Globalization: What Did Paul Krugman Miss?

This is a very nice short framework-for-thinking-about-globalization-and-the-world piece by Paul Krugman: Paul Krugman (2018): Globalization: What Did We Miss?

It is excellently written. It contains a number of important insights.


I have, unusually, a number of complaints about it. I will make them stridenly:

First, Paul Krugman claims that, in Heckscher-Ohlin models at least, from the early 1970s to the mid 1990s international trade put only a little bit of downward pressure on the wages of American “unskilled” and semi-skilled workers. I think that is wrong. I think that from the early 1970s to the mid-1990s international trade, at least working through the Heckscher-Ohlin channels, put less than zero downward pressure on the wages of American “unskilled” and semi-skilled workers.

As I see it, it is important to note that “emerging markets” and “global north” are not static categories. Japan, Spain, Italy, Ireland were low-wage countries in the 1970s. From the early 1970s to the mid-1990s the relative wage levels of the then-current sources of America’s manufacturing imports were rising more rapidly than new low-wage sources of manufacturing imports were being added. The typical American manufacturing worker faced less low-wage competition from imports in the mid-1990s than they had faced in the early 1970s.

As I see it, where manufacturing workers came under pressure (and they did) it was not from increased low-wage competition from abroad but rather from:

  1. fiscal policy failures that produced the Reagan (and then Bush II) deficits as Republican governance redirected dollars earned by foreigners from buying our exports to buying our bonds
  2. managerial failures in Detroit (and elsewhere in the U.S.) and successes abroad
  3. technological failures in Pittsburgh (and elsewhere in the U.S.) and successes abroad

As I see it, yes, we could have protected Detroit and Pittsburgh from the consequences of their managerial and technological failings—but it would have been at immense cost for the rest of the economy, a very unfavorable benefit-cost tradeoff. And we should not have elected Republicans and given them the keys to the economic policy car: that rarely works. But given that we did give the Republicans the keys, and given Detroit’s and Pittsburgh’s managerial and technological failings, globalization from the early 1970s to the mid-1990s was a wonderful thing for America as a whole: it provided us with enormous benefits in every scenario, and in the unfortunate scenario we were dealt by the Reagan Democrats and the Big Three auto executives of Detroit, globalization greatly reduced the damage.

Second, I agree with Paul Krugman when he writes as though the “hyperglobalization” from the mid-1990s to the financial crisis was a big deal (which it was):

This huge surge… Containerization was not… new… [but] t took time for business to realize… [the] possibilities…. [Plus] a broad move… toward outward-looking policies…. China made a dramatic shift from central planning….

But I disagree when he writes that “hyperglobalization” was in some sense a threat to blue-collar Americans’ economic and social position:

It’s clear that the impact of developing-country exports grew much more between 1995 and 2010 than the 90s consensus imagined possible, which may be one reason concerns about globalization made a comeback…

Why? For reasons that Paul recognizes and summarizes:

A fairly novel form of trade… break[ing] up value chains, moving labor-intensive parts of the production process overseas…. The factor content of North-South trade hasn’t risen nearly as fast as the volume…

Let’s unpack this. In the age of widely-separated intercontinental value chains, we can see that there are actually more types of “blue collar” manufacturing jobs than the skilled-craft, semiskilled-assembly line, and unskilled traditional classification. Most importantly, we can see that the blue-collar jobs that are traditionally called semiskilled-assembly line are actually divided into two. The first are those jobs that require relatively literate workers with substantial experience and tacit knowledge who plug into sophisticated and highly productive divisions of labor supported by very productive communities of engineering practice. The second are those jobs that plug into those divisions of labor supported by those communities of engineering practice, but that actually do not require relative literacy or involve a great deal of tacit knowledge or experience—jobs that are doable by virtually everybody with the standard mental structure and eye-brain-hand loop of the East African Plains Ape, and that we thus call “unskilled”, even though they involve tasks that are currently regarded as very hard AI problems.

Before the coming of intercontinental global value chains, the distinction between these two types of semiskilled manufacturing jobs was of relatively little importance. Both paid relatively well for jobs requiring little formal education: both benefited from the requirement that workers be located near to engineers (and marketers, and executives) and from their participation in highly productive production processes, so both shared in the rents produced therein. But the truly unskilled portion—even though they were called “semiskilled” were not truly good jobs: they were boring, repetitive, and not very productive. An economy that could figure out a way to offshore those jobs would find that it had a global competitive advantage, and that would strengthen its truly valuable communities of engineering practice and ability to productively employ those relatively literate workers with valuable experience and tacit knowledge.

This was brought home to me most strongly in the years after the NAFTA debate. Opponents of NAFTA from Harley Shaiken and Thea Lee to Ross Perot had claimed it would be very damaging to the American automobile industry. Not so. And not just the firms executives, the shareholders, and the marketers were better off as a result than they would have been otherwise: the blue-collar workers with tacit knowledge and experience were better off as well from Detroit’s larger market share, and the truly unskilled portion—perhaps we should call them “polyester uniform”?—did not have jobs in the auto industry but had jobs about as good outside of it.

So, at least as I see it, the coming of “hyperglobalization” strengthened opportunities for U.S. workers without formal education to find jobs where their skills, experience, and tacit knowledge could be deployed in ways that were highly productive. What “hyperglobalization” did do was provide the top 1% and the top 0.1% with another lever to break apart the Dunlopian labor relations order, break the Treaty of Detroit, and redistribute the shared joint product from highly productive mass production backed by valuable communities of engineering practice upward in the income distribution. But there were many such levers in the U.S. from the 1970s to today. And “hyperglobalization” was, as I see it, one of the weakest and shortest of them. It gets blamed not because it was an important driver of the process, but because it allows one to blame others: brown people, yellow people, and, of course, the rootless cosmopolites.

Third, I quarrel with Krugman’s—and with Autor, Dorn, and Hanson’s (2013)—assessment of the China shock. Paul writes:

[While] trade deficits explain only a small part of the long-term shift toward… service[s]… soaring imports did impose a significant shock on some U.S. workers…. Fights over tariffs look very much as if they come out of a specific-factors world…. This is where the now-famous analysis of the “China shock” by Autor, Dorn, and Hanson (2013) comes in. What ADH mainly did was to shift focus from broad questions of income distribution to the effects of rapid import growth on local labor markets, showing that these effects were large and persistent. This represented a new and important insight…

Put me down as believing that, as I see it, Autor, Dorn, and Hanson’s focus on the stable absolute number of U.S. manufacturing jobs before the China shock of the 2000s and its drop as a result of the China shock is substantially misleading. One might look at the share of the workforce who have—and the share of those entering the workforce who get “good blue-colllar” jobs, in which we see not stability but rather a smooth decline in the proportion. One might look at individual towns, cities, and regions, in which case one sees patterns of regional industrial growth and collapse: the defense cycles, the collapse of New England textiles and leather, the rise of the Carolinas, the shift out of the Midwest to the falsely-called “right to work” states, plus the general desire of people after air conditioning to live in places where the winters are not so dire. It is not a new insight that such shocks to regional labor markets had effects that were large and persistent: anybody who had ever driven through Lowell or Fall RIver, MA knew that before Paul Krugman had published his first paper. It is, however, a very important insight.

Yes, the reduction in the share of the U.S. workforce in tacit knowledge and experience semiskilled blue collar jobs has been a big deal. But the overwhelming bulk of that is due to technology, not trade. Yes, there has been an additional reduction beyond technology. But the bulk of that has been a second-best compensation and adjustment for the disastrous Republican habit of running large budget deficits at full employment. Yes, the U.S. government should have done much more to support communities and workers who found themselves under the hammer. But for that blame the legacy influence of social darwinism on American politics: the U.S. government did little for Lowell or Fall River back in the day. And complaints about the failure to properly manage a process that is, globally, overwhemlingly positive-sum should be mailed to the address of the Reagan and Trump Democrats of Michigan, Pennsylvania, and Wisconsin, not to poorer brown and yellow people in Mexico and in China.

Moreover, from the perspective of the country as a whole and from the perspective of many of the communities affected, the China shock was not a big deal for local labor markets. Yes, people are no longer buying as many of the products of American factories as Chinese imports flood in. But those selling the imports are turning around and spending their dollars investing in America: financing government purchases, infrastructure, some corporate investment, and housing. The circular flow will it: the dollars are of no use outside the U.S. and so the dollar flow has to go somewhere, and as long as the Federal Reserve does its job and makes Say’s Law roughly true in practice, it is a redistribution of demand for labor and not a fall in the demand for labor.

And here is the kicker, as I see it: the types of people and the types of jobs funded by the imports of the China shock looks very much like the types of people and the types of jobs displaced from the tradeable manufacturing sector. Yes, some local labor markets got a substantial and persistent negative shock to manufacturing, often substantially cushioned by a boost to construction. Other local local labor markets got a substantial and persistent positive shock to construction. And on the level of the country as a whole the factor of production that is (truly) semiskilled blue collar labor does not look to me to have been adversely affected.

Until 2008.

Now we get to my fourth quarrel: the play is Hamlet. But where is the Prince of Denmark? Zero references to “recession”, “finance”, “financial crisis”, or “recession”. Yet, at least as I see it, the key thing that we missed about globalization was not its impact on factor prices in some Heckscher-Ohlin model or an shared rents in some specific-factors model but rather that when a big financial crisis and depression came “globaization”—and poor people elsewhere—would provide an excuse to distract blame. There was a lot of blame: Blame financiers who had no control over their derivatives books because they failed to manage. Blame financeirs who had control over their deiverative books but who thought, like Charles Price of Citigroup: “you have to keep dancing as long as the music is playing”. Blame Federal Reserve Chair Alan Greenspan. Blame Treasury Secretary John Snow. They were at the heads of the agencies responsible for controlling systemic risk when the vulnerabilities emerged. And they did not no—control it, that is. Blame Federal Reserve Chair Ben Bernanke. Blame Treasury Secretary Henry Paulson. They were at the heads of the agencies responsible for controlling systemic risk while there was still time to shore up the system—and they did not.

The Prince of Denmark here is the Greenspan-Snow shock, not the China shock. What we missed about globalization was not its impact on blue-collar semiskilled workers with experience and tacit knowledge and communities, but how it would interact with attempts to shift resoponsibility and blame off of the appropriate properties.

And then, of course, ther is 2010: Barack Obama’s declaration in his State of the Union Address that the time for bold action to boost employment was over:

We took office amid a crisis, and our efforts to prevent a second Depression have added another $1 trillion to our national debt…. Families across the country are tightening their belts and making tough decisions. The federal government should do the same. So tonight, I’m proposing specific steps to pay for the $1 trillion that it took to rescue the economy last year…. Like any cash-strapped family, we will work within a budget to invest in what we need and sacrifice what we don’t. And if I have to enforce this discipline by veto, I will…

I have never found anybody working in economic policy in the Obama administration who thought that this large a shift this quickly was a good idea. Some have admitted to believing that it was a meaningless rhetorical nothingburger—after all, it excepted “spending related to our national security, Medicare, Medicaid, and Social Security”, and you can do anything macroeconomic you want on the spending side in those categories. They were wrong. Others were strongly opposed. Others say that they were quiet, but certainly not boosters.

And, indeed it wasn’t a good idea.

If the Greenspan-Snow shock is the Prince of Denmark in this play, the idea that the crisis was over and the need for stimulative policy was at an end as of early 2010—call it the Obama-Geithner shock, perhaps—is King Claudius, or at least Queen Gertrude here.

And this gets me to my fifth quarrel with Paul Krugman here. As I see it, the most important thing we missed about globalization was how much it required support from stable and continuous full employment. That, I think, ought to have been the focus of his talk to the IMF.

It is now 81 years since John Maynard Keynes published:

Whilst… the enlargement of the functions of government involved in the task of adjusting to one another the propensity to consume and the inducement to invest would seem to a nineteenth-century publicist or to a contemporary American financier to be a terrific encroachment on individualism. I defend it… as the only practicable means of avoiding the destruction of existing economic forms in their entirety and as the condition of the successful functioning of individual initiative….

If effective demand is deficient… the public scandal of wasted resources… the individual enterpriser… is operating with the odds loaded against him. The game of hazard which he plays is furnished with many zeros…. The authoritarian state systems of today seem to solve the problem of unemployment at the expense of efficiency and of freedom. It is certain that the world will not much longer tolerate the unemployment which, apart from brief intervals of excitement, is associated and in my opinion, inevitably associated with present-day capitalistic individualism. But it may be possible by a right analysis of the problem to cure the disease whilst preserving efficiency and freedom…

True. Now as much as ever.

When “Globalization” is Public Enemy Number One

Globalization over the centuries

*Milken Institute Review: When Globalization is Public Enemy Number One: The first 30 years after World War II saw the recovery and reintegration of the world economy (the “Thirty Glorious Years,” in the words of French economist Jean Fourastié). Yet after a troubled decade — one in which oil shocks, inflation, near-depression and asset bubbles temporarily left us demoralized — the subsequent 23 years (1984-2007) of perky growth and stable prices were even more impressive as far as the growth of the world’s median income were concerned.

This period, dubbed the “Great Moderation,” was by most economists’ reckoning largely the consequence of the process of knitting the world together. The mechanism (and impact) was largely economic. But the consequences of globalization were also felt in cultural and political terms, accelerating the tides of change that have roughly tripled global output and lifted more than a billion people from poverty since 1990.

So why is globalization now widely viewed as the tool of the sorcerer’s apprentice? I am somewhat flummoxed by the fact that a process playing such an important role in giving the world the best two-thirds of a century ever has fallen out of favor. But I believe that most of the answer can be laid out in three steps:

  • The past 40 years have not been bad years, but they have been disappointing ones for the working and middle classes of what we now call the “Global North” (northwestern Europe, America north of the Rio Grande and Japan).
  • There is a prima facie not implausible argument linking those disappointing outcomes for blue-collar workers to ongoing globalization.
    * In any complicated policy debate that becomes politicized, the side that blames foreigners has a very powerful edge. Politicians have a strong incentive to pin it on people other than themselves or those who voted for them. The media, including the more fact-based media, tend to let elected officials set the agenda.

Hence it doesn’t take much of a crystal ball to foresee a few decades of backlash to globalization in our future. More of what is made will probably be consumed at home rather than linked into global supply chains. Businesses, ideas and people seeking to cross borders will face more daunting barriers.

Some of the consequences are predictable. The losses to income created by cross-border barriers to competition will grow. And more of the focus of economic policy will be on the division of the proverbial pie rather than how to make it larger. Small groups of well-organized winners will take income away from diffuse and unorganized groups of losers.

Measured in absolute numbers, an awful lot of wealth will be lost. But those losses won’t approach, say, the scale of the output foregone in the Great Recession. Figure on a 3 percent reduction in income, equivalent to the loss of two years’ worth of growth in the advanced industrialized economies.

Most well-educated Americans, I suspect, will either be net beneficiaries of the reshuffling of income or won’t lose enough to notice. Disruption often redounds to the benefit of the sophisticated who can see it coming in time to get out of the way or turn it to their own advantage. But that’s a minority of the population, even in rich countries. Real fear about where next week’s mac and cheese is going to come from applies for a tenth, while fear about survival through the hard times is still a thing for a quarter of humanity.

Why do I believe all this? Bear with me, for my explanation demands an excursion down the long and winding road of centuries of globalization.

Globalization in Historical Perspective: On the brilliant date-visualization website, Our World in Data, Oxford researcher Esteban Ortiz-Ospina, along with site founder Max Roser, has plotted best estimates of the relative international “trade intensity” of the world economy — the sum of exports and imports divided by total output over a very long time. In my reproduction I have divided the years since 1800 into four periods and drawn beginning- to end-of-period arrows for each.

The World in Data

In the years from 1800 to 1914, which I call the First Globalization, world trade intensity tripled, driven mostly by exchange between capital-rich, labor-intensive and resource-rich regions. Countries with both sorts of endowments benefit by specializing production in their areas of comparative advantage. Meanwhile, huge migrations of (primarily) people and (secondarily) financial capital to resource-rich regions established a truly integrated global economy for the first time in history.

The period from 1914 to 1945 saw a dramatic retreat, with the relative intensity of international trade slipping back to little more than its level in 1800. There are multiple, complementary explanations for this setback. Faster progress in mass production than in long-distance transport made it efficient to bring production back home to where the demand was. The Great Depression created a path of least political resistance in which governments sought to save jobs at home at the expense of trading partners. And wars both blocked trade and made governments leery of an economic structure in which they had to rely on others.

This retrenchment, however, was reversed after World War II. The years 1945 to 1985 saw the Second Globalization, which carried trade intensity well above its previous high tide in the years before World War I. But this time, the bulk of trade growth was not among resource-rich, capital-rich and labor-intensive economies exchanging the goods that were their comparative advantage in production. It largely took place within the rich Global North, as industrialized countries developed communities of engineering expertise that gave them powerful comparative advantages in relatively narrow slices of manufacturing production in everything from machine tools (Germany) to consumer electronics (Japan) to commercial aircraft (the United States).

After 1985, however, there was a marked shift to what Ortiz-Ospina calls “hyperglobalization.” Multinational corporations began building their international value chains across crazy quilts of countries. The Global South’s low wages gave it an opportunity to bid for the business of running the assembly lines for products designed and engineered in the Global North. Complementing this value-chain-fueled boost to world trade came the other aspects of hyperglobalization: a global market in entertainment that created the beginnings of a shared popular culture; a wave of mass international migration and the extension of northern financial markets to the Global South, cutting the cost of capital and increasing its volatility even as it facilitated portfolio diversification across continents.

Hyperglobalization, Up Close and Personal: Of these value-chain-fueled boosts to international trade, perhaps the first example was the U.S.-Mexico division of labor in the automobile industry enabled by the North American Free Trade Agreement of the early 1990s. The benefits were joined to the more standard comparative-advantage-based benefits of reduced trade barriers. At the 2017 Milken Institute Global Conference, Alejandro Ramírez Magaña, the founder of Cinépolis, the giant Mexican theater group that is investing heavily in the United States, summed up the views of nearly all the economists and business analysts in attendance:

Between the U.S. and Mexico, trade has grown by more than six-fold since 1994 … 6 million U.S. jobs depend on trade with Mexico. Of course, Mexico has also enormously benefited from trade with the U.S.… We are actually exporting very intelligently according to the relative comparative advantage of each country. Nafta has allowed us to strengthen the supply chains of North America, and strengthened the competitiveness of the region…

Focus on the reference to “supply chains”. Back in 1992, my friends on both the political right and left feared—really feared—that Nafta would kill the U.S. auto industry. Assembly-line labor in Hermosillo, Mexico had such an enormous cost advantage over assembly-line labor in Detroit or even Nashville that the bulk of automobile manufacturing labor and value added was, they claimed, destined to move to Mexico. There would be, in the words of 1992 presidential candidate Ross Perot, “a giant sucking sound,” as factories, jobs and prosperity decamped for Mexico.

But that did not happen. Only the most labor-intensive portions of automobile assembly moved to Mexico. And by moving those segments, GM, Ford and Chrysler found themselves in much more competitive positions vis-a-vis Toyota, Honda, Volkswagen and the other global giants.

Fear of Globalization: Barry Eichengreen, my colleague in the economics department at Berkeley, wrote that there is unlikely to be a second retreat from globalization:

U.S. business is deeply invested in globalization and would push back hard against anything the Trump administration did that seriously jeopardized Nafta or globalization more broadly. And other parts of the world remain committed to openness, even if they are concerned about managing openness in a way that benefits everyone and limits stability risks that openness creates…

But I see another retreat as more likely than not. For one thing, anti-globalization forces have expanded to include the populist right as well as the more familiar populist left. It was no surprise when primary contender Bernie Sanders struck a chord by condemning Nafta and the opening of mass trade with China as “the death blow for American manufacturing.” But it was quite another matter when the leading Republican candidate (and now president) claimed that globalization would leave “millions of our workers with nothing but poverty and heartache” and that Nafta was “the worst deal ever” for the United States.

The line of argument is clear enough. Globalization, at least in its current form, has greatly expanded trade. This has decimated good (high-paying) jobs for blue-collar workers, which has led to a socioeconomic crisis for America’s lower-middle class. U.S. Trade Representative Robert Lighthizer buys this:

Nafta has fundamentally failed many, many Americans. … [Trump] is not interested in a mere tweaking of a few provisions and a couple of updated chapters. … We need to ensure that the huge [bilateral trade] deficits do not continue, and we have balance and reciprocity…

It’s conceivable that the Trump administration will yet pay homage to the post-World War II Republican Party’s devotion to open trade. But it seems unlikely in light of the resonance protectionism has had with Trump supporters. And if the Trump administration proves not to be a bellwether on globalization, it is surely a weathervane.

When Globalization is Public Enemy Number One

The Real Impact of Globalization: Portions of the case against globalization have some traction. It is, indeed, the case that the share of employment in the sectors we think of as typically male and typically blue-collar has been on a long downward trend. Manufacturing, construction, mining, transportation and warehousing constituted nearly one-half of nonfarm employment way back in 1947. By 1972, the fraction had slipped to one-third, and it is just one-sixth today.

But consider what the graph does not show: the decline (from about 45 percent to 30 percent) in the share of these jobs from 1947 to 1980 was proceeding at a good clip before U.S. manufacturing faced any threat from foreigners. And the subsequent fall to about 23 percent by the mid-1990s took place without any “bad trade deals” in the picture. The narrative that blames declining blue-collar job opportunities on globalization does not fit the timing of what looks like a steady process over nearly three-quarters of the last century.

Wait, there’s a second disconnect. Look at the way the declines in output divide among the sub-sectors (see page 29). Manufacturing was about 15 percent of nonfarm production in the mid-1990s and was still about 14 percent at the end of 2000, even as trade with Mexico and China accelerated into hyperdrive. Indeed, the bulk of the fall in “men’s work” has been in construction, which represented 7 percent of private industry production in 1997 and represents just 4 percent today. Warehousing and transportation have also taken a big hit in terms of proportion.

The biggest factors on the real production side over the past 20 years have not been the out-migration of manufacturing, but the depression of 2007-10 and the dysfunction of the construction finance market that continues to this day.

The China Shock: The case that the workings of globalization have had a major destructive effect on the employment opportunities of blue-collar men over the past two decades received a major intellectual boost from the research of David Autor, David Dorn and Gordon Hanson on the impact of the “China shock.”

One of their bottom lines is that the loss of some 2.4 million American manufacturing jobs “would have been averted without further increases in Chinese import competition after 1999.” Moreover, the effects on workers and their communities were dislocating in a way in which manufacturing job loss generated by incremental improvements in productivity not associated with factory closings was not.

The China shock was very real and very large: its significance shouldn’t be discounted, especially in the context of a close presidential election whose outcome may have a large, enduring impact on the United States — and, for that matter, the world. But some perspective is needed if one is to allow the tale of the China shock to influence thinking about globalization.

Start with the fact that, in most ways, this is a familiar story in the American economy that long preceded the rise of China. Dislocation associated with the relocation of production facilities is more damaging to people and places than incremental changes in production processes, whether the movement is across state lines or across continents.

When my grandfather and his brothers closed down the Lord Bros. Tannery in Brockton, Massachusetts to reopen in lower-wage South Paris, Maine, the move was a disaster for the workers and the community of Brockton — and a major boost for South Paris. When, a decade and a half later, my grandfather found he could not make a go of it in South Paris and started a new business in Lakeland, Florida, it was the workers and the community of South Paris who suffered.

The fact that, in the case of globalization-driven dislocation, the jobs cross international borders adds some wrinkles, but not all of them are obvious. As demand shifts, jobs vanish for some in some locations and open for others in other locations. Dollars that in the past were spent purchasing manufactures from Wisconsin and Illinois and are now spent purchasing manufactured imports from China do not vanish from the circular flow of economic activity. The dollars received by the Chinese still exist and have value to their owners only when they are used to buy American-made goods and services.

Demand shifts, yes — but the dollars paid to Chinese manufacturing companies eventually reappear as financing for, say, new apartment buildings in California or to pay for a visit to a dude ranch in Montana or even to buy an American business that otherwise might close. GE, which had been openly seeking a way to offload its household appliance division for many years, sold the business to the Chinese firm Haier, the largest maker of appliances in the world. How different might the world have been for the employees of White-Westinghouse who were making appliances if a Chinese firm had been trolling the waters for an acquisition before the brand disappeared for good in 2006?

Only with the coming of the Great Recession do we see not blue-collar job churn but net blue-collar job loss in America. And that was due to the government’s failure to properly regulate finance to head off the housing meltdown, the subsequent failure to properly intervene in financial markets to prevent depression, and the still later failure to pursue policies to rapidly repair the damage.

All that said, the connection between the China shock in the 2000s and increasing blue-collar distress in the 2000s on its face lends some plausibility to the idea that globalization bears responsibility for most of their distress, and needs to be stopped.

The Globalization Balance Sheet: Last winter, in a piece for, I made my own rough assessment of the factors responsible for the 28 percentage point decline in the share of sectors primarily employing blue-collar men since 1947. I attributed just 0.1 percentage points to our “trade deals,” 0.3 points to changing patterns of trade in recent years (primarily the rise of China), 2 percentage points to the impact of dysfunctional fiscal and monetary policies on trade, and 4.5 percent to the recovery of the North Atlantic and Japanese economies from the devastation of World War II. I attributed the remaining 21 percentage points to labor-saving technological change.

This 21 percentage points has very little to do with globalization. Yes, with low barriers to trade, technology allows foreign exporters to make better stuff at lower cost. But American producers have the parallel option to sell them better stuff for less. And thanks to technology, consumers on both sides get more good stuff cheap. Economists slaving away in musty offices can invent scenarios in which technological change favors foreign producers over their American counterparts and thereby directly costs blue-collar jobs. But the assumptions needed to get that result are highly unrealistic.

To repeat, because it bears repeating: globalization in general and the rise of the Chinese export economy have cost some blue-collar jobs for Americans. But globalization has had only a minor impact on the long decline in the portion of the economy that makes use of high-paying blue-collar labor traditionally associated with men.

Why is this View so Hard to Sell?: Pascal Lamy, the former head of the World Trade Organization, likes to quote China’s sixth Buddhist patriarch: “When the wise man points at the moon, the fool looks at the finger.” Market capitalism, he says, is the moon. Globalization is the finger.

In a market economy, the only rights universally assured by law are property rights, and your property rights are only worth something if they give you control of resources (capital, land, etc.) — and not just any resources, but scarce resources that others are willing to pay for. Yet most people living in market economies believe their rights extend far beyond their property rights.

The way mid-20th century sociologist Karl Polanyi put it, people believe that they have rights to land whether they own the land or not — that the preservation and stability of their community is their right. People believe that they have rights to the fruits of labor — that if they work hard and play by the rules they should be able to reach the standard of living they expected. People believe that they have rights to a stable financial order — that their employers and jobs should not suddenly disappear because financial flows have been withdrawn at the behest of the sinister gnomes of Zurich or some other tribe of rootless cosmopolites.

Dealing with these hard to define, sometimes conflicting claims to rights beyond property is one of the major political-rhetorical-economic challenges of every society that is not stagnant. And blaming globalization for the unfulfilled claims of this group or that is a very handy way to pass the buck.

The good news is that, whatever the merits of the grievances of those who see themselves as losers in a globalizing economy, sensible public policy could go a long way to making them whole. Three keys would open the lock:

  • The failure of regional markets to sustain good jobs could be managed by much more aggressive social-insurance — unemployment, moving allowances, retraining and the like — along with the redistribution of government resources to create jobs where they have been lost.
  • More aggressive fiscal measures to keep job markets tight.
  • Karl Polanyi’s key remains at hand, too. While many Americans claim to worship at the altar of free markets, they still believe that they have all kinds of extra socioeconomic rights — to healthy communities, to stable occupations, to appropriate and rising incomes — that are not backed up by property rights. Governments could intervene on their behalf.

That way lies tyranny, we’ve been told, but also very high-functioning social democracies like Sweden, Germany and the Netherlands.

The bad news, of course, is that the public policies needed to soothe the grievances blamed on globalization seem further out of reach today than they were decades ago. Probably the best one can hope for is that the fever subsides sufficiently to allow for a realistic debate over who owes what to whom.

The New Socialism of Fools

Project Syndicate: The New Socialism of Fools by J. Bradford DeLong–bradford-delong-2017-08: BERKELEY – According to mainstream economic theory, globalization tends to “lift all boats,” and has little effect on the broad distribution of incomes. But “globalization” is not the same as the elimination of tariffs and other import barriers that confer rent-seeking advantages to politically influential domestic producers. As Harvard University economist Dani Rodrik frequently points out, economic theory predicts that removing tariffs and non-tariff barriers does produce net gains; but it also results in large redistributions, wherein eliminating smaller barriers yields larger redistributions relative to the net gains. Globalization, for our purposes, is different. It should be understood as a process in which the world becomes increasingly interconnected through technological advances that drive down transportation and communication costs…Read MOAR at Project Syndicate

Economic Policy Challenges in the US and Japan Panel: Globalization and Inequality

San Francisco from Abovee Berkeley

Globalization and Inequality

J. Bradford DeLong :: U.C. Berkeley, WCEG, and NBER @delong

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Globalization and Inequality

  • Moderator: Naoyuki Haraoka
  • Brad DeLong
  • Francis Fukuyama
  • Yoriko Kawaguchi
  • Hideichi Okada

Growth Strategies of the US and Japan

  • Moderator: Takeo Hoshi
  • Nick Bloom
  • Takatoshi Ito
  • Keiichiro Kobayashi
  • Kathryn Shaw

Is Technology the Answer? (or Will Silicon Valley Save the World?)

  • Moderator: Ken Singleton
  • Shai Bernstein
  • Kenji Kushida
  • Masaaki Tanaka
  • Tsunehiko Yanagihara

Proceed with Caution: What can we say about globalization and inequality?

First, we must say that we have to proceed with caution. We face truly grave problems of measurement—at measuring the extent of globalization, at measuring the prosperity and rate of economic growth of the world, and at measuring inequality.

The problems of measuring growth become insuperable unless we largely neglect the fact that we produce and consume not just more of the same commodities than we did in 1800, but new commodities and new kinds of commodities that give us, as John Maynard Keynes wrote a hundred years ago, “conveniences, comforts, and amenities beyond the compass of the richest and most powerful monarchs of other ages”. The problems of measuring inequality become insuperable unless we largely neglect the implications of fact that an income one-third of the geometric average two hundred years ago meant that you starved to death unless someone took explicit pity on you personally, while an income one-third the geometric average today leaves you poor relative to your neighbors, but still rich relative to your ancestors. But if you wanted deep thoughts about these issues, you would have called for a philosopher rather than an economist.

B. Our Rough Guesses: Thus: neglecting these issues, the world’s prosperity center-of-gravity—the geometric average level of production—was up from perhaps $1000 of today’s real-value international dollars per capita per annum to $4000 , and the world’s life expectancy was up from 28 to 65 years over the period 1800-1976. And in the past forty years prosperity has jumped from $4000 to $9000, and life expectancy from from 65 to 75.

But look at the spread. The spread was roughly a factor of 8 in 1800: few countries then had average income levels less than $500 or more than $4000 per capita per annum. The spread rose to a factor of 32 as of 1976: few countries then had average income levels less than $500 or more than $16000 per capita per annum. The spread remains a factor or 32 today: few countries now have average income levels less than $1000 or more than $32000 per capita per annum.

While the story across nations is one of growing inequality from 1800-1976 followed by a stable level of inequality, the story across people is considerably different. The relative spread of people’s incomes today is substantially, gratifyingly, and fortunately much smaller than it was in 1976. Russia has regressed, not absolutely—fortunately—but relatively toward the global geometric mean.

C. China and India: China and India have grown at stupendous rates so that they now are within close shouting distance above and below the global geometric mean, and few countries and only one large country—Japan—already rich has grown rapidly and so pulled, relatively, significantly further ahead of the global geometric mean. Russia and Japan offset each other. So the “convergence” of relatively income levels across the globe that we have seen over the past forty years that has, in combination with underlying economic growth, made it the best forty year period for human economic material progress ever in global history is 100% a China-India phenomenon.

That is is only two countries makes this “convergence” difficult to interpret as we try to assess the likely future. Have we seen good governance institutions spread to another 30% of the human race, leaving less than 40% of the world with severely sub-par institutions as far as economic growth is concerned? In that case, we would expect good governance institutions for economic growth to continue to spread over the next two generations, and we would be hopeful. Or did just good luck bring good leaders to power in two countries—albeit the two countries that together amount to 30% of the human race—in which case normal luck would see the next two countries to get good governance institutions be small ones, and would perhaps see institutional backsliding, perhaps severe institutional backsliding, in China and India? On such questions as this does our optimism or pessimism about the human global future depend.

D. Branko Milanovic’s Elephant Diagram: The pattern of global growth over the past generation or so in terms of the incomes accruing to different percentile slots in the global income distribution are well-captured in what has come to be called Branko Milanovic’s “Elephant Diagram”: the tail of the elephant are the global poorest, whose lives were and remain virtually indistinguishable from those of our pre-industrial agrarian age ancestors under the curse of Malthus. The back of the elephant is the global prosperous working and middle class—primarily but far from exclusively in China. The upward-lifted tip of the trunk is the global overclass, the elite. the downward-pointing base of the trunk is Russia. And the first upward curve is the middle class of the North Atlantic economies, for whom—especially for the native-born males among whom—the past generation or so has been the worst period since 1850.

E. Globalization, Technology, Education, Institutions as Causes and as Scapegoats: In what sense is “globalization” the cause of this distressing recent generation plus for the North Atlantic middle classes? Or, alternatively, in what sense is “globalization” the scapegoat to which the North Atlantic middle classes resort on their own out of ignorance or are led to resort in an attempt to distract them from the true causes—or, in many cases, simply because if you scare mostly-elderly people about foreigners you can keep their eyeballs glued to the TV and so collect money from advertisers as they try to sell them overpriced gold funds and fake diabetes cures?

The overwhelming part of the story is: technology and educational failure as cause, and globalization as scapegoat.

In brief:

  • In the United States, manufacturing employment has gone from 30% to 12% because of technology.
    • Japan has seen analogous but much smaller technological trends—in large part because technological forces have been hobbled, if that is the word, by institutions in important sectors like food processing
    • The decline in manufacturing employment has been made a much bigger deal for distribution in the United States because the U.S. lost the race between education and technology.
    • Has it been made a bigger deal because of the rise of the overclass?
      • At U. Chicago, it is conventional to bow to Sherwin Rosen’s “superstar economy” ideas and view the rise of the overclass as an unmixed blessing.
      • Not so at Berkeley.
  • In the United States, manufacturing employment has gone from 12% to 9% because of an ill-managed savings-investment balance.
    • Not so in Japan: if the Japan savings-investment balance has been ill-managed, it has been so in the opposite direction.
    • The catastrophic mistake of the Reagan and Bush deficits—starving the country of savings in order to overincentivize the nascent overclass.
      • Japan and Germany offer a different road
      • Globalization provided an important safety valve: allowed a low savings country to continue to invest, albeit at an inadequate pace.
    • Here globalization is not the cause but the scapegoat—and a partial cure.
  • “Bad trade deals!”
    • Manufacturing employment from 9% to 8.7% because of the China shock
    • Manufacturing employment from 8.7% to 8.6% because of NAFTA
      • Trump’s economic policy team appears to have two ideas for how to renegotiate NAFTA
        • Require year-by-year bilateral balance everywhere.
        • Force Canada and Mexico to accept the provisions of the TPP
    • No effect of TPP

E. Globalization, Job Instability, and Job Quality in America: Manufacturing and other goods value-chain jobs become unstable because of the post-1980 dollar cycles the sharp up from the inauguration of Ronald Reagan to the Plaza, the sharp down from the Plaza to the Louvre, the sharp up during the dot-com boom, the down of the 2000s, and now—perhaps—the start of a Trump dollar cycle. These very large exchange rate fluctuations are side effects of improper governance and policy non-coordination. But since the end of Bretton Woods governments in the Global North appear to have decided that they would much rather let currencies float as shock absorbers than commit themselves to policy coordination to damp such fluctuations. The consequence has been to make export and import-competing manufacturing sectors very unstable—and thus very risky, especially for workers but also for investors and managers.

What role has this instability played in undermining the institutional job ladders that used to exist for blue-collar workers in the U.S., and still exist in Japan. And what role have this and other sources of instability started to play since the mid-2000s in undermining the institutional white-collar job ladder stability as well? One powerful possibility is that manufacturing and other goods value-chain jobs are good jobs only as long as they are union jobs. And dollar-cycle instability has meant maintaining a strong union movement in affected industries nearly impossible—even if firms do not prioritize union destruction.

These issues are still very unsettled. I would point people to the arguments raised by and the forthcoming debate around Richard Baldwin’s new The Great Convergence: Information Technology and the New Globalization

I would also say that we are next to nowheresville in terms of understanding the sources of the rise of the overclass in America. There are lots of very good but speculative theories and ideas. But there is little consensus. I find “winner take all economy” explanations completely inadequate. But what is adequate? I would point out that increasing investigation of tax avoidance and tax evasion strongly suggests that the rise of the overclass has been much stronger than one gets from the Piketty-Saez tax data. But I would also point out that, here in the U.S., pre-1987, large amounts of soft-dollar compensation and the use of recapitalizations to create ownership interests then passed on at death or committed to foundations means that we have less insight into historical trends than we would wish.

We do know that the situation is not stable. We can see, ahead, the possible transformation of the American overclass into one in which inheritance has played a much greater role a la Piketty. Has globalization played a large role in its rise? If so, it is a role that Japan—and much of continental Europe—have been largely able to neutralize. English-speaking countries, resource exporters like the Middle East and Russia, and emerging market economies able to find a place in global value chains appear to be in the domain of the rising global overclass in a way that Japan and continental western Europe.

F. Polanyian Perplexes and Fukuyamian Foresight: I have two more slides—with a long quote from Keynes, a brief attempt to apply insights from Karl Polanyi’s The Great Transformation, and a bow to Fukuyama-sensei’s 1989 “The End of History?”—note the question mark at the end—in the shadow of which we have all now lived for a generation.

But I am much more interested in hearing Fukuyama-sensei discuss these issues than I am interested in hearing me so far out of my proper confidence, and the same is almost surely true of you as well…

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Globalization in the Crosshairs: Trade, Jobs, Inequality, Globalization, Robots II

Milken Institute: Globalization in the Crosshairs: Tuesday, May 2, 2017 / 2:30 pm-3:30 pm: Beverly Hills Ballroom

  • Moderator: Gillian Tett, U.S. Managing Editor, Financial Times
  • Steven Ciobo, Minister for Trade, Tourism, and Investment, Australia
  • J. Bradford DeLong, Professor of Economics, UC Berkeley; Weblogger, Washington Center for Equitable Growth
  • John Hagel, Managing Director, Deloitte Consulting LLP; Co-Chairman, Center for the Edge
  • Alejandro Ramirez Magaña, CEO, Cinépolis
  • Stephen Schwarzman, Chairman, CEO and Co-Founder, Blackstone

In the 20 years leading up to the financial crisis, international trade grew at twice the rate of global output. Since then, trade has struggled to recover. Recent data is more worrying still, suggesting that trade’s share of global GDP is falling. With mainstream political support for multilateral trade deals diminishing and populist movements on the rise in the U.S. and Europe, it is time to examine the future of globalization. Panelists will consider the following questions:

  1. Has international trade—and globalization more broadly—entered a period of stagnation or even reversal?
  2. Once unleashed, can globalization ever reverse or are we just seeing a slowdown in a normal cycle?
  3. What are the implications for the global economy and the international economic order?
Max Roser Globalization Over 5 Centuries

Gillian Tett: Good afternoon, everybody, and welcome to this panel session entitled “Globalization in the Crosshairs”. That is the politically correct, slightly optimistic title. I would probably call it: “Are We Sliding Back to Protectionism and Nationalism? Is It ‘Back to the Future’—Like the 1930s?”

Joining me today is a terrific broup of people to talk about these issues. On my far right, to your left, is Steven Ciobo, Minister for Trade, Tourism, and Investment for Australia. Next to him is Brad DeLong, Professor of Economics at Berkeley, one of my favorite economic bloggers. On my immediate left, your right, is John Hagel, Managing Director at Deloitte. Next to him is Alejandro Ramirez, CEO of Cinépolis, a large Mexican media group, and who is also Chairman of the Mexican Business Council. And at the very end is Steve Schwartzman, a man known well to most of you, CEO of Blackstone, and Chairman of the Strategy and Policy Forum at the White House. A great combination of people to talk about globalization, nationalism, protectionism, and the impact on business and the economy.

I would like to start with you, Steve, since you are now in this elevated role, speaking for business across America at the White House. You have built your career very much on the wave of globalization. Globalization has been good for you. Do you regard the president as a protectionist?

Steve Schwartzman: The way the president looks at himself is as someone who sets the table with equivalent tariff and other duties so that globalization goes ahead, but from the perspective of a certain type of equality. When you have the United States charging 1/3 duties and tariffs compared to three times that for the other country, the administration is saying: either you come down, or we will go up, and then let us let trade expand. It is really these in some cases enormous differences, as well as in some cases non-tariff barriers that make it very difficult for us to export our products. We look at it from the perspective of: How did we get into this situation? Why aren’t people letting there be equivalence, so the best products win, or the best services win? What you are seeing is an attempt at reciprocity, or equality, and then continue with globalization.

Right now the U.S. has the lowest fully-landed tariff borders, tariff plus VAT, in much of the world. It happened because of the U.S. dominance after World War II, when we had 70% of global GDP. And it has been allowed to continue. It’s not that the intent is to void or dampen globalization and the things we are all familiar with.

Gillian Tett: But do you around that table, the Strategy and Policy Council, strongly support these calls to renegotiate NAFTA. Are you concerned that this is part of an anti-globalization backlash that could end up damaging you?

Steve Schwartzman: I was at the G-20 in Hangzhou, and President Xi gave a big speech about the general anti-trade pattern. And everybody who measures these things has seen trade constricting around the world. You could look at, Gillian, in a few different ways:

  1. As a simple correction, for equivalence.
  2. Why is it coming up now? The theory is that these issues are being raised around the world.

But, really, this is an equivalence issue. These issues would all go away if barriers were more or less the same everywhere. We would not be having this panel.

Gillian Tett: OK. So it is not protectionism. It is “equivalence”. That is clearly going to be the new buzzword in Washington: “equivalence”. Alejandro, from where you are sitting…

Steve Schwartzman: Let me put it this way. If it were the reverse—if all these tariffs were upside down—what would other people think?

Gillian Tett: Well, let’s ask them. Alejandro, you come from Mexico…

Steve Schwartzman: As a curious item…

Gillian Tett: Well, that’s a great question to ask everyone on the panel. But, Alejandro, sitting in Mexico does what is happening in Washington look to you like an enlightened policy of “equivalence”, or does it look a bit more ominous? How do you read the current mood in Washington?

Alejandro Ramirez: We are very concerned in the Mexican private sector with what we do perceive as protectionist rhetoric in Washington. The fact that on Day 1 the U.S. withdrew from TPP. Last week there was, as you know, a leak saying that the White House was preparing to withdraw from NAFTA. That we are continuing on the path of renegotiating the trade deal. We are concerned because we think that NAFTA has been unduly vilified. We believe that NAFTA has brought many more benefits to all three countries than the trade deal has cost. Trade has more than tripled between the three countries. Bilaterally, between the U.S. and Mexico, trade has grown by more than sixfold since 1994.

Mexico has become the number two destination for U.S. exports. We trade over $500 billion every year. Around 6 million U.S. jobs depend on trade with Mexico. Of course, Mexico has also enormously benefited from trade with the U.S. In specific sectors, for example, more than 20 years ago when the trade deal was going to come into effect one of the most sensitive areas was agricultural markets on both sides. Today some of the biggest beneficiaries from NAFTA are the U.S. corn growers of the midwest and the Mexican growers of fruits and vegetables.

We are actually exporting very intelligently according to the relative comparative advantage of each country.

NAFTA has allowed us to strengthen the supply chains of North America, and strengthened the competitiveness of the region, so that we can produce more competitively in the world.

Gillian Tett: So when you hear someone like Steve Schwartzman saying, along with the White House, that what is needed is “equivalence”—we need a level playing field—do you think that is fair, or do you think that is protectionism under a new guise?

Alejandro Ramirez: I think part of what Steve was referring to was the policy of other countries that do not have a free-trade deal with the U.S. They may have disparate tariff rates. But Mexico—our average tariff was much higher than the U.S. back in 1994. We brought it down basically to zero. Both countries. The U.S. average tariff was below 5%. The Mexican average tariff was above 20%. I do not know about other countries, but I do know that with Mexico we are dealing with a level playing field. And yet the U.S. government has threatened repeatedly to withdraw from the deal.

I do, however, think that there is room for improvement. It is a 22-year old deal. Parts of the economy that did not exist back then—e-commerce. I think there is room for strengthening intellectual property rights. I think there is room for strengthening biotech. Other things we can add—labor, environment, anti-corruption.

There is room for modernizing it. But to call it the worst deal ever for the U.S. I do not think that is an accurate description of NAFTA.

Gillian Tett: Right, right. Just now that we are on NAFTA—we’ll get on the TPP in a minute—John: You have talked to a lot of CEOs. How concerned are they with rising protectionism—”equalization”, “trade modernization”, whatever you want to call it. Do you think we are in the middle of a protectionist backlash? Is that going to hurt companies that you talk to?

John Hagel: My sense is that there is increasing anxiety about the fact that we are at a pivot point, and about which way the world is going to fall. I think it reflects the paradox about globalization. At one level, globalization is creating expanding economic opportunity around the world. At another level, it is creating mounting performance pressure on all of us. It is intensifying competition on the individual level. We all face the possibility of loss of jobs. Wages are coming down because of international competition. At the corporate level, we are facing increasing competition, globally.

We have spent time—I run a research center called The Center for the Edge. We have looked at the long term forces making the global economy. The one metric that we think illustrates this mounting performance pressure—if I can show slide 1—the return on assets for all public companies in the United States:

Globalization in the Crosshairs Trade Jobs Inequality Globalization Robots II

From 1965 until today, if you look at return on assets for all public companies in the United States, it has basically collapsed, over a period of decades. There are short term cycles that correspond to the economic cycles. But the long term trend is very clear. And there is no sign of it leveling off. There is certainly no sign of it turning around.

Our belief is that that is an indicator not only of mounting performance pressure, but of the increasing inability of our institutions to respond to this pressure. This is public companies. But, based on the research we have done, we believe all institutions—educational institutions, government institutions, NGOs—are facing a similar kind of challenge.

Gillian Tett: That trend is going to hit zero around 2030, isn’t it?

John Hagel: This is not a sustainable trend. Clearly, something is going to have to change. Our belief, and this is being an optimist from Silicon Valley, is that this is going to be a catalyst to force us to reassess all of our institutions.

By the way, one of the key indicators of the failure of our institutions is “trust” metrics. We have study after study showing declining trust in every institution—not just companies, not just banks, not just government. Every institution around the world is collapsing! If that is not an indicator of a problem, what is? And our belief is that the problem is that we are unable to respond to mounting performance pressure, and unable to take advantage of the opportunity that is actually created by globalization.

Gillian Tett: Right. I am going to come back later and ask you what can be done. That is obviously a big question. And that is the point of these conferences: to assess what can actually be done. But before I do, I would like to turn to Brad, who has also come armed with a nice snappy chart. Brad, do you want to put this in a longer term historical term historical context.

Brad DeLong: OK. Let’s go!

Max Roser Globalization Over 5 Centuries

Since 1800:

  • First Globalization—Trade between capital and resource rich regions, and huge amounts of migration of finance and labor to the resource rich regions.

  • Globalization Retreat—Faster progress in mass production than in transport makes it efficient to bring production back home; combined with the depressions on the interwar period encouraged governments to take steps to keep jobs at home and engage in beggar-thy-neighbor policies.

  • After World War II, Second Globalization—the enormous expansion of north-north intraindustry trade, as developed countries trade narrow slices of their industrial output with each other. This was the thing that explaining it won Paul Krugman his Nobel Prize.

  • Followed by the green line: Hyperglobalizion—in which the global south’s low wages give it a comparative advantage which can now be harvested for industrial-scale production because of the success in constructing internet and other communications-mediated intercontinental value chains.

Of these, perhaps the first example was the U.S.-Mexico division of labor in the automobile industry. My friends on the right and my friends on the left feared NAFTA back in 1992. They said NAFTA was going to kill the U.S. auto industry. The whole thing would move to Hermosillo. It did not. By outsourcing the most labor intensive parts of their production processes to Mexico, GM and Ford now find themselves in much more competitive positions vis-a-vis Toyota, BMW, and company than they would have found themselves had we not done NAFTA.

Gillian Tett: If you look at that chart, you have that lovely green arrow heading up towards the heavens, looking like it is going to go up forever. The last time I saw charts like that was in 2007 on the eve of the credit crisis. I have seen other charts like that showing what has happened over the past hundred years—to the credit cycle, to banking pay—that go up and down. The question I have is: I look at that, and I look at what we have just seen from John on returns from assets collapsing, and what makes you think that green arrow is going to continue to do up and not suddenly go down again?

Brad DeLong: It is always dangerous to make predictions, especially about the future. Yes, in an era of secular stagnation, with central bank-controlled interest rates kissing zero for large periods of time and governments loath to expand their purchases, one of the few tools left is to try to redirect its country’s spending to its own goods whenever it finds itself short of jobs. Yes, low wages are going to be a much less important player in the global division of labor as robots come and as labor productivity in manufacturing soars upward.

China is almost sure to be the last country that follows the successful industrialization recipe of becoming a lot richer by exporting low wage manufactures to the industrial core and so building up its communities of engineering practice. After China, low wage simple first line manufactures simply are not going to need enough workers to produce them for it to be worth much of anyone’s while.

Gillian Tett: Right. That is not entirely encouraging. On that note, it seems like a good moment to turn to Australia. You are in the position of being the only elected official, the only government official on the panel. You represent governments throughout the world, while Steve is singlehandedly representing American business. How do you read it? Do you think we are on the brink of an inexorable slide into protectionism? Do you see things like TPP unraveling as signposts of that trend? Or are you more optimistic?

Steven Ciobo: I am more optimistic. I was listening to the remarks that Steve made earlier. I will contrast them with our experience. In the 1980s, Australia unilaterally reduced its tariff barriers. most goods coming into Australia come in with zero tariffs. The maximum is 5%. We have free trade agreements with many countries which means, of course, that there are no tariff barriers at all. We are focused on non-tariff barriers so that they too are reduced over time.

We are now in our twenty-sixth year of consecutive positive economic growth, which is very good for a developed economy. In fact, we have the longest consecutive growth period that any developed economy has ever experienced.

Now I am not saying that that is all the consequence of our unilaterally reducing our tariff barriers. But we do know that they distort. They distort not only trade but the efficient allocation of capital.

Our experience as a country is that trade is driving, in many respects, we’ve seen it in the past twelve or twenty-four months, that trade is driving our economy and driving our employment. One of the points that people remark to me is that Australia has a different view and pattern of trade than other countries. In particular, they will focus on European countries. My observation is to say that may be the case, but if you look at Australia those industries that are particularly protected or subsidized tend to be in the agricultural sector. You see that in Europe. You see that in the United States. In Australia, in fact, it is our ag sector that has benefited from the fact that we have preferential market access to the fast growing Asian powerhouse economies of Japan, China, and Korea. This has really underscored the big price increases for ag products for Australia. There is quite a different view there. We had a lot of these battles thirty years ago. It caused pain. It caused disruption. But we have seen at the end of twenty-six years the benefits of having taken those decisions.

Gillian Tett: So if the White House is essentially saying that is not going to engage in multilateral deals, if TPP has essentially been torpedoed by the White House. Are you willing to say: the Americans are being protectionist; let them get on with it; we are going to go forward with, say, China, and do TPP by ourselves?

Steven Ciobo: I certainly believe that there is tremendous benefit from the TPP. Australia’s position is to continue to pursue all options that we can to bring the TPP into effect. As it is currently constructed, by definition the TPP cannot come into force without the USA. But there is an opportunity for the other eleven countries—we did this recently in Chile—to come together to have a conversation about the future of the TPP. Make a minor tweak so it can still come into force without the USA. That is what we are pursuing. I do not want to speak on their behalf, but I know a similar view is held by New Zealand, by Canada. Ultimately, the big player in this will be Japan. I was in Japan two weeks ago. I was particularly pleased that the Japanese government has given some indication that it is considering a TPP 11.

Now in time, whether China, the U.K., or some other country wants to join—that would be there decision. But meanwhile I think it would be an enormous missed opportunity for us not to do everything we can to bring the TPP into effect.

Gillian Tett: And are you willing to take the leadership in that role?

Steven Ciobo: Absolutely. Australia and Canada have been at the forefront of that discussion.

Gillian Tett: Right. Before I turn back to Steve, I would like to ask your reaction. Do you regard it now as wiser to spend more time building links with, say, China, than America given the way that politics is developing in America?

Steven Ciobo: For a long time, Australia’s view was that we considered ourselves a European country stuck in the wrong part of the world. The amazing thing is that good fortune has smiled on us. We live in the fastest growing region in the planet. So Australia has done a number of things. We have done a number of things. We have been pragmatic. We are very goods friends with the United States, with Japan, with Korea, with China. Now they haven’t all gotten along. But we have managed that process pretty effectively. We are not putting all of our eggs into one basket. We will continue to have a diversified approach. We know who are friends are in the United States. But we are focused on doing deals that are good for our country.

Gillian Tett: Spoken like a diplomat—a politician. Steve, I am curious: did you support TPP last year?

Steve Schwartzman: I thought it was a good thing. I believe it was a good thing. It was a shame that Democrats did not want to do it…

[General laughter from the panel and the audience]

Gillian Tett: I am not sure that is quite how history will write it. But go on:

[Continued laughter from Gillian Tett]

Steve Schwartzman: That is what happened.

Gillian Tett: Do you think it is a shame that the current administration does not want to do it?

Steve Schwartzman: I think it was DOA. The philosophy that the current group has. I’m in the private world. I’m not a government official.

Gillian Tett: That means you can speak freely.

Steve Schwartzman: The theory that the current administration has is that bilateral deals are better than multilateral deals. The way they come about that is—say, pretend you have a group of fifteen countries. You cut a deal with country number 1. They want certain things from you and you want certain things from them. You always hate giving up what you give up. But you give it up because the balance makes sense. And then you go to country number two which wants different things. And you cut a deal with them by giving up things. And you don’t want that. And let’s go to country number three and pretend they don’t want any of the things that countries one and two wanted. So now you have to give up more—different things to each one. But in a multilateral deal you give the same deal you didn’t want to give to country one, you give it to fifteen people…

Brad DeLong: But NAFTA is the ultimate bilateral—or, rather, trilateral—deal!…

Steve Schwartzman: Now, their view is: why would I give something away—why do I give the worst deal I could make with everyone? Why don’t I just give the deal I made with country one to country one. And then I do another deal with country two. It has been explained to me that when you do do that, you can get other benefits from the whole group on softer issues, labor issues. But the current group says: I just want to trade with each one, do the best deal I can, and do deals with each one of these countries.

Gillian Tett: Doesn’t it worry you that if Australia, Japan, China, the TPP will have something prepackaged, ready to go, ready to rock-and-roll very fast? The administration then trying to do negotiations with each of those eleven countries—wouldn’t that be time consuming, and perhaps leave American companies at a disadvantage?


I can see Brad’s like…

Steve Schwartzman: I am not trade representative…

Gillian Tett: OK! The professor:

Brad DeLong: I…

Steve Schwartzman: However, I have not found anybody yet who takes the explanation that I have given—and I have checked with the heads of multilateral organizations—that is how it works. The administration doesn’t want to take the first bad deal and give it to all fifteen in a group, and then take the second bad deal and give it to all fifteen in a group. You could make the case, logically, that that makes some sense. You could make that case. And that is what they are pursuing.

Gillian Tett: The professor is dying to come in…

Brad DeLong: Steve Schwartzman is a brilliant genius. The organization he has played a principal role in constructing—Blackstone—is, we all know, outstripping even Warren Buffett’s vehicles in its α-generation for investors over the long run. It is an extraordinary capitalist accomplishment in finance of a truly astonishing magnitude.

Yet the argument Steve is making here this afternoon now against TPP is the ultimate argument for NAFTA—for a focused bilateral or rather trilateral agreement. And yet it was NAFTA that, according to First Son-in-Law Jared Kushner, President Trump was on the brink of abrogating six days ago. According to Kushner, if the President had abrogated NAFTA we would “have wound up in a pretty good place”.

The principal reason Steve gave for why it might be desirable to “get tougher” on trade was that we face asymmetric non-tariff barriers. But I am not aware of any significant non-tariff barriers between the United States, Mexico, and Canada. Indeed, the only one I remember coming up when NAFT was being negotiated was Canada’s request for a cultural carve-out, so that its radio stations and other media could continue to give priority to Canada-themed entertainment—Celine Dion, and for some reason I do not understand, Lenny Kravitz’s “American Woman, Stay Away From Me!”

Gillian Tett: I am presuming a lot of French language Canadian entertainment as well.

You are essentially arguing that if we are moving toward a world with more bilateral than multilateral deals, that that is more dangerous?

Brad DeLong: It is certainly more complicated.

You either have one deal or you have N(N-1)/2 deals. You then have to be very very careful to keep track of what goods go where when with what components of value added covered by what rules of origin. What fraction of stuff coming in to the U.S. from Mexico under the terms of the Mexican-U.S. bilateral is transshipped from Australia where the Australia-Mexico leg is covered by the Mexico-Australia TPP deal. That would negate the idea that there is a bilateral deal between the U.S. and Australia that means anything.

Keeping track of that is an almost insuperable administrative task. It is an example of the reasons that Friedrich von Hayek concluded that central-planning micromanagement could not work. Micromanaging things at any detailed level, very soon—with the G-20, you would have 195 different bilateral trade agreements. It would be a wonderful full-employment thing for trade lawyers, and for those who could deploy the vast numbers of analysts to determine where the loopholes were. You could make serious money in that business. But I don’t think it would be good for the world economy.

Gillian Tett: Steve, how do you feel about moving toward more bilateral arrangements?

* Steven Ciobo*: We keep the full sweep. We are prepared to do a multilateral deal. We are prepared to do a sequence of bilateral deals. We do not believe in one size fits all. You have to cut the cloth to suit. The Holy Grail, as far as I am concerned, is multilateral. multilateral apply one set of rules across all countries. The biggest beneficiaries from a multilateral deal—for example the TPP—are the small-to-medium sized guys.

The big guys can always compete. They can hire the bevies of consultants and lawyers to make sure that the rules-of-origin and so forth are complied with. The little guy cannot. If you have ten different deals with ten different types of rules, the small exporter who is trying to navigate that noodle-bowl of rules really struggles. That is one of the major benefits of multilateral: you have that one set of rules that applies across all eleven countries in the case of a TPP-11 that you can comply with.

The other point I want to make. We get into the politics of this. I need to get votes. I need to get reelected to keep my job.

We took a decision as a government about three years ago to stop all subsidies to our automobile industry. Our automobile industry—tens of thousands of workers—but we could not justify a decision to continue to subsidize it to the tune of $5 billion every four years to maintain a small sector. Your frame of reference matters. I know that by doing that the car fleet in Australia is going to become younger—better for road safety, public health, and all of those things. We do not need a car industry. We were not competitive in it. Now we can focus on other industries where we do have competitive advantage.

The benefits, like always, are diverse, are spread, are small amounts over a large population. Versus a lot of noise that comes from the relatively small population employed in the industry that complains the loudest. That is the politics.

Gillian Tett: Right. Alejandro, you do not need to be reelected, but you are running a company that straddles borders. How would a renegotiation of NAFTA affect you? Do you see problems with trade access between the U.S. and Mexico in fields that you are operating in?

Alejandro Ramirez: Our company, Cinépolis, operates multiplexes in thirteen countries with just over five thousand screens. We are the second largest film exhibitor in the world in terms of admissions. 90% of the films that we show are American films, Hollywood films. Mexico is the fourth largest market in terms of movie admissions in the world, just after India, the U.S., and China. If we started a trade war between the U.S. and Mexico, the Mexican government could retaliate by raising tariffs on American cultural goods like films, including corn—we import all the corn for popcorn from Kansas and Iowa. We import all the amplifiers, servers, screens, popcorn warmers, the cheese—Mexico is the largest consumer of nachos in the world…

Gillian Tett: You are giving your Mexican consumers nachos made from American cheese…

Alejandro Ramirez: The cheese—we bring it from Wisconsin.

Gillian Tett: A fact that you did not know: you go to the cinema in Mexico and you are eating Wisconsin nachos…

Alejandro Ramirez: And popcorn! Mexico does not produce corn with the right expansion properties for popcorn. If there was a cancellation of NAFTA, it would become much cheaper for me to import the corn from Brazil or Argentina. They do have equivalent corn…

Gillian Tett: You can’t import Brad Pitt moves from Brazil, can you?

Alejandro Ramirez: You cannot. Our company is a good example of a NAFTA company. We have cinemas in the U.S. and Mexico, but also throughout Latin America, India. One of the main American exports is cultural goods. If NAFTA were repealed, where would both countries put new tariffs? How would it affect us?

One final point about your previous question: bilateral vs. multilateral. The main economic argument for multilateral is that the deal would include the most efficient producer if it were a multilateral producer. But with a bilateral deal you may well be excluding the most efficient producer. It would be trade diversion rather than trade creation. That is why it would be better to have a global multilateral deal under the WTO. But since Doha nothing has happened. Therefore since then we have had regional pushes. The Asia-Pacific region has pushed for TPP. We have the Pacific Alliance between Mexico, Chile, Columbia, and Peru. That is going very well, further integrating our economies and lowering tariff barriers.

Gillian Tett: Right. I am curious. I would like to ask each of you. If you were suddenly given a magic wand—were to become either the President of the United States, Steve, or the President of Mexico or the President of the WTO—what would you like to see happen over the next year? For you, Steve, would it be rapid “equalization”?

Steve Schwartzman: In the next year? That would be terrific! To resolve most of the major issues… I think NAFTA will be resolved in that time frame. I think you will have general agreement with China. It takes a long time to do trade agreements—working them all out. But the basic outlines of things—it would be great to get all that behind us in life, and have things be normalized.

Gillian Tett: That’s very encouraging! You think NAFTA will be broadly resolved in a year, and a new trade deal with China in the next year?

Steve Schwartzman: We all have our own opinions. I would be quite surprised if NAFTA is not successfully renegotiated. I think with China there is a desire for both countries to normalize trade relations and do it reasonably quickly, if it is possible. I am optimistic on that in spite of the rhetoric and other things of that type. It is in the interest of all of those countries.

Gillian Tett: Alejandro, what would you like to see? Would you like to see a renegotiation of NAFTA?

Alejandro Ramirez: Yes, I would like to see it speedily renegotiated. Hopefully we will have something done by the end of the year. Mexico has presidential elections next year. If this gets into that, it could be messy. So I want it done as soon as possible.

Steve Schwartzman: The biggest service that could be done for NAFTA is to have congress just release this document to authorize renegotiations. Elections are coming up. We could create our own problems as a group of three countries simply by having a document held up, which I think the administration wants to get going. This document is being held up by… I won’t say who… by a part of congress… It is not serving the purposes of the country or of Mexico.

Gillian Tett: John and Brad, what would you hope to see happening over the course of the next year to fell more encouraged?

John Hagel: Without diminishing the importance of these policy debates, I view policy debates as a second-order effect of much more fundamental forces. Unless we address those, the public policy will go beyond our control. The key thing to me is: what is our response to increasing performance pressure? I have spent considerable time studying the psychology of this. Very human things we do when we respond to mounting pressure:

  1. We tend to maximize our perception of risk.
  2. We discount our perception of reward.
  3. We tend to shrink our time horizon: under pressure, we need to just think about today.
  4. When we just think about today, we fall into what economists call a zero-sum view of the world: the resources are given, and the only choice is who is going to get them—you, or me?

The consequence of that is erosion of trust. You may seem like a real nice person, but I know that at the end of the day only one of us is going to get these resources, and it is going to be me. In that kind of environment, we are headed toward a very dysfunctional society. My belief is that at least in the U.S. both sides of the political system have fallen under a threat-based narrative: we are under attack. The enemy is coming at us. We all are going to die. We need to come together and fight, now. These narratives reinforce all those dysfunctional psychological reactions to increased pressure. Until and unless we can frame an opportunity-base narrative that gives a credible view of an opportunity that we can all come together to take advantage of that opportunity, our public policy will go in a dysfunctional direction.

Gillian Terr: And do you see any countries framing things this way at the moment?

John Hagel No.

Gillian Tett: Brad, what would you like to do if you were made president tomorrow. What would you like to do? What would you like to see happen?

Brad DeLong: Since I will not be president, what I hope for is that as little as possible gets broken, and as much knowledge as possible is acquired.

Already we have had President Trump say that he did not know what he was talking about last year on the campaign trail when he said that NATO was “obsolete”. He now agrees that NATO is indeed not obsolete—but the pillar of security for the western alliance.

I would like Donald Trump to say that he did not know what he was talking about when he claimed that the TPP was a job-destroying trade deal that would rob Americans of good manufacturing jobs.

I would like him to say that the TPP would further strengthen market integration across the Pacific to the benefit of the U.S. economy, and that the United States had struck a very good deal with respect to intellectual property in the TPP. Very much so. When I was tending toward “no” on the TPP, it was largely because I did not think that it was fair that the Vietnamese be charged through the nose for pharmaceuticals. They are poor. We bombed them for ten years. We could at least let them buy pharmaceuticals cheaply.

In the best of all possible worlds is one in which people realize that a free trade agreement is a free trade agreement. There are no tariff barriers in NAFTA. To talk about “equalization” of tariffs… There is nothing to be renegotiated. There are no large substantial issues. The issues are, as I said, on the order of those (a) the United States has been consistently in violation of its NAFTA obligations to Canada in the lumber sector over the past 25 years, (b) the United States has, I believe, been consistently in violation of its NAFTA obligations to Mexico in transport services, and (c) the Canadian cultural thing—Lenny Kravitz, Celine Dion. Should we let Hollywood wipe them off the Canadian airwaves?

Gillian Tett: When Secretary Ross suddenly makes lumber and milk key trade issues, is that justified under NAFTA or is that just plucked out of thin air?

Brad DeLong: That is just plucked out of thin air. Admittedly, there have for a long time been many congressmen and senators in the United States who have been upset about the implications of NAFTA. I remember a conversation in the buffet line at Jackson Hole with the chief of staff of one of the Democratic senators. Is it really worth taking a stand here? There response was: yes—we have our lumber and cheese producers, a lot of them, whose interests we need to advance.

That was the thing we had hoped to get away from with free trade. Agreements that were simple, global, comprehensive, and grew the economy so that even the losers from the individual provisions would acknowledge that they had gained more than enough to compensate them from the greater market scale. The spillovers from faster and greater economic growth would make it win-win in five years even if it were a shock now.

The reverse? We know what happens then, too. The spider-diagram from Charlie Kindleberger’s The World in Depression. The collapse of world trade in the early 1930s.

Gillian Tett: The chart that you put up there showing globalization going up like a rocket. Have you tried to calculate what that means for world GDP and so forth? How serious would it be if protectionism does come in?

Brad DeLong: Trade does lead to big redistributions. It leads to big movements of goods and services. But if everything had to be produced at home, prices of most things would not go up by all that much. Australia could run an automobile industry, but at something like 30% subsidies, a 30% cost increase. 10% of the economy in manufacturing that is foreign value added—a 3% hit to global GDP from a coming of some form of protectionism. You can say that’s not very much: 2 years of global north economic growth. But with a world GDP of $80 trillion—that’s a $240 billion a year loss. We do not have a world—you would know it in this room, at this hotel, in this conference—but we do not have a world in which everybody is incredibly rich. We live in a world in which a quarter of our number live lives very much like our pre-industrial ancestors, save that they do have some access to the village smartphone. Fear about where the food is going to come from next week is still a thing for a quarter of humanity.

Only a tenth of humanity has what those of us in this room would regard as a normal, even a bare-bones standard of living.

In that context, $240 billion a year of lost production would be seriously felt by a lot of people. It is not enough to derange an entire economy or to grossly destabilize global asset prices. But there are a lot of people out there whom it would seriously hurt.

Gillian Tett: Steve, when you look at things, is it just business as usual? Do you just try to push ahead with TPP? Or is there something else you can do to promote more globalization?

Steven Ciobo: The outcomes of this global discuss has been an empowering of pro-globalization advocacy. I may feel it more keenly than others. But in the context of myself and the other members of the government, we feel emboldened to stress the benefits of free trade. When you feel under siege, you have to talk about history. You have to talk about how from the 1960s on trade growth was about double GDP growth. We know that trade drives growth. We know that trade drives jobs. I will use illustration after illustration, companies, businesses, and others, that our benefiting from tree trade. This may not be a uniform media environment—but often it is—they will always put the factory closure on the front page and talk about how many workers have lost their jobs. They will never put the business expansion and the extra employment to meet international orders. We have to be realistic. The world is more global than it has ever been. Labor is global. Capital is global. We are kidding ourselves if we do not appreciate that, for the generations coming through now, national boundaries, especially in the western world, mean less than they have ever meant before. That is what we need to tap into.

Gillian Tett: So when you look ahead a couple of years from now, do you see us operating in a climate of more protectionism or less protectionism?

Steve Ciobo: Well, if we are operating in an environment of more protectionism in a decade’s time, we will all be more impoverished. Full stop.

Gillian Tett: How about you, Brad? Do you think that we will be having more protectionism in a decade’s time or less protectionism?

Brad DeLong: I think more. But not significantly more. The secular stagnation issues—that governments are unwilling to increase their purchases, that central banks are largely tapped out and have pushed the pedal to the floor, that redirecting spending to domestically-produced goods is a lever that can and might create jobs—some governments will decide that they have to pull that lever. So there will be some increase in protectionism.

There will also be some reduction in intercontinental value chains. Nike will bring some production back from Vietnam to outside of Boston. It will figure out how to build robots that can handle not just rigid metal and plastic but flexible leather and fabric, and sew shoes. They will get it. Something like a return of the mass production era reshoring, the implications of secular stagnation and aggregate demand pressures, with the burbling underlying political pressures. Lots of people think something is going wrong, lots of politicians are looking for somebody to blame, and the best person for a politician to blame is a foreigner who does not go to the voting booth when they run for reelection. That’s an easy way to go—whether it is true or not.

Gillian Tett: Right. John, do you expect more protectionism? Or less?

John Hagel: In the short term I do expect more protectionism. As an optimist, I view it as a catalyst to force us to reassess our institutions. Broadly, the shift that we see that we need to make is to shift from a model of institutions—and I am not talking about companies alone but all institutions—built on a model of scalable efficiency, thank you Ronald Coase, to a model of scalable learning that will help all of us to learn faster and achieve more of our potential and that will bring us back to more of a globalized mindset.

Gillian Tett: Right. Well, trust the Silicon Valley boys to be more optimistic. Silver linings. Alejandro: more or less protectionism in a few years time?

Alejandro Ramirez: Slightly more, at the global level. But I am an optimist and I hope we will see less after this time that is a little bit turbulent. Mexico, for instance, is trying to open up or strengthen trade relationships with the rest of the world. 80% of our trade is with the U.S. Reach out to Latin America. Modernize and deepen our free trade agreement with the European Union. Open up to Asia. My hope is that we will see less protectionism.

Gillian Tett: Steve. I have chucked many hard questions at you. Only fair to let you have the last word. More protectionism or less?

Steve Schwarzman: Gee. I don’t know whether I want the first word, or the last word.

Gillian Tett: You can have both.

Steve Schwarzman: You will probably see in a historical context a little more. But this is a cycle we are going through. Once you get through the cycle you will have a new baseline and move on to other things. John is right: this is just one part of a very complex set of circumstances, with technology a leader in terms of putting pressure on government and people, and trade gets mixed up with that to some degree as do other political factors. We as a society are going to have to work our way through these things. We have to find a way to deal with technology, with education, which at least in the United States has steadily been declining. We are now number 27 in the world. You cannot deal with important issues like technology putting pressure on margins, returns, job creation expressed through different types of unhappiness with trade and other things without the educational aspect. We used to be in the top three in the world. To become 27 is a remarkable achievement in 25 years. If you do not address that, this will not be the only panel that has not completely cheerful things to say.

Gillian Tett: Right. I think the clear consensus is, by about 4.5 votes, short term pessimism—you are an elected politician so you cannot be short term pessimism—but medium to long term hopes, hopes that this is a cycle. That rocket diagram graph that Brad presented is one quite optimistic framing. Let’s hope that that rocket keeps going up.

Thank you all very much indeed for your time. And best of luck.

Where US Manufacturing Jobs Really Went

Project Syndicate: J. Bradford DeLong: Where US Manufacturing Jobs Really Went: In the two decades from 1979 to 1999, the number of manufacturing jobs in the United States drifted downward, from 19 million to 17 million. But over the next decade, between 1999 and 2009, the number plummeted to 12 million. That more dramatic decline has given rise to the idea that the US economy suddenly stopped working–at least for blue-collar males–at the turn of the century…

Shaken and Stirred: Weekend Reading: Hoisted from 2005

Stephen Cohen and Brad DeLong (2005): Shaken and Stirred The United States is about to experience economic upheaval on a scale unseen for generations. Will social harmony be a casualty?

It has become conventional wisdom that class politics has no legs in the United States today—and for good reason. Regardless of actual circumstance, an overwhelming majority of Americans view themselves as middle-class. Very few have any bone to pick with the rich, perhaps because most believe they will become rich—or at least richer—someday. To be sure, the issues of jobs and wages inevitably make their way into our political campaigns—to a greater or lesser extent depending on where we are in the business cycle. But they seldom divide us as much as simply circle in and out of our political life. Lately anxiety about the economy has been palpable, but for the most part it has not evolved into anger or found specific scapegoats.

Economic insecurity could well divide us in the future, however.

We are on the cusp of an economic era whose challenges will be unfamiliar to most Americans of working age. It is likely to erode the psychological pillars on which class unity has rested in this country: personal economic stability for the middle class, and the promise of at least some upward mobility for most Americans. The most likely division—besides that between the truly rich and the truly poor—will be between those in the middle class who are able (through agility or luck) to manage economic risk and those who find themselves helpless before the economic pressures of a new age.

Once upon a time, or so it is said, America was a place with lots of upward but little downward mobility. In the really old, pre—Civil War days you could start out splitting rails, head west, make a success of yourself on the frontier, and perhaps even wind up as president. In the relatively recent, post—World War II expansion you could do well by landing a blue-collar job in a unionized manufacturing industry or a white-collar job at a large, stable American corporation such as IBM, AT&T, or General Electric—which offered job security, high salaries, and long, steady career ladders.

There was always as much mythology as truth to this image of America. Lighting out for the Territory was expensive. Covered wagons did not come cheap. More generally, although many terms could be used to describe economic life in the nineteenth and early twentieth centuries, “stable” and “secure” are not among them.

But there was considerable truth to the image as well, particularly after World War II.

Regardless of education level or family background, many Americans who valued stability and security really did have the chance to grasp it; jobs with “a future”—that is, with steadily rising wages and solid retirement plans—were plentiful. And even for many of those who were fired, the economic risks were fairly low: the unemployment rate for married men during the 1960s averaged 2.7 percent, and finding a new job was a relatively simple matter. During the first decades following World War II, to the astonishment of interviewing sociologists, a majority of Americans began to define themselves as middle-class.

This immediate post—World War II period stands as a reference point in our popular economic history—a gold standard for rapid growth and shared prosperity, albeit among the limited community of white males. It lingers in our national memory, and remains an important source of confidence in the unity of our culture and the awesome power of our economy. But although it engendered our current economic expectations, our sense of “the way things ought to be,” in reality the postwar era was probably an aberration, a confluence of events never before seen in our history and unlikely to be seen again.

Most obviously, it was an era defined by the isolation of America’s continental market from the devastation of World War II. In the early postwar decades foreign competition exerted virtually no pressure on our economy. (In 1965, for example, imports of automobiles and auto parts came to less than $1 billion—about a fortieth of what they are today, after adjusting for inflation.) At the same time, domestic manufacturers benefited from an enormous pent-up demand for mass-produced goods: cars, washing machines, commercial aircraft, refrigerators, lawn mowers, television sets, and so on. New highways gave rise to new suburbs, and to a resulting construction boom.

These economic conditions, along with successful federal efforts to maintain full employment through loose monetary policy, created an environment exceptionally friendly to workers. With little foreign competition on the one hand and a very tight labor market on the other, American firms were willing and able to offer workers strong incentives—such as pensions and first-rate health insurance—in order to attract and retain them. (Generous tax breaks from the federal government encouraged the roll-out of these benefits.)

Meanwhile, the Great Depression had given rise to a system of government programs and policies that came into full force and maturity only after World War II—among them Social Security, unemployment insurance, welfare, and high marginal tax rates. The rise of communism abroad could only have strengthened commitment to workers’ welfare, as a means of demonstrating that the American capitalist system offered a humane alternative.

Thus favorable macroeconomic circumstances, the absence of foreign competition, and a historically unique political dynamic all combined to allow postwar America many of the benefits of social democracy without the costs. The economy did not stagger under the weight of ample benefits and high taxes. Americans—at least white male Americans—did not have to worry about tradeoffs between security and opportunity, because the United States offered both. And it seemed that this was the natural order of things.

In addition, new technologies and consumption patterns were shifting the U.S. economy’s center of gravity from skilled, unionized, mass-production industry—which fashions products from expensive materials and capital-intensive machinery—to services and retailing, where barriers to the entry of competitors are lower, labor costs more significant, and competitive advantage more reliant on squeezing those labor costs.

The nation’s largest private-sector employer today, of course, is not General Motors or Ford but Wal-Mart. Wal-Mart is in many ways a fine company, but its strategic goals and constraints are quite different from those of the manufacturers of the 1960s. Between them the automakers and the UAW offered workers a fairly robust “social contract”: pensions, good health care, high wages, long-term job security.

Wal-Mart makes no such offer.

By the early 1990s the nature of unemployment had changed as well. As Erica Groshen and Simon Potter, of the New York Federal Reserve, point out, temporary layoffs have become less common. Instead companies under constant competitive pressure are more frequently making layoffs permanent—using advances in technology to eliminate some types of jobs altogether.

At the same time, the rising cost of health care and the falling rate of health insurance have left families much more economically vulnerable in the event of a serious accident or illness. Many Americans today are one lost job and one medical emergency away from bankruptcy.

We do not want to overstate how bad things are. Not even white males would be better off in the economy of the 1960s, when median real household incomes were only about two thirds of what they are today, and much of the medical care that we now fear we cannot afford was unavailable at any price. In a sense we’ve merely returned to a more natural economic state, in which jobs are not always secure and progress is not always assured. And we’ve done so while improving the opportunities and lifestyles available to most Americans. So far, in other words, we’ve adapted reasonably well to increased risk and reduced security. But we’re not at the end of economic history—and the history that will be made in the coming decades is likely to be substantially more turbulent than what we’ve seen in recent years.

Although the impact of globalization on American jobs has been overhyped in the past, its impact in the future will be hard to exaggerate. Last spring saw a short political boomlet of worry over the offshoring of white-collar jobs to India, China, and elsewhere. In the next few years these issues will be raised at the political level once again—and loudly.

The basic storyline is simple enough: what formerly could not be imported now can be. A compelling parallel can be drawn to the latter half of the nineteenth century, when the steel-hulled oceangoing steamship and the submarine telegraph cable revolutionized international trade. Companies could now use the telegraph to tell their agents in distant ports what goods to ship; moreover, powerful steamships made it practical to export not only precious goods (such as rare porcelains, spices, and tobacco) but also staple agricultural and manufactured products: grain, hides, meat, wool, furniture, and machines (which would eventually include motor vehicles, computers, and consumer electronics).

First in a great rush, and then at a somewhat more measured pace, industrial and agricultural workers the world over began to lose their jobs to more-efficient foreign competitors. Illinois could grow wheat more cheaply than Prussia could grow rye. Malaysia could grow rubber more cheaply than Brazil. Of course, displaced workers could generally find new jobs, sometimes better ones. And consumers benefited greatly from lower prices. But that did little to dim the spectacle of immediate dislocation. The expansion of international trade ushered in a century-long storm—though many Americans (perhaps owing to the anomalous calm following World War II) seem to remember only the recent gusts that have buffeted our heavy industries.

The transformation taking place today will have just as great an effect on the world economy. The transoceanic fiber-optic cable, the communications satellite, and the Internet are making much white-collar service work as tradable as anything else. Broadband cables and satellites can connect India or China or Bulgaria to the United States instantly, seamlessly—and almost without cost. A huge new swath of American jobs is beginning to become vulnerable to foreign competition.

When the offshoring of services truly hits (and it will stretch out over several decades), it is likely to deliver a much greater shock to the U.S. economy than the offshoring of manufacturing did. There are several reasons for this. First, in the 1970s Americans’ incomes exceeded those of the Japanese by a ratio of about two to one. The ratio of American to Indian incomes today is more than ten to one. Economists will point out that the gains from trade will thereby be that much greater for the U.S. economy as a whole—and they’ll be right. Indeed, more and greater openness will expand opportunities and raise incomes for some Americans, producing many highly visible winners. At the same time, the potential pay cuts for workers who lose out in rich countries will also be that much greater.

Second, the coming global trade in services will potentially affect a much larger proportion of the U.S. labor force. Even at its height manufacturing constituted only 28 percent of all non-farm employment, and large sectors of manufacturing (food processing, for example) are closely tied to sources of supply and thus immovable. Service jobs constitute 83 percent of non-farm employment in the U.S. economy today, and every job that is (or could be) defined largely by the use of computers and telephones will be vulnerable.

Third, the impact of foreign competition will be borne much more directly by American workers than by their employers. In the 1970s and 1980s foreign imports threatened U.S. companies and workers equally. The CEOs at GM and Ford were on the same “side” as the men and women who worked on the factory floor. The coming wave of economic dislocation will look very different: it will be something that American CEOs do to their own workers.

Not that they’ll necessarily have much choice; offshoring will in many cases be necessary if American businesses are to remain competitive. Remember H. Ross Perot’s “giant sucking sound”? In the early 1990s no one spoke out more strongly against the prospect of job loss caused by foreign competition. Yet on February 7 of last year the Times of India reported that Perot Systems was going to double its employment in Asia from 3,500 to 7,000—nearly half its total worldwide employment. If the economic logic of foreign outsourcing is so overwhelming that Ross Perot can’t resist it, what American CEO will be able to?

None of this is to say that we face a future of permanent widespread unemployment. It is a truth universally acknowledged (except in campaign seasons) that the rate of employment in the United States is set not by levels of imports and exports but, primarily, by whether the Federal Reserve’s monetary policy manages to settle aggregate demand in that sweet spot where neither unemployment nor inflation is too high.

Moreover, during the course of any single year or business cycle the effects of globalization on the U.S. labor market are small. Forrester Research has estimated that by 2018 some 3.3 million jobs in business processes are likely to go offshore. That’s a little more than 18,000 a month—not a huge number in an economy of 140 million jobs.

But—and this is a very big “but”—even though imports and offshoring do not determine the number of U.S. jobs over time, they do powerfully influence the long-run level and distribution of real wages. Eventually the offshoring of service jobs will exert a strong downward pressure on wages and benefits in jobs that stay onshore, just as the offshoring of manufacturing jobs did in the 1980s. Essentially, the pool of workers competing for many service jobs will be increased by, say, several million English-speaking college graduates in India, who will work for a tenth to a fifth of a typical American salary.

In many cases the jobs in question are held by Americans unaccustomed to layoffs or reduced incomes. Often they are high-paying white-collar jobs. The people who hold them may believe that they are on top because they deserve to be: they are smart and industrious; they worked hard in school while others screwed around; they have been diligent and successful in their careers. These people are likely to become very angry when unexpectedly threatened by substantial downward mobility.

How will the country respond when a broad new array of classes and professions are exposed to downward mobility—particularly as others benefit from new opportunities? Will existing class fissures be exacerbated? What new ones might be created?

Winners and losers are unlikely to sort cleanly. People of similar background and training may see their fortunes diverge greatly depending on subspecialty, or on the presence or absence of some idiosyncratic ability that is hard to replicate. But one can make a few predictions. First, the new environment is likely to pit those who are most flexible—most able to shift jobs or careers, most able to absorb unexpected blows, best positioned to benefit from unforeseen opportunities—against those who are less so. The contours of such a divide seem predictable: young versus old, generalist versus specialist, people with savings versus those who depend on their next paycheck.

A second (and overlapping) split might open between those who are highly educated and possess complex skills and those who are merely well educated and skilled. An MIT education may still be hard to imitate abroad. Can the same be said of a finance degree from a state college?

Third, a divide may occur between those—whatever their education or income level—who by disposition can tolerate unexpected income swings across a lifetime and those who abhor uncertainty.

The last group is probably large. The dissatisfaction resulting from falling wages is usually greater than the satisfaction resulting from rising wages. People are not wrong to be risk-averse; for middle-class Americans, just as for portfolio managers, life consists largely of trying to manage risk. This, the Yale political scientist Jacob Hacker thinks, is the source of middle-class Americans’ unease with the current state of the economy—perhaps the primordial form of a sharper discontent to come. “Voters say the economy isn’t getting better because, as far as they’re concerned, it’s not,” Hacker writes. “And perhaps the best explanation for this perception is that Americans are facing rising economic insecurity even as basic economic statistics improve.”

The median annual household income twenty years ago was about $38,000 in today’s dollars. Today it is about $43,000—13 percent higher. Yet, at least in Hacker’s analysis, Americans typically feel that increasing risk and rising inequality have hurt them at least as much as increasing income has helped. Yes, if they are middle-class, they have higher real incomes and living standards than their parents; but the incomes are known to be insecure, and the prosperity is felt to be fragile.

From one viewpoint, economic risk is the flip side of flexibility, entrepreneurship, and innovation—the very things America does best. In the 1980s, when Americans worried about whether the social organization in Japan’s export-manufacturing sector (morning calisthenics, the company song, consensus, lifetime employment, and so on) might offer a better way of doing business, The Atlantic’s national correspondent James Fallows answered with a resounding no. What Americans needed, he argued, was to become “more like us” (the title of his book on the subject), not more like them: America’s competitive advantage was rooted in disorder, constant change, flexibility, mobility, and entrepreneurial zeal.

In 1991 Robert Reich, about to become Bill Clinton’s first secretary of labor, looked at the tremendous expansion of manufacturing and other export-related employment elsewhere in the world and came to a similar conclusion. How, he wondered in his book The Work of Nations, could Americans preserve and accelerate economic growth if the market position and efficiency advantages of America’s largest firms came under threat? He, too, concluded that we needed to shift our focus away from old-style stable mass-production employment to high-knowledge, high-tech, high-entrepreneurship fields. Workers, he argued, should expect to go back to school to learn new skills for new industries.

But embracing change and uncertainty in this way does not come naturally, in the United States or anywhere else, and the pollsters and media-affairs people of the Clinton administration soon told Robert Reich to be quiet: people did not like to hear their government telling them that their jobs were going to vanish.

Economists rightly say that the rising wave of trade-driven service globalization will, like the last waves of trade-driven manufacturing globalization, benefit Americans and foreigners alike. At home more will be won than lost. Fears that expanding trade will destroy jobs and disrupt the economy also need to be counterbalanced by the knowledge that reducing trade—or even failing to expand it—would reduce national wealth potential, destroy future jobs, and ultimately disrupt the economy even more. The social problems of a stagnant economy are far greater than those of a dynamic one.

But economists too readily dismiss concerns about those who lose out, saying merely that they can be compensated. In practice they seldom are. The United States simply does not make the investments needed to turn economic change into a win-win process—investments in retraining and rebuilding that would transfer some of the gains from the winners to the losers (who’ve done nothing personally to merit their loss). In the late 1970s and the 1980s little money was spent on Flint and Detroit in particular, and Michigan in general, to cushion the economic impact as Toyotas and Hondas came to America’s shores. Producers in Japan and car buyers in Boston and San Francisco pocketed the gains, while producers in the Midwest absorbed the losses. As the Princeton economist and New York Times columnist Paul Krugman puts it, free trade is a salable policy only if accompanied by a well-built social safety net and confidence in full employment. But our safety net is full of holes.

Some companies have traditionally provided many of our social services, particularly in the form of health insurance and retirement support. Those companies will not continue to sustain that burden in the future. At the same time, our limited system of government benefits will not be adequate to the changes that we’ll face—leaving aside the possibility that it may be weakened or removed completely, as some politicians propose. That system was designed to protect the poor and the aged, and to tide the rest of us over in case of (temporary) job loss. What we need now is far more career-transition assistance for the middle class, and perhaps more government funding and (surely) portability for the benefits—notably health care—that the private sector increasingly fails to provide. America’s economy will need flexibility in order to compete, but we can provide this protection without sacrificing our flexibility.

Because we are facing an economic transformation that will hit not over the course of a few years but over the course of the next generation, we have time to do what needs to be done. We will need all this time, because the approaching economic shock will be greater in magnitude than anything in recent historical memory.


Thanks to Louis Johnston for reminding me of this this morning…

On Marc Levinson and His “The Box That Changed the World”: Hoisted from the Archives

Shenzhen Skyline 2015

Hoisted from the Archives: The Box That Changed the World (July 25, 2006): It is 40 feet long, 8.5 or 9.5 feet high, and eight feet wide.

It carries up to 29 tons in its 2,000 cubic feet of recommended available space – goods worth roughly $500,000 (or more) when sold at retail.

It, and what it carries, can be transported in a month anywhere in the world where there are suitable harbors, railways, locomotives, flatcars, truck tractors, diesel fuel, and roads.

It is the modern cargo container, and it is able to move non-fragile, non-perishable goods from any modern factory with a loading dock to any modern warehouse anywhere in the world for about 1% of retail value.

Indeed, it can be transported for a marginal cost of perhaps $5,000 – less than the price of a first-class airplane ticket, as Marc Levinson, author of the excellent The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger, puts it.

All of this has happened since 1960 or so. Back then, the costs of international trans-ocean shipment for most commodities could easily amount to between 10% and 20% of retail value. The cargo container has changed everything.

When my family bought a German-made washing machine from a warehouse store in San Leandro, California, more of its cost was absorbed in the ten minutes the saleswoman spent telling us about it than in the entire journey from the factory in Schorndorf, Germany, to the loading dock in San Leandro, or in forklifting it from the loading
dock to its place in the serried ranks of washing machines which filled that corner of the warehouse. In the end, it cost to us of getting our washing machine to our front door was about eight times the cost of the machine’s voyage from the German factory to the warehouse where we purchased it.

The world is certainly not “flat,” as the New York Times columnist Thomas Friedman believes. But, in an economic sense, it is extremely small for non-perishable, non-fragile goods. Every modern factory with outgoing volume large enough for container traffic and a suitable loading dock is next door to every modern warehouse with similar features.

Yet it is not the whole world that is so small, but only that part of it that is attached to the global container-handling network. Areas that lack the necessary infrastructure are still far away from the global trading system that carries high-end German manufactured washing machines from Westphalian factories to California warehouses for just a penny a pound.

For example, if your electricity is unreliable, so that you can’t count on being able to pump the diesel into the truck tractor, you are not attached to the network. If the volume of your production is too small to fill 2,000 cubic feet of space headed for a single country, you are not attached to the network.

Likewise, if the money to fix your roads was embezzled, so that nobody wants to risk their tractors on them, you are not attached to the network. If your courts function so badly that few outsiders are confident that what you say is theirs really is theirs, you are not attached to the network. If nobody has yet noticed what your workers can produce, you are not attached to the network. If your entrepreneurs cannot build organizations at container-scale without attracting politically well-connected extortionists, you are not attached to the network.

For any poor segment of the world economy, getting attached to the global container network is an immense opportunity. But it is an opportunity that requires that everything – infrastructure, scale, public administration, governance, and foreign knowledge of your production capabilities – work just right. And if you have not first built up the social networks that enable your workers and their bosses to know what kinds of manufactured goods would generate high demand in the rich post-industrial core of the world economy, it doesn’t matter even if you are attached to the global container network.

Many have written about how telecommunications technology is bringing about the “death of distance.” Indeed, nowadays, you can talk to anybody, anywhere. But it is the cargo container that appears to have brought about a more effective and – so far – more significant “death of distance.” For, in a commercial sense, at least, the goods we ship across oceans still far outweigh the words we chatter around the world.

Trade Deals and Alternative Facts: Now Fresh at Project Syndicate

Shenzhen skyline 2015 Google Search

Project Syndicate: Trade Deals and Alternative Facts: BERKELEY – In a long recent Vox essay outlining my thinking about US President Donald Trump’s emerging trade policy, I pointed out that a “bad” trade deal such as the North American Free Trade Agreement is responsible for only a vanishingly small fraction of lost US manufacturing jobs over the past 30 years. Just 0.1 percentage points of the 21.4 percentage-point decline in the employment share of manufacturing during this period is attributable to NAFTA, enacted in December 1993.

A half-century ago, the US economy supplied an abundance of manufacturing jobs to a workforce that was well equipped to fill them. Those opportunities have dried up. This is a significant problem: a BIGLY problem. But anyone who claims that the collapse of US manufacturing employment resulted from “bad” trade deals like NAFTA is playing the fool. Read MOAR at Project Syndicate

Question to Self: Germany

Germany does not have the rise of the overclass. And Germany does have the wage stagnation–even though it is done everything right to preserve manufacturing employment and nurture communities of engineering practicing excellence.

Can I take the Germany-U.S. comparison as strong evidence against the “globalization has driven wage stagnation” hypothesis?