Chrystia Freeland

Mitt Romney’s thumping victory in the Florida primary this week is bringing us closer to a Romney-Obama face-off in the autumn. While we do not know for sure if Romney will clinch the Republican nomination, if he does, we can already say what the central question in November will be: Is the United States one nation under God, or has it become a country where the government needs to secure a better deal for the 99 percent?

We know Romney’s view. In a television interview last month, he explained: “When you have a president encouraging the idea of dividing America based on the 99 percent versus 1 percent — and those people who have been most successful will be in the 1 percent — you have opened up a whole new wave of approach in this country which is entirely inconsistent with the concept of one nation under God.”

Meanwhile, in his State of the Union address, the president opted explicitly for the 99 percent perspective. Restoring their fortunes is “the defining issue of our time,” he said. “No challenge is more urgent. No debate more important. We can either settle for a country where a shrinking number of people do really well, while a growing number of Americans barely get by, or we can restore an economy where everyone gets a fair shot, and everyone does their fair share, and everyone plays by the same set of rules.”

The Obama analysis gets a lift from “The China Syndrome,” a recent paper on the impact of trade with China by a powerful troika of economists: David H. Autor, David Dorn and Gordon H. Hanson. The empirical study, which was cited in an important speech on inequality a few weeks ago by Alan Krueger, chairman of the president’s Council of Economic Advisers, is particularly significant because it marks a shift in consensus thinking in the academy.

In the debate about the causes of growing income inequality, U.S. economists have tended to opt for technology as the driving force. Indeed, in his remarks, Krueger referred to a survey he did of those economists, who overwhelmingly cited technological change as the most important factor.

But drawing on detailed data from local labor markets in the United States, the authors of the “The China Syndrome” argue that globalization, and in particular trade with China, is having a huge impact on blue-collar U.S. workers: “Conservatively, it explains one-quarter of the contemporaneous aggregate decline in U.S. manufacturing employment.”

The deleterious effects go beyond those workers who lose their jobs. In communities hit by the China Syndrome, wages fall — particularly, it turns out, outside the manufacturing sector — and some people stop looking for work. The result is “a steep drop in the average earnings of households.” Uncle Sam gets hit, too, especially in the form of increased disability payouts.

Autor, Dorn and Hanson are no protectionists. But in a challenge to the “one nation under God” view of the world, they offer a sharp reminder that the costs and benefits of trade are unevenly shared. As they put it, their finding does not “contradict the logic” of arguments favoring free trade: “It just highlights trade’s distributional consequences.”

When I raised the issue with Joseph E. Stiglitz, the Nobel economics laureate and longtime doomsayer about the downside of globalization, he practically crowed with vindication. “The economic theory is very clear,” he said. “What happens when you bring together countries which are very different, like the United States and China, is that the wages in the high-wage country get depressed down. This was predictable. Full globalization would in fact mean the wages in the United States would be the same as the wages in China. That’s what you mean by a perfect market. We don’t like that.”

The truth is we are no longer living in “one nation under God”; we are living in one world under God. Globalization is working — the world overall is getting richer. But a lot of the costs of that transition are being borne by specific groups of workers in the developed West.

We are accustomed to thinking of the left as having an internationalist perspective. Liberals are the sort of people who worry about poverty in Africa or the education of girls in India. The irony today is that the real internationalists are no longer the bleeding-heart liberals, they are the cutthroat titans of capital.

Here, for instance, is what Steve Miller, the chairman of insurance giant American International Group and one of Detroit’s legendary turnaround bosses, had to say about globalization and jobs. “Well, first off, as a citizen of the world, I think everyone around the world, no matter what country they’re in, should have the opportunities that we have gotten used to in the United States. Globalization is here. It’s a fact of life; it’s not going away. And it does mean that for different levels of skill, there’s going to be something of a leveling out of pay scales that go with it, particularly for jobs that are mobile, if the products can be moved, which is not everything.”

No matter what passport you hold, if you run or own a global company, that is not really a big deal. But as Autor, Dorn and Hanson show, if you are a U.S. worker, that “leveling out” can be painful indeed.

Smart policy, however, can make a big difference. Europe may not seem to have much to teach the rest of the world at the moment, but as Chancellor Angela Merkel leads a group of German industrialists to Guangzhou this week, Americans might want to study how Germany has turned the China Syndrome to the benefit of both its chief executives and its blue-collar workers.

Columbia University economist Joseph Stiglitz is #30 on Foreign Policy’s list of the 100 Top Global Thinkers of 2010. Stiglitz told Chrystia that his big idea is “globalization is something that has to be shaped.”

For much of recent history, special interests have driven the globalization agenda, he says. One of the primary obstacles to completing the Doha Round of free-trade negotiations is the billions of dollars of subsidies the U.S. showers on about 25,000 American cotton farmers, a policy that impoverishes more than 10 million cotton farmers in Africa and that has been judged as a violation of WTO rules.

Despite globalization’s shortcomings, Stiglitz does not believe it is to blame for the hollowing out of America’s middle-class. Increases in productivity and technological changes have reduced the demand for the unskilled labor. “The real failure of public policy,” Stiglitz says, is that “it hasn’t responded effectively to the driving forces of technology and globalization.”  Stiglitz argues that by lowering barriers to trade while failing to invest in health care and education, America has resigned itself to having a middle class that lacks the skills to compete in the global economy.

Stiglitz has not one, but three, big ideas in the pipeline. First, he would like to study the design of financial architecture to find out what the optimal degree of inter-connectivity is in the capital markets. Too often, he says, economists look at either the benefits of risk-sharing or the costs of contagion without formulating a model that considers both.

Second, Stiglitz would like to research the role of ideas in shaping the economy. He recently co-authored a paper with Carla Hoff of the World Bank called “Equilibrium Fictions” that analyzes confirmation bias, the tendency to process information in a way that validates one’s worldview, by looking at the social construct of race in modern history.

Third, Stiglitz outlines his next book, which will look at how the financial crisis has affected globalization and undermined America’s credibility on economic policy.

But, Foreign Policy placed Stiglitz on their list of Top Global Thinkers for a completely different reason — “his full-throated defense of fiscal stimulus”:

If last year was Joseph Stiglitz’s “I told you so” moment, this year has been his “so what do we do about it” opportunity. The Nobel laureate and former World Bank chief economist has gone from predicting the cataclysmic fall of the deregulated global economy to outlining a way back from the abyss.

That’s not to say the famously iconoclastic professor is pulling punches. Stiglitz has excoriated Barack Obama for appointing the very same people who caused the financial crisis to manage the recovery. In his latest book, Freefall: America, Free Markets, and the Sinking of the World Economy, Stiglitz outlines how existential problems such as weak regulations and moral hazard were disregarded in favor of injecting cash back into the most risk-prone banks, while substantive issues such as the foreclosure crisis and the scarcity of small-business loans have worsened with neglect. As for the wave of austerity sweeping Europe, he recently cautioned, that could send the world into an economic tailspin. Stiglitz’s refrain? Forget the deficit and invest boldly in technology and infrastructure. As he wrote in September, “We cannot afford not to stimulate the economy.”

Read a full interview with Stiglitz at Foreign Policy‘s Global Thinkers Issue.

Posted by Peter Rudegeair.

In conjunction with her essay in Foreign Policy‘s Top Global Thinkers issue, Chrystia interviewed six of the financial luminaries that made the list:

MIT’s Daron Acemoglu, Yale’s Robert Shiller, PIMCO’s Mohamed El-Erian, Columbia’s Joseph Stiglitz, the University of Chicago’s Raghuram Rajan, and NYU’s Nouriel Roubini.

Reuters and Foreign Policy will be showing these interviews over the next coming days.  This one is a compilation of the above six global thinkers.

Posted by Peter Rudegeair.