Many Americans today believe that global free trade is responsible for the wage stagnation and inequality that plagues the middle and lower classes. Is it? Not really.
Globalization! Globalization! Booga booga booga! The generalized backlash against globalization has been cited as the underlying reason for Brexit, Donald Trump, and the wave of right-wing populism now sweeping much of the Western world. (Deutsche Bank, for example, has publicly declared that globalization has peaked.) I would dispute this only in the sense that I doubt the vast majority of voters can give a coherent explanation of what they mean by “globalization,” except for “god damn foreigners stealing my job.” People are mad at inequality; people are mad at decades of wage stagnation; people are mad that the chance of living better than their parents did is rapidly shrinking; people in certain industries and in certain places are mad that those industries and places have been hit by job losses. But “globalization” is much too broad a buzzword to get at what has essentially been a 30-year project to deregulate industries, weaken labor, and generally ensure that the gains from globalization all flow to the very rich, rather than being shared broadly.
Free trade, in aggregate, is good—the growth of global trade since the 1800s is correlated with a corresponding widespread growth in incomes. But humans do not live in aggregate. Humans live their own lives, and the flaw in the way that globalization has been pursued in recent decades is that no real plan was put in place to take care of the inevitable losers of free trade. Offshoring manufacturing jobs certainly increases efficiency and profits, but some of those gains must be put back into a program of safety nets to take care of the workers left behind. Had this been a basic tenet of America’s free trade policies from day one, we would not be where we are now. But it wasn’t. We acted as if economic growth that accrued almost exclusively to the rich was the same as economic growth that benefited everyone equally. It wasn’t! And now everyone left behind is reasonably pissed, and the entire vague concept of “globalization” is being demonized, though at its root it might be more accurately described as dressed-up xenophobia than as any real sort of economic critique.
A new research paper by Harvard economist Elhanan Helpman attempts to quantify just how much of the wage inequality is actually caused by globalization and free trade. Helpman notes that the “college wage premium”—how much more college graduates earn than non-graduates—fully doubled from 1979 to 2012, a change that has widened and solidified the gap between the haves and have-nots in our economy. Though he finds that free trade and offshoring of jobs have “adversely affected certain workers,” he concludes that in general, the role of globalization in driving inequality is not as big as generally believed:
A major conclusion from my review of the literature is that the prevalent view that globalization is primarily responsible for the large increase in the inequality of labor compensation has no basis in the evidence. Yes, globalization impacted the wages of different types of workers to different degrees, and yes, it contributed to an increase in the wages of skilled relative to unskilled workers through multiple channels. Yet, in sum, all these effects explain only a fraction of the rise in wage inequality in rich and poor countries alike.
Technological change has affected our economy more than liberalization of trade barriers. Ultimately, though, inequality is a distribution problem, meaning that it is a political choice. As long as a rich minority has the power to design laws in a way that benefits them rather than everyone, inequality will persist.
Globalization as it has been practiced has its flaws, and it is certainly ripe for reform. But the way it has been wielded in the popular mind is as a weapon of false distraction. Low-paid workers in Mexico are not the ones responsible for the loss of your job. Rich people are.