Economic Policy in the Era of Globalization

Thomas I. Palley Economics for Democratic and Open Societies E-mail: [email protected]

www.thomaspalley.com

Main Messages • Economic policy is critical.

• Unions need to: (1) change the way they view economic policy.

(2) increase engagement with policy.

The Importance of Economic Policy - 1

• Historically, unions adopted “service” model = 1) Workplace representation + bargaining wages & benefits, • • 2) Policy = govt.budget & legislation (health, pensions, social safety nets, workplace safety, labor law).

Approach to policy worked well earlier.

Why?  public understanding of the economy favorable to unions = legacy of Great Depression

The Importance of Economic Policy - 2

•

Old model no longer sufficient.

• Why? Economic paradigm has changed.

 Other side now defines economic understanding (free markets, heroic individualism) • New understanding sets economic policy  policy is undermining unions.

The Importance of Economic Policy - 3

•

Unions need to engage economic policy:

(1) Change public understandings.

(2) Change policymaker understandings  automatically do right thing vs. persuading them not to do the wrong thing. (3) Much policy cannot be legislated (e.g. interest rate and exchange rate policy).

(4) Unions “swimming against the current”  uphill task winning policy debates.

The Importance of Economic Policy - 4

•

Successfully engaging economic policy means engaging union movement from TOP to BOTTOM.

•   From union officers to shop floor members. From elite policymakers to the general public.

Enormous challenge: (1) Technical challenge

= multiple levels of communication & message development, (2)

Resource challenge

= have workplace “firefights” everywhere that demand attention. (3)

Cultural challenge

= policy is “abstract/academic”  not what have historically done.

(4)

Political challenge

= easier to go to constituents saying fighting legislation vs. investing in understanding.

The Importance of Economic Policy - 5

• 1950s/1960s unions did not need to do this kind of activity  ruling paradigm favored them.

• That has changed.

• Engaged in a “War of Ideas” & “War of Vision”  What should workers & citizens expect of the economy?

 What will be the rules for national & global economy?

Understanding Neo-liberal Economic Policy

• •

(1) Globalization dominates economic policy debate Need to view as part of “neo-liberal” policy

•

agenda

.

(2) “Flat World” metaphor

 suggests level playing field on which compete on equal terms.

Reality = Playing field tilted & designed by corporate elites, not an invisible hand.

Alternative metaphor

= “The Box”  workers boxed in .

Globalization

The “Neo-liberal” Box

Less than full employment WORKERS Small Government Labor Market Flexibility

The Great Uncoupling

US Productivity & Compensation Growth, 1973 – 2003.

180 Productivity 160 140 120 100 80 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 Source: Source: State of Working America, 2004-05, Economic Policy Institute, Washington, DC.

Compensation average Compensation median female Compensation median Compensation median male

Implications of the Box -1

•

Workers cannot outrun the box.

• Both private & public sector workers boxed in.

• Both Northern & Southern workers boxed in.



Neo-liberal box built upon economic policy.



Changing Economic Policy therefore critical.



Social Policy is welcome but is NO substitute for economic policy change.

Implications of the Box - 2

•

Government also boxed-in

: (1) Mobility of investment & production + (2) Fear of employment losses + (3) Vulnerability to financial disruption  Deters progressive policy (fair taxation, unionization) by raising “political cost”.

 Creates “lock-in”  harder it is to reverse. longer policy in place,

Globalization & Outsourcing - 1

• Global outsourcing = critical element of globalization.

• Should be understood as change in the “nature of competition”.

•

MNC revolution

received much attention • Less noticed & equally important =

“Retail Revolution”

based on Big Box discount stores (e.g. Wal-Mart)  key driver of globalization.

Globalization & Outsourcing - 2

• Stage 1: Started 40 years ago (Wal-Mart estd. in 1962)  created “national buying” model. • Stage 2: 1980s buying model of Big box discounters starts going global.

(1) Puts countries in competition  lowest price (China Price) scour world for (2) Creates N-S competition & S-S competition (3) Puts entire manufacturing sector in international competition, (4) Erodes manufacturing jobs & wages (5) Success forces everyone adopt.

Globalization & Outsourcing - 3

• Out-sourcing = application of model to manufacturing • Exemplified in auto industry by Delphi & Visteon  spun off from GM & Ford and put in national competition  now put in international competition & asked to meet the “China Price” • Happening in aerospace  Boeing’s 787.

• Trade in services = next area of application.

• Internet means even retail can even be out-sourced (e.g. Amazon.com).

Globalization & Outsourcing - 4

•

“Globalization” ties the pieces together in a coherent system:

Changed competition (Global sourcing)

+

Changed technological conditions (capital mobility & MNC production)

+

Neo-liberal trade policy (market opening)

+

2 billion new workers (end of dam of socialism) •

=

downward wage & workplace pressures.

When join two swimming pools, water levels will equalize.

The Role of China

• •

China = systemic role in story.

• (1) 750 million workers, (2) Location for MNC production. (3) Transfer of technology & capital. (4) Large scale sourcing by retailers from China.

This role aggravated by China’s specific policies.

• (1) Export-led growth, (2) Under-valued exchange rate, (3) Unfair trading practices - subsidies, domestic content requirements, offsets, (4) Wage  suppression.

Destructive competition that afflicts N& S.

How Should Unions Respond?

• •

Need to replace neo-liberal policy agenda.

Goal = re-pack the box.

CEOs & corporations in. Take workers out, put (1) Globalization with standards, (2) Full employment policy, (3) Progressive government, (4) Restore worker bargaining power, • (5) Corporate agenda that re-aligns corporate behavior with national interest and social purpose.

Accumulating resentment make change possible… but requires an economic policy revolution

Rediscovering Economics

•

Policy success requires winning war of ideas

•

Rediscover economics of Keynes & Institutionalists

that shaped post-WWII agenda.

• •

Keynes

= economy does not automatically reach full employment  case for government to stabilize economy via monetary & fiscal policy.

Institutionalism

emphasizes “nature of competition” & possibility of “destructive competition/race to the bottom”  Need to design regime of competition.

An Example from History – The New Deal of the 1930s

• Labor markets  established minimum wage, 40 hour week, right to overtime, & right to join unions.

• Financial markets  Created SEC & strengthened Fed. Reserve regulation of banking.

• Result = new “competitive regime” = (1) prevented destructive competition, (2) “Henry Ford” income distribution enabling workers to buy what they produced, (3) policy prevented financial panics & depressions.

Lessons from History - 1

•

New Deal economics suppressed.

1) Conservatives always opposed.

2) Focus was on capitalism’s failings = unacceptable in Cold War era of geopolitical competition.

• 3) Success of 1950s & 1960s created belief that did not need institutions that protected workers/gave capitalism a human face.

Result

= (1) driven out of classrooms & policy discourse, (2) Replaced by free market fundamentalism, (3) Policy makers encouraged to recreate 19 th century

laissez-faire

economy.

Lessons from History - 2

(1)

Ideas matter.

• Control of ideas  control of policy  control of the box.

(2)

The whole is greater than the sum of the parts

 Selling “specific” policy proposals is easier when they are part of a “dominant” vision  = lesson of conservative “free market” vision … links views on pensions, health care, labor markets, financial markets, trade, etc.

(3)

When an idea triumphs, even own political reps are captured unconsciously by that idea

 When lose war of ideas, forced to swim against stream of public opinion & policymaker understandings.

Political Challenges - 1

(1) Specific policy solutions familiar



problem = difficult to convince need because “free market” story dominates

 points to critical role of economics & policy.

(2)

The Problem of solidarity

– culture of individualism + furthered fractured by problems of racism that can be exploited to divert attention. (3)

Problem of low prices:

and consumers  desire high wages vs. desire low prices = “Wal-Mart problem” Labor divided  “destructive competition.”  both workers low prices argument promotes

Political Challenges - 2

(4)

Problem of “the globalization clock”

impacted at the same time.  not all (5)

Canadian difficulties

= regional differences  oil rich west vs. manufacturing & populated east. (6)

Need for international solidarity

solutions less effective   national need international regulation = even more difficult political task.

(7)

Need a narrative/story of the economy & globalization that people can gather around

 economists tell stories  Need an alternative story 

Economic Ideas & Economic policy are critical for unions.