Nostalgia is a treacherous guide to economic policy


Both sides of the US political spectrum are guilty of scapegoating: Democrats and Republicans alike blame globalisation and trade for the plight of left-behind US workers, when the causes are a lot closer to home.

This is not my claim, but that of Adam Posen, the president of the Peterson Institute for International Economics, who has penned a forceful article in Foreign Affairs decrying “America’s self-defeating economic retreat”.

As Free Lunch readers will know, though, I have made similar arguments to Posen’s analysis, in this column as well as in my latest book. So in addition to recommending Posen’s article, I caught up with him to discuss the scapegoating of globalisation and explore where we may have different views.

In a first of what I hope will be more “Free Lunch conversations”, you can watch the interview here:

A key contribution Posen makes is simply to set the record straight and show that the US has actually been disengaging from the global economy. Along many dimensions, its global integration has fallen behind other countries, stopped deepening or even gone into reverse. In an accompanying data piece, he shows this in terms of trade:

in terms of foreign investment:

Foreign direct investment into the US has stagnated since 2000

and even in terms of immigration:

The immigrant population in the US is now growing more slowly than in most other advanced economies

In our discussion we broadened the argument to other high-income countries, which also shows globalisation is not behind the economic malaise experienced in many countries in the past four decades: rising income, wealth, and regional inequality, and the emergence of a group economically left behind. Comparing countries shows that it is often the most open economies, such as the Scandinavian nations, that have navigated these changes most successfully. Moreover, the problems started in the early 1980s, before globalisation as we know it took off in earnest.

We also discussed two areas in which we take different perspectives — at least in terms of emphasis and to some extent in our analysis. First, Posen decries the idolisation of “good manufacturing jobs” in US political rhetoric. The share of factory jobs in total employment has been falling as fast in places such as Germany as in the US, he points out. That is correct. But it is also the case that in most high-income countries, the absolute number of factory jobs rose until around 1980 (the relative share had already been on a secular decline for a long time before that). That suggests the shift from a manufacturing-led to a knowledge services-led economy played a big role in the failure of prosperity to be broadly shared in the decades that followed.

(But as we note in our conversation, it is factory jobs that have declined, not factory output: the US, for example, produces as many cars as it ever has. Those manufacturing sectors that have experienced output decline are typically those with the lowest labour productivity, such as textiles — which, as Posen points out, disproportionately employed women and have received nothing like the attention of more male-dominated jobs.)

That can be seen in the other theme where our perspectives differ: the economics of place. Posen is sympathetic to communities in decline but dismissive of treating “as normal and attainable the privilege of not having to change jobs or homes for economic reasons, a luxury that in recent decades has been enjoyed primarily by white workers living in rural or exurban areas”. I have called for policymakers to take the moral imperative of place seriously in economic policy — if nothing else, then for the political reason that they will otherwise rebel.

Posen is right to say that country after country has failed to prevent areas from economic decline by throwing money at them. But I am more optimistic that we can learn from places that work. Some countries, such as Norway, have bucked the trend of rising regional inequality in productivity per head since the 1980s; and there are success stories even in the US, as the case of Grand Rapids shows.

Where we agree is that nothing will be achieved by clinging to the jobs of the past. Declining places will be turned round to the extent they can host modern, high-skilled and high-value-added jobs, whether in services or manufacturing. (One of the most consequential policy questions today is whether the jump in remote working can be harnessed for this.) And more generally, railing against globalisation helps nobody. We both agree that national policy should focus on creating “good work” for people, as Posen puts it. President Joe Biden’s bold experimentation with moving the US economy to a new model — plainly laid out in his address on Wednesday — is extremely significant in that regard.

The central point, which we both make, is this: to undo the ailments we have allowed to grow in high-income economies, we need to embrace change and the jobs and technologies of the future. As Posen says: “Nostalgia is not a good look for a progressive agenda.”

Other readables

  • In Germany, researchers from the Ifo Institute have observed “massive structural shifts toward online business — even following the lockdowns . . . the crisis is hastening the death of city centers”.

    Chart showing expenditure in household goods and appliances in Germany

  • Three of France’s most prominent economists have made an important contribution to the debate on the EU’s fiscal rules. Philippe Martin, Jean Pisani-Ferry and Xavier Ragot propose that the current suspension of the rules should not be lifted until a new framework has been put in place, which should leave behind the numerical thresholds of the Stability and Growth Pact (the 3 per cent public deficit-to-GDP and 60 per cent public debt-to-GDP ratios). They should be replaced by country-specific debt targets, taking into account differences in growth rates and borrowing costs, and an expenditure growth rule.

  • A new report from the Resolution Foundation showed that the UK government provided significant protection for average household incomes in the pandemic, but only “by radically reshaping the welfare state at very short notice”. As I have argued before, this gives reason to think the British welfare system may be forced durably into a more continental-looking shape.

Numbers news

  • In what could be the most important numerical news of the decade, China’s population has begun to shrink.

  • A new article in the Lancet shows that high-income countries that chose an elimination strategy for coronavirus suffered drastically fewer Covid-19 deaths, much smaller economic losses and lighter lockdowns and shorter restrictions on personal liberties, compared with their peers that opted for mitigation.


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