Globalization & Inequality

On July 17th 2006, Mark Thoma had some great thoughts on globalization and increased inequality.

What should we do about globalization and growing inequality? Making a comparison to the medical profession, it may be that while we can diagnose some conditions clearly, we have no effective cure for them (though there are economists hard at work daily hoping to change that, just as medical researchers are trying to find cures for their set of ills), it requires waiting for the system to "heal" itself over time.

Economists can suggest healthy diets (e.g. monetary and fiscal policy), but that is no guarantee that the economy will not get sick anyway and when it does, we don't always have the cure at hand, though I do think we have, for the most parts, prescriptions to help the economy heal faster. But people want instant cures, a pill to take that makes it better now, not a long difficult road to recovery.

Education, worker retraining, those sorts of things aren't cures, they simply (hopefully) speed the healing process along, and sometimes that can be a much longer process than any of us like.

I know a lot of you like to beat us up because we don't have the answers, and it's useful to motivate us to look all that much harder, but I'm not any more embarrassed for our profession because we can't solve every problem than doctors are who can't cure the common cold. And (this will make some of you mad) they, like us, have to listen to a lot of folk remedies that supposedly work, be told they are idiots, etc. And though every once in awhile the folk remedy is valid, generally the suggestions come from people who really don't understand all facets of the problem. You can't argue with them, they really believe their folk remedies work, so it's best to listen to them attentively, smile and nod, and not engage.

But that's pessimistic. My economics tells me that there will be winners and losers from things like free trade and that the winners will [generally] have enough to compensate the losers and still be better off themselves. So my solution would recognize this reality and, along with all the things we need to do to help the economy heal, it would also redistribute income in a way that produces far more winners and far fewer losers. But I don't think we have the political will to do that yet, the understanding that everyone will still be better off after the redistribution, though the the GOP's change of heart to allow consideration of a vote on the minimum wage is one sign that this is being recognized.

Policies can protect people from losing jobs, but I think that's a recipe for stagnation in the long-run. Policy can help people get new jobs faster, that's where education, retraining, etc. come in, but that hasn't worked as well as we would like (but that's not an excuse to stop trying and my solution involves these things even though so many of you object to such policies). Policy can raise income for lower income groups, that's where minimum wages, negative income taxes, redistribution policy, etc. come in. These help ease the globalization transition by transferring income to affected groups and hence make it easier to accept politically, but it's not clear they make the transition occur any faster.

Finally, we can hope the electoral process results in a change in the use of political power to bring about transfers of income toward higher levels. We have enough trouble dealing with the economics driving such changes, we don't need legislation that makes it even worse.

I think part of the silence is that economists have no instant cure for problems that occur with globalization. We think it's necessary for our long-run health, and we can recommend policies that aid the recovery process, but perhaps our silence is because we've been waiting for some economist working hard to have a "Eureka" moment and announce to all of us a cure is at hand. Until that happens, we will be stuck with less satisfying rehabilitative solutions.