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Wednesday, July 29, 2015

Basics: Is trade zero-sum between workers in different countries? had a long, interesting interview with Senator Bernie Sanders covering a large number of political and economic issues. In this post, I want to focus on just one issue he raised: Whether rising incomes for Chinese workers have to come at the expense of U.S. workers. Here is what Sanders told Vox's Ezra Klein:
I want to see the people in China live in a democratic society with a higher standard of living. I want to see that, but I don't think that has to take place at the expense of the American worker. I don't think decent-paying jobs in this country have got to be lost as companies shut down here and move to China.
What Sanders doesn't mention is that the market, left to itself, will indeed force a tradeoff between U.S. and Chinese workers. We can see this via the Stolper-Samuelson Theorem, which says that increasing trade will raise the real incomes of a country's abundant factors of production and reduce the real incomes of the scarce factors of production. The reason is that abundant factors of production (relative to the rest of the world, of course) will find new markets abroad as trade increases, while scarce factors of production will face increased import competition. Since China is a labor-abundant country and the United States a labor-scarce one, the theorem implies that real wages will rise in China and fall in the United States as they increase trade (all trade, not just with each other). And this effect can be sped up if U.S. companies close factories in the United States and open them in China, just as we have seen happen.

To disable the tradeoff requires political intervention in the market. If you want to preserve gains from trade that are predicted by the theory of comparative advantage, and you want to not worsen income inequality in the United States, you need to find a way, as Ronald Rogowski pointed out, for  the winners to compensate the losers from trade. This isn't easy: As Rogowski also noted, the winners increase their clout in the political system while the losers see their influence decrease (look at the long-declining influence of unions here). As I've discussed before, the increased mobility of capital exacerbates this problem in the U.S., since capital is much more mobile than workers. And so we have seen a steady decrease in the tax burden paid by corporations and the rich, more trade agreements signed, and a constant drumbeat to cut Social Security (despite the coming retirement crisis) and "phase out" Medicare.

What would compensating the losers from trade look like? Most obviously, and most focused, is trade adjustment assistance, which is often criticized as inadequate. Yet it does not really make sense to compensate only those who lose their jobs directly to foreign competition, because those workers then spill into other sectors of the economy, driving down wages as they go. Thus, we need to go beyond trade adjustment assistance.

To raise wages in the economy more generally, we need broader measures. One would be to raise the minimum wage: It pushes up workers' pay, but it also reduces turnover and training costs for employers, and puts money into the hands of people with a high propensity to consume, creating multiple channels to counteract the seemingly self-evident fact that raising something's price means people will buy less of it.

Another broad-spectrum approach to raising wages is to restore the power of unions. As I have pointed out before, the United States has the fifth-lowest union density in the 34-member Organization for Economic Cooperation and Development (OECD). Senator Sanders, in the interview linked above, notes that the increased power of unions in Nevada's gambling industry has enabled house-cleaning staff in the state's casinos to earn "$35,000 or $40,000 a year and have good health-care benefits." Having a National Labor Relations Board that is not in the pocket of industry is critical for us to see this take place.

Third, less targeted still but having the political benefit of universal coverage, an expansion of the social safety net would make it possible for people to simply refuse to take crappy jobs. Yes, this is about bargaining power! It would also encourage entrepreneurship because failure would not mean the loss of one's health insurance, for example. Medicare for all has long been one of Senator Sanders' standard prescriptions, a program that benefits from having far lower overhead costs (it avoids outrageous executive salaries, the need for profit, and does not have to advertise much) than private insurance. We could do a lot worse than considering it -- and we have.

Finally, to pay for these programs, it's necessary to raise taxes on corporations and rich individuals. Thomas Piketty, in his monumental Capital in the Twenty-First Century, suggests that the top marginal income tax rate should be 82% for individuals in the top 1/2% or top 1% of income. He notes that this will not raise much money, in part because it will reduce various lucrative but economically unproductive financial shenanigans. Instead, he thinks a tax of 50-60% on the top 5% of incomes would produce substantial revenue to create what he calls a "social state" for the 21st century. One could go further, of course, by adding a financial transactions tax (I hope to write about this soon) and shutting down tax havens.

To return to our original question, there is no reason that Chinese workers and U.S. workers can't both prosper from trade. But to make it possible in the United States requires a great deal of rule rewriting that will not be achieved overnight.

Cross-posted at Angry Bear.


  1. How about establishing something like a "labor cost equalization tariff"? This tariff would lift the cost of hours of labor content in import items to some desired level of US labor cost.

    The message to the free market would be, you can compete on any terms you like except labor cost.

  2. If the United States is a "labor-scarce" country, then why have millions dropped out of the labor force?

    The winners are CEOs and institutional investors, making profits from stock-buybacks and paying themselves stock option grants). To compensate the losers from trade, they can increase domestic wages and provide more employee benefits (pensions, etc). But instead, these "job creators" engage in mergers & acquisitions when they're not hoarding profits in offshore banks — all while they're paying their board-of-directors multi-million salaries year after year.

    Offshoring jobs overseas (and across our boarders) not only results in THOSE jobs being lost, but any potential new jobs that aren't created from the multiplier effect.

    You can't equate $0.30 a day in Cambodian wages to $7.25 an hour in the U.S. as "foreign competition" -- it's called "labor exploitation".

    How can we raise the minimum wage when voters keep electing Republicans to Congress. If voters vote for the GOP, maybe they deserve lower wages (but in 2009/2010, even the Democratic majority could have raised the minimum wage, but they didn't.)

    How can we restore the power of unions when the Republican Party has been actively trying to kill labor unions to defund the Democratic Party (as though the GOP wants a one party political system in America, as can be seen with their voter suppression laws).

    Trade adjustment assistance IS inadequate, just as unemployment benefits are, because they are only temporary. We will need a permanent guaranteed basic income.

    It is possible for people to simply refuse to take crappy jobs, but then, immigration (and guestworker visas) is used to fill the crappy low-paying jobs, taking the pressure off wage increases.

    "To pay for these programs, it's necessary to raise taxes on corporations and rich individuals" -- But even Democrats won't raise taxes. And corporations are using "inversion" to move from the US to avoid taxes. When that happens, the company that does so should no longer be able to do business in the US again. If they don't want to pay our taxes, they shouldn't benefit from our markets either.

    They want it all --- high wages for the bosses, but low wages with no benefits for their workers; no taxes for themselves; no government regulations, no environmental laws, no safety laws, no workers' rights, etc. --- They have no intentions at all of ever sharing any of the gains they make with anyone (workers, society, government, etc.) unless they are absolutely FORCED to by the governments they do business in and profit from.

    Greed must be regulated.

  3. Hi Bud, you are definitely right that greed must be regulated. Though we aren't talking on the scale which is feasible and desirable, the last two Democratic Presidents both raised taxes And you are certainly right that people need the means by which they can refuse to take bad jobs via better unemployment insurance and social programs generally.

    When I say the United States is labor-scarce, I mean compared to the rest of the world, is has relatively low population density. Even though it is the third most populous country in the world, people are very spread out compared to the rest of the world. If you follow my link on the Stolper-Samuelson Theorem, you will find a fuller discussion there.