Fashionable but wrongheaded shots at globalization

So we now know that it is both fashionable and acceptable to criticize globalization, for even Mario Draghi is doing it.

In his speech in the United States to a prestigious economics association, he joined all the many much less expert voices who are blaming populism and illiberal trends in Western democracies on the effects of globalization. But this is not quite right, as he ought to know.

Giving a speech in the land of President Joe Biden’s protectionist industrial subsidies and of the threat of an even more protectionist Donald Trump in November’s election, it was undoubtedly correct to acknowledge some of the genuine social and economic problems that these illiberal, anti-trade policies are seeking to address.

Yet is globalization really to blame for those problems? As a good economist, Draghi must know that it is not.

The essence of the problem, he rightly said, is that both income inequality and job insecurity have grown, leaving large numbers of middle- and working-class people to feel they have been “left behind” not only in the United States but also in many European countries and even Japan.

This phenomenon has manifested itself in a declining share of “labor income,” as economists call it, or “wages” as normal people say, and a rising share of company profits.

This, however, is not the result of globalization. Primarily, economic research tells us that it is the result of technology – the automation of manufacturing and, more recently, of services, too.

In addition, it is the result of government policies that have deliberately reduced welfare entitlements and have reduced the bargaining power of labor unions as well as removing protective regulations from labor markets.

Another way of looking at this is to