run political issue to get behind. A national health plan would make U.S. workers more competitive in the global economy. Combined with real wage insurance and significant funding for job retraining and education, it could make a difference. At the very least, it offers Democrats an opportunity to look smart about globalization, rather than scared.


The stakes could hardly be greater. As Morgan Stanley's chief economist concluded in his weekly briefing last Monday, previous eras of globalization have been brought to a halt by world wars. There are great differences between the current world order and that which prevailed in the early 20th century, but "in both cases, the integration of economies and capital markets clashed with the fragmentation of geopolitical order. Add in the current tensions associated with widening income disparities, real wage stagnation in developed countries, and the growing outbreak of trade frictions and protectionism, and todays world looks far from secure. The tripwires of globalization are now being set."

Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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