Don’t Reverse Globalization. Refine It.

Advanced countries are awakening to an unsavory truth. There has been a paradigm shift in the world economy, trending towards sluggish or shrinking global demand. It depresses their economic growth and keeps unemployment and underemployment structurally high.

There are several reasons for this development. First, most advanced countries are rapidly aging. Older people consume less. Hence, this depresses demand for goods and services.

This is true even for China, a country with the fastest-aging population in the history of mankind. By 2030, the number of Chinese aged 65 and older will amount to 300 million or three times the current size of this age cohort. Compared to the advanced countries, China will be old, before it will be rich. All of this puts a floor under global demand.

The second reason is that key countries have succeeded in union-busting. After Ronald Reagan in the United States and Margaret Thatcher in the United Kingdom, the collective bargaining power of labor unions all but collapsed in their countries. Reining in overreach is one thing, achieving an outright collapse quite another.

Reforming too far?

Other advanced countries have modeled their approach to labor issues in response to these examples. As a result, even the pay for formerly well-paying jobs has fallen in real terms. Those who earn less consume less, depressing demand further.

Third, taxation policies in most advanced countries have become far less progressive either because of lower effective income tax rates or higher consumption taxes. This has eliminated the beneficial effects of income redistribution. Previously, such policies helped that those who earned less were able to consume more than their fair share.

In today’s advanced economies, the rich have become richer and the poor poorer. The result is, you guessed it, less demand. But more progressive tax rates alone do not in and by themselves boost demand.

This leads us to the fourth reason for the global demand conundrum: globalization. For more than 30 years, world economies have opened their current and capital accounts, allowing for the free flow of goods, services and capital.

There are undoubtedly many benefits for all from operating such open world economy. However, for many advanced countries, this has also meant that many well-paying jobs were shipped overseas to allow for greater corporate profits. That is a key cause for why income inequality has deepened in advanced countries.

Stagnation unmasked

Losing well-paying jobs in advanced countries has depressed wages there, further exacerbating the decline in global demand, while prolonging stagnation.

All of this has been masked for a long time by such phenomena as the IT revolution, first fiscal and then monetary stimulus as well as sustained high economic growth in China.

Suddenly, the props are crumbling. Innovation has created huge productivity gains, but its incremental contribution to economic growth is slowing down.

Fiscal and monetary stimulus is an effective tools in a cyclical downturn, but unsustainable in addressing structural problems. And the Chinese economic slowdown is both a cause and the effect of sluggish global demand.

And so advanced nations are faced with the fact that structurally depressed global demand has caused high youth unemployment, high long-term unemployment and – above all – growing numbers of the part-time employed and those with jobs that do not pay a living wage.

While official unemployment rates in advanced countries may be falling, these underlying imbalances are eroding the social fabric of advanced nations.

What can be done?

Social development and greater educational attainment have a permanent effect on birth rates in advanced countries and are the cause for aging populations. It is not likely – and largely undesirable – for that to change.

Wages can be boosted and taxes on the rich can be redistributed more effectively to those in need, assuming broad-based political consensus. But even then can one prevent the loss of good jobs to lower-income countries without implementing beggar thy neighbor policies and reversing globalization?

Or is it really that binary? Does globalization really mean that corporations should be permitted to indiscriminately ship jobs to lower income countries?

Would “onshoring” boost demand in economies with the greatest consumption potential (advanced countries)? And would such a boost in global demand trickle down to emerging countries, because their excess labor could meet newly recovered demand growth?

For anyone who believes in global integration and the lifting of standards of living in advanced and emerging countries alike is truly challenged now.

Truth be told, the world is still made up of nation states. While we live in a global and deeply interconnected economy, there is no global, elected government. Hence, the citizens of many advanced nations look to their politicians to stop what looks like an inevitable slide into broad-based poverty.

Those national policymakers must consider all options – lest they are willing to enter a period of social and political instability. This is the uncomfortable truth.