Greedy Goblin

Wednesday, June 15, 2011

How globalization destroys social-democracy

Almost 2 years ago I wrote that I found a loophole in the sacred cow of market-believers: while products, capital and workforce are globalized, the cost of the inactives (welfare and/or law enforcement) is not. Why is it bad? Imagine two countries with exactly the same workers, companies and natural resources. These countries should be identical. Now let's say one have more inactives. This country must have higher taxes to support them. These higher taxes make either the workers poorer and/or the companies less profitable. It's not a big problem without globalization as it simply means that this country is a bit poorer.

Now let's globalize these countries. If the poorer country had higher income tax, working in the richer country provides higher income, so workers of the poorer country will leave for the rich one. The production in the poorer country declines, in the richer it increases.

If the poorer country taxed the companies higher, these companies will be less profitable than their competitors in the richer country, so they can be pushed out of the market either by selling products lower than they can, or by draining their workforce by offering higher salary..

So globalization makes the rich country richer, the poor poorer even if they were almost equal at start. For long I considered it a fatal loophole that will destroy it as poorer countries are much better off rejecting globalization, so they will close their borders from competing products, protecting their companies. As there will be always poorest country among the globalized ones, they will quit one by one until none is left.

I still think that the above is true, but I no longer consider it a loophole. It's a feature. We are people and not countries. We are forced to carry the inactives of our countries. However globalization both allows and forces us to escape to the richer country. The "allows" part is obvious, I can go work to a rich country without becoming a fugitive. As my country is EU member, they can't punish me for not working inside.

The "forces" part is trickier: by allowing toll-free import of products, the people of the poor country will buy more competitive import products destroying their own workplace. They will become unemployed as neither them, nor their countrymen will buy the products their former employer produced. Being unemployed forces them to move where the jobs are: to the richer country.

Globalization gives the country three options:
  • losing its workforce, becoming poorer and poorer, 
  • cutting the taxes by decreasing the money given to inactives to remain competitive
  • lock its borders from fleeing workers and incoming better products: welcome to North Korea!
Globalization makes social-democracies (where inactives get large support) very poor, destroying this form of politics. Of course it's not happening overnight as many workers don't leave their poor countries due to social reasons (friends, family, patriotism) and many richer countries don't welcome incoming workers due to social reasons (racism, "they take our jobs").

However slow is enough. Soon the countries that refuses to cut inactive supporting features will fall to poverty. Greece will be the first I guess.

Many people comment that standard of living, overall happiness are not correlated with GDP or tax rate (over a bare minimum) and also that GDP is very loosely correlated with tax rate, so the above is must be wrong. They ignore that globalization is a new thing. Until the most recent decades the idea of moving out of your country was weird. Only refugees running for their lives and a few weird wanderer moved. If you born in Sweden, the idea to run from the 70% taxes, to live richer was not an option. So you worked there, paid and tried your best from the 30%. The unrewarded work of these people made Sweden and many other social-democracies big and strong.

But now the option is there. My parents couldn't think of moving. They worked hard with the attitude "we have to go on with the cards the life dealt". They spent their lives generating GDP in many forms to a socialist country, despite they knew it sucked. They believed that the alternative is an even crappier life: being an unemployed poor person in the same crappy country. For me, moving is an existing option. Many relatives, ex-classmates and colleagues from my generation already moved.

The top 10% pays 80% of the taxes in most countries. So if just 1% of the population chooses to move, 8% of the tax money goes away.


    Anonymous said...

    Which rich EU countries are you referring to exactly? Norway, Denmark, Finland, Sweden, Germany, France, Netherlands, Belgium and Austria are all amongst them, I presume? You might want to research their tax rates.

    Chopsui said...

    Or... we find out open markets and globalization, although we have reaped a lot of the benefits from it, are not the end-all answer to global economics, and some things are better left locally.

    Or... we find out our financial system along with the fact that manual labour is fast becoming a non-scarce resource, is not future-proof and we need to re-evaluate it.

    Gevlon, as you know I don't always agree with your views, but I follow your reasonings because I find them interesting and better to read that most blogs out there. Your conclusion seems correct, if you keep globalization and the financial system as a given.

    I don't know what the answer is to Greece, but I do know if you look at Greece and Spain, that there's so much unemployment (and resulting benefits) that even if we *would* have sensible work for them, that it would not be valuated high enough to get paid over the benefits at all. The question is whether the money made from the work that would be available, would be able to support them at all.

    But really, the current problem seems to stem more from the fact that we simply are starting to lack value-adding work for most people.

    Azuriel said...

    The problem, of course, is that countries like China actually cause the number of inactives in rich countries like the USA to increase, flipping the model on its head.

    In a perfectly globalized economy, there will always be someone willing to do the same work you can for less money than you. Education and specialized skills can cut the labor competition down somewhat, but there are seven billion other human beings out there. In the end, the only people who actually profit are the corporations themselves, the investors, and basically the rich. As always.

    Leeho said...

    Actually the movement is in exactly opposite direction - people tend to migrate to the countries with higher social protection.

    Also countries are not equal, it's cheaper to live in Thai compared to Russia, for example. Cause you don't need to warm houses, build houses the way they could be warm, food doesn't need to be carried for thousands of kilometers, etc.

    Gevlon said...

    @Sweden worshipers: check the GDP of Sweden for the last 30 years, compare it to the US and be surprised

    In short: Sweden is rich because it was rich 30 years ago. Its growth is both slow and extremely jumpy.

    Anonymous said...

    @First anonymous
    Norway is not part of the EU, but has a trade contract (or slave contract, according to some) with the EU called the EEC. and the tax rate is about 70.4% half of which is income tax.

    About Greece
    Greece shows no intention to reduce welfare, and rather threatens the EU to give them bailouts as the bailouts will (in the short term) be cheaper for them than to have the Euro weakened by Greece going under.
    This is realy just international blackmail as the bailout will technicly be given as a loan, but all parts involven know very well it will never be repaid.

    France is giving in, Germany is not, and Portugal, Ireland and Spain who will share the faith of Greece withing 10-15 years are lobbying on behalf of Greece.

    This shows that a currency union of countries with different wealth and price levels is bound to fail. To bad they had to learn the hard way.
    A Euro in a Greman bank is today more valuable than the same Euro in a greek bank. Because Greece is treathening to freeze private accounts, and transfering money to other from Greece to countris is no longer allowed.

    Anonymous said...

    "globalization makes the rich country richer, the poor poorer"

    I don't agree with this. America is outsourcing. Sometimes it seems we have an aversion to any kind of manual labor or manufacturing jobs. As those jobs leave, the people who used to do them go on welfare. We have the same people (at best, if no new ones come) and much less income. We are becoming a welfare nation.

    The faulty premise is "if you live within these borders you have a right to a good life" This is just wrong. America will go bankrupt sooner than you think. Unfortunately we'll probably take a lot of other countries down with us.

    The social, politically correct society that has arien here over the past 50 years is destroying us. Most Americans want to work, the same as any other country I would imagine.

    It is our government driving the jobs away. They think big corporations should support the economy and enact all kinds of crazy laws and taxes without thinking. If you provide an environment friendly to corporations (low tax rates for example) they will come to you or stay with you. It's easy to figure out.

    Why tax a corporation anyway? it's stupid. All they do is pass the tax on to their customers by raising prices. They most certainly will not take a hit to their bottom line because of a tax increase. We should be giving them incentives to come rather than enacting laws to drive them away.

    Sten Düring said...


    Sweden was rich 30 years ago when we didn't have the second highest tax rate in the world. 30 years ago we had the highest tax rate in the world.

    Sweden began climbing to a wealthy nation from the 1950s. Strangely enough that timespan also coinsides with the implementation of the Swedish so called welfare state.

    USA is pretending to have a working economy in difference from Sweden.

    Now go home and read up on your facts. Fail theory is fail

    Sean said...

    I agree, but you may want to reword your post a little as I think my understanding of it is different from how it's expressed. It's not the that globalization makes a poor country poorer, but rather, it makes a social country poorer. When the country reaches the point where they can't carry the inactives anymore, they could be headed into big trouble (e.g. alot of countries in Europe). I have a feeling that USA is also slowly heading towards this social-democracy - a good example is the state of California.

    Anonymous said...

    About taxing corporations:
    Adam Smith wrote in wealth of nations that taxing a worker is pointless as all it does is increase price of labour and in the end the corporation pays the tax.
    Weather you tax the worker or the corporation the consumer will pay the final cost.

    About Global labour markets:
    If a corporation can produce it's goods cheaper in a different country it propably will, if the costs of labour is lower and workers with the proper skills can be obtained.
    However this applies to manufacturing industries, where goods can be shipped back to the consumers.
    The service industry is mostly unaffected, as a person in China can not tend a bar in America. He can move to America but that will give him the american cost of living and a chineese salery is no longer sufficent for him.
    Many jobs have to be done on location, and can not be outsourced to a cheaper country, only immigrants who will work for less can take them.

    In this aspect immigration must be seen over time as general population growt, it's not harmfull, but should be capped to avoid the population growing faster then the economy can expand. Economies can expand quickly and there seems to be no cap on a population size that can be part of an economy.
    If an immigrant has skills that are undersupplied, him filling a job is of harm to no one and helpfull to the economy.

    Steady growt of the population by controlled immigration migth be essential to western economies survival as the fractional reserve banking systems that western coutries have requiere a constantly growing debt to create enough mony to repay existent debts. Of course the system is not sustainable, but as more people mean more loans for houses and cars, it can be kept alive for another while after it would otherwise have collapsed.

    Squishalot said...

    @ Gevlon: In relation to your Sweden argument, your table ranks Greece itself as 12th on the fast growing list, for countries with >20000 GDP per capita.

    In any event, we're talking about a rate of growth of 3.85%p.a. over the cycle to 2010. The forecast by the IMF suggests that they'll increase 5th fastest of countries with >20000 GDP over the next 6 years, suggesting that they (with more information than you would have) have a reasonable belief that Sweden is well placed to continue to grow, relative to other developed countries.

    In short: Sweden's growth is not 'slow' as you put it, and it is not rich purely because it was rich 30 years ago, as identified by the IMF forecast, from the very link that you provided in an attempt to support your case.

    Anonymous said...

    This entire post assumes that that workers can transfer locations without cost. The truth, however, is somewhat different. Not only are there costs of moving one's things, but there are also costs in terms of moving away from one's friends, family and those that speak the same language. This means that local workers and companies continue to enjoy a small advantage, though it may not be sufficient to hold off foreign workers or companies that are much more effective.

    Bernard said...


    "Why tax a corporation anyway? it's stupid. All they do is pass the tax on to their customers by raising prices."

    Because corporations (or any business) consume government services (regulation etc) which have a cost that someone needs to carry.

    Would you prefer if the average citizen carries this cost? Joe Bloggs, the butcher, should pay more tax to ensure that News Corporation stays afloat?

    Anonymous said...

    Sorry, indeed Norway is not in the EU, but my point still stands. Norway is consistently one of the top 3 richest countries in the world per capita and has one of the top 3 tax rates in the world. And probably the most comprehensive set of social benefits in the world as well. It also made it threw the financial crisis relatively unscathed. something very few countries can say.

    in fact, if you look at the list of highest tax rates and compare it to the list of richest populations, there is a very high correlation, especially in European countries.

    Gevlon, picking Sweden from a list of countries and saying it's economy is stagnant is missing the point. the majority of the world population would still rather live there than where they are. the quality of life in Sweden is consistently in the top 10 in the world.

    The problem with this post is that it just doesn't fit the data. The US shows that a more capitalist approach works and Western Europe shows that a Social Democracy approach also works. They each have their own advantages and drawbacks and it isn't clear at all that globalization will kill one or the other.

    Energybomb said...

    "Greece will be the first I guess"

    Greece apart from our HUGE well fare state has additional problems, including widespread corruption, extremely bad administration etc etc

    You are correct about fleeing the country though. I am personally moving to Canada soon.

    Energybomb said...

    sorry for the double-comment, didn't see this one:

    "About Greece
    Greece shows no intention to reduce will never be repaid."

    Are you bloody kidding me? Our cuts in welfare are the biggest recorded in modern history! We are to privatize every single major company we have. I am NOT against that (well, maybe I am against in the way it is done currently) but saying that we don't actually TRY to fix the problem is self-delusional and, honestly, insulting.

    Stupid poor european said...

    Greece's crisis has nothing to do with their support for the inactives, it has much more to do with their long debt history, when they're were forced by globalization to get in debt with other "countries" making their monetary politics the base of their budget's cost.

    There is a very lefty documental around the web call "Debtcracy" talking about this crisis and relationing it with other ones like Ecuador's and Argentina, if you take away all the social nonsense and the typical "fight the capital" propaganda, you can get another very good perspective of the problem, a much more acurate if you want. Their crisis, in summary, is like this: rich people tried do get even more rich and blew away any chance of geting competitive, but there is no problem cause benefits are out of the country so wooza! and stupid poor people didn't do anything cause they were stupid enough to not get it and do anything. Getting rich, right now, has anything to do with being competitive, because getting benefits it's independent of your quality of service and products, it dependes in other factors. z--- this is the video with clumsy subs in english, don't know if there is a better version.

    Lyxi said...

    You're overlooking two things.

    1) People are sentimental morons. Even if they leave their home country to work abroad, they still consider their 'home' their origin country and send back money to their relatives living there. Soon, social democracies will be supported by the consumption of the unemplyed who receive money from relatives abroad because "poor relative in my origin country can't find a job, and I can't ask him to move in other country (even though I moved myself)"

    2) Technological advancement means that more and more GDP is produced through automation. There will be a time soon when a machine working will be able to support a slacker indefinetly, if only for living costs like food and shelter. Whoever learns to do work that machines cannot do will earn more, true, and will afford more luxuries. But I think that in developed countries, even within 50 years, technology will be advanced enough to feed and shelter slackers.

    (Of course, the real discussion that will happen then will be that humans would advance faster if energy and food wouldn't be wasted on slackers... kinda like we have now, I suppose.)

    In any case, perhaps a time where a WoW-like society isn't far off. (In which you don't need food, and staying at the inn is free, but if you want to ride the proto-drake you have to work.) WoW becomes an interesting social experiement then.

    Anonymous said...

    Your logic and conclusion is too simplified as there are a bunch of other parameters that play a role.

    Stable social democracies can anticipate quite well to economical fluctuations, since they have a whole healthcare industry, since they force their unemployed people to get extra education, since facilities (transport, less corruption, security, ...) to be be superior.

    The example of Greece is just one of horrific mismanagement. That can hardly be used as an example of the average social democracy.

    And one main factor why the logic is flawed: the US can basically print as much new money as they want. Since their whole financial system is centred around debt, the only way to keep the system going is by getting (virtually) richer and richer to cover the interest. And the US having a massive economical influence in the world; it affects everyone. They can not be used in any intellectually honest discussion as an example of a non social democratic country.

    There are so many factors you did not mention that it's simply too easy to draw that conclusion.

    Anonymous said...

    Your title is incorrect. It states that globalization destroys social-democracy. In your essay, however, the only thing you prove is that the poor country gets poorer while rich countries get richer. Unless you prove that the rich countries getting richer are non-social-democracies, your title is incorrect.

    Gevlon said...

    @Anonymous: The cause is not being poor but taxing people for social transfers (we can assume that the tax to uphold the state is equal percentage in all countries). The way to get out is not being social democracies, decreasing social transfers.

    Anonymous said...

    Gevlon may be right about the movement of labor, but that doesn't matter much. Capital moves much more quickly and to greater effect. Using the U.S. as an example, the movement of workers into the U.S. is trivial compared to the movement of manufacturing out, despite what our politicians would have us think.

    Anonymous said...

    Gevlon may be right about the movement of labor, but that doesn't matter much. Capital moves much more quickly and to greater effect. Using the U.S. as an example, the effects of immigration have been trivial compared to the movement of manufacturing out once U.S. companies gained access to cheaper Chinese labor.

    Joshua said...


    Actually there are more factories from foreign nations moving into the US because the dollar is weaker and thus cheaper to operate. Not a TON but there are some.

    My question is why are people trying to compare nations like Sweden and Norway and Greece with the US. They are just different places all around. The US is big, actually really big. The wealth in the US is spread out to the edges and the central US just doesn't have the same living standards as the rest of the country. Take New Mexico for example. I lived well well WELL below the poverty line of the country(for those curious it was 11k a year) for a few years and didn't feel a huge impact on my quality of life. It was very cheap to live there so it was doable. If I lived in California or Oregon I just couldn't do it. A lot of these countries have fewer people less area to cover so the social programs simply work better.

    I'm curious Gevlon do you feel that it is a good comparison between the US and smaller countries with more centralized populations?

    Anonymous said...

    I agree. Democratic Republics like the US with growing social liabilities will eventually fall. Politicians don't want to be seen as terrible as fixing the issues with Social Security and the massive bureaucracy would be painful. At some point, there will be no choice. Having 4 of 10 people living off the government teet does not work.

    Anonymous said...

    Gevlon said: "The cause is not being poor but taxing people for social transfers (we can assume that the tax to uphold the state is equal percentage in all countries)."

    Agreed, but you're assuming that all tax goes to supporting the inactives. There are other options. For example, the poorer country could cut on its military spending in order to provide more funding to social programs.

    There's also another flaw in your thinking. You stated "Imagine two countries with exactly the same workers, companies and natural resources. These countries should be identical. Now let's say one have more inactives. This country must have higher taxes to support them."

    First, you're making the assumption that high taxes are necessary to support the inactives. I challenge that. For example, the company with more inactives could be more productive than the country with fewer inactives.

    Second, assuming there is no other difference than the number of inactives, why would there be any globalization? Why would two countries producing the same goods and services at the same price want to trade goods and services? It seems that that would only add overhead to the products with no value or cost savings?

    All that isn't to say that having unemployed or inactive citizens isn't a burden on a country. That I agree with. I just don't see how globalization has any more impact on social democratic societies anymore than on other political/economic system.

    Enarka said...

    I think the economy as a whole is a fallacious idea; it might've been relevant a while back, but seeing how my daily routine exposes me to more and more scientific outbreaks, I wonder why we even need this system.

    Our financial/economic system is based on consumption. Buy, throw, buy, throw, buy. It's based on waste. You can't create everlasting products, or the system crumbles.

    Science is very capable of supplying humanity as a whole in terms of energy/food. If scarcity isn't present anymore in energy/basic needs, a lot of things lose value.

    And from there, it only becomes logical that you don't deplete your pool of resources by making wasteful products for the sake of economic growth. I should put all my thoughts on paper at some point, but it just seems to me as if you're describing the tip of a huge iceberg which should've melted a long, long time ago.

    Anonymous said...

    Yes, I want exactly what you said. The corporations provide jobs and paychecks to enable an economy. I'll gladly let them stay here with no taxes if they keep the jobs here.

    Would you rather all the corporations left so there were no jobs?

    Winter Seale said...

    It subverts the power of nation states for sure. It's globalization that will drive world government, in my opinion.

    Or in other words, the social democratic solution is to raise -everyone- up and not just the relatively well off in the developed nations.

    Alessandro said...

    Well, here in Brazil we have the problem of Extreme Corruption and Money Stealing from politicians.

    So, even with low inactives population (i guess, because we do not have a wellfare state for inactives), we have one of the highest Taxes and in the world.

    Sthenno said...

    If there were any correlation between overall tax rate and standard of living then your argument would make sense. There is not, and so it does not.

    Robin Wickberg said...

    It is quite possible that I missed someones post here. But there are two things that bother me with the ambiance here.
    #1 GDP is based on eternal growth. Which is impossible in the long run. The system is outdated and needs great improvement. Should we not work to replace it? Not continue using a faulty system to messure what is "in spirit" the welfare of humans?
    #2 Everyone are referring to the cost of taxes, how much or how little. But it appears few consider the services you are buying. Shouldn't the focus not be how much is paid but what you get?

    Malcolm Nix said...

    35 comments down the road I finally think somebody should ask how you define 'poor' c.q. 'rich' countries...
    Do you look at the economy and the value added by corporations or do you take a look at the population?
    Shouldn't we judge the state of a country by the percentage of the population that can't manage to survive without aid or welfare, doesn't have access to decent education and health care and doens't have any perspective of ever finding a decent job?
    In my opinion capitalism is the organization of financial transfers from the poor to the rich. The only thing globalization did was broadening the horizon from poor and rich inside one nation to poor and rich, well, globally. The problem therefore is not the difference of scale, having evolved to a worldwide approach, but the mechanism behind this, i.e. the constant search for new ways to accumulate wealth, even if it's virtual money that never leaves the financial speculations market.
    I would like to point out the main purpose of the introduction of the euro as an international currency was countering the speculations against individual European currencies.
    Which brings us to another fundamental question. Is it morally acceptable to speculate on the financial position of a government, like the Greek one, if you know in advance the results of your speculations will have a disastrous effect not as much on the Greek government but rather on the Greek population? The bottom-line is the average Greek is now a lot poorer than he was because somebody else became a lot richer than he was.
    So, taking this into account, does it matter what borders the workforce crosses? This happens everywhere and to everyone. The only conclusion is it gradually means less which passport goes with your poverty.

    Squishalot said...

    Gevlon: "If you born in Sweden, the idea to run from the 70% taxes, to live richer was not an option.
    For me, moving is an existing option."

    What makes you think that it's not an option? People born in Sweden have just as much opportunity to move overseas as you do, if not moreso. Your argument makes no sense.

    Gevlon said...

    @Squishalot: read it again. I bolded the clues for you.

    Sten Düring said...

    Gevlon, dammit, once again, read up on your facts.

    About one million people left Sweden for USA between 1870 and 1920. The idea of leaving the nation wasn't exactly unthinkable.

    The last sixty years, conincidentally years with high taxation, has seen Sweden become one of the main immigration nations in Europe.

    2007 just under 100000 people immigrated to Sweden. Of these 15000 were returnees (Swedish citizens) and 10000 came from our neighbouring countries.

    Immigration from European countries made up another 20000 or so people.

    Non-european immigration made up just about half, a lot of which were indeed refugees.

    In 2007 about 45000 emigrated from Sweden. About half of them were Swedish citizens. Of the other half most were former immigrants.

    The high tax nordic countries are the main recipients of people emigrating from Sweden.

    Not only do about twice as many people immigrate to Sweden as emigrate, but over half of the people leaving Sweden opt to come back.

    Around 30000 were granted Swedish citizenship, which means that about every second (immigration has risen in numbers during the years it takes to fill the requirements for applying for citizenship) person moving to Sweden found our taxes so opressive that they sucesfully applied to become Swedish citizens.

    Sweden doesn't have a history of shooting people trying to leave the country.

    We have among the highest taxes in the world.

    So why do people not only move here, but also pay those opressive taxes long enough to apply for citizenship?

    Squishalot said...

    To be clear - my point is that people are happy to live in Sweden in this decade; I'm not talking about the past. At present, they are still not running from Sweden.