Sam Roggeveen reminds us that Brexit has spotlighted the political unpopularity of globalisation, immigration and the 'neoliberal' economic agenda. The politics of these issues is fraught, with strongly held opinions for and against each of these ideas. Yet economics is pretty clearly in favour of all three, at least as generalisations about complex issues. Why did the economic arguments gain so little traction in the UK debate? Closer to home, is Australian policy-making vulnerable to a populist political push based on these issues?
Let's try first to clear away the baggage surrounding the idea of 'Neoliberalism'. It has come to be used as a term of rhetorical abuse hurled by those on the left of the political spectrum at those on the right , just as 'socialist' is often used (at least in America) as an accusation rather than a description. The case in favour of market-based economies, as opposed to a centrally planned economy like the former Soviet Union, is no longer seriously debated. The clear-cut victory of the market didn't come out of either doctrinal wrangling or text-book analysis: central planning failed comprehensively wherever it was tried, including the rare cases where it still survives; Cuba and North Korea.
That said, this triumph of the market did not result in libertarian economies with minimalist government and little regulation. The same period of history that demonstrated the failure of central planning also demonstrated the inadequacy of the libertarian model. The 1930s depression showed that markets are not self-equilibrating and need quite a lot of government interference to work tolerably well. In the course of the last century, America (where the rhetoric of free markets is loudest) went from the age of the free-ranging robber barons (astonishingly successful if judged purely in economic terms) to the intrusive institutions and ubiquitous regulations of today.
There was another clear lesson from the post-WWII period: countries with very different degrees of government intervention (as measured, say, by the size of the public sector and the degree of regulation) can succeed equally well. Government-heavy Scandinavia has done as well as countries where the public sector is little more than half as large.
What about globalisation? Just as the empirical evidence is clear that market-based economies perform better than centrally planned economies, the Post-WWII experience shows that economies work better if they are open to interaction with the outside world. Even the big-government/high-taxing Scandinavians have made sure they remain deeply engaged and competitive in the outside world. For such a small country (just 10 million people), Sweden has substantial world brands (Ikea, Ericsson, Volvo, Astra/Zenica, Electrolux, H&M, Skype and Spotify, for example). The most dirigist economic planners (such as the amazingly-successful South Koreans) had international competitiveness as the key policy element driving dynamism and weeding out weak players.
The demonstrated benefits of globalisation just confirm a closely-related idea that economists have long promoted: free trade. This is one of the few ideas that economists agree on (with just a minimum of caveats). Countries should specialise in the things that they are good at, export these and import the things which others are better-suited to making. The benefits go well beyond the cloth-for-wine exchanges that Ricardo explained two centuries ago: exposure to foreign competition enhances dynamism. Productivity growth is always higher in the tradables sector than in the sheltered domestic sector.
Yet the public has never bought this argument. The benefit of being seamlessly connected to a large foreign market was the core of the 'Remain' argument: the Brexit losses predicted by the UK Treasury reflected a big hit to forecast productivity. A majority of voters remained unconvinced.
Perhaps this is because globalisation gets blamed for unemployment and increasing income-inequality. Competition from low-wage countries (notably China) is seen as hollowing-out manufacturing, with the loss of its well-paid jobs.
Certainly, China's transformation to become 'manufacturer to the world' put pressure on labour markets everywhere, although other factors — labour-saving technology and the decline of trade-union power — were probably more important in squeezing the labour share of GDP. But even if the direct effects on labour-share are small, globalisation doubtless has a down-side: global exposure involves doing things differently, sometimes with new firms replacing old. Success now depends on being sharper, perhaps working harder. The disruption is often painful and not everyone adapts.
In any case free trade certainly doesn't claim to make everyone better off: all it says is that the benefit to the country as a whole is sufficiently large so that the winners could compensate the losers, leaving some better off and no-one worse off. In Britain, however, instead of compensating the losers, the fruits were showered on a small high-profile elite who epitomise this brave new unequal world. Ostentatious income disparity, combined with a lacklustre recovery from the 2008 crisis, left many in the working class unimpressed by what globalisation had done for them.
Their search for scapegoats went further: to the EU's open-border immigration policy. Immigration illustrates the chasm between general economic principles and political reality. The overwhelming majority of economists favour market-based solutions in general, and yet you rarely hear advocacy for cross-border free labour markets. Economists know that this would be a futile argument, overwhelmed by politics. Since the US restrictions on immigration in the 1920s, no country has had free labour markets, open to all comers.
With the hard-working migrants from Eastern Europe already putting pressure on UK labour and the threat of greater numbers if Turks were allowed to join the flow, a gap opened up between those who benefited from EU migration freedoms (the cosmopolitan elite and the mobile young) and those who did not. In the lead-up to Brexit, the UK Treasury cited numerous studies showing that UK's immigration had been good for the economy and was a net-positive for the budget: in addition, it had not harmed the employment prospects of Britons. Some telling evidence: UK unemployment is historically quite low. Yet the public doesn't believe this: they are more swayed by the anecdotal evidence, from friends and the press, that Britons have been pushed into unemployment by the flood of Eastern Europeans. More anecdotal evidence gives credence to the widely-held view that social security benefits attract indigent immigrants who are a drain on the budget and a burden to society.
There was strong tension between the EU's eastward enlargement and the sensitivity of the immigration issue. There is not much an economist can say to mitigate this. It's up to the politicians to gauge what society will tolerate, with its diversity of perceived losers and beneficiaries. David Cameron tried to negotiate some migration amelioration in Brussels, but the fundamental tension remains between those who want a United States of Europe (where there cannot be constraints on internal migration), and Britain's vision of a more limited economics-based integration.
Dani Rodrik argues that there is a 'trilemma' that would constrain such a 'globalisation-lite' option. In his view, globalisation requires supra-national rules, which are incompatible with democratically-based national sovereignty. This draws the choices too starkly: a globalised world will have multiple layers of rules, some perforce global while other rules can reflect the idiosyncrasies of the local environment. It is true, however, that measures to soften the down-side of globalisation can undermine the upside, dampening incentives and leaving inefficient production in place. The answer is to devise tempering strategies which encourage flexibility and adaptation without ossifying existing production practices.
Ed Miliband, former UK Labour Party leader, argues that the political-right can't provide the offsets to inequality which successful globalisation needs: 'The right can't solve the problem of inequality because to do so would be to abandon too much of what they believe, from a belief in the small state to trickle-down economics.' Again, this may overstate the contradiction.
What lessons are there for Australia? The success of Pauline Hanson's One Nation Party (with its strong anti-immigration baggage) and Nick Xenophon's team of industry protectionists demonstrate that the same issues resonate with some Australian voters. Australia's tough policy towards undocumented arrivals is now bipartisan, which has allowed the high rate of formal immigration to continue without much debate. Nick Xenophon may succeed in keeping South Australian steel production going, even though it has been made uneconomic by China's massive overcapacity. But this is a small distortion in the larger economy which continues to integrate with the outside world.
Despite Malcolm Turnbull's lauding of smaller government, freedom and entrepreneurship, both major parties have provided about the same level of government expenditure and much the same safety-net for those left behind by the modern world. Most of us can reconcile with equanimity the Prime Minister's theme-tune that 'there has never been a more exciting time to be an Australian' with the view that we are exposed to a world over which we have little control. After all, Australia has operated successfully in this volatile world environment without a recession for a quarter century and is adapting without drama to the end of the globalisation-induced resources cycle. In this exciting world, who misses John Howard's 'relaxed and comfortable'?
Photo courtesy of Flickr user Loic Lagarde