Is trade zero-sum between workers in different countries?
Vox.com 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 from Middle Class Political Economist.
Please look at the ideas and proposals from the Coalition for a Prosper us America.com and Tradereform .org I see a great opportunity for America turn its economy around with new livable wage job growth through better-new and enlightened trade policies. !. we need to enact asap the variable rate VAT on all Imports especially from China until a better level of balance is achieved with that trade partner. It is called the Balanced Trade Agenda-Act of 2015 but You and I know that nothing will happen until after Trump Becomes president. Along with this we also need tax reforms of 0 corporate tax and the halt of merchantilism with China’s currency manipulation. We also need to end all forms of government corruption ,waste and abuses called “corporatocracy”. This looting of too big ,self serving government wagging the dog serves only the greedy 1% and changes nothing…Summary: The only way for the 0 corporate tax to work is if you have the variable rate import tax in place working together at the same time. This is what will change and turn our economy around for the benefit of all and for America to be great once again. I hope Trump knows and understands this as we know he is not afraid to say it…THX, IMHO, WPR.
Lester Thurow laid it all out in his book “The Zero Sum Society” back in 1980. Globalization meant that countries with relatively high wages (the U.S., Western Europe) would see a decline in wages while countries with relatively low wages (Asia) would see a rise. Countries with relatively low return on capital (the U.S., Western Europe) would see a rise in return on capital, while countries with relatively high returns on capital (Guatemala, Brazil) would see them decline. Exactly what we see today. The solution for the U.S. is for the rising returns on capital to be used to benefit the polity rather than left in the hands of the few. The capitalists can spend their profits on the public good or they can see them taxed away.
(edited because originally directed at wrong commenter – sorry).
William, Trump is a know-nothing high end real estate investor. He has made some money building golf courses and high end condos and a lot of money promoting casino and hotel projects to which he attaches his name, then sells off to unsuspecting investors leaving himself with little to no personal liability when the Trump branded enterprise ultimately goes to bankruptcy. Which is why he claims that despite four corporate bankruptcies of Trump named companies that he has never personally gone bankrupt. Because the guy operates on the “There is a sucker born every minute” principle of making money.
What evidence do you have, besides his comically inflated balance sheet, that Trump has any skills relevant to running the U.S. government or any understanding of anything but his insatiable need to feed his ego?
This is a serious question. You come here to promote a blowhard on the simple and admitted basis that “he is not afraid to say it”. Yeah that and $45 might buy you a cocktail at a Trump Hotel.
Trump is a liar, a braggart and a moron. Can you supply any evidence to the contrary?
We have been conducting an experiment in the real world and in real time. The results are in. Shutting down factories in the US and moving that production to Mexico and southeast Asia has negatively impacted the former employees of those US factories and those whose livelihood depended on business from those former factory employees. The effects have rippled across the local areas, the states and the country.
To make matters worse, instead of using capital for the production of goods which Americans needed, it has been used for speculating in commodities or the stock markets. From 1985 to 2008, the FED kept lowering interest rates in attempting to keep growth in GDP up. Bubbles, small and large have been created. None of them benefitted the general public but they all carried some price to them.
The overall result is that wages have not kept up with the real cost of living.
Households resorted to debt and now Total Household Debt is at $11.85Trillion. (It was $4.54Trillion in 1999.)
The labor participation rate is down to about what it was in the late 1970s. It had risen from the late 1970s as additional income earners were needed to fund family expenses. But after the economic downturn in 2008, there were no longer enough jobs for those potential workers. Only the housing and debt bubbles had allowed the higher labor participation rate to continue as long as it did.
The average age of light vehicles on the road has been rising since 2002 and is now 11.5 years. The average length of ownership of new vehicles has gone from about 52 months in 2005 to about 78 months in 2015. I drove a garaged 1985 model for 15 years before I gave it to a family member. It was never necessary to replace vehicles in less than 60 months, it was a luxury. A luxury which more and more Americans can no longer afford.
Apparently the vast majority of Chinese workers have enjoyed only a minimal improvement in their lot as the rich got very rich. To make matters even worse, the Chinese government has used the profits from the export trade to finance a modernize a larger military which they use to threaten their neighbors and make outrageous territorial claims in the east and south China Seas.
And we are about to have a secret trade treaty foisted upon us, that by all accounts serves mostly to protect the intellectual property of corporations who have only the slightest practical allegiance to this country. And with that protection process, the American government will be subjected to the whims of private judges. If US corporations want to protect their intellectual property rights, let them keep their production in the US and ask the US government to bar the import of infringing products. Otherwise THEY will have to take their lumps, not the rest of us.
Global Free Trade has shown itself to be a tar baby. The gift that keeps on giving. Like Communism, it always depended on impractical assumptions.
well, i suspect all the “economics bases” arguments here are true enough. but the proposals seem a little rube-goldberg to me, and “tax the rich”, while a good idea up to a point, is a pretty brain dead approach to both politics and to a meaningful improvement in the condition of the working class. people need meaning as well as money in their lives.
the united states taxed imports to protect infant industry on its way to becoming a world power. this tariffs did not seem to hurt the British economy either. but tariffs became a bad word following smoot-hawley. it seems impossible for the brilliant people to understand that we are not in smoot-hawley days or conditions and a properly designed tariff system would protect local industry… not in the face of “comparative advantage” but because there are long term consequences to “comparative advantage” that are NOT to anyone’s advantage. Meanwhile “free trade agreements” seem designed to hand over the sovereignty of “the people” to the world corporations.
I am glad enough to see the Chinese people getting a higher standard of living… if that’s what it is… and I expect the American people are going to have to learn to accept a lower standard of living.. as measured by money
but I frankly don’t see any of the “economics based” ideas preventing a standard of living that is not only poorer in money terms but debased in quality of human life.
Thank you. It seems plain to me that the degradation of the minimum wage (through inflation), the loss of labor union power, and the tax cuts for the rich have coincided with the rise of economic inequality in the USA. I can also see how economic inequality is bad for a country’s economic health, via Keynesian mechanisms. So I like the general policy prescription.
When I started working at the GE plant in Schenectady, NY in 1968, it had 28,000 employees, mostly factory workers. When I left in 2004, Welch had reduced it to about 4000 employees (and closed five other turbine plants entirely). Meanwhile, Welch’s salary and benefits and those of other high executives had increased from about $1M per year to over $200M. I believe the country as a whole was better off when we had those 28,000 employees making the best steam turbines in the world (based on Power Magazine’s reliability and efficiency statistics). Many of those factory employees made more than I did as in engineer, during my first 15 years, due to massive amounts of overtime, but I did not begrudge them for that. Thanks to their union, I had good health insurance, a fixed-benefit vested pension, and another five days of paid vacation for every five years of employment, among other things. Try to get that as a new employee at GE today – they’ll laugh at you.
Coberly, I am not quite sure what you are proposing. Raising tariffs would improve the distribution of income in the U.S., but I doubt that it is politically more feasible than raising taxes. Raising taxes has been done in both the Clinton and Obama administrations, but we don’t seem to have raised tariffs outside of a few specific trade disputes.
Why should the vast majority of Americans accept a lower standard of living when productivity keeps growing and growing?
Bruce and Coberly with all due respect I read your comments often and agree with most of your views but if you think that a “social state’ candidate will solve any problems economically you are dead wrong… Evidence to the contrary is the fact that if Ross Perot had won instead of Clinton we would not be in the mess we are in today. so we don’t want to force trump to run as a 3rd party candidate or you will get more Clinton social state agenda and nothing will change…Trump knows about being a leader, money, budgets, corruption, beltway politics, intimidation, fairness, respect, trust, integrity, character, ect. ect. he is not trapped inside the box of political correctness thinking. or voo doo economic theory thinking… Perhaps you should take a closer look at the globalization of power, Joseph Steggelitz, Alan Nassar.org , Joe Nye, Martin Ford,Nomi Prins ect. ect….Information is abundant, wisdom is scarce. Corporations are not people and money is not speech. Transparency begets trust and real stupidity beats artificial intelligence every time. So we have the best government money can buy when the truth becomes whatever confirms your fears. “If you define yourself by your circumstances instead of your actions, then you will at times be defined by your suffering”. The New Testament… Pragmatist don’t do things. They explain how things cannot be done . Trump will be a doer, there is no doubt in my mind. “Truth never damages a cause that is just”. Mohandra Gandi
Perot was also a moron. If you listened to his actual proposals it was to gather a committee of wise men who would roll up their sleeves and look under the hood of the economic car and figure out a bi-partisan solution. Which is to say it wasn’t really much of a proposal at all.
You might counter with “Hey Flat Tax” but that was also short of details and making the numbers run would have meant applying his version of sales tax to such things as VA health care.
People who think that Perot would have been the solution are a big part of the problem here.
surely there is a great gulf affixed.
you did not attend to “as measured by money.”
we are producing more and more of the stuff that poisons our lives.
it may be that in terms of fairly sharing the worlds resources we may need to live with less while other people have a chance to live with more.
I would like to think we can find ways to have a genuinely higher standard of living without poisoning ourselves.
good lord. where did you get the idea i wanted a “social state.” all my friends hate me because i say i don’t. but that doesn’t mean i want unwashed “capitalism” (it’s not really capitalism, its rule by the money interests.)
and Thomas… I am not yet at the point where i am examining the political popularity of my ideas. i just said that prfee trade was driving us into the rule of the money interests. and that we are no longer in the days of Smoot-Hawley. I believe I even pointed out that the bright people cannot understand that.
Bruce Webb wrote: “Trump is a liar, a braggart and a moron.”
The problem is that the bar for presidential candidates has been set very low lately.
Initially his agenda was illegal immigration but now he seems to have broadened that to include foreign trade.
He is polling at double the rating of next lower candidate even after his little tiff with Senator McCain.
Apparently what he says is so popular that the polled will forgive a misstep.
The electorate is angry with the existing state of things and they are tired of politicians defending the status quo.
It is still very early, he has plenty of time to blowup his candidacy.
Coberly, there is no doubt that we produce lots of poisonous stuff. But my point is that there is no need for the U.S. middle class to live on less in monetary terms or in well-being terms.
I completely agree that “free trade” is dominated by monied interests. That is to be especially expected in the United States, since our tariffs are so low. That’s why “trade agreements” now are mostly about rules for investment, intellectual property, and regulation, and have very little to do with actual trade.
I think I understand your point and agree with it.
I was making a different point.
Bruce Webb wrote: “Perot was also a moron.”
Well, how about the giant sucking sound if NAFTA was passed.
Or his comment “”We got into trickle-down economics and it didn’t trickle.”
“His fifty-page proposal included cuts in domestic spending, investment in education, communication and transportation programs, an increase in income taxes for the wealthy, and an increase in the gasoline tax.”
The increases in taxes for the wealthy and an increase in the gasoline tax both look like good ideas today.
He seems to have had a very keen eye for what was wrong and what would only make matters worse.
I don’t see that last quote in the Wiki article. But I’ll grant the point while noting that he also advocated for tax breaks on capital. Which is typical for a lot of “tax reform” policy – it tends to hit the middle to upper middle class while giving the investor class a pass.
Maybe the “Leontief paradox”will explain it better? The US (one of the most capital-abundant countries in the world) exports labor-intensive commodities and imports capital-intensive commodities. Or the Heckscher–Ohlin theorem explains it in a different way. If labor is separated into two distinct factors; skilled labor and unskilled labor, the Heckscher–Ohlin theorem is more accurate. The U.S. tends to export skilled-labor-intensive goods and tends to import unskilled-labor-intensive goods.
It was easier to take this from Wiki than explain it in mega words.
The question remains; Capital has yet to pay the taxes which supports the infrastructure for which Labor pays taxes. As companies move out, there is a gaping hole left in the revenue generated.
William Ryan : “…Evidence to the contrary is the fact that if Ross Perot had won instead of Clinton we would not be in the mess we are in today. ”
You must be an economist : ” assume a can opener “.
That said , I voted for Perot , and similarly for Nader , because I was desperate for any alternative to the corrupt duopoly that’s had its boots on our necks for the last 3+ decades. I suspected that Perot had a few bats in his belfry , but I was certain “Slick Willie” would be a disaster , and he was.”Superslick Hillary” will be as bad , or worse. Though I didn’t vote for him , I had high hopes for Obama. Silly me.
But Trump ? Seriously ?
Putting some bats in his belfry would be an upgrade.
The actual quote was “The fifty-page proposal included cuts in domestic spending, investment in education, communication and transportation programs, an increase in income taxes for the wealthy, and an increase in the gasoline tax.”
I changed ‘The’ to ‘His’. I should not have enclosed that in quotes.
I agree with you on lower taxes for capital gains.
Marko wrote: “But Trump ? Seriously ?”
The truth is stranger than fiction.
I wrote him off as soon as he announced. Thus my fascination with his approval ratings.
This is not name recognition. He is tapping into something.
Voter anger over illegal immigration and foreign trade is the obvious reason.
But it could be the novelty of a politician actually taking a position with no half measures.
Very very strange.
Pshaw. Illegal immigration in this country can be ended in one day.
The day a CEO is held criminally liable for hiring one.
people will never agree to consume less while they can see an opportunity to consume more.
but people in very poor countries, and even in this country a hundred and fifty years ago when the “standard of living” was much lower were able to find ways to be happy.
not counting those trapped in urban slums, factory jobs, and victims of financial forces.
point here is that if global warming, or the legitimate aspirations of the third world (is china on third?), result in a “lower standard of living” in America, there would be no need to expect a lower standard of happiness. and normal human creativity would find ways to make it exciting and “progressive,” and even increase the GDP which after all is only the “money” value we put on the things we consume, not the “earth cost” of what we do “economically”.
i do not think desperate schemes to “tax the rich,” or foment pfree trade, are necessary or wise.
i don’t mind taxing the rich or encouraging free trade… when it is not merely a scheme by politicians of one stripe or the other to empower themselves by playing on the fears, greed, and natural hatreds of the people.
Amateur: “Illegal immigration in this country can be ended in one day. The day a CEO is held criminally liable for hiring one.”
That would be nice.