Globalisation, powered by free trade and immigration, has produced unprecedented economic progress all around the world, led to enormous advances in all spheres of human endeavour, and lifted billions out of poverty: the proportion of the world population living in extreme poverty was 90% two centuries ago, and 75% in 1950, but today, only 10%. On average, over 200,000 people are lifted above the poverty line every day.
The average global life expectancy was 73 years in 2019—twice what it was a century ago. In 1913, global GDP was $4.74 trillion; in 2013, it was $101.27 trillion. And the global Gini index, an indicator of economic inequality, fell from 69 in 2003 to 65 in 2013.
In the United States, real GDP per capita rose from around $18,000 in 1960 to almost $60,000 in 2019. In the last 50 years, the income of the poorest 20% of Americans has risen by 80%. The US Gini index for after-tax income has remained flat for the last several decades. And the share of households earning more than $100,000 increased from just 8% half a century ago to about 30% in 2017 (in 2018 dollars).
But the story is more complex than these numbers suggest. Globalisation has also disrupted economies, putting large numbers of people out of work in certain sectors, and this has profoundly shaped our politics in recent years. Until recently, mainstream parties in the western world had promoted globalisation while failing to account for its negative local impacts, with the result that far left and far right political parties began to converge ideologically on populism, and voters became susceptible to populist messages, which tap into the emotions of citizens who feel that their interests have been neglected by the existing political establishment. Thus, globalisation has powered the resurgence of national populists who have run on anti-immigrant and anti-free-trade platforms in the United States, Brazil, Hungary, Turkey and elsewhere. Does this make globalisation a net positive or a net negative? Can we find a way to enjoy its benefits while safeguarding against the disruptions and losses it brings to some workers?
Economists and policymakers have traditionally evaluated policies from the point of view of utilitarianism, a philosophy developed by Jeremy Bentham and John Stuart Mill, among others. Its principal idea is that public policy should aim to maximise wellbeing for the greatest number of people. Many fundamental economic theories, such as the efficient market hypothesis and the theory of rational expectations, are based on the assumption that individual human beings rationally seek to maximise their individual wellbeing, and that, when everyone acts this way, it results in the greatest good for the greatest number.
Their adoption of the utilitarian notion of Homo economicus: a vision of humans as self-interested “rational utility maximizers,” led policymakers to take a reductionist view of people’s preferences, in which material self-interest trumps all other considerations. This led them to overlook other quintessential human values.
As Paul Collier writes in The Future of Capitalism:
The emblematic illustration of this confident paternalism was post-war policy for cities. The growing number of cars needed flyovers and the growing number of people needed housing. In response, entire streets and neighborhoods were bulldozed, to be replaced by modernist flyovers and high-rise towers. Yet to the bewilderment of the Utilitarian vanguard, what followed was a backlash. Bulldozing communities made sense if all that mattered was to raise the material housing standards of poor individuals. But it jeopardized the communities that actually gave meaning to people’s lives.
Therefore, utilitarian policymakers are willing to sacrifice the interests of the minority for the sake of overall progress. By contrast, populist policymakers focus on improving the economic position of certain groups, prioritising the interests of the minority over the majority, which tends to lead them to oppose free trade and globalisation. Both populist and utilitarian approaches harm some groups while benefiting others, and both seem blind to the negative consequences of their policies. Utilitarians dismiss the disruptions caused by globalisation as inevitable transition costs, while populists simply deny that halting or impeding free trade and globalisation does anyone any harm worth caring about.
For decades, until recently, the near-consensus of policymakers was to take a utilitarian approach, supporting globalisation, free trade and immigration. However, the costs it imposes on a minority of people may be responsible for the current resurgence in support for national populism.
Globalisation and Its Costs
The evidence is beyond doubt that, on the whole, free trade and openness to immigration bring enormous macroeconomic benefits to all countries. Therefore, from a utilitarian point of view, these policies should be pursued because they promote the greatest happiness of the greatest number.
However, these policies do not necessarily promote the wellbeing of all citizens within particular countries. For example, while, in Asia, inequality has fallen and incomes have risen dramatically, in some areas in the western world, millions of jobs have been either outsourced or eliminated because of increased competition from workers in other countries.
Consider the following. Before China joined the World Trade Organization, the US had around 400,000 textile production jobs. But after America opened its markets to China’s imports, much of the US textile industry went bankrupt and thousands of Americans lost their jobs—although American consumers benefited from falling prices and the American economy shifted to a less labour-intensive and more knowledge-based economy.
The jobs that were lost represented only about 2.7% of the 150-million-strong US labour market, but those job losses were suffered mainly by white men without college degrees who live in economically depressed rust belt states: this demographic was a large part of Trump’s base. This group’s economic woes have arguably contributed to rising rates of what Anne Case and Angus Deaton have called deaths of despair among its members since the late 1990s.
These side effects explain why many see globalisation as a main driver of reemergent populism. A study by David Autor and colleagues suggests that there is a statistical association between experiencing personal economic shock and supporting populist politicians. In addition, areas with higher levels of support for Trump in the 2016 US presidential election had the highest number of job losses caused by competition from Chinese imports. Based on these numbers, the study authors estimate that, if the penetration of Chinese imports into the US had been 50% lower, Hillary Clinton would have won the key swing states and been elected president. Other researchers have reached similar conclusions regarding conditions in the United Kingdom and continental Europe.
Only the utilitarian approach of promoting globalisation and free trade improves the well-being of everyone, everywhere, over the long run. By contrast, populist and protectionist policies, such as Trump’s trade wars, have historically led to worsened economic situations or crises such as the Great Depression. Nevertheless, because it’s important to mitigate the negative consequences of utilitarian policies, even while we double down on globalisation and free trade, we need to enhance the social safety net for those likely to be harmed by those policies. In this way, utilitarian policies can be modified to truly maximise societal welfare.
America’s welfare system, in its current form, is designed to mitigate the consequences of temporary layoffs—and is thus unable to help individuals cope with the structural changes that globalisation brings. Instead of dismissing these changes as inevitable transition costs or foregoing the benefits of globalisation for the sake of a minority, we should try to make globalisation work for everyone by taking concrete actions to extend help to those who are hurt by it.
A Better Approach
As Glenn Hubbard writes in National Affairs:
The nation’s principal social-insurance programs were not designed for a labour market in which structural changes in values of skills dominate cyclical concerns about temporary layoffs. A richer vision of social insurance—one that consists of an economic response to individuals’ absorbing the costs of large risks from disruptions beyond their control—is required.
One option is to provide some kind of universal basic income. For instance, the platform of the 2020 Democratic presidential candidate Andrew Yang included a monthly $1,000 freedom dividend for each adult. Milton Friedman, one of the most famous proponents of free markets, proposed a so-called negative income tax, by which the government would give money to citizens whose income was below a certain threshold. Since, at some point, artificial intelligence and robotics will probably eliminate millions of jobs, including high-skilled ones, some sort of universal basic income is likely to eventually become necessary; but at present, globalisation is still having a relatively limited and localised impact, making support for universal basic income less likely in the near future.
For now, the most important step that governments can take is to offer displaced workers financial assistance and training to help them transition to jobs in different fields. It isn’t a coincidence that the countries in which mainstream parties have managed to stay in power—such as Germany and France—have generous welfare policies. In the US, it would make sense to expand the Trade Adjustment Assistance program (TAA), which has improved the employment prospects of left-behind workers by offering retraining and other kinds of assistance. According to one study, “TAA-trained workers have $50,000 higher cumulative earnings” than those who did not participate in the programme, a statistic resulting from “both higher incomes and greater labor force participation.” Unfortunately, support for this programme is currently anaemic.
Pro-welfare sentiment is not necessarily anti-market. The libertarian economist Richard McKenzie argues in The Fairness of Markets (1987) that welfare benefits are essential to the operation of free markets because, without them, those who have lost their jobs due to globalisation, immigration and automation will vote in politicians who will implement protectionist and other anti-market policies—and, in the long run, such measures end up costing society more money than welfare does: “The welfare state is not only desirable but most likely necessary for the continued collective acceptance of the market system. Welfare, albeit limited in scope and amount, meets goals of efficiency (as economists define efficiency) as well as equity and fairness.”
What makes free and open societies successful is their ability to learn from mistakes. Donald Trump’s 2016 election and the recent successes of other populist politicians have drawn attention to the problems in the current system. Unless we take action to solve the underlying issues that have fuelled the revival of populism on both the left and right, populist policies could become dominant—with potentially destructive consequences.