What should governments do to ensure that economies benefit from globalization? The Treasury's published its answer this morning. It contains a horrible misunderstanding. The Treasury says governments should:
establish macroeconomic stability through sound fiscal and monetary frameworks to help individuals and firms to cope with the shocks and volatility of a rapidly changing global economy.
Now, I'll grant that globalization does increase individual insecurity; for me, this book by Dani Rodrik givs the best explanation of why. My gripe is that there's just no easy link from macro stability to individual economic security. Macro stability is quite consistent with individual insecurity. Evidence:
1. Simple maths. Imagine an economy with two equal-weighted incomes, which have a standard deviation of 25 (roughly, that of the annual return on a relatively safe equity) and correlation of 0.5. The SD of the economy is 21.65. Now imagine the SD of individuals' incomes rises to 35, and the correlation falls to minus 0.5. Macroeconomic volatility then falls to 17.5. Macro stability has increased whilst individual security has fallen.
2. This paper has found that firm-volatility has risen over the long-term whilst correlations between firms has fallen.
3. In the last 12 months, 2.4 million people joined the unemployment figures (table 10 of this pdf). That's equivalent to 1 in 11 workers. Granted, some people join the unemployment numbers from places other work, and there's some double-counting here. But the figures also ignore the possibility that some people who lose their jobs don't sign on. The picture is that there's significant job destruction even in times of macro stability.
4. This important paper (pdf) by Robert Hall shows that, on various measures, over 1% of Americans lose their jobs each month - an annual rate of job destruction of around 15%. And this doesn't vary much over the "cycle."
The message is that individual insecurity is an unavoidable fact about economies. Macro stability cannot create individual security.
The Treasury is, therefore, exaggerating what macroeconomic policy can achieve.
Worse still, it seems to be ignoring the potential of what markets can achieve. There's no mention in its (admittedly short) report of Robert Shiller's proposals for markets to insure against macroeconomic risks.
But then, I wouldn't have expected anything else from the temple of managerialism.