Populist Headwinds

GLOBALIZATION’S POLARIZING EFFECTS ARE NOW CAPITALISMS NEWEST CRISIS

By Adrian Pietrzak

      When Donald Trump announced his candidacy back in June of 2015, insensitive remarks and a deviation from standard political decorum should have been the most anticipated addition to the already noisy political ruckus. Few foresaw that the billionaire who has reaped the rewards of global economic liberalization would turn against his golden-egg laying goose. In a dramatic (and well documented) turn of events, Donald Trump has transformed the party of free trade and entrepreneurship into the one defined by protectionism, skepticism towards globalization, and reversion to an old order of economic production: a role traditionally reserved for union-loving, “fair trade” Democrats. A political void emerges, and few are willing to publicly support globalization.

A RUST BELT PARADOX: EVERYONE LOSES

     From above, disassociation from the globalist consensus that has held in centrist politics seems bizarre. A slew of new technologies, cheap consumer goods, and product differentiation has led to massive aggregate welfare gains. Supporters of trade liberalization look with awe upon consumer advances. Consumers today can purchase smartphones with more computing power than the computers which put man on the moon, all with a price less than the first VCR players. Few economists dispute that the benefits of trade liberalization far outweigh the costs. In some sense, this consensus is so ubiquitous that it is assumed as a fact; one of the primary assertions of nearly every economics textbook is some notion of trade making everyone better off.

     Indeed, this assertion still holds. But it is blind of the political consequences. Whereas economists tend to think in terms of long run welfare, politicians’ horizons are often limited to their next re-election cycle. Angry voters who are threatened by globalization will most certainly punish their politicians accordingly. Increasing import competition and employment vulnerability have been linked with lower support for incumbent candidates. Moreover, populist parties, especially on the right, gain from this uncertainty. And somewhat surprisingly, this phenomenon is not just limited to those most directly affected. Voters are three times more likely to respond to their local environment over their own financial situation. As globalization disproportionately impacts small cities with concentrated manufacturing industries, even the illusion of uncertainty can create dramatic pressure for politicians to deviate from their initial stance.

POLARIZED ECONOMY, POLARIZED POLITICS

      As politicians shift to protectionism, it becomes all too easy to discount such moves as simply opportune.  While globalization certainly has short term effects on those laid off and the community around them, globalization may exaggerate broader economic trends. For one, while globalization may encourage more productive allocations of production due to foreign competition, it may also lead to the reverse effect in the long run. Initial improvements in welfare due to increased competition may lead to only a select number of firms getting ahead over their competitors. These firms, growing too large, become inexplicably linked to national welfare. They become the classic case of “too big to fail,” and, through either market or governmental exploitation, may end up eliminating any welfare gains they initially produced.

     Not only are bigger firms problematic for welfare in the realm of consumer pricing: they are also linked to more polarized wages. Globalization has been partially to blame in a slew of phenomenon associated with income inequality. For one, workers’ wages may be polarized due to vertical specialization. Globalization pressures firms to specialize in highly skilled labor, outsourcing the rest. Moreover, fast changing technological needs are creating a huge markup between the skilled and unskilled, as the educational system struggles to fill the labor market with enough skilled workers to satiate demand. As the wages of a new, skilled, and urban class are pushed upwards and the rest downwards, wages are increasingly retreating from the middle. And a hollowing out of the middle class is not just an inconvenient trend; it may pose as a serious threat to future economic growth.

CAPITALISM’S NEWEST IDENTITY CRISIS

     These developments are not just new challenges; they may present themselves as Capitalism’s newest crisis. Populists have increasingly proven that globalism makes for a good political scapegoat. Moderates, out of fear of political retribution, have fled from the center. Yet, this political polarization carries the threat of destroying the current economic order. The June 2016 Brexit vote proves that the demands of the fringes are not to be taken lightly. Just as authoritarian and populist groups seized governments following the Great Depression, today’s populists may pose the same threat to a globalizing world.

     Just as Keynes was once concerned with anti-capitalist sentiments, so must we be with the anti-globalists. For one, we must acknowledge that there are indeed winners and loser to increasing trade liberalization. Moreover, in order to adapt, governments must take aim by promoting reeducation programs, especially for those most affected by losses in the manufacturing sector. Governments should help promote globally oriented economy through science and infrastructure investment. Yet, we must also control the dangers of increasing market power. It is not enough to simply repeat that trade makes everyone better off. In the short run, we must redistribute the skewed gains of globalization for its long run benefits to truly come to fruition.

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