Nobel Laureates Say Globalization’s Winners Should Aid Poor

LINDAU, Germany -- Globalization and technology have increased income inequality around the world, four Nobel Laureates in economics argued, and governments should intervene to try to help those at the bottom.

Meeting on a picturesque island in southern Germany, the Nobel laureates focused Saturday on the growing gap between rich and poor, which has become a big issue in elections around the world, including the U.S. presidential race. The discussion focused more on broad themes than detailed solutions. But the main thrust was clear: Free markets aren't always fair, and economists should help governments figure out how to make them fairer.

"Much of economics is about the relative efficiency of market allocation," said Robert Solow, a left-leaning economist who won the Nobel prize in 1987 for separating the components of economic growth into labor, capital and technological change. But, Mr. Solow said, economists also have to study how best to reroute income "to those who are damaged by otherwise useful developments in the economy from those who profit."

Mr. Solow, who served as a senior economist in the Kennedy White House, identified three main causes of growing global inequality. Globalization, he said, has dramatically increased the world's supply of low-skilled labor, damping wages for such workers in developed countries. Rapid technological change also has boosted demand for high-skilled workers, whose wages have risen as demand has exceeded supply. In addition, labor unions have lost ground and workers' wages have suffered as wealthy countries have shifted to service industries from manufacturing.

To the extent that growing inequality is the product of such "fundamental forces," Mr. Solow said, "it's hard to know what to do about it, other than to accept it and repair it, rather than try to prevent it." In practice, that's likely to mean higher taxes on wealthier citizens.

Globalization can have mixed outcomes, said George Akerlof, who won the Nobel prize in 2001 for work on how markets function when buyers and sellers have different amounts of information on the product for sale.

"Opening up is a good thing for countries that have the administrative capacity to deal with it," said Mr. Akerlof, now an economics professor at the University of California, Berkeley. But in countries like India in the 19th century, globalization meant succumbing to foreign rule with "vastly bad consequences."

Now, however, many Indians are benefitting from open borders because of country's embrace of technological change, which is a plus for the global economy even if it puts some U.S. employees out of work. "Every time someone gets a job in Bangalore, I'm cheering because it means global distribution has been more even," said Mr. Akerlof, whose wife, Janet Yellen, is a former Clinton White House economist and currently president of the San Francisco Federal Reserve Bank.

Spreading the wealth within countries requires healthy institutions, said Finn Kydland, a Norwegian economist who is now also at Cal-Berkeley. He won the Nobel in 2004 for work on the forces that drive business cycles and research showing how short-term political motivations can undermine sound economic policy.

"Globalization ought to be good for all countries," though it isn't unless government policies are up to the challenge, he said. Look at Brazil and Argentina over the past two decades, he added. In Brazil, global growth has boosted low-wage workers' income levels more than the levels of higher earners. Argentina, by contrast, saw its per capita GDP slide by some 20% in the 1980s as a series of government administrations piled on a debt load that eventually became crippling. Since then, real wages have fallen and the gap between rich and poor has widened.

What made the difference? "Bad economic policy," said Mr. Kydland. "If there's not a mechanism for redistribution, it probably won't happen."

Governments tackling inequality need the right data, said Robert Fogel, who won the 1993 Nobel for applying statistical analysis to the study of economic history. U.S. data on inequality, he said, likely overstate the number of people who are stuck permanently in poverty.

U.S. inequality is far lower when measured by expenditures than by income, said Mr. Fogel, a University of Chicago economist. He said that might be because many of the people in the lowest income bracket are there temporarily: for instance when middle-class people lose jobs and haven't yet got loans or sold off assets.

"Governments in wealthy countries like the U.S. are obligated to improve conditions of life for the poor," said Mr. Fogel. "My message is: Make sure you know what you're doing when you wield this very heavy fiscal ax."