Commentary | Trade and Globalization

Comments on “Growth, Opportunity, and Prosperity in a Globalizing Economy” by Peter Orszag and Michael Deich

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Opinion pieces and speeches by EPI staff and associates.

[ THESE COMMENTS WERE PRESENTED AT THE HAMILTON PROJECT CONFERENCE ON MEETING THE CHALLENGE OF A GLOBAL ECONOMY AT THE BROOKINGS INSTITUTION IN WASHINGTON, D.C. ON JULY 25, 2006. ]

Comments on “Growth, Opportunity, and Prosperity in a Globalizing Economy” by Peter Orszag and Michael Deich

By  Lawrence Mishel

First I would like to thank the leaders of the Hamilton Project for the chance to address this gathering today. This is a very important effort by important thinkers and by important people from the financial community to address the critical economic problems of our day. The nation certainly needs your wisdom as we can all agree that the economy is failing many Americans and that better economic policies are called for.

I am directing my remarks to the Orszag-Deich paper which asks us to embrace the benefits of globalization while investing in workers and market-friendly insurance, cushion the risks associated with globalization and make needed public investments that fuel growth.

What’s Really Great
Let me start with the many areas where I think Orszag and Deich get it exactly right.
1. We are enjoying fast productivity growth and we need public investments in infrastructure, education, basic scientific research and other areas to assure its continuation;
2. The increasing gap between growing productivity and improved wages and family incomes is the marker of a poorly performing economy and failed policies. It is remarkable, according to our estimates, that between 2000 and 2006, productivity will have grown by almost 20% but that real wages—measured for the median worker, a high school-educated worker or even a college graduate- will have risen about two percent, with all of that growth occurring as the result of the strong wage growth of the late 1990s spilling over into the early years of this decade.

Reconnecting productivity with equivalently rising middle-class wages and incomes and reduced poverty –broadly shared prosperity– is the challenge of our time and it is the metric with which we should not judge just the current administration’s policies but also those of future administrations and of policy agendas being offered to the nation, including those of the Hamilton Project and the agenda that EPI is developing.

3. The recognition that “you’re on your own” economics, what my colleague Jared Bernstein calls YOYO economics, can not adequately address today’s problems; and,

4. That economic insecurity, as illustrated by income volatility, is counterproductive to innovation and risk-taking and needs to be addressed.

What’s not so Great
The main point of the Orszag-Deich paper is to persuade us to embrace globalization. They argue that the benefits of trade are very large and that those favoring an open economy should promote policies that soften the blows from job losses.
This paper seems to be asking for a blank check for further trade liberalization in the form of continuing the status quo or of some yet-to-be named set of policies that will deepen or expand globalization with policies along the lines pursued by the Clinton and Bush administrations.

I have to say that I am not persuaded nor do I think most Democrats or progressives will be persuaded because this effort does not acknowledge the damage and risks the current system is generating. Remember that roughly 90% of House Democrats have voted against CAFTA and other recent trade agreements and a similar majority of the American people favor limiting the offshoring of jobs. Moreover, the current and potential offshoring of white-collar jobs has seriously undercut the old Clinton framework where greater education is the pathway through the ‘transition to a globalized economy’. I don’t the public buys this anymore nor should they.

The Policy Choice
The choice is set as between those who endorse market fundamentalism or pure laissez-faire and others who favor a ‘sand-in-the-wheels approach’, apparently favoring “turning inward and shutting out the forces of international competition, while trying to protect specific jobs.” I’ll let the laissez-faire crowd defend themselves. Frankly, this framing does not advance the kind of searching inquiry needed to establish a way to achieve broad prosperity in a global economy. For my tastes the gap between these two poles covers a lot of territory, including mine: I do not want to turn inward but believe that globalization,  as currently practiced  here and abroad, has inflicted substantial damage and wonder why more of the same, perhaps even accelerated, needs to be a policy priority.

It is easy to say that innovations and technological advances have been promoted by international trade and investment. But is any particular approach to trade – meaning actual policy proposals not some imagined fear of a walled off America- actually going to jeopardize this? We are a very open economy right now, certainly the most open among advanced countries. Does anyone really believe that our future innovation and technological advancement depends upon a trade treaty with Oman or Central America?

The Costs and Benefits
It was disappointing to read the analysis of the costs and benefits of trade. For benefits they rely on one fundamentally flawed study from IIE which makes unwarranted extrapolations from four other studies and made it seem as if there was some literature that could justify saying that the benefits of trade were something on the order of 8% of GDP. This is not credible in the least.

On the cost side there…well, there is no effort to quantify the costs of trade. There is still a fear of publicly acknowledging the substantial costs of globalization.  It is dealt with solely as a problem of workers who are dislocated from trade. In fact, the same economics that tells us there are benefits from trade tells us that all semi-skilled and unskilled workers will lose, not just those that are displaced. It is now obvious that highly educated workers are also being affected. It is not just the jobs lost but the wages that are now lower than what they would have been. The costs are very widespread and substantial, including extreme pressure that is a major factor in the unraveling of our employer-based health and pension systems.

Missing Sections
In an examination of globalization one would think there would be attention to the very large and unsustainable trade deficits we are running and the overvaluation of the dollar and related exchange rate problems we have.

What the implications of this situation are and how we are to address them goes unexamined. Some people think that the trade mess we are in is the consequence of the policy prescriptions of the very folks leading the Hamilton Project. It seems appropriate to engage the American people on how we dig ourselves out of this mess. It certainly seems inappropriate to ask for a blank check for ‘open trade’ without addressing current circumstances.

What about Shaping Globalization with Labor Standards/Environmental Standards, etc?
The current rules of trade heavily emphasize rules that protect investment, intellectual property and trade flows. There is weak, at best, attention to establishing a policy regime supportive of meaningful labor and environmental standards. How to achieve these standards and how well they’ve functioned (or not functioned) in existing trade agreements is unexamined here and not a topic of any other Hamilton Project work. Some advocates of
more open trade have feared that such standards are stalking horses for protectionism. I think not,  but if you believe that then I hope you’ll call the bluff on those who say they’ll support open trade as long as there are real protections built in for labor and the environment.

Some Questions
Let me close with some questions that hopefully will deepen our discussion:
1. Orszag and Deich argue that open trade is more compatible with a wage insurance system and less economic insecurity (perhaps even with a good health care system?). Ok, then should we have these systems in place before there is any further efforts to expand our openness. After all, economists argue that trade benefits exceed the costs assuming the losers are compensated. Of course there never is any compensation. So, when does the rubber hit the road?
2. If human capital and other public investments are critical for future growth, as we both agree, then how does this fit into a fiscally responsible budget policy. Does this agenda wait until there’s a fix for all the entitlements? For deficits of 1% of GDP? For balance? Or, at what surplus?
3. What about those trade deficits and exchange rates?
4. Most important, what in the HP agenda will really reconnect wages and productivity? This has to go beyond the policies that address low-income Americans and speaks to how policy can affect the compensation of typical middle-income workers? There’s no discussion of achieving lower unemployment than we now have. There’s no discussion of rebuilding collective bargaining. So, given the limitations of tax and transfer policies, what are the ways we can assure growth is spread more equitably?

Lawrence Mishel is president of the Economic Policy Institute in Washington, D.C.

[POSTED TO VIEWPOINTS ON AUGUST 1, 2006. ]


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