Thursday, January 19, 2017

Don't Blame Davos Man For Globalization's Limits

By Tyler Cowen
The Bloomberg View
January 19, 2017

Perhaps the most common intellectual meme this week is the notion that “Davos Man” and the globalists have neglected the well-being of the people and thus given rise to a hostile but somewhat understandable populism. The reality is that globalization involves some significant self-limiting forces, and that many of its major problems were headed toward solutions, even before the vote for Brexit and the U.S. election of Donald Trump.

Let’s consider some of the complaints in turn.

One of the biggest objections to recent globalization is that it extended international trade at a destabilizing pace. Whether or not you agree with this negative assessment, from 1950 to 2008, international trade grew about three times faster than global gross domestic product. Since then, cross-country trade has grown much more slowly, at about the pace of global GDP growth or perhaps slower. For better or worse, that is a significant deceleration.

Elites didn’t just decide trade growth had to be slowed down. Rather, the initial rapid growth had some self-reversing properties built in. For instance, China’s growth and exports slowed down as the economy matured and wages rose, trade-intensive Europe became a smaller percentage of the global economy, and protectionist nontariff pressures have recently been rising.

The wisdom behind globalization isn’t a belief that it will be steered by very wise elites. Rather, most economic processes show elements of convergence, stability and mean-reversion, without anyone planning them. It’s a common metaphor of chaos theory that a single flap of a butterfly’s wings may cause a hurricane on the other side of the world, but in the realm of economics the analogue hardly ever happens. Stability is the norm, and most big events have fairly significant causes.

Or consider illegal immigration, another common complaint among populists. There was a significant influx of undocumented Mexican workers during the George W. Bush administration, in part to staff the construction for the real estate boom and then bubble. Since the Great Recession, that flow of labor has ended, and there has been net negative migration, namely more Mexicans have returned to their home country than have arrived in the U.S. Again, that is an example of a self-reversing process rather than deliberate planning by elites.

The refugee crisis in Europe has also taken somewhat of a pause, for a variety of reasons, including the deal with Turkey, the patrolling of the Mediterranean, internal European barriers to cross-country migration, and the difficulty the remaining Syrians have in leaving. To some extent this situation was deliberately planned and engineered by elites. I am not sure it should count as morally acceptable, given the associated human suffering. Still, if we are simply asking whether the political elites responded to popular demands to limit the number of refugees moving into the European Union, they did.

Another big concern has been wage stagnation. In the U.S. at least, wage growth has picked up. The last labor market report showed average hourly earnings jumped 2.9 percent over the last 12 months. It is a perfectly legitimate concern to wonder whether this will persist, but still there has been a labor market response. One possible self-limiting mechanism is that, after enough years of wage stagnation, some workers will take more positive steps to improve their lot. Furthermore, the growth of wages in China, relative to the U.S., may make investing in America more profitable once again. In my view, the wage stagnation problem is hardly over, but at least progress can be seen.

Reports from the euro zone also indicate that finally a recovery is under way. This good news may also be fragile, but again it is a sign of a self-reversing process. If an economy stagnates for long enough, but possesses significant human talent, entrepreneurs will learn how to work around the constraints in place. Wages and prices will adjust, if only through subtle changes in the qualities of jobs and working conditions; workers will be re-employed; a recovery will take over. The slow path here is not the best one, but downturns do not last forever.

Less than half a year ago, many economists were talking about liquidity traps and long-term, demand-based secular stagnation. Now I hardly ever see those concepts in the public debate, because the evidence for them largely has gone away. And for that you can thank Davos Man, who defended the notion of a world order based on moderating and self-reversing processes.

I’m not saying that all is well, as I see significant possibilities for instability in the current political configuration. But the elites have in fact been working at their job, and now it is up to voters to catch up in their understanding.

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