Restoring Economic Opportunity to Working-Class America

BY JOHN SCIANIMANICO

David Ricardo, the father of modern-day trade theory, must be rolling in his grave. Ricardo’s doctrine of comparative advantage helps explain how the rise of international trade has benefited countries around the world. Global GDP per capita has exploded, life expectancy has increased, and billions have been lifted out of poverty. In 2013, an estimated 11.3 million Americans worked in export-related industries.[1] American consumers profit from global markets through access to better goods for better prices on the world market. Because firms like Apple can operate supply chains spanning six continents and over thirty countries, the companies can produce and sell higher-quality products for less.

Despite these advantages, 2016 brought a flurry of attacks on Ricardian trade theory. Both Republican presidential nominee Donald Trump and Democratic presidential candidate Bernie Sanders placed US trade policy at the center of their political messages, promising to halt and reverse the supposedly pernicious trends associated with trade, such as rampant inequality, an erosion of the industrial base, and unsustainable trade deficits.

Many perceive the wave of economic populism that pervaded the recent election cycle as a backlash against globalization. Over two-thirds of Trump voters believed that trade deals “have been a bad thing for the United States.”[2] It is not hard to understand why such ideas gained traction. The United States has lost more than 4.5 million manufacturing jobs since the North American Free Trade Agreement (NAFTA) was enacted in 1994.[3] Near the end of World War II, the share of employment in manufacturing was roughly 39 percent; today, this number is at an all-time low of 8.5 percent.[4] Critics of free trade policies blame import competition, especially from China, for undercutting American manufacturing, an industry that propelled American growth in the 20th century and formed the bedrock of working life for millions of working-class Americans.

While it may seem obvious to link manufacturing layoffs to concomitant trade deals, such perspectives often conflate trade with other systemic forces—namely, technology and automation—that have also disrupted traditional manufacturing industries. Indeed, in his farewell address in January 2017, President Obama noted, “The next wave of economic dislocation won’t come from overseas. It will come from the relentless pace of automation that makes a lot of good, middle-class jobs obsolete.”[5]

However, separating the effects of trade from technology can be difficult, as both phenomena have similar impacts. They boost productivity, enhance national welfare, and generate high wages for individuals with specialized training. But they also produce adverse outcomes for the “losers”—less-skilled workers vulnerable to foreign competition. Trade and technology are also blamed for increasing levels of economic inequality and anxiety. Despite their similarities, however, the forces of technological advancement are causing far more disruption and despair in the US labor force than any free trade policy. To restore economic opportunities for blue-collar Americans, it is crucial to understand the real problems they face and determine what public policy can do for them.

Good Politics, Bad Economics

Mainstream economists believe that trade enhances a country’s welfare by increasing overall economic output. When two countries trade, they each theoretically choose to specialize in the production of goods and services in which they possess a “comparative advantage”—that is, products that allow them to use their labor force, natural resources, and capital more efficiently relative to other products. Some producers benefit, while others lose from trade, but trade theory justifies these distributional consequences on the basis that, overall, it makes each country better off.

The stories of losers from trade dominated the narrative of this past election, with a focus on declining American manufacturing industries like textiles and auto machinery. Throughout his campaign, President Trump blamed trade agreements such as NAFTA, a free trade treaty between Canada, the United States, and Mexico, for the woes of Americans whose jobs have moved overseas. He promised a 45 percent tariff on imports from China and a 35 percent tariff for Mexico.[6]Moreover, he has withdrawn the United States from the Trans-Pacific Partnership trade deal negotiated by President Obama and has pledged to renegotiate NAFTA.[7]

Yet the decline of manufacturing jobs in the United States predates many of the country’s most significant trade deals, including NAFTA. In the late 1970s, the Bureau of Labor Statistics (BLS) forecasted that the manufacturing sector’s share of employment would decline from roughly 20 percent to just under 9 percent by 2010. The actual trend has been remarkably consistent with this prediction, though the decline has since leveled off. Moreover, similar declines in manufacturing have occurred in other advanced industrial countries, including those with manufacturing trade surpluses like Japan and Germany.[8]

The United States has free trade agreements with twenty other countries, which together provide one-third of US goods imports[9] and receive almost half of US goods exports.[10] Imposing tariffs on China, the United States’ largest trading partner, or any other country, would likely result in retaliatory tariffs on US exports and even a trade war. According to the Peterson Institute for International Economics (PIIE), such tit-for-tat would cost 4.8 million private sector jobs by 2019.[11] This is because nearly two-thirds of imports to the United States are intermediate goods—those used by workers in US factories to produce final goods. Imposing tariffs on intermediate goods not only inflates the cost of final goods for consumers but leads to greater unemployment as rising input costs force firms to cut back production. Furthermore, higher import prices disproportionately affect the purchasing power and the livelihoods of the poor, who spend a greater proportion of their incomes on goods than the rich.[12]

For an example of how protection hurts Americans, we need look no further back than the Obama administration. In 2009, President Obama placed tariffs on tires imported from China, in response to lobbying by the American tire industry. The PIIE estimates that this tariff saved a maximum of 1,200 American jobs over the following two years. However, American consumers paid over $1.1 billion more for tires than they would have without the tariff.[13] Each job saved cost taxpayers over $833,000, which does not compare favorably with the median salary of a tire technician, which was $24,220 in May 2015.[14] Perhaps the most striking finding from the PIIE is that reduced spending on retail goods—due to greater spending on tires—resulted in a net loss of 2,500 retail jobs. Rather than save American jobs, as Obama intended, trade protection actually increased American unemployment and decreased overall consumer welfare.

Moreover, trade barriers are unlikely to reduce inequality. Harvard economists Claudia Goldin and Lawrence Katz argue that advancements in technology, combined with a slowdown in college completion rates, are the most important factors explaining why a greater share of wealth is going to the top one percent of workers. Since the early 1980s, the net personal wealth of the top one percent has increased from approximately 23 percent to over 37 percent of total wealth in 2014.[15] Part of this is explained by a declining supply of high-skilled labor. Even as college attendance has increased, college completion plateaued in the 1980s,[16] increasing the wage premium for college graduates over workers with only a high school degree and increasing the wage gap between high- and low-skilled workers. Simply put, as long as skill-biased technological progress outpaces the supply of college-educated workers, there is little that protectionist trade policy can do to alleviate inequality.

Creative Destructionism

Increasingly, evidence is pointing to technology and automation as the main drivers of the decline in manufacturing jobs in the United States. Of the 5.6 million manufacturing jobs lost between 2000 and 2010, a Ball State University study found that 85 percent are attributable to automation and only 13 percent to trade.[17] David Autor of the Massachusetts Institute of Technology believes that even if a low-skilled profession had escaped the effects of globalization, sooner or later, technology would have likely ended up eliminating it.[18]

Advanced robotics, artificial intelligence, and machine learning are accelerating the automation of traditionally labor-intensive tasks, reducing the need for human labor.[19] At the same time, even as manufacturing employment has declined, productivity as measured by real output has climbed to pre-2008 levels.[20] For example, Allan Collard-Wexler, associate professor of economics at Duke University, and Jan De Loeker, professor of economics and international affairs at Princeton University, find that between 1962 and 2005, the American steel industry increased its productivity five-fold, even though it shed 75 percent of its workforce, or 400,000 jobs. Collard-Wexler and De Loecker attribute these job losses to a new technology called the minimill, which displaced older technology and sparked rapid productivity growth in the steel industry. The effect of the minimill remained strong, they found, even after controlling for job losses in the Midwest, unionization rates, and international trade.[21]

This trend toward more advanced manufacturing and greater automation of low-skilled work will continue even as companies begin to ‘re-shore’ to the United States.[22] Indeed, Wal-Mart and General Electric have already brought some production back, partly due to rising wages in China. However, their factories are heavily automated. Gone are the days when all a worker needed to work in a factory were his two hands, common sense, and perhaps a high school degree. Now, factory employers expect workers to read, write, and know how to use a computer. A recent New York Times article quoted a retired chief executive of Siemens Energy, an engineering company, “People on the plan floor need to be much more skilled than they were in the past. There are no jobs for high school graduates at Siemens today.”[23] That is why policy makers are skeptical of President Trump’s efforts to prevent American companies from offshoring. Even if companies do stay, there is no guarantee they will retain workers if robots can do the same work at a lower cost than humans.

Notwithstanding these enormous technological changes in the workforce, it would be incorrect to argue that increased trade, particularly with emerging economies, has had no impact on the US labor force. Economists openly acknowledge that trade displaces jobs and lowers wages, with the caveat that these consequences are generally small and easy to fix. For years, the standard belief of economists was that workers displaced by trade can simply relocate or transition into a new industry. However, new research is finding that the effects of trade are more pronounced than originally imagined—between 2000 and 2007, import competition from China cost a staggering 2.4 million American jobs.[24]

The growth of emerging economies like China is pushing economists to reconsider long-held beliefs concerning the effects of trade on manufacturing jobs. What remains uncertain is whether China’s future growth will have as severe a consequence on the American labor market as automation.

Building Human Capital

President Trump has an obligation to restore economic prosperity to communities across the United States that have been left behind by the forces of technology and globalization. But fighting globalization is like fighting to prevent the winter weather in Boston: unproductive, costly, and unlikely to succeed. The same is true regarding technological progress. In order to build an economy that works for all, the country should focus on enabling Americans to work with technology if they are to avoid being replaced by it. There are a number of long-term and short-term policies that can buffer the growing pains of trade while preparing future generations to thrive in a global, technological economy: supporting vocational training programs, closing skills gaps through P–12 education, and expanding fiscal policy.

Investing in vocational training programs for young adults is one essential policy for shifting to a more technology-driven economy. As labor-intensive jobs are displaced by technology, firms are creating new jobs that require technical qualifications. According to a 2015 survey by the consulting firm Deloitte, 82 percent of manufacturing executives believe there are not enough qualified workers to fill skilled jobs in programming, electrical engineering, and robotics.[25] High school students should have opportunities to learn these skills through apprenticeship programs run by companies, community colleges, and government agencies. Americans tend to be suspicious of apprenticeships, which they view as inferior to a college degree. However, according to the Department of Labor, over a thousand careers in blue- and white-collar professions train young people as apprentices.[26] The former secretary of labor, Tom Perez, and others in Washington have been strong advocates, pointing to the high median salaries and the low levels of debt incurred from apprenticeships.[27] In fact, Anthony Carnevale of Georgetown University found that 40 percent of middle-skill jobs—jobs that tend to emerge from vocational training programs—pay more than $55,000 a year, more than the median salary for a college graduate.[28] One example in New York is the Per Scholas program, which offers free computer-technician training to low-income residents. Research shows that the program delivers both more consistent employment and a wage boost of up to 18 percent.[29]

The United States lags far behind many other advanced countries with respect to its vocational training programs, with only 0.2 percent of American workers training as apprentices.[30] In Germany, nearly 60 percent of high school students enroll in technical schools that couple traditional education with workplace training in vocations such as advanced manufacturing, banking, IT, and hospitality.[31] After graduation, students can expect jobs—often from the firms that trained them—with a median salary anywhere from $55,000 to $80,000.[32] In large part due to such apprenticeship programs, youth unemployment in Germany stands at less than 7 percent, the lowest in the industrialized world. The United States could achieve similar results, but this would require a different approach to labor market policies.

A second policy proposal involves strengthening P–12 education. Too many students are entering the workforce or going to college without the necessary skills to succeed. Half of all undergraduate students will take a remedial course before enrolling in a college-level course, costing nearly $7 billion dollars a year, according to one study.[33] As mentioned, even as college enrollment has reached new highs, college completion has risen at a much slower rate.[34] This is problematic not only for students wishing to earn a college degree, but also for students looking to enter the middle-class by means of apprenticeships. If eighteen-year-olds cannot pass a tenth-grade basic skills assessment, how can we expect them to operate a robot or correct computer programming errors?

There are large differences in student achievement across the United States, partly explained by racial and socioeconomic differences but also partly explained by state policy decisions. While President Trump has limited control over the education policies of the states, he can steer them toward policies that close these skills gaps. Such policies include investing in early childhood education, building capacity for data-driven decision-making in schools, and exposing and training more students in the science, math, engineering, and technology (STEM) fields.

Finally, Congress should consider fiscal policies that mitigate the short-term effects of trade- and technology-related job displacement. In many cases, displaced workers have difficulty finding a new job that pays a salary equal to what they earned before, usually because they lack the skills or training required to do in-demand, high-skill jobs. Consequently, laid-off workers starting a new job can expect to suffer some decline in wages. However, a federal wage insurance program could address this concern. A wage insurance program, similar to the one proposed by Robert Lawrence, Albert L. Williams Professor of International Trade and Investment at the Harvard Kennedy School, and Robert Litan, former senior fellow in the Economic Studies Program at Brookings, would offset these lost wages, replacing (for example) up to 50 percent of the difference between the old and new salary.[35] This insurance program could incentivize workers to seek out new jobs rather than continue to collect benefits or drop out of the labor force altogether. Even if a new wage combined with the insurance benefit was less than a worker’s previous wage, this could be only a temporary reality if the firm offered the worker training or educational opportunities that increased their productivity.

Another fiscal policy tool would be expanding the earned income tax credit (EITC), which is a federal wage subsidy for low-income Americans. The EITC encourages individuals to work by making low-wage jobs more financially rewarding. However, the program helps individuals in different ways, based on a range of factors. For example, the program currently offers up to $5,500 a year to working mothers with two children, up to a household income of about $18,000. For a working male without dependents however, the program only offers $500 a year up to an income of $8,200.[36] Considering the declining rate of labor force participation among working-age males, particularly those who are less educated, expanding the EITC for these individuals could be the difference between their re-entering the labor force and giving up altogether.

Conclusion

Thanks to technological progress, the American economy presents new employment opportunities for high-skilled workers. However, technology also threatens the livelihoods of less-skilled Americans, many of whom have already endured wage cuts or given up on finding a new job. The US government has work to do to restore economic opportunity, but blaming trade and embracing protectionism will hurt the economy and harm the economic prospects of hard-working Americans. Instead, the Trump administration should turn its attention to policies that help Americans not only adapt to a technology-driven economy but thrive in it as well.

John Scianimanico is a Master in Public Policy graduate of the John F. Kennedy School of Government at Harvard University, where he studied economic inequality, government performance, and social policy. While at Harvard, he taught economics to Harvard undergraduates and co-managed a panel on education reform at Harvard’s Conference on Poverty and Inequality. Before Harvard, John was a Teach For America corps member in Huntsville, Alabama.

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