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Tuesday, April 20, 2010

Globalization: The Irrational Fear that Someone in China Will Take Your Job

With the Obama administration turning toward trade protectionism, this is a good time to revisit the age-old controversy over free trade. Recent arguments have often centered on the supposed evils of globalization, and Globalization attempts, with only partial success, to deal with globalization anxiety.

According to Greenwald (who teaches in Columbia University’s Graduate School of Business) and Kahn (a former history professor), “writers on globalization” largely misinform the public. They fail to acknowledge earlier waves of globalization that Americans have survived and benefited from, and rely on “anecdotes” but not “harder, more representative, and more dispositive data.” As a result, the public overestimates the negative effects of globalization. The authors aim to more accurately describe and discuss globalization and its consequences.

They begin with the history of globalization. In the first phase (1820-1920), innovations in transportation and communication set the stage for world trade in commodities. Globalization receded during the second phase (1920-1950). Greenwald and Kahn recognize that tariffs, economic depression, and war explain part of that decline, but in their view the leading factor was innovation in the production of commodities, which increased incomes and encouraged manufacturing. The new manufactured goods were not readily traded, so countries exported and imported less output across borders. Globalization rebounded during 1950-2000 as “businesses learned to sell differentiated products in distant markets.”

Currently, the authors see the mix of economic activity changing again. In this phase, productivity gains are reducing the importance of the manufacturing sector relative to the service sector. Greenwald and Kahn reason that many of these services will still be produced in home markets and predict another round of decreasing globalization.

Economists generally advocate free trade as a policy that leads to higher standards of living, but Greenwald and Kahn argue that the causality generally runs the other way, with greater prosperity leading to increasing trade. Their data show that standards of living around the world have little to do with the pace of globalization, and they contend that living standards depend more on whether an economy is capitalistic or socialistic than the ebb and flow of globalization.

Few economists would disagree that market-oriented economies outperform socialist economies. The authors seem to be creating an unnecessary debate on that point. Far worse, however, they endorse neither free trade nor protectionism. “Like other economic policies,” they write, “trade policy is best decided by local authorities, responding to local conditions.” That’s a feeble argument. Local authorities are just as susceptible to special-interest pressures to restrict trade as are national ones, and the results are just as bad for consumers.

Free trade remains unpopular because the public worries about job losses. Greenwald and Kahn acknowledge this concern, but observe that what the public does not notice are the tremendous job gains. “During 35 years of increasing globalization,” report the authors, “employment in the United States actually increased by over 80 percent.”

Their analysis of employment data shows that many of the new jobs are in attractive categories such as management. Furthermore, globalization is not the primary destroyer of manufacturing jobs. By the authors’ calculation, globalization accounted for 35 percent of the manufacturing jobs destroyed from 2000 to 2006, while automation accounted for 65 percent. Might it not be that American workers will keep their jobs but suffer wage cuts due to globalization? In fact, the authors show, while real wages in the United States declined between 1970 and 1982, since 1983 they have been rising.

So far, so good. But Greenwald and Kahn then argue that because other countries are practicing “monetary mercantilism” we must take steps to reverse the U.S. trade deficit. They favor creating a new world currency, with the International Monetary Fund acting as a global central bank. What terrible analysis and advice! Trade deficits are not harmful; they’re the flip side of capital inflows that reflect increasing investment. Furthermore, there is no reason to believe that international bureaucrats can run a central bank any more successfully than can the bureaucrats in charge of our own inflation-prone Federal Reserve.

The basic premise of the book–that people should stop thinking about “globalization” as if it were the economic equivalent of the Black Death–is correct. The trouble is that Greenwald and Kahn let their erroneous notions (not all of them pertinent to globalization) get in the way of a truly enlightening work. We emphatically do not need any of the interventionist policies they propose (like the new international currency) or think are harmless (like local trade impediments). Economic freedom, including global trade, needs a full-throated defense rather than this rather timorous one.