Let's Think Harder About the Role of Globalization in Wage Stagnation

Brad DeLong:

Let's Think Harder About the Role of Globalization in Wage Stagnation: It's disturbing. As we face the probable abrogation of NAFTA, possible trade wars with China, Germany, and others, and the total cluster** that is the Trump administration's policies (if any) toward NATO and Russia, a number of really smart and really well-intentioned people are, I think, making rhetorical--and in some cases substantive--errors that are degrading the quality of the debate and increasing the chances of bad outcomes. And they are doing it while trying to be forces for good, light, human betterment, truth, justice, and the American way...

So let me do some boundary policing here...

Let me ask people--all of whom are wiser than I am, or if not wiser smarter, or if not smarter more knowledgeable--to think about whether they really hold the positions they set forward, and think about whether they have set them forward in a way most calculated to guard against destructive misinterpretation. Today: Larry Summers...

Larry's big point here--the headline--is 100% correct: Revoking Trade Deals Will Not Help American Middle Classes. Hold tight to that.

Larry's second point is also correct: the big deal in terms of the changing shape of the American workforce--and, quite plausibly, changing life chances, the collapse of upward mobility, and wage stagnation--is technology: rampant improvement in manufacturing technology coupled with limited demand, for while nearly all of us want one few of us want too and only a minuscule proportion of us want three refrigerators. That means that if you are hoping to be relatively high up in the wage distribution by virtue of your position as a hard-to-replace cog on a manufacturing assembly line, you are increasingly out of luck. If you are hoping for high blue-collar wages to lift your own via competition, you are increasingly out of luck.

But then Larry goes, I think, rhetorically awry. His third point should be that inequality has been a political creation: those elected to power in America in the 1980s were elected on the platform that America's biggest problem was that it was, economically, too equal a society. Economic equality was strangling entrepreneurship and enterprise. And so they undertook policies to raise inequality. Those policies were successful. But we are still waiting for the flourishing of entrepreneurship and enterprise. He passes over this, not because he does not know this but because he has other fish to fry. Passing over what should have been his third point is, I think, a major rhetorical mistake: it is never good to pass up an opportunity to remind readers that the rise in inequality since 1980 has been something that those who made the Reagan Revolution hoped to accomplish and are proud of.

Bargaining power has flowed to finance and the executive suite and away from the shop- and assembly-floor. Top tax rates have come way down. It could have been otherwise--this is, primarily, a thing that has happened in English-speaking countries. It has happened much less elsewhere. It could have happened much less here.

And then, I think, Larry goes rhetorically awry again by passing over what ought to have been his fourth point. Over and above the decision to put the government's thumb on the scale assisting in the rise of inequality, wage stagnation and manufacturing decline have been driven by bad macroeconomic policies. The consequences of the Reagan deficits were to cream midwestern manufacturing and destroy worker bargaining power in export and import-competing industries. The switch from government surpluses to deficits under George W. Bush had much the same consequences. The low-pressure economies of Volcker, late Greenspan, and Bernanke wreaked immense damage. The strong-dollar policy was kept long past its proper sell-by date. A rich country like the United States ought to be a net lender to abroad, and ought to have a dollar policy that supports that net lending. Larry passes over this as well.

And so, rather than going technology--willed inequality--bad macro policies--globalization, Larry jumps from technology to globalization. Globalization thus shows up as the second most important factor affecting middle-class wages and inequality rather than the fourth.

It is at this point that I have, I think, a (rare) substantive disagreement with Larry. And I do acknowledge that when I have substantive disagreements with Larry, I am wrong at least as often as I am right.

Larry sees the coming of globalization as bringing with it a sharp reduction in the market power of American blue-collar workers in mass-production industries, and thus as exerting significant downward pressure on middle class wages and upward pressure on inequality. The live question, he thinks, is how large and significant these pressures have been.

I see it differently. Yes, technology, inequality promotion--union busting, so-called "right to work" laws, stagnant minimum wages, etc.--and lousy macro policies working through their effects on the trade sector have creamed the market bargaining power of American blue-collar workers. But globalization? Globalization's big effect has been to enable the construction of intercontinental value chains and to create a much finer global division of labor. It has greatly weakened the bargaining power of unskilled manufacturing workers here in the United States, yes. But has it done the same to semi-skilled and skilled manufacturing workers? If the United States had imposed barriers to the construction of intercontinental value chains would the semi-skilled and skilled manufacturing workers of the U.S. be better off? Or would they face stronger and more effective competition from firms headquartered in Japan and Europe that had created efficient global value chains?

Unskilled manufacturing jobs are not good jobs. Semi-skilled and skilled manufacturing jobs are. I think that odds are at least 50-50 that Larry has gotten the sign of the effects of globalization on bargaining power wrong for those manufacturing jobs that are worth keeping.

Thus I don't think that Larry should concede that "the advent of global supply chains has changed production patterns in the US" in a manner adverse to the interests of blue-collar and middle-class American workers. I think that might be true, but equally probably might be false. I think we need to think harder about this...