Globalization and Its Discontents Revisited

by Joseph E. Stiglitz

  5 Source: Data from the Bureau of Economic Analysis, U.S. Department of Commerce.

  6 The full analysis is slightly more complicated because of exchange rate effects.

  7 These are called macroeconomic externalities. Bruce Greenwald and I (in our 1986 paper, “Externalities in Economies with Imperfect Information and Incomplete Markets,” op. cit.) showed that whenever there was imperfect information or incomplete risk markets—that is, essentially always—markets are not fully efficient; there are always government interventions that could make some individuals better off without harming others. Subsequently, a host of economists showed that these effects can manifest themselves in a significant way at a macroeconomic level, with firms, for instance, borrowing excessively in foreign-denominated debt (see, for example, Markus Brunnermerier and Yuliy Sannikov, “International Credit Flows and Pecuniary Externalities,” American Economic Journal: Macroeconomics 7 [1] [January 2015], pp. 297–338).

  8 Matters are even worse: the compensation schemes provide incentives to distort accounting systems to make it seem as if profits are higher than they really are. For a fuller account, see my book, written in the aftermath of the scandals of the early years of this century: The Roaring Nineties: A New History of the World’s Most Prosperous Decade (New York: W. W. Norton, 2003), and especially the discussion of creative accounting (chapter 5). For a discussion of some of the changes in the rules of the American economy that led to the changes in compensation schemes, see Joseph E. Stiglitz et al., Rewriting the Rules of the American Economy, op. cit.

  9 In democratic societies, governments turn over frequently, and this also gives rise to “short-termism,” a focus on the short-term consequences of policies, with insufficient attention given to the long run. But while there is thus clearly a tendency for short-termism, it can and has been combated—but that can only happen once the problem has been recognized. Thus, Norway has put almost a trillion dollars of its oil revenues away for the future in its sovereign wealth fund. In short, there are institutional mechanisms for addressing short-termism.

  10 The first such agreement, between Pakistan and Germany, was signed in 1959. In recent years, they have proliferated—and the world began to understand the problems that they brought. See my paper, “Regulating Multinational Corporations: Towards Principles of Cross-Border Legal Frameworks in a Globalized World Balancing Rights with Responsibilities,” American University International Law Review 23 (3) (2007), pp. 451–558, Grotius Lecture presented at the 101st Annual Meeting of the American Society for International Law, Washington, DC, March 28, 2007.

  11 Trump has necessitated a reexamination of the vocabulary used to describe falsehoods. A lie conveys a malicious intent to deceive.

  12 The branch of the World Bank Group that does this is called MIGA (Multilateral Investment Guarantee Agency). The U.S. government has an agency called OPIC (Overseas Private Investment Corporation).

  13 Source: Duff Wilson, “Cigarette Giants in Global Fight on Tighter Rules,” New York Times, November 13, 2010.

  14 International Center for Settlement of Investment Disputes. 2013. Philip Morris v. Uruguay: Award, ICSID Case No. ARB/10/7, http://icsidfiles.worldbank.org/icsid/ICSIDBLOBS/OnlineAwards/C1000/DC9012_ En.pdf. Had Uruguay lost, it might have had to pay as much as $2 billion to Philip Morris, an enormous amount for this small country. (“Uruguay vs. Philip Morris,” Center for Public Integrity, available at https://www.publicintegrity .org/2010/11/15/4036/part-iii-uruguay-vs-philip-morris.)

  15 The provisions of the investment agreements restricting regulations are sometimes called “regulatory takings” provisions. The argument is that regulations take away property rights; in this way, they are similar to confiscation, except the owner is only deprived partially of his use of the asset. Courts in the United States, and Congress, have repeatedly affirmed that owners do not have to be compensated for the effects of regulations on the value of their assets, for the obvious reason that doing so would totally impair the ability of government to regulate. Indeed, that is the intent of the anti-environmentalists who are the strongest advocates of these provisions.

  16 Thus, imagine what would have happened had these provisions been in place when the health consequences of asbestos were discovered and, as a result, asbestos was forbidden in construction. Rather than the asbestos manufacturers compensating those hurt, the government would have had to compensate the asbestos manufacturers for their lost profits. Critics of tobacco suggest that Philip Morris, in the suit against Uruguay, was effectively asserting its “right to kill.” Though eventually Philip Morris lost, the fact that it was a 2-to-1 decision makes clear that in some other case, the ruling might go the other way.

  17 I was asked by the government of Panama to head a commission to advise them on what reforms were required to enable them to be a good global citizen. When they refused to commit to making our report transparent, Mark Pieth—another non-Panamanian Commissioner and a devoted anticorruption expert from Basel—and I felt we had no choice but to resign. Subsequently, we wrote a report describing what Panama and other fiscal paradises needed to do. See “Overcoming the Shadow Economy,” Friedrich Ebert Stiftung International Policy Analysis Paper, November 2016. For other discussions of the fiscal paradises, see N. Shaxson (2011), Treasure Islands: Uncovering the Damage of Offshore Banking and Tax Havens (New York: Macmillan, 2011); and G. Zucman, The Hidden Wealth of Nations: The Scourge of Tax Havens (Chicago: University of Chicago Press, 2015).

  18 U.S. Senate, Hearings of the Permanent Subcommittee on Investigations, “Offshore Profit Shifting and the U.S. Tax Code—Part 2 (Apple Inc.),” May 21, 2013, available at https://www.hsgac.senate.gov/subcommittees/investigations/hearings/offshore-profit-shifting-and-the-us-tax-code_-part-2. European Commission, August 30, 2016, press release, http://europa.eu/rapid/press-release_IP-16-2923_en.htm.

  19 The distinction between tax avoidance and tax evasion is that the latter entails not paying taxes that are legally due, while the former entails taking advantage of loopholes and differences in tax rates and provisions across different jurisdictions to lower one’s tax obligations. The boundary between the two may be thin.

  20 One of the few things on which Democrats and Republicans in the United States agree is that these arrangements need to change, but they differ in the view of how they should be changed. They all agree that the pile of profits stashed abroad should be taxed now—this gives a one-time bonus that can be used to finance infrastructure investments, or more tax cuts for corporations (in the case of Republicans) or for the middle class (in the case of Democrats). The repatriated money would be taxed at a lower rate than the current 35 percent, but, as this book goes to press, Republicans are talking about a much lower rate than what the Democrats are proposing. Republicans (by and large) believe in a territorial income tax system, where money earned abroad would not be taxed at all by the United States. The Democrats believe that American companies making money abroad should be taxed at the same rate as they would be taxed for production in the United States—otherwise we would be encouraging firms to locate abroad to lower-taxed jurisdictions.

  21 These were called tax inversions. The Obama administration issued regulations to stymie these attempts at tax avoidance. As this book goes to press, Trump appears to be making efforts to undo these restrictions.

  22 I noted earlier (in the introduction) the large reduction in the revenues raised in the United States by corporate taxation (as a percentage of GDP). In Europe, individuals can easily move between countries, choosing a low-tax residence, making it difficult to impose very progressive income taxes. By contrast, U.S. citizens are taxed on their income, regardless of where they live. For a fuller discussion, see Joseph E. Stiglitz, The Euro, op. cit.

  23 Source: David Riker, “Intellectual Property Rights and International Receipts of Royalties and Licensing Fees,” Office of Economics Working Paper, U.S. International Trade Commission, August 2014.

  24 The true cost to develop
ing countries of IPR is much greater than this amount, for the IPR gets leveraged into monopoly, and those in the developing countries thus have to pay much higher prices for goods which fall under the protection of IPR. In the absence of this monopoly, firms in developing countries could enter and the country would benefit not just from the lower prices but from the learning that resulted. India had a thriving generic drugs industry before stronger IPR laws restricted its scope. See Stiglitz and Greenwald, Creating a Learning Society, op. cit.

  25 Economists distinguish between two kinds of compensation: what one receives for the exertion of effort (wages), and what one receives from the ownership of an asset (land), which has nothing to do with one’s exertions, also called “rents.” Rents also include the returns one gets from the ownership of a monopoly. Economists have broadened the concept: rent-seeking is any attempt to increase one’s income in a way unrelated to one’s exertions directed at increasing the size of the national pie. For an elaboration, see Joseph E. Stiglitz, The Price of Inequality, op. cit.

  26 As I have noted elsewhere, what separates developing and developed countries is a disparity in knowledge that is even greater than the disparity in resources. Excessively strong IPR impede the closing of the knowledge gap and force a flow of resources from developing countries to the developed.

  27 Association for Molecular Pathology et al. v. Myriad Genetics, Inc., et al. Case No. 12-398. Argued April 15, 2013-Decided June 13, 2013. I was pleased to have written an Amicus brief, in support of the ACLU (Case 1:09-cv-04515-RWS, Document 224, Filed 01/20/2010).

  28 There was a net outflow of Mexican immigrants of 140,000 from 2009 to 2014. “More Mexicans Leaving Than Coming to the U.S.,” Pew Research Center, November 19, 2015, available at http://www.pewhispanic.org/2015/11/19/more-mexicans-leaving-than-coming-to-the-u-s/.

  29 Trade in goods would be a nearly perfect substitute for movement of labor. In such a world, if we imported more unskilled-labor-intensive goods from China, the demand for unskilled labor in China would increase, while in the United States it would decrease, thereby increasing unskilled wages in the former and decreasing them in the latter. This back-and-forth would continue until the wages for unskilled labor would be the same in both countries. This was the central message of our earlier discussion on trade liberalization.

  30 There are some “limiting” cases where full-factor price equalization might not occur, for instance, a country with much unskilled labor totally specialized in producing goods intensive in unskilled labor.

  31 Branko Milanovic´, Global Inequality: A New Approach for the Age of Globalization (Cambridge, MA: Harvard University Press, 2016).

  32 In particular, of public services, like defense, in which there is no increase in costs when another person moves into the country. Moreover, an increase in the supply of unskilled workers could increase the productivity and wages of skilled workers. (Technically, economists would say that that happens if unskilled and skilled workers are complements. It is usually assumed that they are.) Of course, if the direct public services used by the immigrant are greater than his total tax contributions (direct and indirect), then there will be a burden on those already living in the country.

  33 This discussion has focused on the effects of immigration on the “receiving” country. There are similarly benefits and costs to the sending country. A large literature has analyzed the benefits that arise from the remittances that are sent back. Some have argued that there are also “cultural remittances”: returnees bring back skills that they have learned abroad. There can also be negative effects on the sending country: when the most talented young people leave, leading to a “hollowing out” of their society, it may impede the growth and development of the sending country. Developing countries rightly complain that after spending large sums in providing education, some of the most talented emigrate to developed countries, which receive the benefits but provide no compensation to the developing countries. Malaysia’s former prime minister described this as the theft of the country’s intellectual property. (See Joseph E. Stiglitz, Making Globalization Work, op. cit.) Some have suggested there can be other adverse effects—for instance, that workers returning from the Middle East to Bangladesh, Pakistan, and some other countries have been radicalized.

  34 Boeing also is helped by loans through the U.S. government’s Export-Import Bank (sometimes called “Boeing’s Bank”). To be fair, Europe also subsidizes its producer, but in a different form. Indeed, the entire industry is rife with subsidies.

  The construction of an assembly plant by Airbus, the main European aircraft manufacturer, in Mobile, Alabama, illustrates the secondary role played by standard comparative advantage. The parts were shipped into Alabama largely from Europe. The workers there had no relevant skills that Airbus was taking advantage of. Indeed, the mentality of American workers—don’t worry about getting things right the first time; we can fix it later—was seen as a problem. Rather, having a plant in the United States was seen as helping promote sales to the American government, and possibly other purchasers. Assistance from the state government—it picked up much of the tab for training workers—mattered, as did the absence of unions, which resulted in wages topping up at $23 an hour. Binyamin Appelbaum, “Politics Rives Epic Assembly Line Project,” New York Times International Edition, May 9, 2017, p. 1.

  35 See M. Mazzucato, The Entrepreneurial State: Debunking Public vs. Private Myths (London: Anthem Press, 2013).

  36 Source: 2015 National Health Expenditure Accounts, United States Government Centers for Medicare and Medicaid Services.

  37 Indeed, in the TPP negotiations, the USTR was asking for stronger protection for Big Pharma than the president had argued for in other contexts.

  38 Indeed, when the USTR compromised on a technical provision (the length of data exclusivity for certain products)—in a way that even the president had advocated—one of the key senators threatened to torpedo the entire agreement and send it back for renegotiation.

  The industry justifies its demands in terms of ensuring that American firms get a fair return on their investments in R&D. The battle between access to medicines and ensuring returns to innovation was settled within the United States by the Hatch-Waxman Act of 1984, which enabled Big Pharma to maintain very high profit levels, while generics grabbed more than 80 percent of the market. Without generics, as I have noted, drug prices would be much higher than they are today. Big Pharma has tried to reopen the matter, behind closed doors, through trade agreements—trying to get a far better deal for themselves than under Hatch-Waxman.

  39 There were two arguments of modest validity: Why, they said, should those who lose their jobs from globalization be singled out? Weren’t those who lost their jobs due to technology equally deserving of help? The answer, of course, was yes, and we as a society should have helped both. But the Republican stance was to help neither.

  The other argument was that these job assistance programs sometimes don’t work. And that was true, especially when the economy was far from full employment. We can’t retrain people for jobs that don’t exist. But here again, the right answer was to change macroeconomic policies to ensure that the economy operated with a tight labor market—even if it meant mild inflation; and to learn, from countries like Sweden, how to make job retraining programs work well.

  40 Economics plays an important role in these political trends, but there are other forces at play. Those who supported nativist policies, which include many who have suffered as a result of globalization or changes in technology, also include disproportionately those with less education, and at least the United States and Europe each have their own history of such inward-looking politics.

  CHAPTER 3

  1 There are profound consequences of just being able to pick one’s “alternative facts.” In a Trumpian world, what is one to make of “due process,” or many of the other terms that constitute our system of jurisprudence? Presumably, the president could just make up his alternative facts, c
oncluding that he had done what the law requires.

  2 For an elaboration of these ideas, see J. Mokyr, The Gifts of Athena: Historical Origins of the Knowledge Economy (Princeton, NJ: Princeton University Press, 2002); J. Mokyr, The Enlightened Economy: An Economic History of Britain, 1700–1850 (New Haven, CT: Yale University Press, 2009); and Joseph E. Stiglitz and Bruce C. Greenwald, Creating a Learning Society, op.cit.

  3 Even when they are defeated, as Le Pen was in France in the 2017 election, the size of their vote—about a third of those voting chose Le Pen—is disturbing.

  4 For a more extensive account of the crisis and its aftermath, see my book Freefall, op. cit.

  5 Source: E. Saez, “Striking it Richer: The Evolution of Top Incomes in the United States (Updated with 2015 preliminary estimates),” UC Berkeley, June 30, 2016, available at https://eml.berkekey.edu/~saez/saez-USStopincomes-2015.pdf.

  6 Of course, some businessmen have engaged in the serious study of economics, and their practical experience has no doubt been of some value. The point here is simple: knowing how to buy and sell real estate itself teaches very little about how our global economic system works. Worse, there is a danger that it narrows the lens through which one sees the world. A real estate developer will naturally assign a great deal of value to real estate, and think that lowering capital gains taxes on land is a good thing, because it makes his business do better; in fact, a tax on land has long been established as one of the most efficient taxes, because it has zero effect on land supply. This is but one of many examples of how understanding the economy through the lens of a particular industry can be dangerous.

  7 Since becoming president, he seems to have backed off from these extreme threats, but as this book goes to press, he continues with his strongly protectionist rhetoric.