How The 2016 Campaign Has Rewritten Debate On Economics
PARIS — It all adds up to a major mea culpa. For the most prominent economists, the U.S. presidential campaign feels like an act of contrition. Yes, we were wrong about the virtues of global free trade. No, French philosopher Montesquieu's beloved doux commerce ("gentle commerce") thesis wasn't necessarily a win-win recipe for all.
There are failures. There has been significant collateral damage. Nowadays, even newspapers such as The Wall Street Journal, or the British Financial Times and The Economist — true bastions of free market liberalism — admit it. That, in itself, is quite a new development. The way we perceive free trade, or globalization, will never be the same as it was before this presidential campaign. Donald Trump's and Bernie Sanders' pointed criticisms of the system resonated with voters, whether Republican or Democrat.
Their criticisms go far beyond economics. They're part of a broader protest movement against globalization and increasingly porous national borders, with the resulting migration flows, trade competition and uncontrolled capital flows. Dismissing these stances as "populist" is pointless. It would be better to question the root causes of the angry chorus that is being heard from both sides of the Atlantic. What is it all about, then? It is likely a reaction to an ever-growing sense of vulnerability stemming from the combined impact of the technological revolution and globalization. Some of the effects are well known: an increase in inequalities, and a stagnation of middle-class incomes.
Let's briefly pay homage to those non-conformists who dared express doubts about the absolute value of free trade, which was trumpeted incessantly over the last 25 years. Their warnings were prescient, and today, they're part of mainstream analysis. Even The Economist, the temple of free trade dogma, admits it: Economists are having mixed feelings about the potential universal benefits of an ever-freer world trade system.
In an editorial published on April 2, The New York Times acknowledges that "American policy has allowed the winners to keep most of the spoils of trade and has given the losers crumbs â€¦, as Mr. Sanders has correctly pointed out."
"Free trade has always created losers, but now they seem to outnumber the winners," writes Philip Stephens in the Financial Times. He adds, "There is nothing populist about noticing that globalization has seen the top one percent grab an ever-larger share of national wealth."
"Has the protectionist moment finally arrived?" asks Nobel Prize-winning economist Paul Krugman in The New York Times.
And his answer is a resounding "no." If there exists a consensus among the world's English-speaking economists Â— be they liberals or social democrats — it could be summed up in a few sentences.
First, the globalization of the post-1945 economy, resulting from the dismantling of national borders, benefited everyone by creating incredible wealth. As a result, equality improved between developed and developing countries.
Second, re-establishing trade barriers, as Trump advocates, will not stop the decline in U.S. manufacturing jobs. All basic manufactured goods are now produced in transnational systems. And there will be no return. Developed countries will never benefit from massive industrial resettlement.
Third, globalization will not stop — it will last. Supported by technological innovation, globalization is driving the growth of developing economies, and developed countries need these developing markets, but they will have access to them only if they keep their doors open.
Creating a new welfare state
But while free trade is here to stay, it is in need of a new legitimacy in developed countries. The success of the various protest movements that have emerged both in Europe and the U.S. proves this point and forces hardline economists to face the facts: namely, that globalization, technological innovation and China's economic rise serious damaged Western countries, contributing to unemployment, greater income inequalities and a lower average wage. The European and American public will no longer swallow the nonsense they were fed twenty years ago, when they were assured that those who lost their manufacturing jobs would find equally well-paid opportunities in the service sector. That was a enormous lie.
The most oft-cited reference work on the subject was published by three famous economists: David Autor, David Dorn and Gordon Hanson. They studied the impact of Chinese imports on the domestic U.S. market, and the results were unambiguous — immediate job loss. The promised "adjustment," whereby manufacturing skills were supposed to lead to success in the service sector, did not happen. Over a decade, perhaps longer, jobs were lost, new opportunities got harder to come by and the unemployment rate peaked.
There is a risk, now, of lapsing into protectionism. That would be detrimental to both the European and U.S. economies: It would prevent the implementation of new trade agreements that would mandate a minimal social safety net, as well as environmental constraints. The solution does not lie in policies that would "protect" national frontiers, but with those that help the people hurt by globalization. A new welfare state needs to be built, adapted to the social issues created by the irreversible economic integration — and the Left should be in charge of establishing it.