Summary: Something is wrong with America, rendering our society incapable of connecting effectively to reality. Who can tell what has caused this social illness, a form of cultural Alzheimer’s? The symptoms appear in many aspects of our national public policy, an inability to effectively take collective action in critical areas such as energy, geopolitics, and management of our economy. This is chapter 2; the first chapter (6 December 2007) discussed our housing bubble.
Contents
- Introduction
- A brief look at free trade
- Problem recognition is always the first step
- About those wages for highly trained professionals
- Ricardo probably would consider our trade policies insane
- Mockery of obsolete orthodoxy, an effective tool to encourage thought
- Other reports about free trade and globalization
- Afterword and where to go for more information
(1) Introduction
Globalization — the free flow of capital, jobs, and trade — was a pillar of the post-WWII geopolitical regime. Economists and the foreign policy establishment assure us that this globalization is an unqualified good thing — a “win-win” for all parties. That is, of course, absurd. Globalization in its current form has clearly become problematic for America. It has weakened us in important ways during the past 3 decades. Unless we start to think more clearly about trade, the ill effects will grow both during this downturn and in the following recovery.
Our inability to adjust to this change is another example of America’s broken thinking. The late USAF Colonel John Boyd described the connection of individuals or groups to reality as a process: Observe, Orient, Decide, and Act. For a description of the OODA loop see this or Wikipedia. All four phases of this process seem to work poorly in modern America, but we seem to have special difficulty with orientation. To learn more about Orientation see this article by Chet Richards.
(2) A brief look at free trade
Is free trade beneficial to the US? David Ricardo stated that both sides benefited if the key factors of production were not mobile (On the Principles of Political Economy and Taxation, chapter 7). That was true in 1817, but not so today. Three of the key factors are mobile: knowledge, capital, and labor (both as migration and outsourcing).
The expansion of our exposure to third world competition was tolerable so long as limited to traditional “tradable goods.” Now both sophisticated manufacturing can be done almost anywhere, exposing a large fraction of our workforce to global wage competition. Worse, globalization is expanding to services. Another tranche of high paying jobs — this time white collar, professional jobs — are going overseas.
As a result, the political support for free trade is weakening. The core of America’s middle class has become vulnerable. By now everyone knows the “globalization” playbook, whether from jobs flowing overseas or immigrants (e.g., H-1B and H-2B visas) coming here to lower wages. That is, the political basis for globalization is eroding even faster than our national balance sheet. Will these folks passively watch their “class interests” (a Marxist education is becoming more useful these days) get eroded in order to maintain record high corp profit levels (as % GDP)?
Globalization is too vast and complex a subject for a brief post, so this will attempt hit the high points of the emerging opposition to globalization among economists.
(3) Problem recognition is always the first step
(a) “Offshoring: The Next Industrial Revolution?“, Alan S. Blinder, Foreign Affairs, March/April 2006. Blinder is no anti-globalization nut, right-wing reactionary, or even just another economist. He is Professor of Economics at Princeton, member of the White House Council of Economic Advisers (1993-1994), Vice Chairman of the Board of Governors of the Federal Reserve (1994-96). Excerpt:
Although there are no reliable national data, fragmentary studies indicate that well under a million service-sector jobs in the United States have been lost to offshoring to date. A million seems impressive, but in the gigantic and rapidly churning U.S. labor market, a million jobs is less than two weeks ‘ worth of normal gross job losses.) However, constant improvements in technology and global communications virtually guarantee that the future will bring much more offshoring of “impersonal services ”. That is, services that can be delivered electronically over long distances with little or no degradation in quality.
That said, we should not view the coming wave of offshoring as an impending catastrophe. Nor should we try to stop it. The normal gains from trade mean that the world as a whole cannot lose from increases in productivity, and the United States and other industrial countries have not only weathered but also benefited from comparable changes in the past. But in order to do so again, the governments and societies of the developed world must face up to the massive, complex, and multifaceted challenges that offshoring will bring. National data systems, trade policies, educational systems, social welfare programs, and politics all must adapt to new realities. Unfortunately, none of this is happening now.
(b) “Will the Middle Class Hold? Two Problems of American Labor“, Testimony of Alan S. Blinder to the Joint Economic Committee, 31 January 2007
…the dividing line between jobs that are deliverable electronically (and thus are threatened by offshoring) and those that are not does not correspond to traditional distinctions between high-end and low-end work. …
First, we need to repair and extend the social safety net for displaced workers. This includes unemployment insurance, trade adjustment assistance, job retraining, the minimum wage, the EITC, universal health insurance, and pension portability — plus other, newer ideas like wage loss insurance.
… Second, we must take steps to ensure that our labor force and our businesses supply and demand the types of skills and jobs that are going to remain in America rather than move offshore. Among other things, that may require substantial changes in our educational system-all the way from kindergarten through college.
Blinder gives the standard remedies: welfare, retraining, and more education.
- The first is likely both insufficient unsustainable as “outsourcing” grows from the manufacturing sector to the larger service sector, and effects higher-wage jobs.
- Re-training just pushes more workers into the ever-smaller boat of jobs not exposed to foreign competition.
- The last is nuts. Consider the plight of middle-aged workers with advanced professional degrees. Do they return to school to get a 2nd masters, or a PhD — competing for the tiny pool of jobs for which these are required?
Blinder is not alone in questioning this orthodoxy, but others take the analysis a few steps further.
(c) “Is Off-shoring Really Just Good Old Free Trade?“, Herman Daly and James Socas, presented to a Senate Democratic Policy Committee Hearing, 5 March 2004. Daly is a Professor at U Maryland, was a Senior Economist at the World Bank. Summary:
Many academic economists argue that off-shoring is simply the next chapter in “free trade” theory – a “good thing.” However, some politicians of both parties are beginning to question whether off-shoring represents a fundamental break from the past. To them it appears that off-shoring is not free trade, as most think of it, but the systematic substitution in the production process of higher cost U.S. workers by lower priced foreign workers, due to an increasingly integrated global economy. The result is rising corporate profits, but falling U.S. jobs, stagnating wages, and enormous pressure on the country’s middle class.
The authors contend that what is happening in today’s globally integrated economy is not the classical operation of “free trade,” and, they point out, that argument can be found in the original writings on which free trade theory is based.
(4) About those wages for highly trained professionals
“The Minimum Wage and Doctors’ Pay“, Dean Baker (Dean Baker is an economist and co-director of the Center for Economic and Policy Research), Beat the Press, 24 June 2006 — Excerpt (emphasis added):
To me, the main economic story of the last 3 decades has been that those in high paying professions (e.g. doctors, lawyers, dentists, accountants, economists etc.) have managed to drive up their wages by sustaining and increasing barriers against competition (both foreign and domestic), while less-skilled workers, like autoworkers, textile workers, dishwashers, and custodians have been deliberately placed in direct competition with low-paid workers in the developing world.
The wages in these latter categories have generally been flat or declined over this period, while workers in most of the high-paid professions have seen substantial pay increases (e.g. the OECD reports that the real wages of doctors in the United States increased by 55 percent from 1964-1995 [sorry, it’s not free data, so I can’t link to it]). If this pattern is to be reversed, then the wage increases for workers at the middle and bottom will have to come at least partly at the expense of the real wages of high-end workers, just as the wage gains of high-end workers have come partly at the expense of those at the middle and bottom over the last three decades.
This is all accounting; one can debate the merits of specific policies to reverse the upward redistribution of income, but there really is not much room to debate the accounting. My favored policy is free trade in professional services, so that doctors, lawyers, accountants and economists can enjoy international competition in the same way as autoworkers, textile workers and dishwashers, see chapter 1 of The Conservative Nanny State.)
(5) Ricardo probably would consider our trade policies insane
Roy J. Ruffin’s article in History of Political Economy (Winter 2002) is highlights the re-thinking of free trade theory: “David Ricardo’s Discovery of Comparative Advantage“.
These observations are Ricardo’s “home runs.” Ricardo emphasized the “four magic numbers” as well as stating that because Portugal has an absolute advantage in the production of both cloth and wine:
“it would undoubtedly be advantageous to the capitalists of England, and to the consumers of both countries, that under such circumstances, the wine and the cloth should both be made in Portugal, and therefore that the capital and labour of England employed in making cloth, should be removed to Portugal for that purpose.” (Ricardo, I, p. 136)
Accordingly, Ricardo realized it was necessary to suppose factor immobility between countries. Indeed, of the 973 words Ricardo devoted to explaining the law of comparative advantage, 485 emphasized the importance of factor immobility!
Here’s a link to Ricardo’s discussion of mobile/immobile factors of production. Discussions of “free trade” usually cite Ricardo — but ignore his specific statement that this assumes the major factors of production are immobile. They were immobile when in 1817, but today communication and cheap transportation have made land the only immobile factor — and land matters not at all.
(6) Mockery of obsolete orthodoxy, an effective tool to encourage thought
It’s not just right-wing nationalists, like Patrick Buchanan, questioning free trade. Here are comments from the site of Brad DeLong (Prof Economics, Berkeley). His readers tend to tilt leftward but remain conventional with respect to economic policies. But trend over past few years is clearly against “free trade.” The right in America has always been suspicious of free trade; labor unions and domestic manufacturers have been opposed. With the left turning against it, the only interest group remaining in favor are exporters.
By Ponzi Q. Globalization, 22 February 2007, link — about Blinder’s recommendations:
“{T}his is what happens when a super smart man honestly analyzes and concludes that the following of his beliefs will lead to horrors but just can’t let go. Many economists must be starting to feel like the Communists felt when it became clear that it just wasn’t working out like they thought it would.
By Ponzi Q. Globalization, 27 February 2007, link:
Why the conflict, dudes? You guys seem stuck in some zero sum downer. You have to realize that there’s no problem. Everybody wins with Free Trade!
The Chinese will get all our boring old jobs researching, developing, and making stuff that people around the world need and want and Americans will do all the new and wonderful work that the Chinese will be too stupid to do. See, the Chinese *AND* the Americans win!
It’s like Brave New World where the Alphas (Americans) do the really really hard intellectual work and the Betas, Gammas, etc. (non-Americans) do the easier — but no less important — routine intellectual and manual work. Thank heavens that geography is destiny when it comes to ability {& that knowledge cannot cross borders}, otherwise there would be a lot of unhappy Americans competing for work with people making a fraction of what it takes to get by in America.
The really cool thing is that it all is happening naturally, with no human intervention. Just the inevitable workings of the natural unfettered market. So there’s really no point arguing whether it’s good or not. It just the way it is and the way it has to be.
By dissent, 29 March 2007, link:
“The free trade economists on globalization remind me of the hard core neo-cons on Iraq. They are incapable of a critique of their own ideology, because they don’t recognize it as such. They think globalization is reality (and truth and beauty and history). So there are no choices but to more heavily commit ourselves to a policy that is proving to be a failure.”
By Fred, 29 March 2007, link:
“Economists, like everybody else, have failed to predict the impact of the digital revolution. What we have left is “Faith” in the free market. You must admit that faith in God is more emotionally satisfying. Indeed, insecurity may foster religiosity.”
By Ponzi Q. Globalization, 29 March 2007, link:
Blinder is an intelligent man and so he sees that the majority of Americans will be screwed by globalization. He sees that globalization, technology, and differences in living standards have combined in a very ugly way. Blinder realizes that with this ugly combination there’s really no good reason to produce much of anything domestically.
Blinder is an orthodox member of the economics community and so he will not propose anything substantial to get us off the destructive globalizationized path we are currently on. That is, he would rather let the majority of Americans suffer than enter a state of sin by proposing heterodox solutions.
Blinder and his ilk are not bad or stupid. They just can’t think out of the box in which their orthodox training has imprisoned them.
(7) Other reports about free trade and globalization
- “Fear of Offshoring“, Alan Blinder, December 2005 (31 pages)
- Pain From Free Trade Spurs Second Thoughts Mr. Blinder’s Shift Spotlights Warnings Of Deeper Downside, Wall Street Journal, 28 March 2007
- “Globalization, Worker Insecurity, and Policy Approaches“, Congressional Research Service, 31 July 2008 (18 pages)
(8) For more information
If you liked this post, like us on Facebook and follow us on Twitter. See all posts about Obama, his administration & policies, and these posts describing how the world is changing:
- Power shifts from West to East: the end of the post-WWII regime in the news, 20 December 2007 — We are seeing another western industry ceding dominance to eastern competitors, one more step in a larger process.
- Let us light a candle while we walk, lest we fear what lies ahead, 10 February 2008 – Putting the end of the post-WWII regime in a larger historical context.
- “The changing balance of global financial power”, by Brad Setser, 22 August 2008
- German Finance Minister Peer Steinbrück explains how the world is changing, 30 September 2008
- America has changed. Why do so many foreigners see this, but so few Americans?, 1 October 2008
- America is changing. Read some chilling words from a liberal economist, 2 October 2008