06.30.2009 0

Globalization and Government Expenditures

  • On: 07/08/2009 09:38:00
  • In: Economy
  • By Justin Williams

    Globalization, the extension of investment and business overseas, is always a hot button issue during election time in every country. Each party tries to please both the Unions and investors in order to get reelected. Just last year in the United States, 2008 Democratic Presidential primary, both candidates Hillary Clinton and Barack Obama promised to reopen negotiations of the North American Free Trade Agreement (NAFTA), because of anti-globalization sentiment.

    Often politicians support social government expenditures to try and offset some of the temporary unemployment that can be caused by newly globalized markets and trade. This is the period when the workforce shifts from lesser efficient sectors of the economy to more efficient as laid out by classical economist David Ricardo in his famous book “Principles of Political Economy and Taxation.”

    But these policies jeopardize the stability of America’s long-term growth.

    Of course, those on the left—who favor big government—are more likely to vote for these damaging expenditures because the Unions are a very strong voting base, especially in Europe. On the other hand, the rightwing parties support the capital owners and believe, rightly so, that the jobs that get sent overseas are replaced with other new higher paying jobs.

    In fact, America can attribute much of its success for being the leader of international open markets.

    Recently, economist Niklas Potrafke found that those OECD countries (Western Europe, Japan, U.S., Australia, and New Zealand) from 1980-2003 that achieved both a higher rate of globalization and a move to the left saw the fastest increase their government expenditures, 1.7 percent.

    In other studies by Economists Douglas Irwin and Marko Tervio, it was proven that every 1 percent increase in trade openness causes a 2-3 percent increase in the home country’s income. As a result, it is obvious that the leftist policy is to trade short-term political gain for long-term economic growth through import tariffs and trade quotas.

    These short-sided policies of high tariffs and trade quotas reduce a large amount of competition in domestic industries. And then these policies allow the domestic companies with their state-approved monopolies to raise their prices, which in turn raise their profits. This causes a misallocation of precious resources that should be used in a more productive part of the economy.

    But it creates a very happy Unionize/Corporatize voting bloc.

    For example, if the United States did not produce any automobiles domestically and the government had high import tariffs on foreign-made automobiles, this would raise the cost of other forms of transportation like the horse and buggy. Except perhaps for the Amish, most Americans would agree that the government policy should not raise costs upon the American people to save the jobs of the horse and buggy makers.

    But when a special interest group like Big Labor creates a large voting bloc that is susceptible to short-term posturing, leftists around the world stand in line to deliver the policies that would muster votes for their frequent election cycles.

    Globalization brings great benefits to all countries around the world. It has created more jobs than it has destroyed. And it is spreading freedom to the countries that participate.

    Unfortunately, the fight still rages on as leftist politicians use the short readjustment period—which would lead their citizens to better paying jobs—to get elected and create policies that jeopardize the long-term growth of their countries.

    Justin Williams is a Contributing Editor of ALG News Bureau.

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