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Wednesday, June 13, 2012

Is Globalization Good for America's Middle Class? Part 2

In Part 1, I examined what economic theory has to say about the winners and losers from trade. The main conclusion is based on the Stolper-Samuelson Theorem: Because the United States is labor scarce in a global perspective, an expansion of trade will reduce the real wages of labor. As we have seen, this theoretical prediction has been borne out as real wages remain below their peak level for the 39th year running.

In this post, I analyze what I consider to be the other main element of globalization, the expansion of the mobility of capital. Just as transportation innovation and cost declines made trade easier, they also make it easier for owners of capital to locate it in a broader range of places than 30 or 40 years ago. Similarly, the decline in communication costs make it easier for owners of capital to coordinate production on a global scale as well as offering additional ways of moving financial capital (think tax havens).

Note that I have said nothing about actual movements of capital. Simply the ability to move capital strengthens capital owners in their negotiations with business and labor, because it makes the threat of moving credible and thereby gives companies greater bargaining power. Kate Bronfenbrenner showed clearly that after the passage of the North American Free Trade Agreement (NAFTA) in 1993, companies more frequently resorted to threats in their bargaining with workers, even to the point of violating the National Labor Relations Act by threatening to move during union organizing drives. In this blog, I have previously discussed the case of Boeing's establishment of a Dreamliner plant in South Carolina and admitting it was due to workers in Washington state exercising their right to strike, a form of retaliation that was a prima facie violation of the Act.

Similarly, we have seen how companies have used the threat of relocation to extract subsidies from state and local governments. Sears, with its $275 million (nominal) retention package from Illinois, is just the most egregious in recent years. That package alone could support 550 state jobs at $50,000 a year for 10 years (assuming no raises, something pretty common for state workers lately though unlikely to last 10 years). And remember, Sears did this in 1989 as well, when it got $178 million not to move out of state.

More generally, who should win and who should lose from the growth of capital mobility? One possibility is that it would simply speed up the effects of trade. If Mexico had needed to wait for the growth of domestic entrepreneurs, it could not have expanded its exports to the U.S. nearly as rapidly as in the actual situation where U.S. companies could provide the money. In that case, we would simply expect the effect of heightened capital mobility to be the same as the Stolper-Samuelson Theorem.

But this would not explain why European labor appears as opposed to globalization as U.S. unions. Western Europe is labor abundant, so we would expect western European worker to benefit from the expansion of trade. Yet one does not have to look hard at all to see that European unions are not in love with globalization. The right answer now might be that those who are mobile win in the global economy, while those who are immobile lose. While capital is mobile geographically, governments are bound to their location. Workers, even where they have significant legal opportunities to move, as in the European Union, are still restricted in their mobility by their language abilities or lack thereof, and by the common desire to live near their families (another way in which corporations are not people, by the way). And it is not as if European capital can only be invested in the EU.

This is consistent with studies of the effect on home country labor of foreign investment (see Richard Caves' Multinational Enterprise and Economic Analysis): reduced employment because exports are replaced with foreign production, some possible increased employment due to supplying goods and services to foreign subsidiaries, but at best the result is a wash and more likely the net effect is negative.

If this is right, U.S. workers may have the worst of both worlds: they are harmed by expanding trade, and they are harmed by being less mobile than capital. While this does not explain the political changes that have happened in the U.S. since 1970 (though it is certainly relevant), it gives us a pretty good handle on the economic market pressures that the middle class needs to address politically. I will have more to say about these issues in future posts.


  1. Anyone interested in this line of thought might be interested in A Utilitarian Welfare Analysis of Trade Liberalization at

    1. Robert, a very interesting paper. I like your direct attack on the Hicks-Kaldor view of efficiency. A professor of mine once said in class that its predominance in the economics discipline was due to a very deliberate assault on Pareto optimality as the basis of efficiency by the Chicago School. Does this make sense to you?

    2. Good idea for another post Ken.

  2. "...and by the common desire to live near their families (another way in which corporations are not people, by the way)."

    My company set up its factories at certain locations in Asia to be near critical suppliers. It also responded to tax incentives. But it has kept its US R&D facility in the very-expensive Silicon Valley, due I believe to the specialized skills that are needed for this work that are not readily available elsewhere. I imagine this rationale also applies to financial institutions operating on Wall Street or in the City of London. So while corporations are not people, those that are engaged in higher-margin non-commodity businesses may reflect some of the mobility constraints imposed by their human workforces.

  3. This was surely one of the most clear-headed, concise expositions of the problems of globalization I've seen; thank you.

    Does it address the headline question though?

    I would argue that no one can answer that question, because the empirical research needed to write a conclusive answer can never be conducted at a reasonable cost in a reasonable time frame.

    Consider all the costs and benefits we'd have to measure: costs of unemployment (there's surely tens if not hundreds of types of costs here, short-term and long-term), costs of reduced bargaining rights, costs of uncertainty due to capital mobility, etc.; all versus the benefits of cheaper products (another multi-dimensional category), increased employment in cushy service jobs, larger investment opportunity sets, etc.

    We'd then have to make arguments about how each of these affects utility/welfare (i.e. does an increase in employment in SC have a smaller, larger, or equivalent effect on total social welfare than an equal decrease in employment in Washington).

    Of course, we'd have to think about agglomeration and other effects that create non-linear relationships within our massive study.

    So where do we end up? We end up humble. I don't honestly think anyone can tell us whether globalization in aggregate is good or bad for the middle class.

    But we can try to figure out if specific effects are good or bad and I think this article does a great job of covering many of the specific effects we need to look at.

  4. The trade imbalance has been bad for the US middle and working classes, as well as its domestic based manufacture. See:

    The US, for the 21st Century, has played trade patsy to the world, and its people have, and are, paying. Running a trade deficit is bad, bad, bad. If you want more evidence, look at the Euro periphery.

    If you want evidence on how running a surplus is good for an economy, look at China and Germany.