Globalization and Its Discontents Revisited

by Joseph E. Stiglitz

  9 I warned about these issues in Making Globalization Work, op. cit., the book on globalization that I wrote following GAID. GAID had explained what had gone wrong with globalization. In Making Globalization Work, I sought to explain what could be done to make it work right. Chapter 4 in this book can be viewed as an extension of that work.

  10 This was a concern in South Africa, which took measures to protect small African producers, insisting that Walmart incorporate them into its supply chain. For full disclosure: I was an expert witness appointed by the South African government in its case against Walmart.

  11 In these cases, trade can originate based not on relative competence, as in the standard theory, but on relative market power. In Mexico, Walmart demonstrated another strength which need not contribute to societal well-being: greater willingness and ability to engage in corruption. For the story that broke the scandal, see David Barstow, “Vast Mexico Bribery Case Hushed Up by Wal-Mart after Top-Level Struggle,” New York Times, April 21, 2012.

  12 That is, they worry that small producers will always claim that a large firm from abroad has market power, and that is why it can undersell.

  13 This is one of the central points in Bruce C. Greenwald and Joseph E. ­Stiglitz, Creating a Learning Society: A New Approach to Growth, Development, and Social Progress (New York: Columbia University Press, 2014; Reader’s Edition, 2015).

  14 Some point to Germany and its success in retaining manufacturing jobs, suggesting that if the United States would only follow Germany’s example, it could recover its manufacturing jobs. This is wrong, for several reasons. As I discuss later (chapter 3), total global manufacturing jobs will be in decline, and it will be even difficult for the United States to retain its current share. Germany did so in part by having an undervalued exchange rate, the result of its being part of the euro. But Germany did so in part by having a well-tuned apprenticeship and education system, which would take years for the United States to create—if it could do so. Besides, Germany was “lucky” in focusing on niches within manufacturing, like complex machine tools, that China has yet to enter. As China moves up the “value chain,” producing increasingly complex goods, Germany may find it increasingly difficult to retain its share in global manufacturing employment.

  15 Indeed, the success the United States has had in retaining jobs in, say, manufacturing has necessitated massive cuts in wages—in some cases by two-thirds. One of the arguments for focusing on manufacturing was that those jobs were “good,” high-paying jobs. But that argument is obviously weakened if, to retain manufacturing, those jobs are converted into low-paying jobs.

  16 When government revenues exceed spending, government has a surplus, i.e., it is saving. Conversely, when spending exceeds revenues, there is a deficit. National savings is the sum of private savings plus government savings. When the government runs a deficit, the government has negative savings, obviously diminishing national savings. Funds are fungible, so it doesn’t matter much whether the government borrows from abroad to finance its deficit, or the government borrows from America’s private sector, but the private sector borrows from abroad to finance its investment.

  17 In note 6, I noted that exports of services—like sales to tourists or to ­students­—are just as much exports as the exports of manufactured goods. Exports of services create jobs just as exports of goods do.

  18 It was not until the Clinton administration that the huge fiscal deficits were reversed. But as this happened, America went through an investment boom—the tech bubble. With limited private savings, the corporate sector had to borrow abroad, so even as the fiscal deficit was eliminated, the trade deficit persisted. Bush returned to fiscal deficits with his tax cuts of 2001 and 2003, and during his tenure we had both fiscal deficits and a housing boom. Finally, Obama inherited the Great Recession, leading to massive fiscal deficits even as investment contracted. Thus, the gap between domestic investment and domestic savings persisted.

  19 Though the United States did restrict some exports of high-technology products to China. China argues that U.S. complaints about China not buying enough American goods are unfair: the United States refuses to sell it some of the key goods in which the United States has a comparative advantage.

  20 The lower interest rate made it less attractive to buy U.S. Treasury bills. Money shifted from the United States to, say, Europe, lowering the value of the dollar relative to the euro. The defense of the United States was that this fall in the exchange rate was an incidental side effect. In reality, of course, the adjustment of the exchange rate is one of the main mechanisms by which interest rates have a macroeconomic effect. These benefits would not have occurred if other countries had lowered interest rates in tandem. But in April and again in July 2011, the European Central Bank, then headed by Jean-Claude Trichet, actually increased interest rates; it was worried about incipient inflation, and saw its mandate narrowly as fighting inflation. Later, Europe did lower its interest rates to levels close to that of the United States, eliminating this advantage.

  21 This amounts to a decline of 25 percent. Source: Bloomberg.

  22 As in the case of his complaint about Mexican immigrants, Trump’s timing was badly off.

  23 What determines comparative advantage in a modern economy is complex. In the simple agricultural economy analyzed by David Ricardo, it’s weather: Portugal has a comparative advantage compared to the UK in producing wine, relative to wool, because its weather is more suited to wine. But with capital, and even skilled labor, relatively mobile, and even knowledge that resides within a corporation moving easily across borders, comparative advantage resides in those aspects of production which are not mobile, such as the legal institutions.

  24 These expenditures could, however, affect the sectors in which a country has comparative advantage.

  25 See Joseph E. Stiglitz, Making Globalization Work, op. cit., chapter 6.

  26 Trade agreements have not dealt with the problems posed by market power, but some countries have used their own competition laws. For instance, when Walmart entered South Africa, competition authorities required it to take certain actions (including making certain payments) to ensure that small South African producers were not adversely affected.

  27 This was called the factor price equalization theorem. Trade in goods was (under the stipulated conditions) a perfect substitute for movement of people. If one worried about the consequences for unskilled wages of a large immigration of unskilled workers from developing countries, one should have been equally worried about free trade with developing countries. See Paul Samuelson, “International Trade and the Equalisation of Factor Prices,” Economic Journal 58 (230) (1948), pp. 163–84.

  28 Wolfgang Stolper and Paul Samuelson showed that trade liberalization—reducing tariffs—would lower unskilled wages in the country with relatively high unskilled wages. See W. Stolper and P. A. Samuelson, “Protection and Real Wages,” Review of Economic Studies 9 (1) (1941), pp. 58–73.

  29 This is an aphorism attributed to John F. Kennedy in various speeches, most notably in 1963. See “Remarks in Heber Springs, Arkansas, at the Dedication of Greers Ferry Dam,” October 3, 1963.

  30 See Joseph E. Stiglitz, The Price of Inequality, op. cit.

  31 See Joseph E. Stiglitz et al., Rewriting the Rules of the American Economy, op. cit.

  32 Later, Warren Buffett would say: “There’s class warfare, all right, but it’s my class, the rich class, that’s making war, and we’re winning.” As quoted by Ben Stein, “In Class Warfare, Guess Which Class Is Winning,” New York Times, November 26, 2006, available at http://www.nytimes.com/2006/11/26/business/yourmoney/26every.html.

  33 While GAID focuses on the consequences of globalization for the poor in developing countries, in Making Globalization Work, op. cit., I explain how unskilled workers in advanced countries would be hurt. But the underlying ideas, as I explain, could be traced by to the work of Stolper and Samuelson cited earlier.

  34 This particular president
was a doctor, and when he asked me whether he should sign the proposed trade agreement, I replied by asking him whether he had taken the Hippocratic Oath (required of all doctors) which includes: do no harm. He said he had. I replied that he then couldn’t sign the trade agreement, especially since the proposed agreement would have reduced access to life-saving medicines. Whether because of these arguments, or more likely domestic politics, he decided not to push for an agreement with the United States.

  35 As I’ve explained here and elsewhere, perhaps even more important was the fact that over the past third of a century, the rules of the market economy have been rewritten in ways which have weakened unions’ and workers’ bargaining position. This is one of the central themes of Joseph E. Stiglitz et al., Rewriting the Rules of the American Economy, op. cit.

  Changes in technology have combined with changes in the structure of the economy and in the rules and their enforcement leading to an increase in market concentration in many sectors. The resulting increase in prices leads, in turn, to lower standards of living for workers.

  Some argue too that there is greater dispersion of wages within the service sector than in manufacturing, and as the economy moves to a service sector economy, there will be more wage inequality. This, however, does not account for the decline in the share of labor overall, and the fact that workers’ compensation has not kept pace with productivity. See Josh Bivens and Lawrence Mishel, “Understanding the Historic Divergence Between Productivity and a Typical Worker’s Pay: Why It Matters and Why It’s Real,” Economic Policy Institute Briefing Paper #406, 2015, http://www.epi.org/publication/understanding-the-historic-divergence-between-productivity-and-a-typical-workers-pay-why-it-matters-and-why-its-real/.

  36 See Bruce Greenwald and Judd Kahn, globalization: n. the irrational fear that someone in China will take your job (Hoboken, NJ: Wiley, 2009).

  37 Perhaps that’s because he believes in American exceptionalism—that because of U.S. economic power, it can get away with doing what others can’t. But while this might have been true at one time, it isn’t true today, at least when other large economies, like China and the EU, are affected.

  38 Globalization’s rules have had an ambiguous effect on the disparity between developed and developing countries in knowledge. What separates developing and developed countries is a disparity in knowledge even more than a disparity in resources (See Stiglitz and Greenwald, Creating a Learning Society, op. cit., and World Bank, Knowledge for Development, World Development Report, 1998.) Those in the advanced countries enjoyed enormous “knowledge rents,” extra income that they receive because of the advantage of knowledge that they have that is not universal. While globalization facilitated the movement of technology across borders—thus reducing this advantage—an important part of modern globalization, discussed below, are global intellectual property rights, designed to impede the movement of knowledge across borders and to ensure that those in the advanced countries maintain their knowledge rents.

  Still, the location of production matters for learning associated with production, learning by doing. And there are important spillovers from such learning for the entire economy. This learning has played an important role in the success of China and some of the other countries of East Asia.

  39 Trump, of course, never explains how he calculates this; indeed, throughout the campaign and months after the election, he refused to even specify what he would like changed.

  40 From 1994 to 2013, Mexican corn production was reduced from 8.0 million hectares to 6.8 million, while that in the United States increased from 29.3 million to 35.5 million. American subsidies take many forms, some of which are more distorting than others. The U.S. mandate for cars to use ethanol and subsidies for U.S. ethanol production played an important role in the expansion of U.S. production. See G. C. Hufbauer, C. Cimino-Isaacs, and T. Moran, “NAFTA at 20: Misleading Charges and Positive Achievements,” Peterson Institute for International Economics, PB14-13 (2014).

  41 A 2016 study by the Wilson Center put Mexico-dependent jobs at 4.9 million, while a 2012 report by the U.S. Chamber of Commerce estimating 6 million jobs is also frequently cited. See Christopher Wilson, “Growing Together: Economic Ties Between the United States and Mexico,” Mexico Institute at the Wilson Center, November 2016, and “Enhancing the US-Mexico Economic Partnership,” U.S. Chamber of Commerce, April 2012.

  42 Source: United States Census Bureau’s 2016 Foreign Trade statistics, retrieved from https://www.census.gov/foreign-trade/index.html.

  43 In 2016, for instance, the United States had a goods trade deficit with Canada of $12 billion, but a services trade surplus of $25 billion. Source: United States Trade Representative, retrieved from https://ustr.gov/countries-regions/americas/canada.

  44 The international system, in which there are reciprocal agreements about how each country behaves with respect to exports and imports and how disputes about compliance with such rules are to be resolved is often referred to as the “global rules-based system.” Respect for such agreements—actually complying with the agreement—is part of the respect for the international rule of law.

  Some might argue that since countries can always withdraw from such agreements, they have not really given up any sovereignty. (The contrast is between the states of the United States, which cannot withdraw from the union, and the members of the EU, which can.) De facto, however, there is a weakening of sovereignty (and that is certainly how signing the WTO agreement was perceived, especially by conservatives, in the United States). The United States has respected most of the adverse WTO decisions, either changing its action or providing compensation to the offended party to induce it to withdraw the complaint. In no instance has there been retaliation against a country that has been authorized by the WTO to impose trade sanctions in response to what has been judged to be a WTO-noncompliant action. Thus, the WTO has avoided trade wars.

  45 For a popular account, see Daron Acemoglu and James A. Robinson, Why Nations Fail: The Origins of Power, Prosperity, and Poverty (New York: Crown Business, 2013).

  46 See, e.g., President Xi’s speech in Davos, January 17, 2017, available at https://www.weforum.org/agenda/2017/01/full-text-of-xi-jinping-keynote- at-the-world-economic-forum.

  47 This principle is long-standing and was embodied in international agreements that preceded the WTO, in GATT, the General Agreement on Tariffs and Trade, which went into effect in 1948.

  48 See, for instance, The Stiglitz Report: Reforming the International Monetary and Financial Systems in the Wake of the Global Crisis, Report of the Commission of Experts on Reforms of the International Monetary and Financial System appointed by the President of the United Nations General Assembly (New York: New Press, 2010).

  49 Thus, TPP was seen as part of the “pivot to Asia.” In fact, as I will note later, the economic benefits were estimated to be negligible.

  50 Obama not only overestimated the trade benefits of TPP, but also the foreign policy benefits. China already had multiple trade agreements around the region, and with most countries in the region, its trade was far larger than the trade with the United States. Many believe that the United States should have been focused on encouraging cooperation with China, not the kind of confrontation that TPP represented. Earlier, the Clinton administration had switched from a policy of containment and confrontation to one of engagement and cooperation. In other arenas, such as climate change, the Obama administration did engage in cooperation, and without this cooperation, the Paris global deal on climate change would not have been possible.

  51 The U.S. recession also played a role in discouraging migration.

  52 I discuss how they do this in greater detail later.

  53 Source: “Trans-Pacific Partnership: Likely Impact on the U.S. Economy and on Specific Industry Sectors,” United States International Trade Commission, 2016, available at https://www.usitc.gov/publications/332/pub4607.pdf.

  54 J. Capaldo, A. Izurieta, and J. K. Sundaram, “Trading Down: Unemployme
nt, Inequality, and Other Risks of the Trans-Pacific Partnership Agreement,” GDAE Working Paper 16-01, Tufts University, 2016.

  55 Consistent with there not being significant externalities to other jurisdictions. Unfortunately, the European Commission often seems to have forgotten this principle in its quest for regulatory uniformity.

  CHAPTER 2

  1 The Riegle-Neal Interstate Banking and Branching Efficiency Act eliminated previous restrictions. The restrictions were originally motivated out of a worry that the big money center banks would drain money out of the rest of the country toward them. It was thought that such restrictions would encourage the development of different regions of the country, and there is some evidence that that is in fact the case. (See, e.g., Bruce Greenwald and Joseph E. Stiglitz, Towards a New Paradigm in Monetary Economics [Cambridge: Cambridge University Press, 2003].) One of the arguments for the act was that the banks had found many ways of circumventing the restrictions.

  2 See, e.g., Stiglitz and Greenwald, Creating a Learning Society, op. cit.

  3 Smith’s most famous book, The Wealth of Nations, was published in the year of U.S. independence, 1776.

  4 Almost a half century ago, I showed that when the tax code provides for deductibility of interest (as the U.S. code does), the corporate income tax has no effect on investment when depreciation rates correspond to “true” economic depreciation. In fact, most tax codes (including that of the United States) provide for faster depreciation, so that the effect of the corporate income tax is actually to encourage investment, with the tax reducing marginal returns by less than it reduces marginal costs. See “Taxation, Corporate Financial Policy and the Cost of Capital,” Journal of Public Economics 2 (February 1973), pp. 1–34.