The Bear’s Lair: Globalization has become political poison

Since 1991, globalization has been touted as the solution to all the world’s problems, that will pull emerging markets out of poverty while making rich countries more efficient and competitive. Yet in the last few years, public opinion has soured on it; whenever new measures of globalization are proposed, voters oppose them vehemently. There are good reasons for this.

Back in his day Robert, Lord Liverpool knew how to win elections, on an issue that was similar to globalization in that elite opinion differed violently from the popular consensus. Whenever an election was due, he would get the opposition Whigs to propose “Catholic Emancipation” — allowing Catholics into Parliament — a proposition that is obviously sensible to us today and was favored by most elite opinion then but was extremely unpopular with the British electorate. The result would be a massive landslide election victory for the good guys, a trick that worked five times, four for Liverpool and once for his predecessor the Duke of Portland in 1807. Sadly, Liverpool’s successor Arthur, Duke of Wellington, a better military than political strategist, led his Tory government to emancipate the Catholics themselves in 1829, thereby making the Whigs the dominant party of government for the next half century. Well, globalization has become the Catholic Emancipation of our time.

Like globalization, Catholic Emancipation looked the logical thing to do, but had hidden snags; overall, the ignorant and bigoted British electorate was probably right. For one thing, emancipating the Catholics turned upside down a British constitution that had been established at the 1688 Revolution specifically on the basis that the country was Protestant. Even today, the monarch cannot legally be a Catholic, which as Liverpool remarked leaves him or her with fewer civil rights than any of their subjects.

More important, Catholic Emancipation did not solve the problems of Ireland, as Liverpool had forecast it wouldn’t – it merely brought into Parliament a dissident leftist mob of Irish Catholics who failed to integrate into any mainland political party and worsened all political compromises, notably during the 1830s and 1880s.

Ireland was mired in poverty, caused partly by spiraling population but also, as Liverpool himself pointed out, by the gross violation of Irish property rights carried out by British Protestants through the 17th Century, which had left most Irish Catholics effectively destitute. The only solution was a “land reform” reversing this and depriving absentee landlords of their rolling acres, but that too would violate property rights, and had best be undertaken by an independent Irish government, as indeed happened after 1922 (with some preliminary steps in the late 19th Century). The 1801 Act of Union had been a hideous mistake, undertaken for security reasons in the middle of a 22-year war. Home Rule, not Catholic Emancipation, was the solution to Ireland’s problems, but that was politically impossible in the 1820s. Catholic Emancipation without Home Rule damaged the interests of all parties.

Like Catholic Emancipation, globalization seemed like a good idea. The simple optimism of Thomas Friedman’s 2005 “The World is Flat” suggested that over time, modern communications would iron out the political differences and economic inequalities between societies, making a harmonious world that was both more equal and richer. Even back then, it was clear that low-skill workers in rich countries would suffer relatively, but it was believed that global growth would be sufficiently rapid to handle the problem. After all, if the best brains of China and India were now able to play a role in driving innovation, surely innovation must speed up enormously from its previous level, with corresponding benefit to global productivity and growth rates.

This has not happened, mainly because the world’s governors have added several other policies into the mix that have nothing to do with classical Ricardian liberalism, the motive-force behind globalization. These policies have turned the fairly marginal benefits available from globalization into gigantic costs, at least as far as the majority of rich countries’ populations is concerned.

The most damaging policy error that globalist governments have made is to over-regulate, using new international bodies to impose regulations from which businesses can’t escape. Before regulation was global, companies that wanted cheap labor or which had an unpleasant manufacturing process could simply locate in an emerging market whose inhabitants would be glad of the jobs. Now that is no longer possible; global environmentalist and labor regulators, and their NGO enforcers chase all over the world, harassing businesses wherever they operate. Only anti-globalist “rogue regimes” are exempt, one reason why popular support for such regimes is growing.

Over-regulation, whether environmental or otherwise, has a doubly damaging effect on the victims of globalization. It slows overall global growth, so that the benefits of globalization may no longer be sufficient to protect the loving standards of the low-skilled in wealth countries. Further, regulations are generally differential in their application, so rich country manufacturers can escape some of the more foolish domestic regulations by relocating manufacturing to the Third World – thereby hollowing out the good blue-collar jobs that the rich country labor force needs.

A second downside of globalization is crony capitalism. In a non-globalized world, companies from all over the world compete, and have competitive advantages only in their own countries. However, as the world globalizes, the major multinationals can buy up or drive out local competitors. Once this happens, the multinationals’ innovation and resulting productivity growth is slowed by their gigantic behemoth size and inefficiency. However, as governments have grown larger and regulations more complex, the multinationals have been able to ally with host governments all over the world to draft regulations that favor them and keep out upstart competitors. Even in the high-tech sector, the symbiotic relationship of Facebook and Google, not with their domestic regulators but with EU regulators, is able to ensure that their global oligopoly is preserved for all time, and not subject to erosion by pesky new competitors. Again, globalization makes cronyism inevitable, and with cronyism comes bloated bureaucracy and sluggish innovation.

A third accompaniment of globalization has been ultra-low interest rates, already set below the optimum level by Fed chairman Alan Greenspan in 1995 and lowered further worldwide with each economic hiccup. On a global scale, these have narrowed the capital cost differential between rich and poor countries, artificially speeding the relocation of rich county industries, since new factories can be erected artificially cheaply in emerging markets. Then, within economies, these low interest rates have encouraged tsunamis of misdirected investment, whether on companies that should have been allowed to die or on over-priced real estate. Millennials now cannot afford urban housing; ultra-low interest rates, in many cases negative in real terms, have driven house prices to artificial and unsustainable levels. By misdirecting capital, low interest rates have also lowered productivity growth, the only means by which living standards can be improved. In general, low interest rates have enriched those with connections, at the expense of everybody else; with globalization, there has been no escape from them.

A moderate amount of high-skill immigration is necessary in a globalized world; you must attract the skills that are not available locally. However, globalization’s proponents have widened this to include massive low-skill immigration, whether on guest-worker contracts or simply illegal, as well as endless floods of refugees. This kind of immigration lowers domestic wages and strains welfare systems, depressing living standards (and indeed quality of life) throughout the economy.

Finally, globalization has been accompanied by a bloating of government spending worldwide. To some extent, governments bloat spending because they can. If interest rates are ultra-low, even negative in real terms, there is no incentive to stop wasting money on boondoggles that may attract votes. However, apart from the unsustainability of most current budget deficits, by bloating government, resources are diverted from their most productive uses to the utterly unproductive public sector. Thereby, real productivity (which may differ from that in GDP accounting, which takes all government activity as beneficial) is once again caused to decline.

In Third World countries also, where controls on corruption are feeble, bloated government spending attracts the “best and brightest” into the public sector, where dodgy money can be made most quickly – the Malaysian 1MDB mess, aided and abetted by Goldman Sachs, is a prime example of this, which should now be punished to the fullest extent of available law. However, allowing democratic change to punish government malfeasance is not a sufficient solution to this problem; it will merely cause the crony globalist governments to rig the political system, as the EU is attempting to do in Italy and elsewhere, to prevent that change from happening.

In theory, globalization should enable poor countries to grow rich, while rich countries also benefit and innovation proceeds at a wildly accelerated pace – that’s what the Ricardian textbooks say. In practice, over-regulation, cronyism, artificially low interest rates, excessive immigration and government bloat have made globalization increasingly damaging to the living standards of ordinary people in both rich and poor countries. That damage to living standards is growing further day by day as the poorly controlled globalist economic system becomes more corrupt and inefficient.

To win an election, therefore, just get your opponents to advocate a thoroughly globalist, international platform (or, within the EU, EU-integration, which comes to the same thing). The voters have seen through the follies of globalization and will duly reward the party that opposes it most vehemently.

(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)