Duncan’s Economic Blog

The Centre Left and Globalisation

Posted in Uncategorized by duncanseconomicblog on December 7, 2010

The IPPR is doing some excellent work at the moment – their New Era Economics programme looks very promising and I heartily recommend the first major pamphlet on innovation policy.

Today they announced “a major new project on the future of globalisation” chaired by Peter Mandelson.

In the press release they state that:

The benefits of global growth have not been shared equitably (either between or within countries) and global institutions have been unable to resolve the major fault lines which have emerged in the global economy (including trade and currency imbalances).

Nothing to disagree with there. Where I become a tad more concerned is with:

The project will start from the position that free trade, global integration and open markets are vital for economic prosperity… In this context, there is a risk that centre-left policymakers will retreat into a more protectionist mode. 

I am simply not convinced that a belief in “free trade, global integration and open markets” is the best starting point when considering globalisation. And I’m far from convinced that centre-left policy makers retreating into a more protectionist mode is a major risk. The bigger risk, as I see it, is centre-left policy makers (who like the authors of the IPPR press release remain convinced of the benefits of free trade) reacting to the world as they wish it to be rather than as it is.

Now let me caveat this – my ideal solution to the question of global imbalances would be some form of International Clearing Union (as proposed by Keynes as Bretton Woods), in the spirit of this I thought the Geithner Plan presented at the recent G20 summit was a worthy aim. I agree with Gordon Brown that a Global New Deal focussed on correcting imbalances and creating jobs and, in a first best world, some form of progressive multilateralism is the centre-left’s base response to globalisation.

But we don’t live in a first best world. We live in a world of rising currency and trade tensions. We live in world in which Germany seems unprepared to engage in multilateral action within the Eurozone itself, let alone globally.

Leaving aside the current currency and trade tensions, we live in a world in which the future of globalisation will be shaped more by China than by liberal democracies.

I’d rather the IPPR started with a blank page and considered the centre-left response to globalisation from first principles than began by believing that such actions are “vital” to prosperity.

As Paul Krugman noted yesterday (a man who won his nobel prize for his work on trade theory) “trade does not equal jobs”:

If you want a trade policy that helps employment, it has to be a policy that induces other countries to run bigger deficits or smaller surpluses. A countervailing duty on Chinese exports would be job-creating; a deal with South Korea, not. If you want the Korea deal, fine; but don’t claim virtues for it that it doesn’t possess.

We should look again at Alan Blinder’s (another noted Liberal, in the US sense, economist) work from 2006.

So repeat after me: Globalization is good for the world. Which is where economists usually stop.

And where my alleged apostasy starts.

For these same forces don’t look so benign from the viewpoint of an American computer programmer or accountant. They’ve done what they were told to do: They went to college and prepared for well-paid careers with bountiful employment opportunities. But now their bosses are eyeing legions of well-qualified, English-speaking programmers and accountants in India, for example, who will happily work for a fraction of what Americans earn. Such prospective competition puts a damper on wage increases. And if the jobs do move offshore, displaced American workers may lose not only their jobs but also their pensions and health insurance. These people can be forgiven if they have doubts about the virtues of globalization.

Or note what Michael Pettis say about protectionism:

[Trade barriers] force domestic consumers and foreign producers to bear the cost of the adjustment.  Remember however that local households comprise both domestic consumers and domestic workers, so the real impact on household income may be positive if trade barriers are expansionary for employment (which they usually are in diversified deficit economies).  The question is which households.  The unemployed working class may benefit while the struggling middle class may get hurt.

A few weeks ago I challenged free marketeers as to what was here response to rising protectionism.

I understand that their ideal scenario would be unfettered free trade, free floating currencies and minimal government action – but in a real world in which country after country is adopting (or threatening to adopt) measures such as deliberate devaluation, tariffs or export subsidies, what exactly do they propose the UK should do?

I am increasingly realising that that very same question (with a slight amendment or two) could be addressed to much of the centre-left.

26 Responses

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  1. Tim Worstall said, on December 7, 2010 at 1:37 pm

    I hadn’t known you’d issued a challenge:

    “I understand that their ideal scenario would be unfettered free trade, free floating currencies and minimal government action – but in a real world in which country after country is adopting (or threatening to adopt) measures such as deliberate devaluation, tariffs or export subsidies, what exactly do they propose the UK should do?”

    What should we do? Carry on being free traders of course. The entire point of trade, the benefit of it, is that we can import the good to great things that other people make better than we do. Exports are just the dreary going to work that we must do to pay for it. If other people put barriers in the way of our exports, well, that means that those good to great things we could buy from them are more expensive: we must make more effort to be able to afford them. Which is very sad but it doesn’t mean that our response should be to make them even more expensive again by imposing tariffs or restricting our ability to purchase them.

    Similarly, an undervalued currency is a subsidy by the undervaluers to our consumption. The correct answer there is “Thank you, can we have some more?”

    I do have to say that I find this centre lefty argument about trade to be completely incomprehensible. Normally you’re all screaming about how the producers screw the consumers. As soon as it comes to trade you take the producers’ side.

    Why?

    • Andreas Paterson said, on December 7, 2010 at 1:58 pm

      I do have to say that I find this centre lefty argument about trade to be completely incomprehensible. Normally you’re all screaming about how the producers screw the consumers. As soon as it comes to trade you take the producers’ side.

      We are on the side of the workers, who are both producers and consumers. The reason we kick up a fuss about trade is the plain and simple facts on the ground in the form of the unemployed.

  2. Neil Wilson said, on December 7, 2010 at 1:39 pm

    It strikes me that the best approach is to look after #1. Then if all countries of the world adopt that position the standard fallacy of composition balances everything automatically.

    Free trade only helps the most powerful nation in any free trade block. It’s always been like that. That’s why the UK liked it in the 19th century and the American’s in the 20th Century. It won’t be long before China becomes a convert.

    I would go with

    – concentrating on demand managing the domestic economy in the domestic currency to ensure that domestic production is run at full employment and is consumed or exported.
    – exporting real goods and services sufficient to swap for required imported commodities that happen to be priced in a foreign currency.
    – importing as many discretionary real goods and services that you can get in return for your own domestic currency, since they enhance the standard of living of your own people for literally no cost.

    This requires a strange Chimera of policies from left and right.

  3. […] This post was mentioned on Twitter by sunny hundal, Clint David Samuel, John Latham, NewLeftProject, Duncan Weldon and others. Duncan Weldon said: Post: The centre left & globalisation – or why I think the IPPR is not questioning enough. http://wp.me/pt0AC-jy […]

  4. Tim Worstall said, on December 7, 2010 at 2:03 pm

    “The reason we kick up a fuss about trade is the plain and simple facts on the ground in the form of the unemployed.”

    Eh? Trade causes unemployment does it? Well, that puts the kibosh on Keynesian economics then, doesn’t it: what with the insistence that employment is determined by aggregate demand.

    “Free trade only helps the most powerful nation in any free trade block.”

    What? That there is a flourishing trade in pineapples from Costa Rica to the UK only aids the US, the dominant partner in the post WWII trading system? Seriously? My getting cheaper and better fruit to go with my gammon only helps Dick Cheney?

    Might I suggest a better fitting tin foil hat?

    • Neil Wilson said, on December 7, 2010 at 5:00 pm

      Well it certainly ain’t helping the Costa Ricans is it. That’s why they are producing pineapples and not high-tech machinery. Comparative advantage is the backbone of the Free Trade religious ideology but it’s effect is to keep the backwaters, backwaters.

      But from your point of view it keeps your pineapples cheap, and that’s all you’re bothered about. The rural poor stay poor.

      Don’t forget that in the 19th Century Adam Smith suggested that the American Colonies should concentrate on agriculture rather than manufacturing and that the protectionism they introduced would cripple the country.

      Only by protecting its nacent industries throughout the 19th and early 20th centuries did it start to flourish. Similarly with Japan, India and of course China.

  5. Andreas Paterson said, on December 7, 2010 at 2:29 pm

    “Well, that puts the kibosh on Keynesian economics then, doesn’t it: what with the insistence that employment is determined by aggregate demand.”

    Tim – Not necessarily, let’s take a simple example, a British company decides to outsource part of it’s IT department to India. In this situation we get a decrease in employment in the UK and an increase in employment in India, globally, there is no change in employment but in the UK we now have a group of unemployed IT people.

    We then have to rely on creative destruction within the domestic economy to find new uses for these now unemployed people. I personally don’t think that this process within the UK economy is up to the job.

    • Neil Wilson said, on December 7, 2010 at 5:07 pm

      That depends on the policy of the state. It would be possible for the state to pay these unemployed IT people so that they build Free Software and also pay the Indians in Sterling to do the other work.

      So we have UK people doing interesting stuff but with money to buy stuff (creating employment), Indian people doing the boring stuff and we’ve paid them in our money which they (or whoever they swap it with) will have to spend here in the UK on something creating more UK employment.

      And we get universally accessible capital creation other people can leverage to generate more good stuff.

      There is no problem with importing as much goods and services as we can get with Sterling. The important thing is that there is enough money supplied into the economy to maintain full employment (and I mean real full employment, not 1.5 million sat around starving on a pittance because somebody redefined full employment as 5% unemployed).

  6. Left Outside said, on December 7, 2010 at 3:20 pm

    Well, I definitely put myself on the free trade left.

    In fact, most of what I want to acheive involves IT jobs going to India, that is called development, and I’ll have as much of that as possible thank you very much.

    Where do we want the world to be in 100 years time? Well I’d quite poor people to be rich, that is going to involve a huge amount of technological transfer to those poorer countries. A lot of that will involve jobs going overseas because that is where the knowledge is.

    I think the idea that creative destruction is dead in the UK as a productive force for employing people is a little daft, we’ve had a downturn but as chris said last week:

    These figures from the ONS have not received the attention they deserve. They show that even in the worst recession in living memory, 236,000 new businesses were set up – equivalent to 10.1% of all firms. These are businesses registered for PAYE or VAT, so they don’t count the minor consultancies, odd-job outfits or interior designing businesses set up by the unemployed. Sure, this is less than the 280,000 set up in the best year in recent times – but it’s not hugely less. Similarly, although a record 11.9% of businesses ceased trading last year, this is not much higher that the cyclical low point, of 9.4%.

    Doesn’t sound like its seized up to me.

    We’re pretty much too rich to benefit from trade protection, we aren’t stuck with a low productivty economy, we’ve done relatively well at growing and we appear to have growth opportunities open to us which will not be enhanced by trade protection (especially if it is recipricated). If we need to improve British industry a larger market is more likely to be a good thing than a bad thing, solar panels won’t be a good thingto invest in if it is difficult to export them to Southern Europe or the tropics, they become a really good thing to invest in if you can export them there.

    Trade protection is pretty much always a second best policy, good for some developing countruies, normally bad for already rich countries except under very specific and temporary circumstances.

    If working people are doing badly then helping them by hurting consumers is not a good policy. A more redistributive tax and benefit system is, something like a citizen’s basic income and a land tax f’rinstance.

    I remember younger something about “Bra Wars” and I decided that this sort of shit was not what politicians should be concerning themselves with/

    • Andreas Paterson said, on December 7, 2010 at 11:35 pm

      LO – I was making a point that there is a relationship between aggregate demand, trade and unemployment rather than expressing an opinion one way or another on the Indian software industry. I will say though that through the eyes of a worker watching his boss getting the credit as his job is outsourced to India it’s not exactly a positive thing (I’ve never lost my job to outsourcing, but I know people who have).

      I do however take issue with your creating a straw man of my comments on creative destruction and then calling this “daft” (quite a lot of issue in fact) . While Chris D’s post paints a positive picture in some ways, it’s very limited in how far you can apply it. Take a look at this about 1/4 of the country’s constituencies have male unemployment rates of over 10%, for even more depressing news check out the worst 25, all over 15% male unemployment (just thought I’d add I’m using the male statistic because despite the changes in our society, traditional male/female roles are still pretty common). I’ve also heard a 20% youth unemplopyment statistic, I personally can’t look at those numbers and conclude that things are just fine.

      I didn’t call creative destruction dead, that’s absurd but I do think the creative bit is happening in the wrong places and is not doing anywhere near as much creating as it should.

      I’m wary about the benefits of trade protection and I’m certainly against it being used aggressively and screwing over other countries, but I do think that a government has a responsibility towards it’s citizens. If the market isn’t creating jobs then the government should take action and I don’t think that the more interventionist options should be as dismissed as readily as the IPPR does.

      On a slightly different note, one thing that seems to be absent from this discussion is restrictions on the moovement of capital. I think this subject does merit more discussion.

      • vimothy said, on December 8, 2010 at 2:02 pm

        Good comment. While it is no doubt comforting to those of us who have lost our jobs due to globalisation to know that we are better off on average, the warm glow of self-sacrificial satisfaction is not, as far as I can tell, edible.

        • Left Outside said, on December 8, 2010 at 11:22 pm

          Sorry Andreas, I did totally pick on a straw man there.

          But the numbers of jobs lost due to the development of backwards economies and the integration of world markets is small (but admittedly significant) compared to both the normal churn of the labour market and those job losses caused by technological change.

          I agree that our economy is too heavily focussed on finance (much of the world is, but we got it bad), but I’m not sure trade protection is the best way to expand the other sectors of our economy. Our main competitors in high value manufacturing for example are in Europe, where we do most of our trade and we have no way of raising intraeuropean tariffs.

          With regard to the youth employment statistics they are disgraceful, and I do think my trade optimism falls down a little here. The young are unskilled, almost definitionally, but because of the economy in which they live their wages are much higher than other unskilled people far away, and because of low transport and communication costs that matters.

          I’m just not convinced trade sanctions will 1) help our economy grow in a more balanced way 2) grow in a way more conducive to full employment.

          • vimothy said, on December 8, 2010 at 11:44 pm

            High value manufacturing = low labour intensity. Right? The problem is not that the economy as a whole needs a little bit of pruning to make it more efficient, the problem is that as we shifted from one macro policy regime into another, we created sets of winners and losers. No doubt its great fun to work as an aerospace engineer or an asset manager. Round here, there are estates where nobody works. And it is not for lack of jobs in high value manufacturing.

            • Neil Wilson said, on December 9, 2010 at 8:47 am

              Trade sanctions won’t help. The simple solution is to spend money creating work positions that the private sector refuse to or cannot create. That can be as simple as paying people if they do any ‘useful work’ at all – including voluntary, and probably ‘big society’ work, or looking after children.

              And if the private sector don’t like the resulting government deficit, then the solution is in their hands – start investing and hiring people.

              We all know that the unemployed are used as a device to control wage costs. Why pander to that?

          • Andreas Paterson said, on December 9, 2010 at 12:50 pm

            No probs LO, for my part I’ll say that trade sanction measures style measures are right at the bottom of my list of ideal solutions. My preferred option is a set of state industrial interventions. The first and most obvious being a state investment bank, a series of state venture capital funds and a strategic infrastructure fund.

            The idea being that they can offer carrots in the form of equity investment and cheap loans based on a set of social criteria. A business looking to raise money could get a lower rate by setting up in an area with high unemployment. The infrastructure fund could then offer funds to assist in developing any infrastructure/training that might be required.

            • Tim Worstall said, on December 9, 2010 at 12:51 pm

              State investment stuff, eh?

              You mean like Labour chucking money at West Midlands marginals just before the 2005 election?

              Yes, most economically rational.

  7. john b said, on December 7, 2010 at 3:31 pm

    Hang on. On the left, are we supposed to be about the international ideal uniting the human race, or about the English the English the English are best, I couldn’t give tuppence for all of the rest?

    Cos if the former, then Blinder is talking total arse: if Indians get work as accountants and programmers, then that’s great news for the world – efficiency improves, and people move out of poverty.

    If the latter, then count me out of the left.

  8. Tim Worstall said, on December 7, 2010 at 5:21 pm

    “There is no problem with importing as much goods and services as we can get with Sterling. The important thing is that there is enough money supplied into the economy to maintain full employment”

    So you do mean that teh level of employment is determined by the level of aggregate demand then, not trade rules?

    Blimey, wish you peeps would make up your mind.

    • Neil Wilson said, on December 7, 2010 at 5:36 pm

      You’ll find there are several idea floating around here.

      Be careful about premature aggregation.

  9. Neil Wilson said, on December 7, 2010 at 5:23 pm

    I’ll leave the Free Trade demolition to Chomsky:

    “So take a look at one of the things you don’t say if you’re an economist within one of the ideological institutions, although surely every economist has to know it. Take the fact that there is not a single case on record in history of any country that has developed successfully through adherence to ‘free market’ principles: none.”

    • Luis Enrique said, on December 8, 2010 at 3:09 pm

      what a buffoon that man is at times.

      set aside the platonic ideal of the ‘free market’ which allows you to conclude that no country developed by adhering to it (because is has never existed) and look at actually existing policy variation in actually existing economies at each point in time. Now classify that policy variation along the dimension more or less free market, and now see whether more or less free market economies at each point in time have tended to do best.

      the idea that mainstream economists are somehow blind to global economic history is the kind of thing only somebody who doesn’t trouble to find out what mainstream economists write about could write.

      • vimothy said, on December 8, 2010 at 11:20 pm

        Noam Chomsky rules the world, or thereabouts–whatever he is, he’s no buffoon.

        • Luis Enrique said, on December 9, 2010 at 11:54 am

          I did insert “at times” – the times in question often being when he opines on matters economic. As in this instance.

          • vimothy said, on December 9, 2010 at 3:20 pm

            I find what he doesn’t say most interesting of all. Presumably, you could make the exact same remark about anarchism–anyone eager to try out the “Somalian model”?

    • Left Outside said, on December 8, 2010 at 11:14 pm

      Oh come on! Why make me do this?

      You can turn this around quite easily, no country has ever developed without institutions protecting property rights and for the effective enforcement of contractual arrangements.

      [Also: Hong Kong? What’s his explanation for Hong Kong, it doesn’t count?]

      Development is difficult, it very often looks nothing like textbooks would recommend in form, but in function it is very often similar to what regular economics would suggest.

      Yes industrial policy is important, no that is not necessarily some vindication of left wing principles, but just an illustration that in a global market economy there are tremendous tides which can retard the development and operation of a national market economy.

      I think I’m getting quite Marx like in my treatment of poor countries, the whole capitalism as a necessary stage thing.

  10. Yan Su said, on December 17, 2010 at 10:42 pm

    “free trade, global integration and open markets” this idea is so cool, it can encourage the whole world to reach the economic peak. Trade is the basically economic principle, and free trade gives the impulse to develop global economy. Also, open market is the result businessman want to see.


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