Can globalization be reversed (wonkish)

The term “globalization” came into widespread use in the 1990s, about the same time as Fukuyama’s End of History. As that timing suggests, globalization was presented as an unstoppable force, which would break down borders of all kinds allowing goods, ideas, people and especially capital to move freely around the world. The main focus was on financial markets, and the assumption was that only market liberal institutions would survive.

The first explicit reaction against globalization to gain popular attention in the developed world[1] was the Battle of Seattle in 1999, but the process, and the neoliberal ideology on which it rested, didn’t face any serious challenge until the Global Financial Crisis of 2008. The Crisis destroyed Neoliberalism as a political project with positive appeal, but its institutions have remained in place through inertia.

Now, however, globalization is finally facing serious threats, most immediately from the nationalist[1] right, seeking to restrict movement of people and goods across national borders. There hasn’t yet been any serious challenge to financial globalization, but faith in the wisdom and beneficence of financial markets has disappeared.

An obvious question here is: can globalization be reversed? My short answer is: within current political limits globalization can be reversed least partially in the case of trade, but can only be slowed in the case of movements of people. I’m still thinking about financial flows.

Starting with trade, the reaction to Trump’s various trade wars has shown that the 21st century system of world trade based on complex supply chains involving many different countries is quite fragile. An across-the-board tariff rate of 10 per cent, the level that prevailed in 1960, would render supply chains with multiple border crossings uneconomic. The more likely pattern, again as illustrated by Trump, would involve a lot of unpredictable variation.

If Trump’s tariffs are maintained, and met with retaliation, the obvious response will be to return to the simplified supply chains of the 20th century. Manufactured goods would be produced in a single jurisdiction (maybe using imported raw materials, which are rarely subject to tariffs) either for domestic consumption or for export as finished products.

Moderate tariffs won’t, however, be enough to produce substantial import replacement of the kind needed to make (for example) American manufacturing great again. The force of comparative advantage is too strong for that. A return to something like Smoot-Hawley tariff scales (up to 60 per cent) would be needed. This seems to be outside the limits of what could happen political, given the increase in consumer prices that would result. However, any judgement about political limits has to be taken with a grain of salt these days.

What should we think about the costs and benefits of such a transition? Breaking down complex supply chains involves some obvious losses in efficiency. It’s hard to estimate how large they are on a continuing basis, but there would certainly be some big economic losses in the transition.

The current system enables US companies to hire subcontractors with exploitative labor practices, they can, as Naomi Klein pointed out in No Logo, be put under pressure to fix things. If most production was undertaken by firms in poor countries, there would be less of an opportunity for such pressure.

Complex supply chains also facilitate tax evasion through transfer pricing. However, this problem is due at least as much to the operations of the financial system as to the organization of physical production.

A lot depends on the specifics of tariff structures. Trump’s moves so far have been largely random, and the responses have been targeted at causing political pain for Trump rather than as part of a coherent strategy. In these circumstances, the reversal of globalization in trade is likely to cause more harm than good.

fn1. Nationalism in this context means something like “dominant identity nationalism” where dominant identity is a placeholder for those considered to be “real” members of the nation concerned,for example, white Christians in the US case. I plan to write more on this, but may not get around to it for a while.

fn1. A commenter at Crooked Timber points out that the Zapatista rebellion in Mexico (1994) was prompted by the signing of NAFTA

Keynes and Versailles, 100 years on

The 100th anniversary of the Treaty of Versailles is coming back. I have a piece in The National Interest which ran under the headline (selected by the subeditor, as is usual), America Needs to Reexamine Its Wartime Relationships. Keynes first came to public attention with his critique of the Versailles Settlement, The Economic Consequences of the Peace, whith foreshadowed, in important respects, The General Theory of Employment, Interest and Money.

I argue that the rise, fall and rise again of the standing of Keynesian macroeconomics runs in parallel with views on the justifiability of the terms imposed at Versailles and more generally of the use of war as a policy instrument.

Explaining Adani: why would a billionaire persist with a mine that will probably lose money?

That’s the title of my latest piece in The Conversation, republished on the ABC website. Possible answers

So what could be going on? Perhaps Gautam Adani is willing to lose a large share of his wealth simply to show he can’t be pushed around. Alternatively, as on numerous previous occasions, his promises of an imminent start to work may prove to be baseless.
The third, and most worrying, possibility is that the political pressure to deliver the promised Adani jobs will lead to a large infusion of public money, all of which will be lost.
The $900 million Adani sought from the Northern Australia Infrastructure Facility in 2017 would be enough to keep the project going for a couple of years, without the need for Mr Adani to risk his own money. It now appears that a similar sum might be sought from the Export Finance and Insurance Corporation.

Eye of the needle, again (crosspost from Crooked Timber)

The US college admissions scandal is rolling on, seemingly endlessly. There’s been a lot of discussion of moral decay, hypocrisy and more. But no one seems to have mentioned the central point. The number of places in the Ivy League and similar schools has remained almost unchanged for decades, even as the demand for those places has been swelled by a wide range of factors, most notably by the growth in all forms of inequality, which is mediated in part by unequal access to education. Parents who want their children to maintain their position in the scale, or climb upwards, need to facilitate that access if they can.

There’s no fair way of allocating that limited set of places*, and, even if there were, the existing system is full of arbitrary roadblocks to some and loopholes for others. The standard way of allocating scarce goods in a market system is through willingness to pay, and that plays a big role in the process. But since an open market isn’t an option, willingness to pay isn’t enough on its own, and can’t be tied to directly to the admission decision. What you want, as this story says of Harvard is “well-off, multi-generational Harvard families [who] pay higher tuition and give more money” (ideally over a long period). Unsurprisingly, parents with money, but without the required social access have sought more direct methods of buying a way in for their children.

Catching and prosecuting a few parents isn’t going to change this, and neither is any reform of the admissions system. The problem can only be resolved by reducing inequality in society as a whole, and particularly, by increasing access to high quality post-school education. I have no clear idea how this goal should be pursued in the US, given the stratification entrenched in the system. Given the numbers involved, there’s a strong case for focusing on free access and more funding for community colleges, ideally with a transition path to four-year institutions. But I don’t understand the system well enough to know whether this would work. Regardless, the US case provides a warning for countries like Australia, where the leading universities (the so-called “Group of 8”) are keen to put more distance between themselves and the rest.

  • An system based solely on test scores, such as the SAT, would not be as obviously arbitrary as the current one. But it would clearly favor those with the resources to get test prep tutoring and so on. The Japanese example is not encouraging, at least from a distance.

Pinker polymathic

The New York Times has a piece pushing the idea that nuclear power is the solution to our environmental problems. It’s familiar stuff, citing the French success in the 1970s, the promise of Gen IV and small modular reactors, and so on. Indeed, two of the authors had an almost identical piece in the Wall Street Journal in January. What’s most interesting is that the set of authors[1] this time includes Steven Pinker, who seems to be spreading his claims to expertise yet more broadly[2].

None of the authors has any training or expertise in economics, AFAICT. So, they make extreme claims such as that South Korea and China can build nuclear plants at one sixth the cost of the US. With the abandonment of the nearly-complete VC Summer project, the only nuclear plant now under construction in the US is the 2GW Vogtle project in Georgia. That looks like coming in at about $20 billion or $10 billion/GW. Most estimates of Chinese costs are around $3.5 billion or one third of that – the most optimistic I’ve seen is $2 billion.

Moreover, it might have been worth mentioning that South Korea has stopped new nuclear power and China hasn’t started a new project in three years. In both cases, renewables have undercut even the lowest estimates of the costs of nuclear.

Also striking is a sudden shift in the argument about halfway through. The article begins reasonably enough, pointing out that the success of the French model in the 1970s depended critically on the large-scale deployment of a small number of standardised designs. (That wasn’t the only crucial feature, as I’ve pointed out before.) That contrasts sharply with the current situation where nearly every new plant is First Of A Kind, or close to. They point to US efforts to promote new nuclear power, including the Nuclear Energy Innovation and Modernization Act, recently passed through Congress by big margins (361 to 10 in the House, and a voice vote in the Senate).

Then suddenly, the article shifts gears, claiming that the crucial problem is irrational public fear of radiation, nuclear accidents and so forth. The obvious question to raise is: how does this supposed climate of fear manifest itself? Obviously not in a Congress, generally notable for bitter partisan division, where pro-nuclear legislation sails through with negligible opposition. Nor is there any evidence of significant resistance at the regulatory level, where numerous plants have had their licenses extended.

With the abandonment of the nearly-complete VC Summer project, the only nuclear plant now under construction in the US is the two-reactor Vogtle project in Georgia. Googling for Vogtle protests, I found numerous links to protests from shareholders, customers and others concerned about the massive cost overruns of the project. But the only anti-nuclear protest I could find was back in 2011, and appeared to have no effect at all on the project.

The myth that nuclear power would roar ahead if only public fear could be overcome is comforting to nuclear fans. But the truth is that the technology is doomed by economics.

fn1. The only author with any relevant expertise is Staffan Qvist who works on Gen IV reactors and has previously written policy pieces with our own Barry Brook.

fn2. I also write on lots of different things. On the blog, I’m happy to state my views on all kinds of topics, as I would in ordinary conversation. But when I write for the general public, citing my professional affiliation, I try to stick to areas where I have some claim to expertise.

What’s happening to the Australian Dairy Industry

I just recorded a radio interview for ABC Toowoomba on the dairy farmers’ campaign against supermarkets selling milk for $1. Here are my notes for the discussion

Consumer prices have increased 20 per cent since 2010, when the milk price was $1.30/litre, so to maintain the real price, the current price would have to be around $1.56.

Dairy producers in Australia have been under continuous pressure to increase herd size and reduce costs, with those unable to do so having to leave the industry or accept declining incomes. I first researched this topic in the early 1980s, when farm numbers had already fallen by about 50 per cent.

Since 1979, the number of dairy farms in Australia has fallen from 22 000 t0  5700. In Queensland the number has gone from 3000 to less than 400.

However, because of increased herd size the number of cows hasn’t changed much . Milk output per cow increased rapidly up to about 2000, so total production grew over that period before stabilising

The “cost-price squeeze” affects most agricultural producers but the problems of dairy farmers are exacerbated by the market power of supermarkets and their use of milk as a “loss leader”.  The decision to raise the price charged to consumers represents at least a symbolic step away from that practice.

Monopoly: too big to ignore

That’s the headline given to my latest piece in Inside Story

Here’s the opening para

Two hundred years after the birth of Karl Marx and fifty years after the last Western upsurge of revolutionary ferment in 1968, the term “monopoly capitalism” might seem like a relic of outmoded enthusiasms. But economists are increasingly coming to the view that monopolies, and associated market failures, have never been a bigger problem.

and the conclusion

The problems of monopoly and inequality may seem so large as to defy any response. But we faced similar problems when capitalism first emerged, and Western countries came up with the responses that created the broad-based prosperity of the mid twentieth century. The internet, in particular, has the potential to enhance freedom and equality rather than facilitate corporate exploitation. The missing ingredient, so far, has been the political will.