'Stop Calling Me A 'Loser' And Start Doing Something Instead'

07/12/2016 17:39

The urgent need for a better approach to adjusting to globalisation

Mark Carney did it this week. The day before it was the Chief Economist of the IMF. Rather than merriment 'tis the season for global economic leaders to decry the inequities of globalisation and declare that more needs to be done to help the victims of change.

They are channelling a new mood of introspection. Take part in a post-Brexit, post-Trump discussion with leading British or American economists and -- once you get past the angst and puzzlement -- you can be sure that you will hear repeated reference to the imperative of 'compensating losers'.

It is the ubiquitous catchphrase that nods to the fact that economic openness will result in casualties and implies support for doing something about it -- without saying what. Whether wittingly or not, it serves as a great get-out clause that enables many of our finest economists to side-step the messy business of working through how, in reality, to support people and places affected by structural shifts in the global economy.

Until recently the typical stance on free trade taken can (only slightly unfairly) be characterised as: it raises productivity and in aggregate makes us much richer; alas, there will be some losers; but not so many and they'll soon recover; schemes to help them tend to be messy and possibly counterproductive; let's move on. Even now this would still be fairly common (though of course some have long railed against this outlook).

From the vantage point of late 2016 this aversion to grappling with these gnarly distributive and policy questions looks like rather more than a minor collective professional oversight. Even before this year's seismic political events, crucial new research shook up complacency over the downside of trade as it dramatically revised up the estimates of the costs of the 'China Shock'. David Autor and colleagues have shown that the adjustment process is 'stunningly slow' with wages and employment in affected areas affected over the long-run. (Other recent work highlights the impact of import competition on job-polarisation in European countries or on voting behaviour not least in the recent Brexit vote).

None of this is to say that trade has been the only or even largest factor behind trends such as the decline of manufacturing -- automation probably takes that prize (though the two intertwine). But that will be of little comfort to those on the receiving end of additional pain arising from foreign competition who face losses that are large, persistent and dwarf compensating payments. Nor, to state the obvious, can the burden be measured simply in terms of earnings forgone: identity, status and the wider social fabric -- as much as wages -- are often the casualty. And being told you're a 'loser' now eligible for welfare really won't feel much like 'compensation'.


Credit: Shoreway Sean, under Creative Commons license

There are, of course, many serious economists doing all manner of relevant work -- say the returns to training to improving progression at work -- that provides an insight into how to assist workers and communities adjust to shocks, whether they come in the form of trade or technology. But there are precious few seeking to put all these elements together to provide a sense of the overall policy regimes best placed to help people and places rebound.

One consequence is that a generation of politicians and policy-makers look exposed. Even as they strain for new things to say they find themselves tethered to good-times assumptions forged in the 1990s when openness, macro-stability and flexible labour markets -- leavened with tax credits and investment in skills -- were thought to be a reliable recipe for a 21st Century economy that works for all. Britain is hardly alone in this regard. As the US economist Jared Bernstein put it last week: 'Yes the Rust belt demands an answer -- but does anyone know what it is?'

One thing we should know, however, is that it is wise to exercise caution in relation to familiar lines of argument which, though partially correct, fall short of offering a 'big solution'. An example is the belief that all policy can really do is help people leave affected areas. Geographic mobility is a fine thing and we could do with more of it in the UK (and US). But are we really going to argue that the primary answer to the problems of post-industrial northern towns is for an ever larger proportion of prime-age workers to exit? The political fallout of such an approach has never looked uglier.

Another familiar view is that compensating losers is really all about having a strong welfare system that looks after people and places that can't cut in the market. Three cheers for the idea of a robust social security system. But the notion that welfare spending is the route to rejuvenating economies on the wrong side of sweeping import competition is a non-starter. And then there is the perennial call for re-skilling. Again, there is plenty more that could be done via training (and gutting the adult-skills budget is a terrible mistake). Yet we ask too much if we expect it to be our central response to structural shifts in demand in a local economy. Nor does it pass the political sniff test. One of the many hard-lessons coming out of the recent US Presidential campaign is that you can't fight big lies like 'mines will be re-opened' or 'manufacturing jobs re-shored' with small pledges to retrain displaced workers.

Imaginative work on the future policy landscape is sorely needed which combine sustaining demand in struggling economies with new thinking about the types of combined interventions needed to provide them with at least a chance of longer-term renewal. Among many other things, it's hard to see how this could mean anything other than a dramatic upward shift in our ambitions for infrastructure investment as well as a willingness to depart from standard cost-benefit approaches that will dictate that the priority should be high-growth areas (a point Diane Coyle makes well).

Those who (like me) believe that open economies remain the best way of securing broadly-based prosperity need to take these wider questions of policy design and public consent seriously. Far more so than has been the case over the last generation, and in ways that will upset aspects of conventional thinking. After all, it is the worldview of those who believed that the need to 'compensate losers' was something of a side-show that has suffered the biggest defeat of all this year.

Gavin Kelly is Chief Executive of the Resolution Trust

This blog first appeared on Gavin Kelly's blog, and can be read here