Markets and states are complements

The main point of my 1999 book with Jeff Williamson was that globalisation produces both winners and losers, and that this can lead to an anti-globalisation backlash. We argued this based on late 19th century evidence, but opinion poll evidence (citations here) suggested that something similar was at work in the late 20th century as well, a hunch confirmed in the early 21st century by the 2005 and 2008 French and Irish referenda.

What was missing from all this was an analysis of what, if anything, governments can do about this. Which is where Dani Rodrik’s finding that more open states had bigger governments in the late 20th century comes in. Dani’s interpretation is that markets expose workers to risk, and that government expenditure of various sorts can help protect them from those risks. In a series of articles, and an important book, Michael Huberman showed that this correlation between states and markets was present before 1914 as well: countries with more liberal trade policies tended to have more advanced social protections of various sorts, and this helped maintain political support for openness.

Anti-immigration sentiment was clearly crucial in delivering an anti-EU vote in England. And if you talk to ordinary people, it seems clear that competition for scarce public housing and other public services was one important factor behind this. If the Tories had really wanted to maintain support for the EU, investment in public services and public housing would have been the way to do it: if these had been elastically supplied, that would have muted the impression that there was a zero-sum competition between natives and immigrants. It wouldn’t have satisfied the xenophobes, but not all anti-immigrant voters are xenophobes. But of course the Tories were never going to do that, at least not with Osborne at the helm.

If the English want continued Single Market access, they will have to swallow continued labor mobility. There are complementary domestic policies that could help in making that politically feasible. We will have to wait and see what the English decide. But there are also lessons for the 27 remaining EU states. Too much market and too little state invites a backlash. Take the politics into account, and it becomes clear (as Dani has often argued) that markets and states are complements, not substitutes.

 

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12 thoughts on “Markets and states are complements”

  1. Kevin, you were quoted in Kevin Philipps’ Wealth and Democracy which I think is the best overview of what is going on now.
    The North of England has been hollowed out by neoliberalism.

    https://www.theguardian.com/uk/2010/jul/12/laura-barton-wigan-southerner

    http://www.ft.com/cms/s/0/5f61e16c-2d59-11e6-a18d-a96ab29e3c95.html

    The forces that are now tearing Westminster apart have been marinating for over 30 years.

    Meanwhile USD 11.7tn in sov bonds are now negative yield. Last week it was 10.4 tn. Some people are making a lot of money from the last neoliberal Ponzi.

  2. This interview with Hollande in Les Echos is of interest in the context of this debate.

    http://www.lesechos.fr/politique-societe/politique/0211079549317-francois-hollande-limmobilisme-serait-la-dislocation-de-leurope-2010836.php?ftcamp=crm/email/nbe/BrusselsBrief/product

    On free movement!

    La question des migrations du travail, avec la directive sur les travailleurs détachés, a été au coeur du débat britannique mais pas seulement. Qu’est-ce qui doit changer selon vous ?
    Mais qui a négocié cette directive ? Les libéraux et en premier lieu les Britanniques ! Qui voulait de la main d’oeuvre bon marché venant de l’Est de l’Europe ? La droite européenne et au premier chef les conservateurs anglais. Ils en paient le prix aujourd’hui. La France ne demande pas de remettre en cause la libre circulation des personnes mais de supprimer les abus par un encadrement strict des « détachements » et une sanction des employeurs indélicats. C’est une discussion difficile car les pays de l’Est sont hostiles. Nous devons y parvenir. Sinon les dérives sur le travail détaché vont ronger l’Europe.

    One could add that the UK was also instrumental in gaining acceptance for the “big bang” approach to EU enlargement.

    What might be described as the conflict between the centripetal and centrifugal forces at work, involving self-evidently both markets and governments, is the everyday business of politics, both domestic and international. In this instance, one of the participants – Hollande – is ignoring the reality that the concept of free movement has been moved well beyond simply that of the posted workers directive with the introduction of the concept of EU citizenship. A step too far?

    Time well tell. There are advantages and disadvantages for the participants, as in all negotiated compromises, and the Brexit negotiations will establish clearly where these lie.

    On the various statements by the competitors for the steering wheel of the UK ship of state, these are being made in the context of that competition. How they will stand up to reality when that competition is decided is another matter, especially if May, in favour of staying in the EU, wins.

    It is worth noting that one of the few items of business going through the Dáil at the moment is the bill enabling the government to get funds from the Single Resolution Board established at EU level by Euro Area states to wind up failing banks!

    1. I believe May is for political purposes ambivalent about remaining in the EU and in the absence of a clear swing in public opinion to counter the referendum (which is being misinterpreted in some quarters as a binding instruction to government, together with timetable) will aim to leave.

      And we are talking about the Conservative Party here, so she is definitely grappling for control of the helm – not the steering wheel of the ship.

      1. Quite right!

        This contribution on the thread dealing with the article by Colm McCarthy is relevant.

        The article is an excellent summary of how the UK got itself into the mess. This one, by Jonathan Powell, it seems to me, suggests the only route possible to get it – and us – fully out of it.

        http://www.irishtimes.com/opinion/jonathan-powell-it-s-not-too-late-for-uk-to-negotiate-a-way-out-of-this-disaster-1.2705259

        The article was written when Boris Johnson was still in the running for PM and contains a Plan A posited on his being successful and the holding of a second referendum. It can be discarded. (Another doubtful referendum to reverse another equally doubtful one was never on the cards, in any case. Equally, the idea that Scotland would necessarily vote to secede from the UK if the UK ends up in a position of isolation is far from certain.)

        Plan B, on the other hand, lies in the realm of real politics as it provides a recognised political route for the UK electorate to correct an error made when following another (and largely ersatz one in a UK constitutional context) i.e. the idea of Labour campaigning on a remain platform in a general election; and winning, with assistance from the Liberals, although Powell does not mention this.

        In other words, what happens in the leadership contests for the Conservative and Labour parties is a crucial indication of how events will evolve. Whether it is better or worse to have a Remainer or a Brexiteer leading the Conservatives is a question of appreciation which can only be assessed when the result is known. (Were May to win, there would be the advantage that she knows the dossier on immigration inside out as the UK’s longest serving Home Secretary.)

        As to Labour!

      2. Continuing the nautical parallels, it seems that the UK government, or what is left to it, is beginning to twig that the obstacle ahead is, in fact, not a small craft but the EU lighthouse. There is now a veritable rush to get a new PM into place and May is the clear front-runner.This will certainly have had something to do with it.

        http://www.bbc.com/news/uk-politics-eu-referendum-36678222

        Legally and technically the Commission is, no doubt, correct. In an amicable divorce, however, a more constructive approach would have been found.

        Maybe Corbyn would now also accede to Cameron’s entreaty, put his country first and quit the stage.

  3. @Kevin.

    Article on VoxEU today by Milanovic supports your general view of Brexit as representing an anti-globalisation political backlash, in at least some of its aspects..
    .http://voxeu.org/article/greatest-reshuffle-individual-incomes-industrial-revolution

    He points out: “Most people are concerned with their incomes as compared to their national peers. Milanovic and Roemer (2016) show that what seems a very positive development (that is, lower global inequality) when individuals are assumed to be concerned solely with their absolute incomes becomes much less positive when we also include in their welfare functions a concern with relative positions in national income distributions. Then the dominant feeling across the world, reflecting increasing national income inequalities, becomes one of a relative loss.

    The political implications of a global ‘elephant graph’ are being played out in national political spaces. In that space, rising national inequalities, despite being accompanied by lower global poverty and inequality, may turn out to be difficult to manage politically.”

    1. Veronica

      I remember reading something a while ago about comparisons. Most people are only focused on comparing themselves with their peers and people down the road. The big picture stuff like current income inequality or ceo to least paid ratio doesn’t get a look in until things stall falling apart.

  4. Brexit is today’s crisis but it doesn’t stop there. There will be many more days of panic and chaos until we reach an equilibrium.

  5. It looks as though history is being rewritten by the Left to portray the referendum result as some sort of uprising of the proletariat, where the downtrodden masses voted for more state involvement in the economy, higher taxes and spending, greater equality and various ‘progressive’ causes.

    There is no evidence whatever of this. All the evidence is that this was a conservative revolt (in England) against what is perceived to be the liberal elite.

    Here is Lord Ashcroft’s poll, the most comprehensive I’ve seen.

    http://lordashcroftpolls.com/2016/06/how-the-united-kingdom-voted-and-why/

    All social classes voted for Brexit except one.

    The biggest difference between those voting for and against was what nationality they saw themselves as. Those seeing themselves as English first voted overwhelmingly for Brexit. Those not seeing themselves as English first voted overwhelmingly against Brexit.

    Blacks and Asians voted overwhelmingly against Brexit, although they are the most deprived.

    Both sides were equally divided on whether they thought capitalism was a good or bad thing, with virtually no difference between them. So, they didn’t vote according to the historic right/left divide.

    Those voting for Brexit were overwhelmingly opposed to social liberalism, feminism, immigration, the environmental movement and virtually every ‘progressive’ cause, while those voting against Brexit were overwhelming in favour of these things.

    Although the poll doesn’t mention such things as state involvement in the economy, higher taxes or greater equality, the responses to the rest of what might be called the Irish Times agenda (social liberalism, feminism, immigration, the environmental movement) would suggest that those voting for Brexit were overwhelmingly opposed to these too.

    As i’ve said elsewhere, I have no gripe with the vote going the way it did, merely attempts to foist the result on non-England parts of the U. Kingdom.

  6. I haven’t read huberman’s book, though I want to after this post.
    But if his claim is a strong welfare state in open economies weakens the reaction to globalisation, could causation work the other way, ie countries with strong, effective welfare states are less likely to have polarised political cultures, more like to have political systems based on cooperation, bargaining and expert policy formation. Therefore the rise of anti immigrant/globalisation sentiment is more likely a result of the structure of the political system, and the lack of political factions sowing discontent along these lines.
    I don’t know if this is a sensible interjection on my part, but if it is how does huberman respond to it?

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