Explaining the Gains from Globalization

Recently, the topic of how to share the gains from globalization in order to prevent a protectionist backlash has been widely discussed. For example, the in the last few days the Financial Times has two articles on this issue, Share gains with globalisation’s losers by Martin Wolf and Global stability rests on sharing the gains by Jan Kregel and William Milberg, the New York Times has had many articles about this such as Real Wages Fail to Match a Rise in Productivity by Steven Greenhouse and David Leonhardt, and this topic has been discussed in many other forums as well including this year's Federal Reserve Symposium at Jackson Hole, Wyoming.

A common theme in these articles is that a key to political success and to staving off protectionist responses to problems perceived to be caused by globalization and technological change is to find a way to share the gains more equally without sacrificing the political support of the winners. However, Berkeley economist Brad DeLong, writing about the Martin Wolf Financial Times article, says simply redistributing the gains may not be enough:

Brad DeLong: Ben Bernanke said that the world will move forward with globalization only if policy makers "ensure that the benefits of integration are sufficiently widely shared." He is wrong: just making the benefits of integration widely shared isn't enough. After all, the benefits of globalization and increased economic integration are widely shared today--and yet forward progress on further globalization still hangs in the balance for politico-economic and politico-security reasons.

In the United States, at least, the problem is that most beneficiaries from globalization don't really know that they are beneficiaries, or how much they benefit. Feckless congressmen and congresswomen don't understand that the American economy is cushioned from their fiscal policy stupidities by the ability of the U.S. government to sell bonds internationally on a jaw-droppingly unbelievable scale. Home sellers in California don't realize that they got such a good price because of financing from across the Pacific. Walmart shoppers see the "made in China" stickers, but don't understand what a good deal they are getting because the rulers of the PRC are desperate to sell the products that their workers make at always low prices in order to stay as close as possible to full employment.

The task is primarily one of making perceptions agree with reality, and only secondarily one of changing reality.

If Brad is correct (but see Brad Setser for a counterargument to the diverse benefits, concentrated costs claim), the task before the Democratic Party is, I think, two-fold. First, there are both winners and losers from globalization and the groups that are negatively impacted cannot, and should not, be ignored. Policies such as universal health care, portable retirement packages, and other changes that reduce the cost of unemployment are a place to start. Creating the perception that the Democratic Party is strongly devoted to helping those who are hurt by globalization would be a positive step to take.

Second, the Party must do a better job of explaining how workers and their families benefit from open markets so that, as Brad DeLong put it, "perceptions agree with reality." This is not an easy task, but it is essential that Party leaders explain how globalization benefits typical households.

Paul Krugman explains the difficulty in a passage from his textbook on international trade:

[P]olicies that impose large losses in total, but small losses on any individual, may not face any effective opposition. ...[T]ake the example of the sugar import quota. This policy imposes a cost on a typical American family of approximately $25 per year. Should a consumer lobby his or her Congressperson to remove the quota? From the point of view of individual self-interest, surely not. Since one letter has only a marginal effect on the policy, the individual payoff from such a letter is probably literally not worth the paper it is written on, let alone the postage stamp. ... And yet if a million voters were to write demanding an end to the quota, it would surely be repealed, bringing benefits to consumers far exceeding the cost of sending the letters. ...[T]here is a problem of collective action: While it is in the interests of the group as a whole to press for favorable policies, it is not in any individual's interest to do so.

The problem of collective action can best be overcome when a group is small (so that each individual reaps a significant share of the benefits of favorable policies) and/or well organized (so that members of the group can be mobilized to act in their collective interest). The reason that a policy like the sugar quota can happen is that the sugar producers form a relatively small, well-organized group that is well aware of the size of the implicit subsidy members receive; while sugar consumers are a huge population that does not even perceive itself as an interest group. The problem of collective action, then, can explain why policies that not only seem to produce more costs than benefits but that also seem to hurt far more voters than they help can nonetheless be adopted...

What does this tell us? First, if Democratic Party leaders are organized and united on these issues, they have a better chance of achieving their goals. No surprise there. But more importantly, the benefits should be explained not in broad sweeping terms as is generally the case, but rather in terms of how it benefits smaller groups within the Democratic Party. The message needs to be targeted to specific groups. How does globalization benefit consumers, the poor, small businesses, and so on, and how will those who are harmed be protected? There are good answers to all of these questions, but it will require politicians to learn about and explain the answers to their constituent groups rather than caving into the loud and well-funded voices of special interests.

This is a guest contribution as part of NDN's ongoing debate about the economy. Read our new report The Bush Economic Record here.