The Return of Protectionism?

Stephen DeAngelis

February 21, 2008

Nothing can slow globalization as fast as rising protectionism. Globalization, as I have pointed out before, requires the relatively free movement of capital, people, and resources and protectionism is all about curbing the free flow of goods. According to Wikipedia, several past surveys of professional economists recorded up to 95 percent support ratings for free trade; but that may be changing according to BusinessWeek [“Economists Rethink Free Trade,” by Jane Sasseen, 11 February 2008].

“Many ordinary Americans have long been suspicious of free trade, seeing it as a destroyer of good-paying jobs. American economists, though, have told a different story. For them, free trade has been the great unmitigated good, the force that drives a country to shed unproductive industries, focus on what it does best, and create new, higher-skilled jobs that offer better pay than those that are lost. This support of free trade by the academic Establishment is a big reason why Presidents, be they Democrat or Republican, have for years pursued a free-trade agenda. The experts they consult have always told them that free trade was the best route to ever higher living standards. But something momentous is happening inside the church of free trade: Doubts are creeping in.”

Liberal pundits have decried for years that productivity in the U.S. was increasing and bringing companies bigger profits, but those gains were not matched by salary increases. The resulting wage stagnation, some analysts have argued, is what has created the credit crunch now plaguing America and spreading like a cancer throughout the global economy.

“Economists [concede] their ideas can’t explain the disturbing stagnation in income that much of the middle class is experiencing. They also fear a protectionist backlash unless more is done to help those who are losing out. ‘Previously, you just had extremists making extravagant claims against trade,’ says Gary C. Hufbauer, a senior fellow at the Peterson Institute for International Economics. ‘Now there are broader questions being raised that would not have been asked 10 or 15 years ago.’ So the next President may be consulting on trade with experts who feel a lot less confident of the old certainties than they did just a few years ago. From Alan S. Blinder, a former vice-chairman of the Federal Reserve and member of the Council of Economic Advisers in the Clinton Administration, to Dartmouth’s Matthew J. Slaughter, an international economist who served on President George W. Bush’s CEA, many in the profession are reevaluating the impact of globalization. They have studied the growth of low-wage work abroad and seen how high-speed telecommunications make it possible to handle more jobs offshore. Now they fear these factors are more menacing than they first thought.”

Even as economists ponder how to increase middle class wages, they fear protectionism — the economic policy of restraining trade between nations. Protectionism comes in many guises from tariffs on imported goods to restrictive quotas and regulations. The objective of these measures is the protection of domestic industries and the jobs they represent. Protectionism is the very antithesis of globalization. Wikipedia notes, “Some may feel that better job choice is more important than lower goods costs. Whether protectionism provides such a tradeoff between jobs and prices has not yet reached a consensus with economists. Some point out that free-trade has not benefited those in manufacturing, and that service-sector jobs, such as store clerk, do not pay as well as manufacturing used to.” The big question remains about whether globalization and free trade has caused the current wage stagnation. Even if that question is answered, another bigger question is raised: what can be done about it? The fact wages have stagnated is not in question. Robert B. Reich, a former Secretary of Labor in the Clinton administration and currently a professor of public policy at the University of California, Berkeley, asserts that wage stagnation (which has caused people unwilling to reduce their standard of living to turn to credit) must end [“Totally Spent,” New York Times, 13 February 2008]. He writes:

“We’re sliding into recession, or worse, and Washington is turning to the normal remedies for economic downturns. But the normal remedies are not likely to work this time, because this isn’t a normal downturn. The problem lies deeper. It is the culmination of three decades during which American consumers have spent beyond their means. That era is now coming to an end. Consumers have run out of ways to keep the spending binge going. The only lasting remedy, other than for Americans to accept a lower standard of living and for businesses to adjust to a smaller economy, is to give middle- and lower-income Americans more buying power — and not just temporarily. … The underlying problem has been building for decades. America’s median hourly wage is barely higher than it was 35 years ago, adjusted for inflation. The income of a man in his 30s is now 12 percent below that of a man his age three decades ago. Most of what’s been earned in America since then has gone to the richest 5 percent. Yet the rich devote a smaller percentage of their earnings to buying things than the rest of us because, after all, they’re rich. They already have most of what they want. Instead of buying, and thus stimulating the American economy, the rich are more likely to invest their earnings wherever around the world they can get the highest return. The problem has been masked for years as middle- and lower-income Americans found ways to live beyond their paychecks. But now they have run out of ways.”

Reich notes that American workers used three principal means to combat wage stagnation. First, women joined the work force in record numbers, creating households dependent on two incomes. Second, workers started working longer hours. Finally, they turned to borrowing. He concludes:

“We’re finally reaping the whirlwind of widening inequality and ever more concentrated wealth. The only way to keep the economy going over the long run is to increase the wages of the bottom two-thirds of Americans. The answer is not to protect jobs through trade protection. That would only drive up the prices of everything purchased from abroad. Most routine jobs are being automated anyway.”

His prescription for solving the problem, which includes larger earned-income tax credits and more unions, is certainly debatable; but his concluding remarks need to be taken seriously.

“Over the longer term, inequality can be reversed only through better schools for children in lower- and moderate-income communities. This will require, at the least, good preschools, fewer students per classroom and better pay for teachers in such schools, in order to attract the teaching talent these students need. These measures are necessary to give Americans enough buying power to keep the American economy going. They are also needed to overcome widening inequality, and thereby keep America in one piece.”

One would think that conservatives and liberals alike would agree that an economy dependent on the shaky credit of over-extended consumers is not in America’s best interest. Even though many economists, like Reich, still believe protectionism is bad, it seems to be rearing its ugly head. Sasseen writes:

“No one is suggesting that trade is bad for the U.S. overall. According to estimates by the Peterson Institute and others, trade and investment liberalization over the past decades have added $500 billion to $1 trillion to annual income in the U.S. Yet concern is rising that the gains from free trade may increasingly be going to a small group at the top. For the vast majority of Americans, Dartmouth’s Slaughter points out, income growth has all but disappeared in recent years. And it’s not just the low-skilled who are getting slammed. Inflation-adjusted earnings have fallen in every educational category other than the 4% who hold doctorates or professional degrees. Such numbers, Slaughter argues, suggest the share of Americans who aren’t included in the gains from trade may be very big. ‘[That’s] a very important change from earlier generations, and it should give pause to people who say they know what’s going on,’ he says. Blinder warns the pain may just be starting. He estimates that eventually up to 40 million service jobs in the U.S. could face competition from workers in India and other low-wage nations. That’s more than a quarter of the 140 million employed in the U.S. today. Many of the newly vulnerable will be in skilled fields, such as accounting or research—jobs U.S. companies will be able to move offshore in ever greater numbers. ‘It will be a messy process of adjustment, with a lot of victims along the way,’ Blinder says. The rumble of academic debate is already having an effect on the Presidential campaign. In an interview with the Financial Times late last year, Hillary Clinton agreed with economist Paul A. Samuelson’s argument that traditional notions of comparative advantage may no longer apply.”

Sasseen’s article underscores the fact that there are probably as many recommended solutions to this problem as there are economists.

“What to do? Blinder argues for a big expansion of unemployment insurance and a major overhaul of the poorly performing Trade Adjustment Assistance program (TAA), which retrains manufacturing workers whose jobs disappeared. More vocational training and wage insurance, which would partially reimburse displaced workers who take new jobs at lower pay, also figure in his proposals. Both Clinton and Obama—and even Republican Senator John McCain—have similar ideas. That’s not enough, says Slaughter. He sees a need for some form of income redistribution to spread the gains from free trade to more workers. In a controversial article Slaughter co-wrote last summer for Foreign Affairs, he proposed ‘A New Deal for Globalization’ in which payroll taxes for all workers earning below the national median income level would be eliminated. Slaughter has talked with campaign advisers in both parties. So far, he has no takers. But it’s one more sign of how far the trade debate has moved.”

Few pundits seem to think that the stimulus package recently passed by Congress and signed by the President provides a long-term fix to the U.S. economy. Some belt tightening and real gains in middle and lower class wages seem to be the prescription gaining support. I expect the economy to be the biggest issue on voters’ minds come this November, which means it will be interesting to see which economists the presidential nominees decide to listen to.