We know three things about globalization. Lower transport and information costs and falling tariffs cause rapid increases in the movement of goods, services, capital and workers. These flows contribute to growth in global gross domestic product. Yet these developments are also one of the causes of increases in income inequality. The old free trade mantra claimed that this did not matter because all boats were lifted with the rising tide of globalization. But since 1973 the average hourly wage for 80 percent of American workers has risen by only a penny.
Since trade no longer works for everyone, it should not be surprising that the public is concerned. Some will argue that U.S. voters misunderstand the forces of technological change, which are a bigger driver of inequality than globalization. But detaching trade from technology is tricky. A recent study shows that the contribution of trade to inequality has probably risen over the last decade—amid the global flowering of information technology.
But if average American workers see their companies in decline and their wages flat line, or their job outsourced, why would the cause matter? The evangelists of free trade have sown the seeds of their own downfall by failing to adequately understand the societal impact of trade or introduce policies to compensate.
The next President and his new administration must ensure that trade works for everyone by focusing on a policy of progressive growth. First, international economic policies must ensure that the global market place for American exports continues to expand. It is essential that middle income countries move away from short-term export-led growth strategies and put in place social safety nets so that their middle classes can spend their earnings rather than saving for retirement or bad health. For this to happen, the United States must not be afraid to shout foul play when its trade partners compete unfairly. The IMF, World Bank, International Labour Organization and WTO have important responsibilities to ensure that trade rules are obeyed, carbon emissions reduced, labor rights protected, and currencies not manipulated. By engaging rather than dismissing these bodies and providing adequate funding, the United States can help induce middle-income countries to become more cooperative, ensuring a level playing field for its exports.
Second, the United States should move to a low-carbon economy in order to mitigate the long-term effects of climate change. Reduced U.S. reliance on oil and lower energy costs are achievable by introducing an economy-wide carbon cap-and-trade program, increasing production of renewable electricity, and providing incentives for increased home and vehicle energy efficiency. The United States should also increase its ratio of R&D to GDP, which has slipped to 7th in the world, in order to speed this energy transition. Creating technologies, particularly in the field of alternative energy, will generate new opportunities for export.
Third, investment in the nation’s physical capital is desperately needed. Infrastructure is at a breaking point, with inadequate roads, airports, ports and water systems increasing costs and inefficiencies (as well as the unnecessary human suffering as seen in Minneapolis and New Orleans). The Congressional Budget Office identifies about $185 billion a year of necessary spending on transportation infrastructure. Meanwhile, the United States has slipped to 15th out of the 30 industrialized countries in the OECD in broadband adoption.
Fourth, the U.S. education system must be repaired. Standards and participation have reached levels unacceptable in a global marketplace. Education policy must also ensure that workers have the skills they need and the outlook and capacity to try something new if their chosen path does not work out. The pace of change means that there may well be job losses in one sector at the same time as labor shortages in another. Closing the borders to legitimate immigration is just another form of counterproductive protectionism.
Finally, the next administration must tackle poverty and inequality at home so that the gains from trade are shared more evenly. Measures should include an increase in the minimum wage to half the average hourly wage, expansion of the Earned Income Tax Credit and Child Tax Credit, protection of workers’ right to organize, a guarantee of childcare assistance for low-income families, and reform of unemployment insurance so that it reaches more people who need it.
Only this combination of policies can ensure that the global market place expands, America competes, and all in society benefit.
Will Straw is Associate Director for Economic Growth at the Center for American Progress.
The content is exclusively the personal opinion of the author. Under no circumstances should the content be attributed to CSIS, Next America, or the author's employer, unless explicitly stated.
The Relentless Force of Globalization
In the poll, I chose to agree with Kim because I disagreed with Will. I do not think that Kim's argument is complete; however, I do believe that the policies that Will Straw espouses, while progressive, are not economically viable for America at this time.
Each policy that Will proposed must be implemented at great cost to the American Federal government. His ideas also seem to be lacking in effectiveness. To demonstrate my point I will take his argument point by point.
First, Will recommends that America utilize international organizations to ensure fair play and punish foul play. What he does not take into account is that most of the undeveloped world sees these organizations as tools of the United States. Moreover, the countries that are most likely to play unfairly are those least likely to be affected by WTO, IMF, or World Bank complaints.
Second, His recommendations for improving energy independence are excellent, but only as preparations for the future and investment in research. The things he proposes must be done, but they will not translate to any improvement in the global marketplace.
Third, investment in infrastructure is important, but not nearly as important as he makes it out to be. American infrastructure is already among the most developed and advanced in the world. Obviously further development and upkeep is necessary, but it will not translate to any tangible benefits to the America economy, and it places a greater economic burden on the government at a time when it can ill-afford it.
Fourth, he recommends that the American education system be repaired. This is obvious. The government has been trying to improve it for years. He offers no concrete recommendations, only requirements for the end result. This is the most important aspect of improving the United States economic situation, but no solution has been found for the complacency of the average American student.
Lastly, he recommends an increase in the minimum wage, an expansion in tax credits, and a reform of unemployment insurance. An increase in minimum wage will not only not improve the United States economic situation, it will actually increase the number of companies moving their plants and factories overseas. When the wages of American workers are so far above those of the Chinese or Malaysian, businesses have no choice but to lay-off American workers to keep from folding. His other recommendations are small micro-reforms that will make no tangible difference to the American economy.
In conclusion, while some of his points were on topic, Will failed to address them effectively, and other of his recommendations were simply counter-productive. I agree with Kim that the only way for America to survive and prosper in the new world order of globalization is to open up and adapt. When free trade is universal the world will be forced to equalize. The United States will certainly suffer from this process, but in the long run the whole world will benefit. After the initial shock of competing with workers in Asia and Africa and Latin America, Americans will adapt, adjust, and begin to realize that prosperity is no longer guaranteed simply by being American, it must be earned. All that the government can or should do, is to work to educate students well and prepare them for the global economy and ensure that the United States is prepared to compete with the rest of the world.
Focus on Inequality
The United States recently earned the shameful title of the second most unequal country in the OECD, next only to Hungary. One of the clearest consequences of globalization has been increased inequality both within and among economies. (It’s not noted often enough that this is in part due to the fact that “free trade,” as currently promoted, is in fact not free, but quite protectionist when it comes to shielding workers in highly paid professions from foreign competition.) It is therefore worth reminding ourselves of the societal ills that correlate to inequality. In the United States, these include crime, health disparities, and racial tensions; in more desperate locations, it can breed wars over resources.
To return to the main question posed in this debate – how the United States should best compete in the global economy – the answer is to be found domestically in the ways that Will Straw describes. Those who would decry additional attention to these problems as anti-trade or anti-globalization should take a closer look. Few people actually argue against pursuing a bigger economic pie through reliance on comparative advantages, but acknowledgement that there are long-term winners and losers from economic integration is a starting point for deciding how we can make globalization start working for the losers, both at home and abroad.
The Search for a Middle Ground
I agree with Kim's argument that the world economic pie can be an ever expanding one. I even endorse his belief that prosperity comes from "maintaining and improving an environment in which entrepreneurial activities and innovation can flourish". However, I disagree that the market can magically resolve the short term and long term economic dislocations occurring around the world today. At the expense of sounding cute, it was never built to do that. Kim does not really address how the economic challenges we face as a nation can be thought of in new ways, nor how to pursue greater economic freedom in the context of a world increasingly plagued by the pitfalls of our default free-market system.
At the same time, few doubt the inherent value of international trade and globalization, and certainly, not even the most radical of the progressives desire “bringing to a halt America’s long-standing commitment to openness and economic freedom”. So what I hope Will Straw is recommending, and what I agree with, is a policy that is mindful of the losers. As Jonathan mentions, we have to accept that thousands of Americans are part of this group of losers. And the focus should be on lifting them out of their current state by improving America’s infrastructure and social safety nets like Straw suggests.
But progressivism only has an appeal, in so far as it creates jobs and provides the necessary economic impetus to help our country rise out of debt and restructure its basic foundations. Fixing public institutions and entire systems like education and welfare will need a lot of money. That is where Kim has a point – we have to ensure that the idea of free enterprise, a value cherished deeply by generations of Americans, and probably the source of the famed American entrepreneurial spirit and wealth, is not compromised. The idea is to avoid a protectionist road euphemistically labeled “progressive”.
This might seem like I am using ambivalent posturing to hide my indecisiveness. But given the option of choosing between a semi-welfare state (which is honestly the first image that comes to my mind after Straw’s piece) and a reckless free-market state (Kim’s piece), I would rather a progressive, free-market state.
I invite others to suggest what shape such a middle ground could take in terms of policies...
Globalization Anxiety
I agree with most of what Will Straw said. I would add that free trade, in the manner the United States has gone about it, does not work. Denmark's flexicurity system, while not necessarily applicable in its entirety to the United States, should certainly be a source of inspiration. It combines high levels of spending on education and job re-training for those who have lost their jobs as a result of globalization, and subsidies to make sure those that are displaced can continue to live a decent life. This, combined with Denmark's strong social welfare traditions of universal health care and government sponsored pensions helps to ensure that globalization does not only benefit those at the top.
I believe that the Next America forum provides room for enlightened discussion of the issues, but I can not help to mention a certain emotional pull to this particular issue. While it is important to me that millions of people around the world have been lifted from poverty due to globalization, I often have to wonder what the end game is for the United States. It has been said that the growing wealth of developing countries is not a zero sum game--- in so far as developed countries like the United States can continue to thrive and maintain their standard of living. As of now I, along with many Americans, am not sure that this is true.
If multi-faceted approaches like Will Shaw's truly help the average American's well-being, then it seems like a good thing to do. If not, I think the United States should hesitate before signing any more FTA's or backing down on farm and industrial subsidies at Doha.