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Behind the New View of Globalization

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Reposted from The New York Times

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Behind the New View of Globalization

Edward Alden | August 29, 2012 | NY Times

After a recent Economix post (as part of the election-year project called The Agenda) explaining that many economists see globalization as a major cause of the income slowdown in this country, Edward Alden of the Council on Foreign Relations noted on Twitter that this view was a new one. For years, economists argued that increased global trade did not have a large effect on wages or employment in the United States. The editors invited Mr. Alden — the director of the Renewing America initiative at the council, who previously helped run a council task force on trade and investment policy – to send along a more detailed version of his point.

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For decades, economists resisted the conclusion that trade – for all of its many benefits — has also played a significant role in job loss and the stagnation of middle-class incomes in the United States. As recently as 2008, for instance, Robert Lawrence of Harvard, one of the country’s most respected trade experts, concluded that trade explained only a small share of growing income inequality and labor market displacement in the United States.

Rather than focusing on trade, economists argued that other factors – especially “skill-biased technical change,” technological innovation that puts an added premium on skilled workers – played the biggest role in holding down middle-class wages. But now economists are beginning to change their minds. Responding to The Times’s recent survey about the causes of income stagnation, many top economists have cited globalization as a leading cause.

While the evidence is still not conclusive, it is pretty strong. Trade’s effect on jobs and income, which was probably modest through the 1990’s, now seems to be growing much larger. Among the recent studies:

• In “The Evolving Structure of the American Economy and the Employment Challenge,” the Nobel-winning economist Michael Spence looked at job growth from 1990 to 2008 in sectors of the United States economy. He found almost no net job growth in sectors, like manufacturing, in which global trade played a large role. Nearly all of the net gains occurred in sectors in which trade plays a minor role. Government and health care, in which trade plays almost no role, accounted for more than 40 percent of all new jobs.

• David Autor, David Dorn and Gordon Hanson looked at regions in the United States where companies are competing most directly with China. From 1990 to 2007, they found that regions that faced growing exposure to Chinese competition had higher unemployment, lower labor-force participation and lower wages than might otherwise be expected. And the effects grew over that period. In 1991, just 2.9 percent of United States manufacturing imports came from low-wage countries; by 2007, that had risen to nearly 12 percent, mostly from China.

• In the Council on Foreign Relations Task Force on U.S. Trade and Investment Policy, my colleague Matthew Slaughter looked at employment at multinational companies with headquarters in the United States, companies that account for roughly 60 percent of American exports and imports. From 1989 to 1999, those companies created 4.4 million jobs in the United States and 2.7 million jobs at their foreign affiliates overseas. From 1999 to 2009, however, those same companies eliminated a net of nearly 3 million jobs in the United States while adding another 2.4 million jobs abroad.

The usual rebuttal to these findings is to argue that they stem mostly from manufacturing. And manufacturing, the argument goes, is facing a long-run, secular decline in employment that is largely technology-driven, not unlike the story of agriculture in the 20th century. The job losses in manufacturing may seem as if they have been caused by trade, according to this view, but they have actually been caused by technological change.

Through the 1990s, that story was largely plausible. But over the last decade it is not. Manufacturing output in the United States is no longer growing as rapidly as it once was (and as you would expect if technology had simply been replacing workers in factories). Real manufacturing output grew just 15 percent in the 2000s, compared with more than 35 percent in each of the 1970s and 1980s and more than 50 percent in the 1990s. And one sector where the statistics are of dubious meaning — computers and electronics – accounts for almost all of the recent gains. In 13 of 19 manufacturing sectors, real output declined over the last decade, in some industries quite sharply. There is no question that over the last decade United States manufacturing has declined, taking away jobs and driving down wages for those who are still employed. Robert Atkinson and colleagues have a useful paper on this topic, showing that the loss of more than five million jobs in manufacturing in a decade was not primarily a technology and productivity story.

The real-world evidence makes it surprising that it has taken economists so long to catch on. The recent strike in Joliet, Ill., at Caterpillar – a true global company — ended with union workers being forced to accept an agreement that includes a six-year wage freeze, even as the company is earning record profits. Elsewhere, two-tier agreements, in which new hires earn wages and benefits roughly half as large as those in the old union contracts, have become standard in many of the manufacturing industries that remain in the United States.

One reason that economists may be uncomfortable talking about trade’s impact on jobs and wages may be concern that it could set off protectionist responses. And economists are right that expanded trade has certainly been good for the United States. It has brought us better and cheaper consumer goods, opened new export markets, lifted up many poor countries and strengthened American alliances around the world.

But I think the fear of protectionism is overblown. One unexpected feature of the great recession was how little protectionism it led to, especially in the advanced economies. The lesson of the Great Depression – that protectionism is counterproductive – seems to have been learned.

Instead, the evidence should produce some soul-searching about the causes of this country’s declining competitiveness. The list is discouragingly long: crumbling infrastructure, inadequate educational performance, stifling regulation and a cumbersome tax system. But it might not take that much to tip the scales in favor of the United States. The Boston Consulting Group, which has looked at the slight uptick in the nation’s manufacturing employment over the last two years, argues that rising wages in China, high transportation costs and falling United States energy costs should bring more manufacturing back home.

With the rapid growth of middle classes abroad, trade should be an opportunity for the United States to sell into growing markets, increasing opportunities and wages for many Americans here at home. But over the last decade, that has not been the story.

9 Responses to “Behind the New View of Globalization”

  1. http://keepamericaatwork.com/?p=207308

    What follows is part of the article that the link above links too.
    I am not an economist, but I am a damned good analyst in a high tech industry that says it can’t find qualified people when many like myself and andrew mentioned below cannot buy an interview.

    It might be worth a minute of your time to read the whole article.

    That is where all of our towns, counties, states and even federal government find themselves today, which is why you hear our politicians yelling from the rafters that we are broke.

    They are right.

    We are broke, but it is not from a financial perspective as I will show you in the rest of the article.

    We are broke from a moral perspective.

    I say Moral because we have our very large corporations doing this:

    The U.S.-based CEO of one of the world’s largest hedge funds told me that his firm’s investment committee often discusses the question of who wins and who loses in today’s economy. In a recent internal debate, he said, one of his senior colleagues had argued that the hollowing-out of the American middle class didn’t really matter. “His point was that if the transformation of the world economy lifts four people in China and India out of poverty and into the middle class, and meanwhile means one American drops out of the middle class, that’s not such a bad trade,” the CEO recalled.

    Click here to read that article.

    And at the same time we have our small businesses doing this:

    I’m not surprised. When small technology companies like mine need help we turn to outsourcing. I have ten people in my company and outsource to dozens of others. And I don’t care what country they’re from. I’m looking for good, skilled workers who are reliable and can accomplish tasks. Lately, many of my IT contractors have come from Ukraine, which has established itself as the world’s 26th most attractive outsourcing location. This is not an accident.

    This is why so many Ukrainians find themselves amongst the population of Microsoft developers. And why my experience with them has been so positive. I find, for the most part, that the technologists I deal with from Ukraine have a long history of doing work in the technology field. This is due to the country’s commitment to the IT industry, which draws more of its talent. Science and math are taught from an early age. The industry receives unprecedented support from its government. Smart people are drawn there because of the chance to earn more. And for a small business like mine, the cost is incredibly low!

    Un-American? Anti-labor? I don’t have time to consider that. I need work done by skilled people and I need to keep my costs as low as possible. I’m fortunate enough to be in the technology industry which means I don’t need someone to be onsite to do this work. It seems that other jobs, particularly creative jobs, are catching on to this trend too. And the tools I’ve mentioned above enable me much flexibility. So I’ll go where I can find the best people. And recently those people have been in Ukraine.

    Click here to read that article.

    This has now left us with the small business owners that cannot sell their businesses and retire even though they are ready.

    Danny Sullivan dreams of gardening and spending time with his grandchildren, but that’s just a fantasy. Retirement is out of his reach, at least for the foreseeable future.

    The 62-year-old founder of a small catering company spends his days helping stock bars with beer and ice, wooing potential new clients and juggling the 20 to 30 different events his firm handles daily.

    “I am so tired,” he says. “I don’t know that I’ll ever be able to retire.”

    Click here to read the article.

    This has now left us with the former proud employees of our corporations finding themselves in this position.

    They are people like Andrew McMenemy, who used to make $80,000 a year as a computer systems administrator at a software firm. He was among the 80 percent of the firm laid off in March 2010.

    Now, he makes $9.15 an hour, providing tech support for Apple. The job offers no benefits. He works from home in East Stroudsburg, Pa., where he lives with his father.

    “I’m going to be 53; I have to live at home with my father,” McMenemy said. “I made more when I worked in high school.”

    Click here to read the article.

    Which brings us back to our original question.

    Do we raise property taxes, or do we cut services?

    Problem is, neither one will fix the problem until we deal with the Moral issue.

    • Tom T. says:

      What we have, Virgil, is a non alignment of incentives. Until we get that right— and it won’t change as long as our political process remains one of image rather than one of substance. Traditional conservatives have been big on alignment of incentives, which has been good for the economy. Now they are not as they are too busy aligning their incentives with the money instead of the voters. The game of capitalism is the best economic system in the world but the rules of that game are being sold to the highest bidder. It results in a non alignment of incentives that ends up wrecking the game.

      Tom T.

  2. Tom T. says:

    “Until we get that right— and it won’t change as long as our political process remains one of image rather than one of substance,”— the incentives will remain non aligned and the economy will falter.

  3. Sorscher says:

    Protectionism is often used to mean the opposite of “maximum possible trade.”

    Our current trade policy is really about maximum possible trade, and the only other policy we can imagine is protectionism.

    Nothing about trade theory justifies maximum possible trade. The optimal, best, ideal, beneficial amount of trade may be somewhat less than what we have now.

    In fact, we might do a LOT better if the level of trade was the amount that resulted in balanced trade, balanced flow of capital, higher overall employment, better job security, more respect for environmental conditions, protections for human rights and labor rights, and accommodations for public health.

    Taking all of those factors into account, we would have lower trade, higher prices and much higher living standards.

    That’s not protectionism. That’s the way we ran our domestic policies for generations,

  4. Harry Moser says:

    The list of the “causes of this country’s declining competitiveness” should be extended to include “inaccurate calculations of the P&L impacts of offshore sources vs. domestic sources. I was one of the business experts in Pres. Obama’s Jan 11, 2012 Insourcing Forum. I emphasized, and the assembled executives supported, the need for companies to more consistently utilize TCO analysis instead of price variance in making their sourcing decisions.
    The non-profit Reshoring Initiative’s free Total Cost of Ownership software helps corporations calculate the real P&L impact of reshoring or offshoring. When companies recognize that they will often be more profitable producing or sourcing here, they will come back. User data suggests that about 25% of what has been offshored would come back if companies decided based on TCO instead of on price. We also have a new tool for companies to report and post their reshoring cases and number of jobs reshored.
    Based on the 290 published reshoring articles in our Reshoring Library http://www.reshorenow.org/resources/library.cfm, we calculate that at least 50,000 manufacturing jobs have been reshored. Thus reshoring represents at least 10% of the 500,000 manufacturing job growth since the low in January 2010.
    You can reach me at harry.moser@reshorenow.org for help using our tools for sourcing decisions and when selling.

  5. Pete Murphy says:

    There are a couple of points that need to be made here regarding misconceptions that this article helps to perpetuate:

    1. “One reason that economists may be uncomfortable talking about trade’s impact on jobs and wages may be concern that it could set off protectionist responses.” Why would economists fear the only response – tariffs – that offers any hope of restoring balance to global trade when it was the enormous imbalance in global trade that nearly collapsed the global economy? What they really fear is the field of economics being exposed once again as a failure and fraud. Their free trade theory, based upon the 19th century principle of comparative advantage, is fatally flawed by its failure to account for the inverse relationship between population density and per capita consumption, and its role in driving imbalances in trade between nations grossly disparate in population density.

    2. “The lesson of the Great Depression – that protectionism is counterproductive – seems to have been learned.” The notion that protectionism caused the Great Depression is absolute nonsense perpetuated by those vested in defending the failed free trade theory. First of all, the Smoot-Hawley Tariff Act wasn’t even signed into law until June of 1930, a full eight months after the stock market crash of October, 1929. Secondly, Smoot-Hawley raised tariff rates only marginally higher than those set by the Fordney-McCumber Tariff Act of 1922 which, at the time, was widely credited for the economic boom times of the “roaring ’20s.” At the depth of the depression in 1933, America’s balance of trade contracted by only $2.9 billion from its previous high of $4.4 billion in 1929. At the same time, our GDP contracted by $33.1 billion. Only the mathematically-challenged could blame the depression on a decline in trade that contributed less than 10% to the overall decline in GDP, and only the gullible could believe it. Obviously, the decline in trade was the result of the Great Depression – not the cause – just as we saw a large decline of trade during the most recent Great Recession.

    That facts are that, making intelligent use of tariffs to maintain a balance or surplus of trade for the first 171 years of our nation’s history, we buit ourselves into the world’s greatest industrial power. But, since the signing of the Global Agreement on Tariffs and Trade (GATT) in 1947, which started the move toward “globalization,” our nation has been bankrupted and we have now endured 37 consecutive years of trade deficits. It’s no mere coincidence that our cumulative trade deficit during that period – more than $11 trillion, closely matches the growth in our national debt over the same period.

    Nothing will change until economists get over their irrational fear of a return to the use of tariffs to assure a state of balance in global trade.

    Pete Murphy
    Author, “Five Short Blasts”

    • Bruce Bishop says:

      Mr. Murphy,

      I agree with you about the Smoot-Hawley tariffs NOT being the cause of the Great Depression.

      However, in regard to your question/statement: “Why would economists fear the only response – tariffs – that offers any hope of restoring balance to global trade. . .”

      I would suggest that you take a look at Warren Buffett’s 2003 recommendation that we impose “Balanced Trade” on those companies who import goods from China. (You can Google “Balanced Trade.) Our government could simply mandate that we import no more from China than China imports from us, thus a near zero balance of trade, and millions of jobs would return to the U.S. There is an excellent book on the subject that explains Buffett’s proposal and offers an alternative approach to implementing it. The book is “Trading Away Our Future,” by Raymond, Howard and Jesse Richman — three generations of economists. They have an excellent website called http://www.idealtaxes.com

    • Arthur Taylor says:

      Pete Murphy:

      Brilliant assessment of the economics trade and let me bring in another point:

      Cost and price are not linked. Period. If this is true – and it is – then how does this effect the underlying basis of classical economic theory which rests on the notion that price follows cost? The reality is that price most often precedes cost. Which is exactly why the multinational are so in love with China.

      • Tom T. says:

        Cost and price are linked but it is just about an all or nothing proposition. One can produce products under the cost of the price they get, make a profit, and continue production. Costs over price can be continued in the short run until capital or relief runs out. It is this concept that allows the big to swallow the small. They can often localize prices in one area to put a producer out of business and then capture their market share.

        With China, and other countries with no market system, the relationship of cost vs. price is more irrelevant while the national goals of the government (China) take more relevance. Thus, China is able to use the concepts in the first paragraph to take jobs and manufacturing out of the United States and deposit them in their country. They are capturing the demand in the United States with their products but in the process undermining the production of that demand.

        Economic theory would suggest in mature industries that the marginal revenue on the product equals the marginal cost to maximize profits. That is to say that the costs of producing the last product produced must at least equal the the value that the last product gives to the company (this is based on the laws of supply and demand for goods and services).

        Just because these are the economic theories in play for maximization of profits and efficient allocation of resources, it is a simplistic view of what actually happens in the market. Businesses can and will produce over the place where marginal costs equal marginal benefits on purpose to place competitors at an economic disadvantage so they can take over their markets when they fail.

        Retailers do the same thing when they have loss leaders. Loss leaders are products that are sold below their marginal cost so that buyers will come in and on average buy products above their average costs instead of going to competitors and so maximize profits and capture market prices.

        On the world markets, there is something known as dumping. This is where countries that have producers who have over produced and maximized their profits through analyzing their supply/demand market, and “dump” excess products on the world markets, often at prices below their costs (or what the costs are claimed in their home country. This may include agricultural goods whose supply is determined by extraneous uncontrollable factors like the weather, or even goods like medicines where world prices are not allowed in the home country because of some government concession on importing THEIR OWN ITEMS.

        Thus, Arthur is right. There are many, many exceptions to price follows cost. Unusual and anti-competitive market power can easily adjust this notion to maximize corporate profits. Theories are only explanations but they can and are certainly be used in arguments to justify unjust use of market power to capture profits.

        Tom T.

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