No Con Economics

A Review of Kimberly Clausing recent book Open: The Progressive Case for Free Trade, Immigration, and Global Capital

In a recent article in Foreign Affairs (November / December 2019), Clausing clearly states why she has chosen to write this book now.

It has almost become the new Washington consensus: decades of growing economic openness have hurt America workers, increased inequality, and gutted the middle class, and new restrictions on trade and immigration can work to reverse the damage. This view is a near reversal of the bipartisan consensus in favor of openness to the world that defined U.S. economic policy for decades.

In Open, Clausing confronts this new “consensus” by addressing three fundamental questions:

1. Why has inequality increased markedly in the U.S. in the last forty years despite significant GDP per capita growth?
2. What are the consequences of restrictions on openness for U.S. workers?
3. What policy changes can reverse these inequality and productivity trends?

Two graphs illustrate how the distribution of income in Post WWII U.S. inverted from the earlier period (1945-1980) to the latter period (1980–2015). The graph below shows two significant periods in which GDP per capita grew much faster than median household income: the 1980s and the post-2000 era.

The second graph shows that the share of income received by the lowest earning 50% of adults (red line) grew markedly after WWII until about 1970 and began to fall rapidly in 1980.  In contrast, the share of national income of the top 1% of adult earners (blue line) traces out an opposite pattern with the most recent entries showing that the income share of the top 1% has reached almost double that of the bottom 50%.  Such income stagnation for a large share of the population in the U.S, helps explain their rising economic dissatisfaction.

Although politicians of both political parties (as noted above) tend to believe that increased globalization has caused economic stagnation, Clausing cites five other forces with at least as much influence on the regressive change in income distribution:  technological change, increased economic concentration and market power, decreased labor union influence, a huge increase in CEO pay relative to that of workers earning the median wage, and changes in tax law that favor high income households.

To address the role of trade in responding to the first question above, in figures 3.3 and 3.4, Clausing shows that countries that globalized had both higher economic growth and lower unemployment rates than those that did not.  Roughly half of all imports in the U.S. are used in domestic production: one primary reason for the increased domestic output and reduced unemployment.  Of course, as trade increases, some industries and firms gain while others lose. For example, manufacturing employment has declined, especially after China joined the WTO in 2001; however, as illustrated below, the decline in manufacturing employment began in the 1950s in the U.S. Similarly declines in the share of the labor force in manufacturing characterize other high income countries (Figure 4.5).

In responding to the second question, Clausing emphasizes that attempts to discourage imports have had substantial negative effects.  Tariffs, an excise tax on imported products, hurt both domestic producers and consumers.  For example, the tariffs on aluminum and steel imposed by the Trump administration have increased domestic manufacturing costs and led to reciprocal tariffs by our trade partners (which, for example, reduce the export of agricultural products.) Furthermore, tariffs lead to a higher cost for many consumer goods which low and moderate income families bear the majority of the burden.  A recent Brookings study  observed that tariffs affect after-tax income of those in the lowest 20% of families three times as much, in percentage terms, as those in the highest 20%. In short, attempts to inhibit trade tend to hurt those with incomes in the bottom half of families much more than those in the top income groups.

Policy responses to the economic stagnation and perverse income distribution cited above (and responses to the third question Clausing poses) require change in both political and economic domains.  In the closing chapters, the author characterizes a variety of constructive policy changes we might implement.  She concludes by highlighting three broad steps needed to generate globalization that more equitably shares its benefits and costs, and thus, improves the economic well-being of most if not all Americans.

Step 1: Policies should better equip workers for our modern economy including those that foster greater individual economic security, more competition in product marketplaces, and support for skill development.

Step 2:  A more efficient and equitable tax system should expand the earned income tax credit, eliminate tax burden differences based on source or location of income, introduce a carbon tax to reduce greenhouse gases, and retain and strengthen a progressive income tax structure that eliminates both domestic and international loopholes.

Step 3:  Policies should encourage a constructive partnership with businesses including more transparency on pay structure and labor inclusion, more robust anti-trust laws, and simple, fair regulations.

Clausing concludes her Foreign Affairs article with the following:

American workers have every reason to expect more from the economy, but restrictions on trade and immigration ultimately damage their interests. What those who care about reducing inequality and helping workers must realize, then, is that protectionism and nativism set back their cause. Not only do these policies have direct negative effects; they also distract from more effective policies that go straight to the problem at hand. On both sides of the aisle, it’s time for politicians to stop vilifying outsiders and focus instead on policies that actually solve the very real problems afflicting so many Americans.

These are wise words absent from most political discussion in the U.S. today.  Without policies such as those described by Clausing, the U.S. economy may begin to resemble the Japanese economy over the last 30 years, but that’s a topic for another posting.