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Globalization; Boom, Bust, Inequality & National Security


Historical Background
Globalization was an unknown word to the public until it came to be more widely used in the late '90's, i.e., the 1990's (not 1890's) although globalization was practiced to some degree during the past 500 years and deeply in the late 19th century. The question most had was "How will it affect me?" Economists proselytized that globalization, the free movement of goods, services and capital would improve (mostly) everyone's lives.

The claims to success are that it has lifted hundreds of millions out of extreme poverty. Unfortunately, it has also impoverished many, as well, and much of it in the West. And although the claimed millions have been lifted out of "extreme" poverty, there are still billions left poor, mostly bypassed by globalization. In the West, many who were middle class have moved lower either from loss of jobs, reduced wages or stagnant purchasing power. Multi-national companies, once an integral part of many communities, have left for the "greener" pastures afforded by out-sourcing and off-shoring, and personal and corporate tax havens. Some of those tax havens are located in the West; not all are in charming locations in Europe, Asia or the Caribbean.

The Theory of Economic Globalization
The essential idea underlying globalization is that when one buys a product or a service, we want to pay what that good and service is best valued at without adding the costs of tariffs used by governments to limit external competition (i.e., mostly non-domestic). Tariffs vary over a wide range, from 2% to 25% or 50% (Trump imposed tariffs on Canadian steel and aluminum) or higher. When tariffs are nominally 0%, we have free trade. Governments usually collect these tariffs, sometimes these are shared with the "harmed" domestic suppliers and others who have inveigled themselves.

Up to WWII, industrialization had occurred in nominally three main regions; the USA / Canada, Europe (Western, Northern, Central) and Japan. Of course, there were other countries which had industrial capability but not to the extent and intensity of these three regions. That changed after the Second World War when institutions and mechanisms were installed to rebuild the destruction of that conflict and develop and distribute global wealth more equitably while the consequential interdependence would presumably preclude future conflict & wars. Of course, several more relatively large scale conflicts have occurred, others narrowly avoided but many local conflicts still initiating and continuing. What is humanity without self-inflicted conflict?

GATT (General Agrement on Tariffs and Trade, 1948) and the succeeding WTO (World Trade Organization, 1995) provide the legal framework for international trade in goods, services and capital. By many accounts (mostly from economists) it has been a success. A few economists disagree; while it has been of a benefit to some, not so for many others, economists such as Joseph E. Stiglitz politely critique that globalization has been mismanaged. Stiglitz is a Nobel prize laureate in economics; he refers to himself as an economics theorist. In his latest book Globalization and its Discontents Revisited he repeats his complaints made in his prior book of similar title and rails against the mechanics and outcomes of globalization.

Comparative Advantage
This concept is embedded explicitly in the WTO rules; the notion being that if two countries make a product, one country will be "better" at making the product than the second country. But the second country may make another product "better" than the first country. Hence each country should make the products it is "better" at and trade with each other without the impostition of tariffs. This leads to economic efficiency with benefits accruing to the consumer. When multiple countries and multiple products are traded freely, then "global free trade" is implemented. When services and capital are included then globalization is whole. The development of super container ships and the internet has enabled cost effective globalization.

Absolute Advantage
For some reason, the WTO does not mention the role of absolute advantage which occurs when a country is better at providing either of all the products, all the services or, all the capital "better" than the second country or all the other countries. And tipping the scales significantly, that country, by WTO rules, does not need to provide regulations governing the environment, labor, health & safety or human rights or democracy. The notion of et cetera paribus is not a requirement when determining who is "better".

What is obvious is that comparative advantage describes the trade between developed and advanced economies such as Western Europe, USA/Canada, Japan and Korea. Germany and Japan produce, arguably, better vehicles than the USA/Canada; Germany is known for specialized & high-quality machinery, the USA for passenger aircraft, mass entertainment, raw agricultural products, innovation & entrepreneurship; Korea is an electronics and shipbuilding powerhouse; Europe and Japan for high quality steel and alloys. Purchasing power in these developed countries is nominally equivalent; the rule of law by means of laws protecting property, labor, environment and human rights are nominally equivalent.

Surprisingly, the developed & advanced countries of the USA, Australia and Canada are dominant suppliers of commodities such as oil & gas, coal, mining, forestry and agricultural products through their comparative advantage of land, climate and productivity.

Why did globalization go off-the-rails in practice when the theory was sound?

In the last twenty years, some developing countries have been able to challenge the developed countries across all products and services; that advantage is now extended to capital. The basis is the absolute advantage of wage cost and lower environmental, labour and human rights standards in those developing countries. When wages are $0.35 to $5.00 per hour and there is a sufficiently trainable and educable workforce, then advantage in primary and secondary products is assured; and services and capital follow. When workers wages do not rise, as should occur in a free market response, the advantage is maintained. Unskilled & low-skilled manufacturing and service workers in developed countries are the first to be impacted, later skilled workers are impacted. Since profit from globalization passes to the extreme capitalists in both the "developing" and "developed & advanced" countries, wealth inequality and social stratification increases. Europe may have had its nobility in the 19th century but many countries (whether Western, Asian, African; democratic, authoritarian, communist or failed) are seeing the massive inequality occassioned by the rise of the 0.1%.

The Mismanagement of Globalization
Globalization, as stated, is justified by economists on the basis of comparative advantage. Stiglitz's major complaint is that the rules of globalization, although written by the West (primarily the USA), were not written by government but multi-national corporations and special interest groups. Stiglitz is not just a grumpy old guy, he was economics adviser to Bill Clinton, and a vice-president and chief economist at the World Bank. In his book, he recounts the decline of his home town Gary, Indiana, as globalization took hold. Gary was home to the largest integrated steel mill (United States Steel Corporation) in the world and reached its peak in the mid-1950's. In 1901, Gary's population was 16,800, peaking at 178,320 in 1960. Today, it is 76,000; USSC employed 30,000 in 1970 but only 5,000 in 2015 (just before another round of layoffs).

Closer to home; plants operated by Atlas Steels, Stelco, Union Carbide (now Dow Chemical), John Deere, Columbus McKinnon, General Motors, Ford have left entirely or reduced substantially their presence in Canada for low-cost areas of Mexico and Asia.

Professor Stiglitz is very gracious in his descriptions of the architects of the WTO; while acknowledging the improvement in living standards for hundreds of millions in the world's developing countries, he bemoans as foreseen the consequences for the developed West and developing countries,too . What was not specifically not foreseen was the rising disparity in wealth between the 1%, and in particular, the 0.1% and the rest. He attributes this to the explicit greed of the multinationals and the callousness and neglect of a number of Western governments by means of not enforcing regulation nor expanding the innate rights of populations.

Stiglitz opines that the intent of globalization was to move unskilled and low-skilled labor jobs off-shore; displaced workers in "the West" would apply their skills elsewhere or be re-trained. They would be taken care of by the West's system of social democracy; except employers did not retrain or redepoly those workers and Western governments found that lost revenue from the unemployed and tax cuts for the wealthy left their public treasuries short and political will conveniently restrained by legislation. As Western economies de-industrialize, jobs created in the service sector do not pay as well, and even many of those jobs left and continue to migrate off-shore. Globalization means free movement of labour so where feasible, service sector jobs (banking, insurance, payroll, backroom IT, customer service) could be moved off-shore (workers are hired at greatly reduced cost in less developed countries).

Sting: The Last Ship
In The Last Ship Police frontman, musician, singer, songwriter Sting (Gordon Matthew Thomas Sumner) presents his story of growing up in a ship-building town in north-east England and closure of the shipyard. He lamented that the company showed no consideration for its former workforce and simply closed up and walked away.

What About National Security ?
There are general questions of the wisdom of losing capabilities across a number of economic sectors; whether light or heavy industry, manfacturing or services. These are not addressed by economists as they do not fit the conventional narrative that strong interdependencies foster good behaviour by the Parties; one only has to look at the "globalization" of the late 19th century when distance was "annihilated" by the new technologies of steam transportation and the telegraph allowing unprecedented global movement of goods, people, captital and information.

In WWI, at eight days into hostilities, the British were able to cut the five transatlantic telegraph cables running from Germany to the USA; thereafter, telegrams were dispatched by the Germans on the US transatlantic cables from Denmark and Sweden. These ran through the British relay station in Cornwall, England where they were intercepted and deciphered by the British Admiralty. The relay station was owned by a private company, Eastern Telegraph Company.

In today's globalized environment the annhilation of past technologies from the Internet of Things, forthcoming 5G communications, outsourced suppliers, transnational corporations and ease of international travel, the lessons of history should not be forgotten. The lessons of the "Cambridge Five" should be mandatory study[1].

Service Jobs, Automation & What's Coming
The reality that resulted is that service sector jobs in the West now mean fast food and grocery store cashier jobs; jobs that do not pay like manufacturing jobs once did. Financing paid well but that was restricted to Wall Street where (predatory) capitalism rules. During the financial collapse of 2008, one designed, nurtured and reaped by Wall Street, bankers received 100% on the dollar for their failures courtesy of the US taxpayer (Troubled Asset Relief Program, TARP; suddenly that money was available). The architect of this program was Hank Paulsen, US Treasury Secretary whose previous employment was as CEO of Goldman Sachs. Apparently, the US Congress did not see the conflict of interest; perhaps, dollar blindness? Banks and near banks paid their executives hundreds of millions of dollars individually for the bumper years; after the near-collapse, the Wall Streat executives were paid more millions in retention awards. Apparently, this expertise could not be found elsewhere; lucky, for elsewhere.

In developing countries, workers work the jobs of displaced Western workers for $0.35 per hour, and are fortunate to receive $1.00 per hour. The 1% in the developing countries got most of the gain with millionaires and billionaires soon emerging. This is what is probably meant by economists when referring to "emerging economies". The theory was that those wages would rise as globalization took hold. Unfortunately, after 70 years of "free trade" workers in Bangladash still make $0.35 per hour; in China, the average wage is apparently about $5.00 per hour and much better than the $25.00 per day for a worker in Mexico. However, those workers do not have access to a social safety net,clean & safe environment air or labor rights ; if they complain, if they get hurt they are replaced as there are millions more in poverty in those countries who will take those jobs at those low wages. That outcome was inconveniently anticipated when proper protections were not included in these trade agreements as early as the 1940's.

In the 21st century, automation and artificial intelligence [AI] are displacing further the prospects of a return to large scale employment in Western manufacturing and domestic sourced service sector jobs. Even Stiglitiz states that automation and productivity would account for much of the loss of Western manufacturing regardless of globalization. What this infers is that any job which can be done anywhere else, will be done in the cheapest location possible. Historically, this has happened for the past 270 years (since the start of industrialization) and has always caused turmoil.

That leaves certain jobs protected in developed economies for workers in a very narrow population; government, academic, health, finance and corporate executives. Three of those jobs are public sector jobs with job protection, rising wages and secure and indexed pensions. The executive positions in finance and industry write their own cheques.

Free and fair market conditions would dictate that wages would eventually equilibrate but that has not occurred since free and fair markets do not exist; rather, unregulated and predatory capitalism, state capitalism and autocracies have captured globalization for the benefit of elite groups in developed and developing countries.

Developing countries continue to drive their economies to higher GDP, austensibly to increase the living standards for their populations while telling Western economies that they must meet their greenhouse (GHG) gas emissions commitments and other global commitments. Some western / developed economies are stalling out in attempts to meet the rhetoric, the US economy appears unfazed. However, in both instances wealth inequality appears to be increasing for the Bottom 99%.

Figure 1 Comparison of Select GDP's
GDP

Figure 2 Wealth Ratio for Top 1%
wealth ratio


Globalization as a Failed Political Tool
Globalization as intended by economists was to lift billions out of poverty which, to an extent and definition, it has accomplished although still leaving billions very poor (poor and poverty being defined differently by economists) but also delivering lowered incomes to new entrants (mostly, in the West). That is because economists perceived globalization as a process; first, as an income redistribution tool, secondly, once freed from want people would set their sights on political freedom. Unfortunately, several major impacts have occurred;

  •   the middle class, in the West, is in decline as wealth inequality has increased; this inequality being effected by the predatory capitalism of the late 1980's culminating in the 2008 financial crisis, ongoing suppression of wage growth, the capture of legislatures favouring capital over labour, the withdrawal of the social safety net and the withdrawal of corporate responsibility.

  •   nominally rising income in developing countries has not lessened the grip of tyrannts, despots, oligargies, autocracies and dictatorships. The path from repressive state to free state condition does not appear to have been mapped by economists; rather, this appears to have been more, on their part, an implicit assumption than actionable strategy. Rather than weakening these structures, globalization has strengthened them. A frightening possibility is that this may be proving a model for the financial and political elites in the West.

  •   a deliberate decline in the institutions of the West leading to a lengthy list of defects in the rule of law and disincentives for business
      · predatory lending
      · excessively restrictive intellectual property laws
      · excessive litigation costs, inefficient legal system
      · ineffective political system
      · overly complex tax code
      · overly complex & ineffective regulation
      · inflexible hiring, redundancy practices

Globalization as Successful Debt Management
That the United States has a debt of $22 trillion (11 Feb 2019) i.e., $22x1012 is breathtaking. Approximately 1/3 of that debt is held by foreign countries in the form of Treasury Bills. That debt is approximately 110% of GDP and would be a concern for many governments but not for a government holding the world's reserve currency. Effectively, the printing press replenishes the state coffers.

The foreign purchases of Treasuries is the means by which the $US is kept sufficiently low (in relative terms) to keep US exports up and foreign currencies in check (to encourage imports) which are then recycled into Treasuries. Hence, rather than a gold standard, the world's economy operates on a US Treasury Bill standard or paper gold standards. This behavior, cited by a few economists, describes today's globalization as a global free ride for the United States. It's how America can sell the spectrum of wheat & soybeans to aircraft to the world while getting cheap raw materials & consumer goods in exchange. Accordingly, the federal debt of the US is not bound nor expected to be repaid and with asset prices rising interminably (also a feature not known until this "modern" era as an indicator of too much printed money sloshing through global economies.

Suggested Readings & Viewings
Akerloff & Shiller; "Phishing for Phools: The Economics of Manipulation and Deception", 2016 Audible Studios
Domhoff, G. William, "Power in America; Wealth, Income and Power" https://whorulesamerica.ucsc.edu/power/wealth.html
Ferguson, Niall; "The Square and the Tower; Networks and Power, from the Freemasons to Facebook", Penquin, 2018
Ferguson, Niall; "The Great Degeneration; How Institutions Decay & Economies Die", Penquin Press, 2012
Hudson, Michael (b.1961); "The Monster: How a Gang of Predatory Lenders & Wall Street Bankers . . .”, 2011 St. Martin's
Hudson, Michael (b.1939); "Super Imperialism: The Origin & Fundamentals of U.S. World Dominance”, 2003 Pluto Press
Shiller, Robert J.; "Irrational Exuberance", 2016 Princeton University Press
Sington, David; "The Flaw" DVD 2010 New Video Group
Stiglitz, Joseph; "Freefall: America, Free Markets And The Sinking Of The World Economy", 2010 WW Norton
Stiglitz, Joseph; "Globalization and its Discontents Revisited", 2017 WW Norton
https://www.census.gov/data/tables/2014/demo/wealth/wealth-asset-ownership.html
https://www.bbc.com/news/technology-47305420
[1] https://en.wikipedia.org/wiki/Cambridge_Five


Please feel free to contact the author with your critique or suggestions for adding value to our thesis.