James Galbraith on being progressive

James Galbraith discusses trade and wages in The American Prospect. It is best to read the whole article before commenting to make sure I am not leaving something out. I have to run this morning.

Indeed, rather than being spooked by the supposed effect of trade on wages, let’s consider how that relationship works when you take it the other way around. What is the effect of wages on trade? Suppose that instead of building a trade policy to help with wages, we built a wages policy to help with trade. Does that sound far-fetched? It isn’t. If you did that, you would have what economists call the Scandinavian Model.

The Scandinavian countries are egalitarian. They have universal unions, high minimum wages, and a strong welfare state. But they also are highly open. They practice free trade. Business there is free to import, export, and outsource. Business there is free to hire and fire. And yet the Scandinavians enjoy, most of the time, the lowest unemployment rates in Europe.

The secret is in the wages. If you are a business in Sweden or Norway, there is one thing you are not free to do. You are not free to cut your wages. You are not free to compete by going after cut-rate workers, either native or immigrant. You are not free to undercut the union rate. Successful businesses must, therefore, find other ways to compete. They do it by keeping productivity high. This means that advanced industries thrive in Scandinavia, while backward ones die out. (And that progressive businessmen prosper, while reactionaries fade away.) As a result, the economies stay competitive. The tax and welfare systems then make sure that everyone has enough to live on.

We are not Sweden or Norway — we are much larger and will always be much more diverse — but the economic principles are exactly the same. And we have, in fact, applied them in the past. As Dorgan and Brown correctly state in their essay, this is how the American middle class got built in the first place. It was done through unions, laws, regulations and, yes, standards. But the standards weren’t imposed on other people. They were imposed at home, where they can be enforced — and the rest of the world adjusted to what we did here. The problem, in short, is not foreigners and trade. The big problem is simply that unions, laws, regulations, and standards have been undercut by conservative policymakers, right here at home.

In certain industries, with advanced technologies and strong unions (think aircraft, or telecommunications), high wages persist. Yet those sectors remain competitive. This is how the model works — high wages mean that business has no alternative but to stay on its competitive toes. We can, if we choose, spread that model more widely. How? Let’s start with a higher minimum wage, a union-friendly workplace, universal health care, and stricter corporate governance. Let’s pass the Employee Free Choice Act. And let’s have enough new credit and research support to create the new industries that the future — especially the environmental demands of a changing planet — will require.

Will we lose some jobs to trade? Sure. But unlike the Scandinavians, we don’t have to balance our current account. Given the dollar’s global position, we can improve our living standards, our productivity, and our competitive position — and still run a substantial trade deficit. For now.

This is a reality-based populism. Our goal should be shared prosperity through egalitarian growth, based on our own efforts and imagination. Let’s therefore stop scapegoating the Mexicans and the Chinese, and accept that they must have their role, which they will largely determine by their own actions, in the world in which we all live. Let’s also stop talking obsessively about trade agreements with tiny countries that don’t really matter much.

Let’s concentrate, instead, on getting things right for workers right here. Let’s raise wages, create jobs, support unions, deliver services — and especially, let’s cut the inequalities in our structure of pay.

If we do that, one still can’t guarantee that our trade position will come out all right in the end. But based on the economics and the politics, it’s probably our best shot.

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Related: See Jeff Faux’s “Breaking the Consensus (Finally),” and an exchange between Galbraith and Faux on globalization and progressive priorities: “Trade War.”

Update: Here is a link to a back and forth of two economists on ‘Trade War’. The write ups are much more than the little bit quoted here, but I think DolB has the right direction for thinking.