Transcript 3.29-GL Gone Too Far?

State vs. Market – in theory
 Mainstream economic thinking has been a
battle between 2 paradigms, their relative
influence shifting over time
 paradigms: philosophical or theoretical frameworks
 Crises spark “paradigm shifts” (Kuhn 1962)
 Wall Street Crash & Great Depression (1929-late 30s)
 Energy Crisis of the 1970s (1973 - late 1970s)
 Global Financial Crisis of 2008?
 Nature and extent of the “paradigm shift” still unclear
1
State vs. Market – in policy
 Wall Street Crash & Great Depression (1929 - late 30s):
stock market crash sparks bank runs & collapse of banking
system, with worldwide ramifications, e.g., a global downturn
 Prompts gov’t intervention & regulation to protect workers &
economy
 Shift to the STATE: 1940s – 1970s
 Energy Crisis of the 1970s (1973 – late 70s): oil embargo
of the Organization of Arab Petroleum Exporting Countries
leads to 1973-74 stock market fall and sharply falling profits
in manufacturing in US and other advanced industrialized
countries, e.g., Germany & Japan
 Prompts deregulation, de-unionization, retreat of the gov’t
from economy
 Shift to the MARKET: 1980s - present
2
Shift to the STATE: 1940s-70s
 Keynes = philosophical forefather
 Postwar advanced industrialized
economies featured gov’t intervention,
subsidies to key industries, protection of
labor rights, expansion of public
spending (in education, infrastructure,
etc.) trade protection
 Associated with postwar boom (1945–late 60s), a
long period of growth in GDP & real median income
3
Shift to the STATE: 1940s-70s
 The most successful newly industrializing
economies in Asia and Latin America
also had considerable gov’t intervention
 South Korea subsidized & protected “infant
industries”
 Brazil followed ISI (import-substitution
industrialization) to reduce foreign dependency,
erecting trade barriers against cheap foreign imports
while subsidizing the local production of
industrialized products
4
Shift to the MARKET:1980s-present
 Hayek = philosophical forefather
 “Reagan revolution” in US begins 30-yr
wave of deregulation, proclaims faith in
free markets & mistrust of gov’t
 Labeled “market fundamentalism” by Stiglitz
 Neoliberalism, Washington Consensus,
reigns supreme globally
5
Shift to the MARKET:1980s-present
 Growth in the most advanced economies
increasingly based on financialization
 In the US:




income & wealth inequality increases
real median household income declines
household debt increases
financial leverage (debt) overrides capital
(equity) in the corporate sector
6
Income inequality in the US
(US Census Bureau data)
7
8
financial capitalism/financialization

In financial capitalism, financial leverage tends to override
capital (equity) and financial markets tend to dominate over the
traditional industrial economy



financial intermediaries (banks, investment firms) become large concerns
wealth holders have significant influence on political process and economic policy
financialization: an economic system or process that attempts to
reduce all value that is exchanged (whether tangible, intangible,
future or present promises, etc.) either into a financial
instrument or a derivative of a financial instrument




original intent is to reduce any work-product or service to an exchangeable financial instrument, like
currency, and thus make it easier for people to trade these financial instruments
workers, through a financial instrument such as a mortgage, could trade their promise of future
work/wages for a home
financialization of risk-sharing makes all insurance possible
financialization of the US govt's promises (bonds) makes all
deficit spending possible
but financialization also makes economic rents possible


economic rents are excessive payments for goods/services
9
The Political Trilemma of the World Economy
(Dani Rodrik, 2010)
Hyper-globalization
Golden
Straightjacket
National
Sovereignty
Global Governance
Bretton Woods Compromise
Democracy
10
What is democracy?
 Democracy is a certain class of relations
between states and citizens
 A regime is democratic to the degree that
political relations between the state and its
citizens feature broad, equal, protected and
mutually binding consultation
 Democratization means net movement toward
broader, more equal, more protected, and
more binding consultation
 De-democratization is movement in the reverse
(Tilly, Democracy, 2007)
11
"Has Globalization Gone
Too Far?,"
Dani Rodrik, Ch. 28, pp. 241-246 (Excerpted
from Rodrik, “Has Globalization Gone Too
Far?,” in Has Globalization Gone Too Far?,
Institute for International Economics, pp. 2,
4-7, 77-81.)
12
GL is exposing deep fault lines b/w
social groups
 Those who have the skills & mobility to flourish
in global markets
 Those who don't have these advantages or
perceive expansion of unregulated markets as
a threat to social stability & deeply held norms
 tension between the market and social
groups such as workers, pensioners, and
environmentalists, w/ gov’ts in the middle
13
Sources of tension between the
global market & social stability
1) Reduced barriers to trade/investment
increase asymmetry b/w groups that
can cross borders & those that can't
2) GL makes it difficult for gov’ts to provide
social insurance
3) GL engenders conflicts within and b/w
nations over domestic norms and the
social institutions that embody them
14
1: Reduced barriers to trade & investment
increase asymmetry b/w groups that can
cross borders (directly or indirectly via
outsourcing) and those that can't
 Those who can: owners of capital, highly
skilled workers, professionals free to take their
resources where they are most in demand
 Those who can't: many unskilled & semiskilled
workers and most middle managers
 their labor is elastic, substitutable, i.e., they are more easily
substituted by services of other ppl across national boundaries
 most GL research has focused on the downward shift in
demand for unskilled workers rather than the increase in the
elasticity of demand
15
GL enables “substitutability,” transforms
the employment relationship
 Postwar “social bargain” b/w workers & employers (i.e.,
steady increase in wages and benefits in exchange for
labor peace) has been undermined
 Substitutability has concrete consequences:
 Workers now have to pay a larger share of the cost of
improvements in work conditions and benefits (i.e., bear
greater incidence of nonwage costs)
 They have to incur greater instability in earnings and hours
worked in response to shocks in labor demand or labor
productivity (i.e., volatility and insecurity increase)
 Their bargaining power erodes, so they receive lower wages
and benefits whenever bargaining is an element in setting the
terms of employment
16
2: GL makes it difficult for gov’ts to
provide social insurance
 social insurance is a central gov’t
function, which has helped maintain
social cohesion & domestic political
support for liberalization over postwar pd
 Gov’ts have used fiscal powers to
insulate domestic groups from excessive
market risks, especially when they're
foreign in origin -- but gov’t has been
downsizing, reducing social obligations 17
3: GL engenders conflicts within and
b/w nations over domestic norms &
social institutions that embody them
 With international diffusion of technology, nations with
different values, norms, institutions, begin to compete
head on in mkts for similar goods
 presents opportunities for trade among countries at very
different levels of development
 Trade becomes contentious when it unleashes forces
that undermine domestic norms
 e.g., plant closed in South Carolina for child labor in Honduras
or French pensions cut in favor of EU obligations
 Trade policy has redistributive consequences, among
sectors, income groups, and individuals
18
The Role of National Governments

Policymakers must respond to these tensions
without sheltering groups from foreign
competition through protectionism:
1) Strike a balance b/w openness and
domestic needs
2) Do not neglect social insurance
3) Do not use "competitiveness" as an excuse
for domestic reform
4) Do not abuse fairness claims in trade
19