Sunday, December 11, 2016
We need more globalisation and technology, not less
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

These are risky times, in which the dangers of policymakers getting things badly wrong are greater than for a very long time. The lure of populist policies, which appear to help beleaguered voters but will end up doing them harm, is tangible and dangerous.

A few days ago Mark Carney used a speech in Liverpool to pick up on one of Theresa May’s themes. The prime minister, in her Lord Mayor’s banquet speech last month, had repeated her argument that globalisation has left too many people behind.

The Bank of England governor, while absolving monetary policy of the blame the prime minister tried to heap on it a couple of months ago – and doing so quite successfully – also had worries about globalisation. Many people in the advanced economies, including Britain, lament a loss of control and have lost trust in the system.

And, as he put it: “Measures of aggregate progress bear little relation to their own experience. Rather than a new golden era, globalisation is associated with low wages, insecure employment, stateless corporations and striking inequalities.”

The “left behind” arguments about the consequences of globalisation have been seen as key drivers of this year’s dramatic political developments, including the Brexit vote and the election of Donald Trump. As Carney noted, the fact that a more open and connected world economy has lifted over a billion people out of poverty and resulted in a considerable rise in living standards – world gross domestic product per head is two and a half times what it was in 1960 – cuts little ice if people in Britain are in the first “lost decade” for real wage growth since the 1860s.

Add in technology and the rise of the robots, where Carney quoted his chief economist Andy Haldane’s figure that up to 15m current British jobs are at risk of automation, and progress appears to bring only bad news. Automation and its possible consequences for employment is worth a piece on its own, which I shall save for another day.

There is, however, a risk of serious misdiagnosis here. Carney is fundamentally sympathetic to globalisation and new technology, as is the prime minister. Both are right to address the need for growth, not just to be more inclusive, but to be seen as so. “It is not surprising that people are largely ignoring pieties about the virtues of open markets and new technologies,” he said.

Whether ignored or not, however, some things are fundamentally true. One is that trade, and other forms of globalisation, brings benefits, and opportunities for growth, that far outweigh the costs. The other is that new technology is much more likely to be productivity-enhancing, something we desperately need at the moment, than job-destroying.

So how do we answer the arguments against globalisation? The past few years, far from representing a high watermark of globalisation, with jobs being outsourced right, left and centre to lower-cost locations, has seen something of a pause in it.

Just as world trade growth has been subdued since the global financial crisis, so have other manifestations of globalisation. As far as trade is concerned, where it has struggled in recent years even to grow as rapidly as global gross domestic product (GDP), we need more globalisation not less.

Trade is a generator of stronger productivity. Open economies do better in raising productivity, and thus living standards, than countries which close themselves to the world. As the governor argued, the fundamental challenge for monetary policy, and the need for both near-zero interest rates and unconventional policies such as quantitative easing, has been to try to offset the malign effect of a 16% shortfall in productivity since the crisis.

Where does that shortfall come from? Some of it arises from the fact that the globalisation impetus has slackened. Some of it has been due to a reluctance by firms to invest, and in some cases an inability to raise the finance to do so.

For both productivity and living standards, however, a far better culprit than either globalisation or technology is the fact that we have been living with the hangover of the biggest financial crisis in history. It has always been known that the crisis would reduce living standards below what would otherwise have been expected, and that these effects would last a number of years.

The fiscal hangover, mainly as a result of the crisis’s impact but also the public spending boom that preceded it, meant that this expected hit to living standards was compounded by the post-2010 “austerity” years of tight control of government spending.

The banking hangover from the crisis meant that the normal process of creative destruction in and after a big recession – the inefficient being shut down and replaced by new and vibrant businesses – did not operate as it normally should, because lending was rationed.

The performance of real wages in recent years better reflects a post-crisis hit than an ongoing squeeze from globalisation. Real wages fell from 2008-9 to 2013, but have since been recovering. If we are heading for another squeeze now, that will be largely the consequence of the pound’s post-referendum fall.

Broader measures of household income have held up better, partly because of government actions like the raising of the personal income tax allowance, partly because of low interest rates. So real household disposable income per head is 8% above pre-crisis levels. It fell in 2011 and 2013 but rose strongly last year.

As for employment, this remains a very considerable success story. Whether it is measured by the workforce as a whole, or UK-born, or UK nationals, there has never been a higher proportion – roughly three-quarters in all cases – of people of working ago (16-64) in work. This is a vibrant job market, not one where jobs are being stolen by globalisation or robots.

Averages, of course, are averages and some will say that their experience comes nowhere near matching those averages. Some will choose to look at the labour market through a Sports Direct prism and the rise of insecure jobs but that, while regrettable, is not representative.

I am not falling into the trap, identified by Carney, of suggesting we have never had it so good. But things have been a lot better in the wake of the crisis, than they might have been. Anger about the crisis is still justified. Blaming globalisation and technology is mainly not.

In fact, the argument needs to be turned on its head. We need more globalisation and technology to raise productivity and living standards, not less. And in these strange times we need to keep saying it.