Could Globalization Fail?

Policies that spawn economic inequality rather than free trade could bring about an economic crisis.

Activists are not alone in grumbling about globalization. Financial crises in Latin America, government restrictions of foreign takeovers in Europe, increased outsourcing of both blue- and white-collar jobs in the US, and potential loss of social benefits in all countries have increased anxiety about globalization in recent years. Even supporters of globalization wonder if the process could hit a limit and then collapse. Economies tend to become insular when trouble hits, and the early 20th century offers lessons for analyzing globalization’s future. After the First World War, nations withdrew from trade, and economic policies resulting in uneven distribution of prosperity led to the financial crash of 1929. Modern financial institutions are less fragile than those of the late 1920s. However, modern globalization has a contradictory quality that poses dangers, contends author Thomas Palley. The current economic system depends on massive consumption, yet encourages companies to escape from communities or countries with high social-benefit costs. Polices that deregulated the financial markets mask stagnant wages and allow the consumption to continue. But those policies lead to excessive debt that has essentially hollowed out the middle-class, and the consumption cannot last without some increase in wealth. A weakened middle class with massive debt could produce another economic crash, warns Palley, and many critics will blame free trade and globalization. He analyzes possible responses to such a crisis, all of which challenge the elite. To both maintain globalization and support a social democratic mass-consumption economy, Palley recommends a new domestic and international system of rules to reduce extreme economic inequality. – YaleGlobal