Must-Read: Kaushik Basu: America’s Dangerous Neo-Protectionism

Must-Read: The incredibly sharp Kaushik Basu is another one who makes what I regard as a substantial mistake in diagnosing the economic ills of our age. The loss of security and place by those who in an earlier age would have been blue-collar workers settled in stable firms with straightforward career paths is due to:

1. Technological progress which has–worldwide–greatly amplified manufacturing labor productivity, accompanied by limited demand for manufactured goods: few of us want more than one full-sized refrigerator, and very very few of us want more than two.

2. The failure to manage the economy to either prevent deep recessions or to insure a rapid bounce-back of employment in the industries that collapsed in the downturn. The Reagan administration, with Paul Volcker, delivered the disinflation shock in the early 1980s and then followed it with a bounce-back that was rapid but generated jobs elsewhere than in blue-collar manufacturing. The Bush administration delivered the 2007-2009 shock, and the Obama administration then failed to deliver a rapid bounce-back anywhere.

3. Macro policies–the Reagan and Bush tax cuts and the strong-dollar policy–that have turned the U.S. not into the trade-surplus capital-exporting economy that a rich economy should be, but a trade-deficit capital-importing economy, and in the process sent the market signals that large chunks, and very valuable chunks, of our manufacturing communities of engineering practice and blue-collar skilled worker pools are simply not wanted.

4. Basu says “globalization”–but globalization is really not on the list. Globalization deepens the division of labor, and does so in a way that is not harmful to high-paying manufacturing jobs in the global north. The high-paying manufacturing jobs that require skills and expertise (as opposed to the moderate-paying ones that just require being in the right place at the right time with some market power, and the low-paying ones) are easier to create and hold on to if you can be part of a globalized value chain than otherwise…

Kaushik Basu: America’s Dangerous Neo-Protectionism: “NEW YORK – US President Donald Trump is about to make a policy mistake…

…It will hurt – particularly in the short run – countries across Sub-Saharan Africa, Latin America, and Asia, especially emerging economies like China and Sri Lanka (which run large trade surpluses vis-à-vis the United States) and India and the Philippines (major outsourcing destinations). But none will suffer more than the US itself. The policy in question is… an attempt to “save” domestic jobs by slapping tariffs on foreign goods, influencing exchange rates, restricting inflows of foreign workers, and creating disincentives for outsourcing. On the other hand, it involves neoliberal financial deregulation….

Real wages have been largely stagnant for decades; the real median household income is the same today as it was in 1998. From 1973 to 2014, the income of the poorest 20% of households actually decreased slightly, even as the income of the richest 5% of households doubled. One factor driving these trends has been the decline in manufacturing jobs. Greenville, South Carolina, is a case in point. Once known as the Textile Capital of the World, with 48,000 people employed in the industry in 1990, the city today has just 6,000 textile workers left. But… the major challenge facing labor today lies only partly in open trade or immigration; the much bigger culprit is technological innovation and, in particular, robotics and artificial intelligence, which have boosted productivity substantially. From 1948 to 1994, employment in the manufacturing sector fell by 50%, but production rose by 190%….

While some forms of targeted protection may be able to play a role in supporting US workers, neo-protectionism is not the answer. And it would not just be ineffective; it would actually do substantial harm…. An effective solution to the problems facing American workers must recognize where those problems’ roots lie…. What workers need, however, is more wages. If they aren’t coming from employers, they should come from elsewhere. Indeed, the time has come to consider some form of basic income and profit-sharing…