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Growing Apart

A Political History of American Inequality

Colin Gordon, Author

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The World Is Flat? Globalization

The first culprit in such an explanation is often globalization—by which we mean the ease and speed with which goods/services, money, information, production (firms), or labor can move across national borders. For most of the nineteenth century (and especially in the decades after the Civil War), the United States maintained high tariffs to protect domestic manufacturers from foreign competition and to aid farmers by creating a steady demand in the home market for the food and raw materials that they produced. The strategy was successful, but that success was also its undoing. Postwar economic growth and diversification (marked by rapid infrastructure development, legal and political support for the modern corporation, and the emergence of the “New South”) made many American producers global leaders—and eroded the logic of protectionism.1

The road to freer trade, however, was a rocky one. Tariff politics was sectoral and sectional, and some parts of the economy and of the country clung to protection. And any downward revision of tariffs rested on the ability to replace the revenues they represented. Movement toward freer trade was stalled by World War I, and by postwar politics which were simultaneously suspicious of foreign entanglements and of higher taxes (the only revenue alternative).  But the real reckoning came after 1929, when the United States (along with others) responded to the global depression (and made it worse) with sharply higher tariffs. As global trade withered, global tensions—in Europe and in Asia—grew. These developments galvanized the “Wilsonian” conviction that freer trade was the only route to peace and prosperity. But—in the absence of meaningful international agreements and institutions—there was little that the Roosevelt Administration (or anyone else) could act on these convictions.2

The cauldron of World War II forged these institutions, which were a clear condition of American participation in the grand alliance, and foremost among American postwar goals. The “Bretton Woods” system (named for the site of a 1944 Allied conference), included short-term provisions for reconstruction and postwar aid and longer term institutional agreement on global security (the United Nations), finance (the International Monetary Fund and World Bank), and eventually trade (the first General Agreement on Tariffs and Trade in 1947).3 All of these were sustained by American leadership and by their relative success—especially for the only major industrial economy not recovering from the devastation of war.

The logic (and returns) of Bretton Woods lasted into the late 1960s. In some respects, the grand bargain had simply run its course: recovering and emerging economies began to erase the longstanding competitive advantage enjoyed by the US, and the sources of that advantage (including cheap and plentiful energy) became less reliable.   In other respects, the costs of American leadership—highlighted by the fiscal impact of spending on Vietnam—began to outstrip their benefits. 4

All of this has recast the United States’ place in the global economy. For the last generation, “globalization” has been both more intense and more heterogeneous; its rewards flowing to emerging or resource-rich economies, and to private interests rather than nations. The politics of trade have been much more fragmented; marked by localized conflict over resources (especially oil) and by a profusion of bilateral trade agreements. And the American strategy has been to export the market fundamentalism that took hold in American domestic politics in the 1980s. This “Washington Consensus” pressed for deregulation, dampened public spending, privatization, and more open trade and financial markets.5

And all of this has clear implications for the trajectory of American inequality. Even the fiercest devotees of liberalized trade acknowledge that its benefits lie in aggregate growth, and that its costs will be borne unequally.  Indeed, as the world has flattened over the past generation, the general (and expected) trend has been toward declining inequality between countries and rising inequality within them.6  This is borne out in the American experience, where exposure to trade has increased markedly in the last fifty years: exports have grown from about 5 percent to about 12 percent of the economy; imports have grown from about 4 percent to 15 percent; and the trade balance—negative since the mid-1970s—now runs at about 5 percent of GNP [see FIG below].7

Economists have invested considerable effort in minimizing the role of trade on the growing inequality of wages or incomes in the United States (or in arguing that the problem is short-term or transitional). But it is harder to ignore or explain away the extent and depth of the damage. There are, of course, are stark examples of production following lower labor costs across borders and oceans (most notably in clothing and consumer electronics).8  The threat of flight or plant closing has—in the global age—became a pervasive and effective strategy in labor relations.9 And the local impact, in regions and communities more directly exposed to low-wage competition from abroad, has been devastating: markedly steeper unemployment, lower labor-force-participation, slower wage growth, and higher demands on public services and support. 10

The impact has been starkest on American manufacturing—where we have seen sustained competitive pressures from labor-intensive imports, a diversion of domestic investment, and unrelenting pressure on wages. Job growth since 1990 has occurred almost solely in sectors (like health care or government) not subject to trade pressures, and has been declined sharply in those sectors—especially manufacturing—which are most exposed to global competition. Between 1989 and 1999, job creation by American-based multinationals was widely distributed—about 4.4 million at home and about 2.7 million abroad; since then (1999 to 2009), job creation by these firms abroad has continued apace (another 2. 4 million) but reversed at home—where nearly 3 million jobs have been eliminated.11  Put another way, globalization is directly implicated in the “hollowing out” of U.S. labor markets, in which growth is concentrated in high-skill occupations at the upper end, and low-skill services at the other.

The damage wrought by all of this is not confined to the one-time adjustment to a new world of comparative advantage—in which the United States cedes low-wage, low-skill manufacturing to its competitors. In the information age, the boundary between tradable and nontradable goods is fuzzy: as we know, at least from anecdotal evidence, outsourcing might include everything from taking fast food orders to reading x-rays.12  And this intense, and seemingly boundless, competition has been accompanied by a dramatic increase in the global labor supply over the last 20 years or so [see FIG below]. With the integration of China, India, and the former Soviet bloc into the global economy, the supply of labor has essentially doubled. This has skewed the ratio between global capital and global labor in such a way as to dramatically increase the ability of firms to move production, or to wring concessions from workers in exchange for staying put.13

These are pretty dismal consequences (and prospects). But, by the same token, it is important to understand globalization—and its discontents—in a broader economic and political context. As an explanation for economy-wide wage weakness, the footloose mobility of capital is often overdrawn. The world is not flat: indeed much of the economy is rooted in place by labor markets, supply chains, or consumers.  Sectors of the economy untouched by liberalized trade shed workers and dampened wages at pretty much the same rate as the rest of the economy in the 25 years after 1970. While globalization (and particularly the competitive presence of China) has accelerated since 1990, wage inequality at the bottom (between low-wage and median-wage workers) has actually slowed over that span. Most of the growth in inequality during this era has been driven by gains made by very high earners—a pattern unlikely to be shaped much by trade.14

More to the point, all countries face the forces and consequences of globalization, and yet wage and income inequality is starker in the United States than in most other settings. Indeed, the United States is less exposed to trade than any of its OECD (Organization for Economic Cooperation and Development) peers [see FIG below], and yet more unequal than almost all of them. It is not globalization (as an abstract and inevitable force) that generates or explains inequality, but the political response to globalization in particular countries.15

The negative impact of trade on wages and incomes of less-educated, or less technologically adept workers is not a natural outcome of free trade—but the skewed outcome of trade and immigration policies which protect some workers and not others. The terms of trade, after all, are political—and might include more robust standards for wages and working conditions across countries, or more generous compensation (extended unemployment benefits, retraining) for those most directly affected. On this score, the United States offers only token assistance to low-skill workers displaced by trade but substantial protection (through both professional licensing and immigration law) to high-skill professions—a combination guaranteed to widen wage and income inequality.16

The punchline is this: Globalization and its demands on the labor market can be a race to the bottom, but it need not be given sufficient investment in education and protection for those workers exposed to new competition. Indeed, it is pretty clear that globalization widens the wage gap (within and across countries) not universally, but when and where labor protections are weak. Such protections might include a strong minimum wage, safety net programs (unemployment insurance, retraining) for displaced workers, or stronger political and legal support for organized labor.17  “At the very least,” as one recent study concluded, “the fact that wage inequality has not risen in the countries where minimum wages and/or union power remained strong suggests that institutions do have an important role to play.”18

Indeed, it is pretty clear that globalization widens the wage gap (within and across countries) not universally, but when and where labor protections are weak. Such protections might include a strong minimum wage, safety net programs (unemployment insurance, retraining) for displaced workers, or stronger political and legal support for organized labor. 

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