From Davos: Globalization Depends on Reducing Income Inequality

A host of star-quality economists made a forceful case at Davos that governments in advanced economies need to reduce income inequalty; otherwise there will be a backlash against globalization. They also took a swipe at the dangers posed by hedge funds and excessive leverage.

As cogent as their arguments are, they cross an ideological fault line in America. The free market fundamentalists are not going to accept that income redistribution and a larger state role are the price of further globalization. They believe that open markets lead to greater efficiency, and view the human cost as proof that the losers were, well, losers. If they had better skills and worked harder, they’d have come out on top.

And the anti-globalizers, who want to protect domestic industries to preserve jobs, have good cause to be suspicious of an offer to go along with opening markets in return for training and various forms of welfare. Once trade barriers are dismantled and weak players swept away, it would be well-nigh impossible to revive them later. Skills would have been lost and physical assets liquidated. But tax policies and other programs can be reversed with a stroke of a pen, and almost certainly would be if the Republicans had their way. Why should they trust a promise that will almost certainly be broken?

Global economic integration also seems oddly out of step with national security concerns. The State of the Union address stressed the need for energy independence. Um, that means supporting high-cost inefficient domestic players over cheap international sources. It might be prudent to consider, from the standpoint of domestic stability, how much we really want to be dependent on foreign suppliers. This article on chip manufacturing is admittedly dated (from 2003) but even then, there was data that indicated that over 60% the world’s chips were manufactured in Asia, and more companies were shifting production to China. Our economy and military run on computers and chip-based communication devices which have fairly short lives. We appear to be chosing to depend on foreign-based suppliers whose geopolitical intersts are not the same as ours (why do you think China is so keen to regain control over Taiwan? It certainly isn’t to get back the art that Chiang Kai-Shek took with him).

From Davos, as reported in the London Times:

Growing fears over globalisation among millions of people across the West are being fuelled by a sharp squeeze on incomes and living standards as much of the financial benefit from a more interconnected world economy flows into corporate profits rather than earnings, a panel of prominent experts argued at the World Economic Forum’s annual meeting in Davos.

The warnings came after Stephen Roach, chief economist of Morgan Stanley, this week highlighted in The Times recent trends that have seen the share of national income in the West that flows to workers drop to historic lows, even as the share flowing to companies’ profits has climbed to a record high.

Robert Shiller, one of the world’s most renowned academic economists and a professor at America’s Yale University, told Davos delegates that these trends were being amplified by the integration into the world economy of India and China. He said that the rise of these twin economic powerhouses was “the greatest economic event since the Renaissance and the Industrial Revolution”.

But Prof Shiller and other panellists sounded an ominous warning over the risk that a backlash across Western electorates could spark social unrest and a retreat by leading developed economies into protectionism. He called for governments to raise taxes on the wealthy to counter this danger, so that the proceeds could be used to ease the economic strains now afflicting large sections of Western societies and fostering increased inequality.

“We are reaching a world where there is great anxiety,” he said. “This is a critical thing to deal with … This is a big problem.”

Prof Shiller said that the West was “developing a powerful class of people who will be doing very well”, but there was intensifying stress on “the people who will be left behind”.

He said the political challenge of tackling these issues was all the more pressing since “once inequality increases it’s a problem that will be with us forever”.

“The political discourse about this problem is way too low,” he added. “We really need in every major country a serious debate about how we are going to stop this inequality getting worse. And do it now, not after it has created all of these problems.”

The Yale professor’s analysis was echoed by Nouriel Roubini, a leading US economic consultant, who agreed that “lots of losers” were emerging from the effects of globalization in the West. “You have this process of increasing income and wealth inequality,” he said.

Prof Roubini said that the problems in America were being amplified by the impact of tax cuts by President Bush which he argued had been “highly regressive”.

“The old social contract that existed in some senses in the US is breaking down exactly because of rising China and rising India,” he said. “But that means if you want [to avoid] a backlash against it, you need a much stronger role for the state.

“If a safety net does not exist then the backlash is going to be more nasty.”

As well as backing Prof Shiller’s call for higher taxation of the wealthy, Prof Roubini argued that Western governments needed to devote greater resources to retraining workers whose skills were being made redundant by cheap labour in China, India and other emerging market economies….

The economists said the globalization was also raising other risks to prosperity, with mushrooming capital markets creating escalating dangers from excessive use of leverage by financial institutions including hedge funds.

Prof Roubini said that the very rapid expansion of credit through derivatives markets was heightening the threat of “something ugly and systemic happening”.

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One comment

  1. Yves Smith

    Someone has been putting the same very long and not topical comment on multiple posts. It is not welcome.

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