Saturday, August 27, 2016

Globalization Requires A Larger State In Order To Avoid Populist Backlash

We have seen the rise of Donald Trump in the US as well as the rise of populist parties in Europe. Immigration and trade agreements have been under attack for good reasons.  Globalization increases the size of the economic pie but it is not equally shared.  The losers from globalization have been getting a smaller share of a bigger pie. The global economic expansion was arrested by the financial crisis and that made things even worse for the losers.  Monetary policies, which have been the favored response,  increased the value of assets held by those who benefited from globalization but that only made it more expensive for the losers to purchase housing and financial assets which have increased in value.  The political backlash that we are seeing should not be surprising.  It has happened before under similar circumstances.  This article provides us with a history lesson that has been largely ignored by economists and the political leadership.  Globalization could easily be reversed in dangerous ways unless something is done to deal with the unintended consequences of poorly managed globalization.

One of the reasons for the political backlash is that our political leadership views the state and markets as substitutes.  Their focus in on reducing the size of the state and privatizing many of the activities of the state.  The market and the state are complements and not substitutes.  We will continue to see backlash, and threats to market integration,  unless the state is expanded to address the needs of those who been left behind by poorly managed globalization. If the Tory government in the UK wanted to remain in the EU, it was a bad idea to reduce the level of public services when many were worried about sharing those resources with immigrants. It would be unfortunate if rational responses to globalization turned into the irrational forms of populism that we have seen in the US and in much of Europe.

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