Arvind Subramanian: US's globalisation angst

There isn't much to prove the point that the problems of the US are because of globalisation.

Politicians posture. And Democratic Party politicians in the US have been posturing on globalisation. This posturing is obligatory in the run up to the November presidential elections but ultimately harmless, or so it is hoped.

It is the intellectual change in the globalisation debate, though, that is noteworthy for developing countries. This has partly been occasioned by, and must be seen in the context of, three related developments in the US: stagnant middle-class wages, rising inequality, and mounting insecurity, especially concerning the availability and costs of health care.

Three luminaries of the economics profession "" the Nobel-prize winner Paul Samuelson, Paul Krugman, and most recently, Larry Summers "" have all expressed angst about globalisation (and this list could easily include the highly respected Alan Blinder of Princeton whose writings on outsourcing are similar in tone and content). All three see globalisation as a potential economic and/or political problem for the United States. All have, though, stopped short of calling for outright trade protection as a possible remedy. To quote Larry Summers (Financial Times, June 24, 2007): "Equally, arguments that suggest the only way to raise the incomes of middle-class families is...to restrict increases in international trade are very dangerous."

An interesting rehabilitation of an earlier analytical argument by Summers (FT, April 24, 2008) relates to the consequences of capital mobility. According to this, hyper-mobile US capital creates a double whammy for American workers: first, as companies flee in search of cheaper labour abroad (the "giant sucking sound" in Ross Perot's evocative and provocative phrase), American workers become less productive (because they have less capital to work with) and hence receive lower wages; the "exit" option for capital also reduces its incentive to invest in domestic labour. Second, capital mobility also impairs the ability of domestic policy to respond to labour's problem through redistribution because of an erosion in the tax base as countries compete to attract capital by reducing their tax rates. From this analysis emerges the policy agenda of international regulatory harmonisation "" of taxes, financial sector regulation, and labour standards among others "" so that at least some forms of capital mobility can be reduced, addressing to some extent the two problems identified above.

Consider in turn the diagnosis and the prescription. In principle, capital mobility (or flight) combined with a race to the bottom could erode tax bases. But what has been the US evidence on each of these?

Over the last decade or so, the United States has actually been a large and increasing net importer of foreign capital. So that effect goes the other way. But what if the effects identified above are only really felt when companies (i.e. direct investment) move rather than financial capital. The data, however, suggest that net foreign direct investment (FDI) outflows from the US have been small, occasionally negative, and exhibit no clear trend; and if the problem is one of capital fleeing to lower wage developing countries, net FDI outflows to developing countries are really miniscule (less than 0.5% of GDP and an even smaller share of U.S. capital stock) with no sign that it is rising.

The tax revenue numbers also do not support the picture of an eroding tax base. Overall taxes as well as corporate and income taxes (as a share of GDP) have either been relatively constant over the last two to three decades or trended up. 
 

United States: Total, Corporate and Individual Tax Revenues, 1975-2006 (% of GDP)
	1975	1985	1995	2000	2005	2006*
Total Taxes	25.10	25.60	27.90	29.90	27.30	28.20
Corporate Taxes	2.90	1.90	2.90	2.60	3.10
Individual Taxes	8.90	9.70	10.00	12.50	9.60
Source: Revenue Statistics 1965-2006 - 2007 Edition - OECD © 2007 - ISBN 9789264038349 *Provisional

Individual income taxes blipped up around 2000 because of the tech bubble and the cashing of stock options but have since reverted to long-run trends.

Yes, tax rates have been cut under President Bush but that has been more ideology driven than forced upon globalisation-straitjacketed policymakers. Globalisation has no links with the repeal of the estate tax, or the need for reforms in US education and health care. The case that globalisation has constrained policy choices to bolster the sagging fortunes of US labour needs stronger empirical backing.

Turn now to the remedy of international regulatory harmonisation. As a policy response, this has the appeal of not being protectionist. But "" even leaving aside that calls for labour standards harmonisation are especially vulnerable to protectionist misuse "" there are reasons to be cautious. The Bhagwati-Ramaswami insight about appropriate policy instruments is applicable here. Worsening income distribution is overwhelmingly a domestic problem. The appropriate remedy "" the most effective, with the least collateral damage in terms of foregone growth "" must therefore also be domestic, especially since external constraints on domestic policies are not obviously present.

There is another reason for pursuing the domestic option first. While Lou Dobbs blames the ills of the American worker on globalisation or the more advantageous playing field of his Chinese/Indian counterpart, it could well be that the American worker is really being hurt more by the uneven domestic playing field between him and US managers and capitalists.

The American worker who has watched the recent scandals "" of Enron and the tech bubble, the widening pay differentials between chief executives and average workers (from a multiple of 27 in 1973 to 300 in 2000),and the wealth accumulation by the financial wizards despite their reckless and socially costly risk-taking "" all with public policy either actively aiding (in the case of the tax cuts) or being acquiescent (through excessive regulatory forbearance), could reasonably suspect double standards in the rules for capital and for labour. The American social compact "" which condones inequality of outcomes to a greater degree than elsewhere "" is supposed to be about all Americans at least having an equal shot at the American dream.

More effective redistribution, more accessible healthcare, and better regulation of corporate excesses, including executive salaries, would help shore up the fact and perception of the economic well-being and security of US labour. In turn, these domestic policy responses could go a long way in restoring faith in the basic American compact, raising morale, and checking the natural and understandable instinct to ascribe to the foreigner the travails that are mostly home made.

The author is Senior Fellow, Peterson Institute for International Economics and Center for Global Development, and Senior Research Professor Johns Hopkins University