Protectionism is a threat to the U.S. economy. Saving globalization requires that its gains are spread more widely. The best way: redistribute income, or at least so says Kenneth F. Scheve and Matthew J. Slaughter in the current foreign affairs.

Globalization has brought huge overall benefits, but earnings for most U.S. workers ” even those with college degrees ” have been falling recently; inequality is greater now than at any other time in the last 70 years. Whatever the cause, the result has been a surge in protectionism. To save globalization, policymakers must spread its gains more widely. The best way to do that is by redistributing income.

They claim that there is greater support for engagement with the world economy in countries that spend more on programs for dislocated workers. I am little unsure about this claim, since France, for example, has very generous social programs and they have a very negative view of globalization.

More to the point, there is another side of the opinion poles, which is that politicians both react to them, but can also affect them. Many people blame globalization for their situation in great part because government officials often say that globalization is to blame for the unpopular policies that they implement. Similarly, corporations regularly say that they have no choice but to cut wages or offshore their operations to make it in today’s global economy. Further, some democratic politicians reenforce that idea in the minds of their constituents. Globalization is the perfect scapegoat. This political reality would have been a potentially illuminated area to engage.

Having said that it is a a great article. The basic idea is that the vast majority of American are not enjoying a rise in income through globalization although it is crucial to continued growth. The public has an increasingly negative view of globalization and move to protectionism, despite their apparent understanding of the benefits. Their solution, which is worth quoting in full, is something new to consider.

Recall that $500 billion is a common estimate of the annual income gain the United States enjoys today from earlier decades of trade and investment liberalization and also of the additional annual income it would enjoy as a result global free trade in goods and services. These aggregate gains, past and prospective, are immense and therefore immensely important to secure. But the imbalance in recent income growth suggests that the number of Americans not directly sharing in these aggregate gains may now be very large.

Truly expanding the political support for open borders requires a radical change in fiscal policy. This does not, however, mean making the personal income tax more progressive, as is often suggested. U.S. taxation of personal income is already quite progressive. Instead, policymakers should remember that workers do not pay only income taxes; they also pay the FICA (Federal Insurance Contributions Act) payroll tax for social insurance. This tax offers the best way to redistribute income.

The payroll tax contains a Social Security portion and a Medicare portion, each of which is paid half by the worker and half by the employer. The overall payroll tax is a flat tax of 15.3 percent on the first $94,200 of gross income for every worker, with an ongoing 2.9 percent flat tax for the Medicare portion beyond that. Because it is a flat-rate tax on a (largely) capped base, it is a regressive tax — that is, it tends to reinforce rather than offset pretax inequality. At $760 billion in 2005, the regressive payroll tax was nearly as big as the progressive income tax ($1.1 trillion). Because it is large and regressive, the payroll tax is an obvious candidate for meaningful income redistribution linked to globalization.

A New Deal for globalization would combine further trade and investment liberalization with eliminating the full payroll tax for all workers earning below the national median. In 2005, the median total money earnings of all workers was $32,140, and there were about 67 million workers at or below this level. Assuming a mean labor income for this group of about $25,000, these 67 million workers would receive a tax cut of about $3,800 each. Because the economic burden of this tax falls largely on workers, this tax cut would be a direct gain in after-tax real income for them. With a total price tag of about $256 billion, the proposal could be paid for by raising the cap of $94,200, raising payroll tax rates (for progressivity, rates could escalate as they do with the income tax), or some combination of the two. This is, of course, only an outline of the needed policy reform, and there would be many implementation details to address. For example, rather than a single on-off point for this tax cut, a phase-in of it (like with the earned-income tax credit) would avoid incentive-distorting jumps in effective tax rates.

This may sound like a radical proposal. But keep in mind the figure of $500 billion: the annual U.S. income gain from trade and investment liberalization to date and the additional U.S. gain a successful Doha Round could deliver. Redistribution on this scale may be required to overcome the labor-market concerns driving the protectionist drift. Determining the right scale and structure of redistribution requires a thoughtful national discussion among all stakeholders. Policymakers must also consider how exactly to link such redistribution to further liberalization. But this should not obscure the essential idea: to be politically viable, efforts for further trade and investment liberalization will need to be explicitly linked to fundamental fiscal reform aimed at distributing globalization’s aggregate gains more broadly.

A more distributive fiscal policy and fairer rules will undoubtedly make globalization more politically viable and sustainable.

The article also makes me think about developing countries. I’m a sucker (perhaps knowing so much economics) for political liberty following from economic liberty. It’s breathtaking what’s happened in the last 20 years or less. It’s as though the whole world has changed its mind. Everywhere — in India, China, Asia, Latin America, Europe, North America, and above all in the communist world — governments have retreated from “the commanding heights of the economy.” The old debates were about what the role of the market was, what was the role of the state. I think it’s now generally appreciated that it’s the market that harnesses people’s initiative best. And the real focus of progressive thinking is not how to oppose and suppress market forces but how to use market forces to achieve progressive objectives. The article raised the same old argument against globalization: does it really work for lower class workers?