The Economist: How to help places hurt by globalisation

From back in October, a fantastic two-part write-up (Leaders piece + long-form essay) by The Economist on globalization and how to cushion the economic blow for disaffected regions.

In summary: Prior to full-scale globalization regional inequality would converge over time between and within industrialized nations as investment dollars would flow to cheaper, undervalued regions; poor countries became poorer on a relative basis. Full-scale globalization reversed this trend, driving regional inequality within industrialized nations and allowing poor countries to catch up to rich countries. In short, rich countries trading with poor countries allowed wages to converge.

Historically those in disaffected regions would simply move. But The Economist cites demographics (i.e. childcare and elderly parent care) and the welfare state (i.e. living on a fixed income in an economically depressed area is doable from a cost perspective) as chief drivers of declining mobility, creating a policy nightmare. Akin to the fact that no amount of sit-ups will specifically remove belly fat – only total body exercise and dieting – within reason, no amount of federal dollars (sit-ups) is going to replace the free market (total body exercise and dieting) in reviving a specific region.

While South Carolina’s successful enticement of BMW to build what is now its largest plant in Greenville, reviving a once moribund region into a manufacturing powerhouse, is a tempting model for politicians seeking to boost disaffected regions, according to The Economist’s data it is not a sustainable template across the board. Instead, The Economist proposes greater proliferation of the latest technologies and education.

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I would be interested in a deeper dive by The Economist into the details of how the welfare state has limited mobility. Even if one has “free” healthcare via Medicaid, how does one sustain a lifestyle on other forms of fixed income? Food stamps? Unemployment insurance? Clearly I need an education on the extent of the welfare system, as I was under the impression it was largely temporary in nature, and designed to help precisely those hurt by globalization as they transition to new employment. At face value, The Economist makes it sound as if a vast swath of individuals are living off of the welfare system, which is unacceptable.

The role of the federal government is to provide goods and services that do not meet the free market’s “return on investment” hurdle rate. The social safety net fits squarely within the confines of this role, and it is absolutely within everyone’s best interest to support those hurt by globalization: but temporarily. Nobody benefits from a true “nanny state”.

My globalization policy prescription for disaffected regions would be three-fold: highly targeted, but temporary transition assistance + a reeducation program + (adopting The Economist prescription) highly targeted, but specific regional infrastructure and technology stimulus. The transition assistance would last for no more than a year (obviously this would be adjusted based on expert input); the reeducation program would be along the lines of the G.I. bill, but such that it could not be gamed (i.e. my cousin attended various trade schools simply for the sake of milking the program with no intention of utilization); and the regional infrastructure/technology stimulus would be in the form of a tax credit matching program that incentivizes states to attract companies such as BMW and various new technologies (very, very loose form thought that needs far more development).

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After all of the above reading, thought, and analysis I am still left thinking that we need a far more in depth “quality-adjusted” analysis of globalization. So American corporations traded with poor countries in order lower their cost bases; but to what extent was quality sacrificed? An American-made washer/dryer set used to last for 20 years – now probably 10. Is the decline in purchase price such that two purchases instead of one over the course of 20 years, in inflation-adjusted terms, such that American consumers are net better off, including the economic cost to disaffected regions? Like measuring the long-term all-in cost of climate change, the calculation is extraordinarily difficult.

But at minimum I believe politicians owe it to the electorate to establish a globally-credible measure of quality-adjusted trade. This calculation would be far simpler and easily digestible to the vast majority of citizens.

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