Must-Read: Lawrence Summeers: Revoking Trade Deals Will Not Help American Middle Classes

Must-Read: Five things are going on with respect to America’s blue-, pink-, and–increasingly–white lower-middle and middle-middle working classes. Three of them are real, and two of them are fake:

1. Technology: It 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. That means that if you are hoping to be relatively high up in the wage distribution by virtue of your position as a hard-to-replace cog on a manufacturing assembly line, you are increasingly out of luck. If you are hoping for high blue-collar wages to lift your own via competition, you are increasingly out of luck.

2. Legal and institutional bargaining power: The fact that bargaining power has flowed to finance and the executive suite and away from the shop- and assembly-floor is the second biggest deal here. It could have been otherwise–this is, primarily, a thing that has happened in English-speaking countries. It has happened much less elsewhere. It could have happened much less here.

3. Macro policy: Yes, the consequences of the Reagan deficits were to cream midwestern manufacturing and destroy worker bargaining power in export and import-competing industries. Yes, the low-pressure economies of Volcker, late Greenspan, and Bernanke wreaked immense damage. Any more questions?

4. Globalization: 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 lower-paying ones that just require being in the right place at the right time with some market power) are easier to create and hold on to if you can be part of a globalized value chain than otherwise. This is largely fake.

5. Trade agreements: This is a nothingburger: completely fake.

As somebody who strongly believes that supply curves slope up–are neither horizontal nor vertical–and that demand curves slope down–are neither horizontal nor vertical–I think that Larry Summers is misguided here when he talks about how “companies have been able to drive harder bargains with workers, particularly in unionised sectors, because of the threat they can outsource.” This was certainly true since the 1950s with the move of American manufacturing to the south, and the rise of deceptively-named “right-to-work” laws. But the threat to outsource is zero-sum on a national level: the balance of payments balances. Individual sectors lose–and manufacturing workers have been big losers. But that is, I think, only because of our macro policies. If we were a normal global North manufacturing power–a Germany or a Japan–exporting capital and running a currency policy that did not privilege finance, he would not be talking a out how “companies have been able to drive harder bargains with workers, particularly in unionised sectors, because of the threat they can outsource.” He would be talking about how the opportunity to participate in global value chains increases the productivity of semi-skilled and skilled manufacturing workers in the U.S.

Thus I think Larry conceded too much here. Blame macro policy. Blame technology. Blame the conflict between the market society’s requirements that only property rights matter and that everything pass a profitability test against people’s strong beliefs that even if they have no property rights they have rights to stable communities, stable industries, and stable occupations. But, to channel Pascal Lamy, look not at the finger but at the moon here.

However, Larry is right on his main point: NAFTA really ain’t the problem:

Lawrence Summeers: Revoking Trade Deals Will Not Help American Middle Classes: “There is a debate to be had about the impact of globalisation on middle class wages and inequality…

…Increased imports have displaced jobs. Companies have been able to drive harder bargains with workers, particularly in unionised sectors, because of the threat they can outsource. The advent of global supply chains has changed production patterns in the US. My judgment is that these effects are considerably smaller than the impacts of technological progress. This is based on a variety of economic studies, experience in hypercompetitive Germany and the observation that the proportion of American workers in manufacturing has been steadily declining for 75 years….

But an assessment of the impact of trade on wages is very different than an assessment of trade agreements. It is inconceivable that multilateral trade agreements, such as the North American Free Trade Agreement, have had a meaningful impact on US wages and jobs…. American tariffs on Mexican goods, for example, averaged about 4 per cent before Nafta came into force. China had what was then called “most favoured nation” trading status with the US before its accession to the World Trade Organization…. The irrelevance of trade agreements to import competition becomes obvious when one listens to the main arguments against trade agreements. They rarely, if ever, take the form of saying we are inappropriately taking down US trade barriers….

Incremental agreements like TPP have been largely irrelevant to the fate of middle class workers. The real strategic choice Americans face is whether the objective of their policies is to see the economies of the rest of the world grow and prosper. Or, does the US want to keep the rest of the world from threatening it by slowing global growth and walling off products and people?… A strategy of returning to the protectionism of the past and seeking to thwart the growth of other nations is untenable and would likely lead to a downward spiral in the global economy…