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Negotiating a New Social Contract

By Grant Aldonas | August 13, 2007

Devin Stewart interviews Grant Aldonas, former Bush Administration Under Secretary of Commerce for International Trade (2001–2005), on his recent study with Matthew Slaughter of Dartmouth and Robert Lawrence of Harvard on the policy response to globalization. The study, "Succeeding in the Global Economy," focuses on how government policies can help the American worker.

Grant, tell me about your recent report, which makes a strong case for globalization. How have Americans benefited from globalization?

America's openness to the world economy over the past 50 years has added $1 trillion to our annual GDP. This translates into an average gain of $10,000 every year for a family of four earning the median U.S. income of $46,000. As we move further to reduce barriers to trade, particularly in the services arena where the U.S. holds a comparative advantage, some economists estimate that we will add another $500 billion annually to U.S. GDP and another $5,000 to the average U.S. household.

We often underestimate the benefits of globalization because we often overlook the broader beneficial impact of international trade on the U.S. economy. To the extent that our openness to the world economy fosters greater competition and competition drives quality up and prices down, inflation remains in check. That translates into lower interest rates and higher home ownership. It would surprise many who listen to Lou Dobbs's tirades about the inequities of international trade that home ownership in the United States is at an all-time high, due largely to this phenomenon.

We also tend to underestimate the costs of protectionism. Traditionally, economists have looked at the welfare costs associated with barriers to trade. In a global economy, the costs of protection run far deeper. Behind higher trade barriers, firms are no longer exposed to changes in consumer preferences, technology, and business processes. That erodes their competitiveness.

The best illustration I know of is the U.S. textile and apparel industry, which was cosseted behind strict import quotas for 40 or more years. The industry still benefits from among the highest tariffs the U.S. imposes. Yet, when the quotas were removed, the industry was largely unable to compete. Protection has a corrosive effect on the ability of firms to stay competitive precisely because it removes the spur of competition.

If we want to remain competitive, we need more globalization, not less. The competition forces us to raise our productivity and that is essential to raising our standard of living.

What is the greatest challenge for American workers?

The biggest economic challenge is not a particular country, like China or India. The greatest challenge we face is demographic. In a few years, as the baby boomers retire, the United States will have fewer workers per retiree. We will face a significant labor shortage, particularly among skilled workers and managers.

The United States will have to raise its productivity significantly simply to keep its standard of living where it is now. If we want to see it rise, we will have to raise our productivity and bring more skilled workers into the workforce.

What that means for the average worker is the need for a dramatic increase in productivity. The clearest route to increased productivity is specialization—doing what one does best and trading for the rest. We should think of globalization as offering us the opportunity to specialize in ways we couldn't if we were limited to the U.S. economy alone.

In other words, pursuit of our comparative advantage in a global economy holds the key to meeting the greatest economic challenge we face domestically.

How would you articulate the challenge that globalization poses to policymakers?

The goal of economic policy in a global age can be captured in a fairly simple question: How do we ensure that we expand and share the benefits of globalization while reducing the human cost of adjustment to economic change to a bare minimum?

Remaining open to the world economy is the key to our success because it produces the benefits we hope to secure. The harder challenge is how to ensure that the benefits are broadly shared and that we invest sufficiently in the future of American workers in ways that allow them to adjust to economic change.

That is why the bulk of our report focuses on how we facilitate change—how government policies can contribute to the ability of communities, firms, and workers to adjust to the changes that our openness to the global economy will bring.

Given that challenge, you can understand why our report maintains that the current debate, focused as it is on trade or the approach our negotiators take in areas like labor and the environment, is too narrow to respond to the challenge that globalization poses. Those issues, while important are inapposite to the challenges globalization forces us to confront.

Look at the conventional tools of trade policy. Steelmakers argue that the antidumping laws are the only thing that stands between the U.S. economy and certain death at the hands of nefarious foreign competitors. But the reality is quite different. Antidumping actions apply only to trade in manufactured and agricultural goods, which represent less than 15 percent of the U.S. economy. There is no antidumping action or tariff that can bar the delivery of financial services or medical advice to my cell phone.

Meanwhile, globalization has collapsed the convenient distinction between international and domestic economic policy. In a world in which the competition has shifted from a focus on markets to a competition for investment capital, talent, and ideas, traditional trade tools won't work. Things like tax policy, our education system, our physical infrastructure, and regulation become more relevant.

It's not hard to see why our policies and politics—to the extent they focus on things like tariff negotiations and antidumping rules—are roughly 30 years out of date.

To what do you attribute the erosion of public support for free trade policies and globalization?

The place to start is by looking at the experience of virtually all Americans in terms of their real income. What they have seen is downward pressure on wages across 96 percent of all levels of educational achievement. We have also seen an extended period when there have been considerably higher returns to capital than to labor.

Now, the reality is that only 10 to 20 percent of that is attributable to what we would think of as international trade. Much of it is churn generated by technological change and the fortunes of particular industries or companies, like U.S. auto manufacturers, which I think most folks recognize is not simply a question of foreign competition.

Much of the pressure on wages and the lower returns to labor may be a function of the current business cycle. As businesses climb out of a recession like that of 2000–2001, they strip out costs, including workers, in order to raise their productivity in the face of economic pressures. The higher returns attributable to those productivity gains go to capital, but over time they return to labor in the form of higher wages.

But the only honest answer is that we don't yet know what is causing the sustained downward pressure on wages. Anyone who says they know is engaged in polemics. But it is also clear that globalization is a part of it and that the precise cause may not matter.

While the average family benefits from globalization, it's also true that they are confronting an economic vise that is pressing on them from both sides.
Folks are seeing downward pressure on wages while they are seeing increases in family expenses, particularly for outlays like health care. While the average family benefits from globalization, it's also true that they are confronting an economic vise that is pressing on them from both sides.

What's interesting is that the strongest downward pressure on wages is among the college-educated. Why? Our best guess is that U.S. workers with less education have in some ways faced globalization first. Working in manufacturing, where a higher percentage of the goods produced in that sector are tradable, those workers faced the downward pressure on wages before workers in the services industry or workers with college degrees that were often a part of management.

The reason that the facts on wages are so interesting is that the group feeling the strongest downward pressure on their wages also represents the group that has traditionally provided the strongest support for free trade policies and engagement in the global economy. Without suggesting that there is a strict causality, the correlation is pretty strong and helpful in explaining at least some of what we have seen in erosion of the support for free trade and globalization.

How can the U.S. government help facilitate adjustment?

This is an area where there is a tendency to think in terms of half-measures. Much of that is due to political constraints. But you cannot do justice to the effort to meet the challenges of globalization simply by expanding the existing Trade Adjustment Assistance (TAA) program. TAA simply is not structured to deal with the way people lose their jobs. Nor does it reflect the ways in which people reenter the workforce.

TAA does produce significant individual successes. And the effort by the Labor Department working with community colleges to train people for new careers will pay dividends. But in its current form TAA amounts to "non-adjustment assistance," rather than assistance that would offer workers meaningful assistance in grappling with economic change.

What it does mean is that we need a fundamental overhaul of the constellation of government programs that span the spectrum from unemployment insurance to job training programs to adjustment assistance programs. The goal should be achieving reemployment, not paying to take you out of the job market, precisely because the most valuable training takes place on the job.

My instinct is that the more fundamental approach is one that would appeal to Senate Finance Committee Chairman Max Baucus, who has been the strongest advocate on TAA expansion. But he is faced with a deadline—the impending sunset of the TAA program—and knows that it would be hard to generate the needed support for broader reform and still harder to reauthorize TAA even in its current form if it is allowed to lapse.

In the end, I trust people to be the best judges of their futures and their careers. There is nothing government can really do to substitute for that judgment and it is demeaning to try. That is why we need to take the "T" out of TAA and develop an Adjustment Assistance program that is worthy of its name. It should offer a range of services that comport with what people need when they are trying to get back into the job market. That can run anywhere from relocation expense to job training to wage insurance to the portability of pensions and health care to a Small Business Administration loan to start a business.

What is the role of businesses and consumers in addressing issues related to globalization?

Business and consumers can move to respond to global problems. One recent example is IBM's establishment of the equivalent of an employer-paid 401K program for education and training. What's more, it's portable.

That is not wholly altruistic. IBM has recognized what global competition is all about. It is about managing your firm as a global enterprise as opposed to a multinational firm that is simply the aggregation of different enterprises serving separate national markets.

What that implies is managing your firm based on the notion that the future of global competition lies in attracting investment capital, talent, and ideas. IBM is not only doing its employees an extraordinarily good turn, it's also making itself extraordinarily attractive to talent and the ideas they bring to IBM's business.

We are in the process once again of renegotiating the basic social compact in our country.
We are in the process once again of renegotiating the basic social compact in our country. That is going to be a challenge just as was the creation of our federal system of government or the shift from an agrarian to an industrial society.

Our society is too complex to suggest that the process of creating that new social compact will occur by bringing various interest groups to Washington to debate the question. But, neither will we succeed in that effort if we try to ignore the fact that that is the process in which we are engaged.

I think it's also worth emphasizing that the political process is not doing its share to sort this out. For the lack of a better alternative, we are leaving that process to the market. I have a lot of faith in markets, but they are best at communicating things like price and quantity, not the murkier process by which we achieve a political consensus on the way forward.

There are lessons we can learn from what is going on in the marketplace as we think our way through the process of achieving that context. One might ask for example, which contract will prevail? Will it be the contract under negotiation between the United Auto Workers and GM, which will focus on preserving jobs and retiree benefits and which the union will try to impose on Ford and Chrysler in the old manner of bargaining? Or will it be the contract between IBM and its workers that is designed to attract the best talent and foster their ability to raise their own productivity and create their own economic future in the process?

I'm betting that the IBM approach is more likely to create both workers and an enterprise that is capable of making the adjustments necessary to remain competitive in today's complex and competitive world. In fact, I expect that, in the future, those unions that are most successful will be those that invest heavily in improving the productivity of their members and reinforcing their claim to the profits those productivity gains generate.

The difference in approaches helps clarify the choice facing U.S. government policymakers, as well as the political constituencies they serve. Will they be able to look past their parochial interests and develop an approach that ensures that every American enterprise and worker has the opportunity to bargain for their future?

We will need to change the political lexicon on globalization fundamentally: It is time to stop applauding it and it is past time to stop demonizing it. It is time to do what Americans have always done, which is figure out what about globalization serves our interest and how we can foster that and figure out what we don't like about globalization and find ways to ameliorate it.

William James's pragmatism is the truly native-born American philosophy because it reflects our past and suits our disposition as a people. We could use a dose of that now.

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