When Margaret Thatcher visited the College of Europe in 1988, she joked that a British leader coming to address an elite college of European civil servants was like Genghis Khan being invited to a peace conference. But in what became known as the Bruges speech, Thatcher’s message was anything but hostile. Nobody, she said, can deny that Britons are European; there are plenty of poppies in the fields of Flanders to prove it.
Britain’s vote to leave the European Union doesn’t reverse Thatcher’s declaration of commonality. But like the candidacies of Donald Trump and Bernie Sanders, and like growing protest movements across Europe, it reflects a reality of today’s world that the free-market Thatcher couldn’t have imagined: those who feel marginalized are rebelling against establishment parties and policies.
The conventional wisdom was always that globalization would have some losers. But those who feel unhappy with the status quo are not a minority; they are a majority. That’s not because globalization doesn’t benefit societies, but because government policy hasn’t adapted to help workers cope with the added pressures it brings.
Though the world has seen a return to growth after the 2008 financial crisis, a large share of the population has not seen an improvement in its standard of living. That is partly because technological advances have enabled the substitution of all but the most qualified labor with machines, putting pressure on potential earnings. But it is also because low-skill labor has to compete with developing world producers, and locally with a seemingly endless supply of immigrant labor. Those struggling with these pressures now make up a majority of the Western world’s voting population.
Migrants accounted for 47 percent and 70 percent of workforce growth in the U.S. and Europe over the last 10 years; but only 14 percent of the increase in the high-skilled workforce in Europe came from immigration. That is, while the high-skilled have benefited, the low- and medium-skilled population has had its earnings ability capped, or even lowered, because of greater external and internal competition. A 1997 report from three economists at the Brookings Institute in the U.S., quoted by the Congressional Research Office in 2010, puts it in stark terms:
By becoming a major supplier of low-skilled workers and thereby changing the nation’s skill endowment from what it otherwise would have been, immigration may have accounted for some 44 percent of the decrease over the 15-year period in the relative wage of workers with less than 12 years of schooling.
Immigration, as many studies have shown, may provide a net economic benefit over time. But the increased stress on infrastructure and communities — from school places to hospital beds — is often taken for granted. In Britain, where austerity budgets have squeezed public spending, that has left a smaller pot for local low- and medium-skilled workers.
Globalization, and immigration, promote growth. But neither can benefit the majority over the longer term unless the state invests in physical infrastructure and human capital. Unfortunately this isn’t happening. Accounting rules that assimilate investment into budgetary spending ensure that investment spending is crowded out of budgets. Focused on balancing budgets and believing austerity to be an unqualified virtue, Britain failed to invest in its future and sowed the seeds of the current divisions that produced Thursday’s dramatic referendum result.
The implications reach beyond the U.K. The answer isn’t redistributive welfare policies, but investing in physical infrastructure, though large public works projects and investing in education and skills-training. The more generous the welfare system, the lower the comfort threshold for immigration.
Governments that fail to do these things will find that those left out by globalization will increasingly seek to reverse a process of economic integration that has left them cold.
