Why Embrace Economic Change?

I suggested in an earlier post that it would be good if leading Democrats encouraged Americans to embrace economic change. Doing so would increase the political feasibility of putting in place a policy package that enhances economic security and promotes mobility.

I want to try to spell out the argument a little more clearly and elaborate a bit.

The argument

1. Economic globalization tends to benefit Americans as consumers. We get to choose from a wider array of products and services, and the increased competition among firms tends to reduce the prices we pay.

2. Economic globalization also benefits some Americans as workers. The prices their employers pay for inputs are lower, and the number of customers is larger. Both may increase employment and/or wages.

3. Economic globalization hurts some Americans as workers. Some lose their job; others experience stagnant or falling wages.

4. Access to the U.S. market tends to benefit citizens in poor countries, in the form of more jobs at higher wages. This is good for Americans on both altruistic and self-interested grounds.

5. It is economically and politically wise to have government policies in place that help those hurt by globalization to adjust. These include unemployment insurance, portable pensions and health insurance, retraining, job placement assistance, wage insurance, infrastructure improvement for hard-hit communities, and a higher and inflation-adjusted minimum wage and Earned Income Tax Credit. In addition, government can support job creation via a large-scale investment in renewable energy and/or an employer subsidy. By compensating the losers, these policies make globalization win-win. And in doing so, they lessen opposition.

6. Technological advance has properties similar to globalization; it tends to benefit us as consumers and some of us as workers, but it also hurts some of us as workers. So too does the ability to move, buy, and sell across state borders within the United States.

7. The policies described in #5 are just as appropriate for those hurt by technological change or internal economic movement as for those hurt by globalization. We would want these policies even if there were no cross-country trade or offshoring at all.

8. These policies are likely to be easier to sell politically if framed as a response to all forms of economic change, including globalization.

9. We already have most of these policies, but they are inadequate in coverage, funding, and coordination.

10. Part of the reason these programs are inadequate is that debate about economic globalization tends to get stuck on the question of free trade vs. managed trade. Three groups have an interest in framing the debate in these terms. One is Republicans who find it helpful to argue that Democrats are protectionist and therefore against the interests of American as consumers. The second is lobbyists for firms that stand to benefit from protection. The third group is people who work in manufacturing and offshorable services. They hope that blocking trade and offshoring will help protect their jobs. Democrats want their votes and hence often say they’ll address globalization in part by restricting it.

Regardless of whether the proposed restrictions are relatively minor (minimal labor and/or environmental standards) or extensive, once this door is opened it almost inevitably takes center stage in the debate. Far less attention, if any, gets devoted to the adjustment and cushioning side. As a result, the political constituency and momentum for these policies tend to be far smaller than they could be.

11. For Democrats, it might not be harmful politically to shift toward a position that embraces economic change — in other words, that forgoes managed trade. Democrats could then ask voters whether they prefer globalization and technological advance with less government help (the Republican position) or with more. But even if it hurts them politically in the short run, an approach that focuses on responding to globalization via adjustment and cushioning rather than managed trade is, in my view, the right thing for Democrats to do.

12. This does not mean Democrats ought to rule out trade restrictions altogether. What it means is that they should leave them off the list, or put them at the very bottom, of strategies for addressing job loss and wage stagnation. And labor and environmental standards should be discussed mainly in the context of foreign and/or environmental policy, rather than trade policy.

A couple of examples

Barack Obama and Hillary Clinton. In campaigning in Ohio and Pennsylvania, Clinton and Obama have criticized trade agreements such as NAFTA for contributing to American job losses. What’s ironic is that the leading economic advisers to both candidates — Austan Goolsbee for Obama and Gene Sperling for Clinton — are known to have different views about how to approach economic globalization. I’m not sure whether the candidates’ positions are due to the closeness of the campaign or to a genuine difference between them and their advisers (more on this here, here, and here). Either way, I’m afraid there will be little significant advance in pursuing the policy agenda highlighted in point 5 above until leading Democrats move away from the managed trade approach to globalization.

Jared Bernstein. I’ve just read Jared Bernstein’s book All Together Now: Common Sense for a Fair Economy. It’s full of compelling analysis and argument. On addressing the challenge of globalization, he offers a three-pronged proposal (pp. 72-77). One is help with adjustment. A second is a proactive strategy to create new jobs. These are both terrific. The third, though, is to more actively manage our trade arrangements, mainly in the form of imposing conditions on our trading partners — “some degree of labor standards and honesty in exchange rates.” There is nothing wrong with this per se. But once managed trade is introduced as an option, it ends up crowding out discussion of other approaches.

Okay, but …

They don’t really mean it. Neither Obama nor Clinton is likely to press for serious restrictions on trade or offshoring if elected president. This holds for most Democrats running for Congress too. But that isn’t the point. Even if they did follow through on a managed trade agenda, it probably wouldn’t have much impact on actual import levels. Pacts such as NAFTA seldom dramatically alter the degree of cross-border trade; had it not passed, imports from Mexico would not be much lower than they are today. The problem isn’t that managed trade rhetoric might lead to actual trade restrictions; it’s that it distracts from efforts to advance the scope and generosity of adjustment and cushioning policies.

Are there really net gains to Americans from globalization? I think the evidence leans heavily in favor of believing so, but some reasonable analysts are skeptical. Even if this skeptical view were correct, though, I doubt that trade restrictions would do nearly as much good for Americans as a generous set of cushioning and adjustment policies.

We need the cushions in place first, before agreeing to forgo trade restrictions. This is a reasonable notion in the abstract. But it traps us in an unproductive loop. Insisting that the cushions come first reduces the chance we’ll get them. And round and round we go.

I might be wrong about the impact of restrictionist rhetoric on the politics of social policy. My argument rests on a hypothesis that Democratic leaders’ trade rhetoric has a significant effect on the political feasibility of more generous and extensive social policies. I could be wrong about this. But given that any trade restrictions they might actually put in place would probably do little to stem globalization, it seems to me the potential costs of abandoning managed trade rhetoric are likely small.

More reading

Here are links to some of my favorite writing on this issue:

Alan Blinder, Offshoring: the next industrial revolution?

Brad DeLong, Free vs. fair trade

James Galbraith, Why populists need to rethink trade

Nicholas Kristof, Inviting all Democrats

Paul Krugman, Pop internationalism

Paul Krugman, In praise of cheap labor

Paul Krugman, Divided over trade

Paul Krugman, Trade and wages, reconsidered

Robert Reich, Hillary and Barack, afta Nafta

Dani Rodrik, Has globalization gone too far?

Gene Sperling, The pro-growth progressive

Gene Sperling, Rising tide economics

Joseph Stiglitz, Making globalization work (ch. 3)

Mark Thoma and others, Helping the losers from globalization

5 thoughts on “Why Embrace Economic Change?

  1. I would recommend reading Bryan Caplan’s recent “Myth of the Rational Voter.” Many of the strategies suggested on this post are nice in theory, but with an electorate focused on single issues and without much education, it would probably fail.

    I’m not saying you’re wrong, just overly optimistic.

  2. I also recommend “Against the Tide” and/or “Free Trade Under Fire”, both by Douglas Irwin.

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