Breaking the Consensus (Finally)

The bipartisan consensus that has integrated Americans into the global economy over the last two decades is clearly in trouble. Polls show a majority of voters skeptical of free trade, and November's election shifted at least 7 Senate and 30 House seats from supporters of current trade policies to outspoken critics.

When Wall Street's Robert Rubin -- who as Bill Clinton's Treasury Secretary guided the policies that exposed U.S. workers to low-wage competition in the 1990's -- met with House Democrats in December, he was greeted with a chorus of complaints about outsourced jobs, depleted local tax bases and shrinking opportunities for young people. Rubin responded that, in the interests of party unity, they ought to drop the subject. They told him he was out of touch.

For two decades, leaders of both political parties have assured members of Congress and the public that de-regulating imports and exports would make the typical American working family richer. It was said to be Economics 101: Americans were better educated and harder-working than other workers and had access to the world's best technology. Therefore, they could easily overcome both the advantages of cheaper wages in poorer countries and the government subsidies for health care and pensions in other advanced economies. Indeed, free trade was said to be "win-win" for workers all over. Americans would go up the wage ladder and workers elsewhere would get jobs on the bottom rungs

When skilled blue-collar jobs started going overseas, policy elites told workers that they -- or their children anyway -- would get better jobs providing services in the new "information economy." Then the call centers, computer programming jobs, and routine technical positions of that very economy left the country too. Soon, accounting, design engineering, and radiology work began to be shipped overseas to places where college graduates could be hired for less than half the U.S. price.

Today, IBM, General Electric, and the other "American" multinational corporations are moving their research and development operations to China, India, and other overseas locations. The United States is now running a trade deficit in high tech. Indeed, the premise that the average American can prosper by thinking up ideas for the rest of the world to produce is bankrupt. A plurality of Americans now believe that the next generation will be worse off. If the nation continues on its current trajectory, they are clearly right.

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Under any circumstances, the changes in information and transportation technology that have allowed corporations to expand production, marketing, and finance across borders would have challenged American living standards and the survival of companies that produce here. But instead of controlling the opening up of the U.S. economy in sync with strategies to maintain our competitiveness and protect real incomes, successive U.S. governments -- proclaiming their faith in the free market -- have traded off the interests of American workers in favor of American corporate investors. Trade agreements permit corporations to produce overseas and sell back in the United States. A strong dollar policy allows investors to buy foreign assets at bargain prices while making U.S. exports expensive and imports cheap. And Washington has led in the creation of policies at the World Trade Organization, the International Monetary Fund, and other global economic institutions that encourage privatization, de-regulation, and worldwide lowering of social safety nets.

As a result, the current form of globalization has undercut the bargaining power of the average American worker, whose wages and benefits are falling further and further behind his or her productivity. It is also a major contributor to domestic social tensions around immigration. The North American Free Trade Agreement (NAFTA), for example, was sold to Americans as a way to reduce illegal Mexican immigration. Instead, NAFTA allowed U.S. agribusiness to flood Mexico with subsidized corn, blowing some 1 -2 million small Mexican farmers off their land. Desperate for work, many came north -- helping to double the rate of illegal immigration from Mexico since NAFTA's enactment.

Defenders respond that globalization has brought us cheaper sneakers and underwear. This is true -- but such benefits are routinely exaggerated. Estimates by the Carnegie Endowment of the value of cheaper import prices as a result of the current “Doha Round” of trade negotiations under the World Trade Organization come to $15 per American. Even the U.S. International Trade Commission thinks the current total per capta costs of import constraints comes to about $50. Fifty bucks is not nothing, but -- as polls suggest -- most Americans think it’s not enough to justify the downward pressure on wages and benefits and the shrinking of future opportunities.

Given this dismal record, one would think it was time to consider changing course. Instead, those who promoted these policies changed the story. It seems that free trade has not failed America's workers; the workers have failed free trade. According to the Washington policy class, America is losing competitiveness because Americans do not take enough science and math, want too many entitlements, and do not save enough to buy the imports they want.

For many Americans, the lack-of-skills story fails a very bitter laugh test. After investing years of their lives and going into deep debt to get more education, millions have found that the labor market's demand for their credentials is virtually stagnant. The Bureau of Labor Statistics projects that by 2014, 29 percent of workers will have a college education, but that only 21 percent of jobs will require one. A recent study by Alan Blinder, a former Federal Reserve Vice-chair and dedicated free-trader, estimates that between 30 and 40 million jobs are now vulnerable to off-shoring. Blinder tells us that success in the global economy comes not through more education, but by taking personal service jobs that can’t be off-shored -- not just manicurists and waiters, he assures us, but brain surgeons too!

As for the lack of savings, if we weren't running huge trade deficits we wouldn't have to finance them. Indeed, one reason that the economy looks as good as it does is precisely because we are borrowing back from China and other trading partners the dollars that we spend on imports. The result is that our collective debt has been rising faster than our income. This is clearly unsustainable. On our present course, the dollar will fall further, interests rates will rise, and real incomes for the majority of workers will take a further hit.

While the country's economic position deteriorates, the discussion in the elite editorial pages remains stuck in the primitive language of "free trade versus protectionism." But globalization is much more than simply an expanded exchange of goods and services among sovereign nations. It is, rather, a process of global economic integration. As Renato Ruggiero, the first director-general of the World Trade Organization, observed back in 1995: "We are no longer writing the rules of interaction among separate national economies … We are writing the constitution of a single global economy."

Unfortunately, this evolving constitution (which includes the rules and policies of international agencies like the IMF and the World Bank as well as trade agreements) protects the interests of one citizen -- the the global corporate investor roaming the world in search of cheap labor. Most Americans have rejected the radical claim that the elimination of worker, consumer, and environmental protections in the U.S. domestic economy would be justified by the promise of an increase in overall economic growth. Yet the argument for a global economy without a social contract is essentially just that.

Globalization has provided a golden opportunity for American corporations' CEOs and investors to escape the constraints on robber baron capitalism imposed by the New Deal. As they can get their workers, their financing, their components and finished products, and increasingly their customers in other countries, a prosperous America is less important to their future plans. For years, CEOs of large corporations have been declaring quite openly that they are global, not American companies.. Last year the CEO of Cisco Systems -- poster company for the information economy -- went a step further: "What we are trying to do is outline an entire strategy of becoming a Chinese company."

Reflecting this reality, outsourcing strategy is a major subject in the nation's business schools. Jeffrey Garten, a major architect of U.S. globalization policies and now dean of Yale Business School, writes in Business Week that America "must adapt to the reality that U.S. multinationalists' goals may no longer dovetail with the national interest."

But America has not so adapted. Washington's economic policies, almost completely dominated bv business since the election of 1980, continue to be based on the notion that what is good for Cisco Systems is good for America. Our country's path to global economic integration has been routed through a series of narrow trade deals, negotiated by officials whose careers are nurtured by a cozy corporate culture that takes care of its own. Carla Hills, who ran the cabinet-rank Office of the U.S. Trade Representative for George H.W. Bush, and Mickey Kantor and Charlene Barshefsky, who ran it for Bill Clinton, now give high-priced trade advice to global corporations. Robert Zoellick, who used to run it for George W. Bush, now works for Goldman-Sachs. And so it goes.

Confusion between multinational and American interests leads even those searching for solutions to policy responses that are perverse. For example, increased government research and development is now supported on both sides of the aisle in Congress. But the universities and high tech firms who will receive such subsidies are partners with multinationals and research centers in other nations, and see themselves as "global universities." Thus, the innovative products and processes that they develop will surely be made overseas. Downsized Americans, in other words, will be taxed to create the innovations that foster better jobs in other economies.

It is time for a comprehensive progressive strategy to deal with global economic integration, one that is commensurate to the scope of the threat that the current trajectory poses to living standards -- and perhaps to domestic political stability. Ultimately, this will require a political deal with that part of the U.S. business community that still sees its future as tied to the health of the American economy; this includes those who would invest in our industrial base were the global playing field more even.

Congressman Barney Frank, now chair of the House Banking Committee, has already proposed a political bargain -- Democrats would support new trade agreements, in exchange for business's and Republicans' support of enforceable labor and environmental standards, both at home a abroad.

Frank's instinct is right, but his proposal is premature. Democrats eager to get on the right side of business tend to accept less than half a loaf in these bargains. To come to the bargaining table as an equal, they must first demonstrate that they can deny multinational corporations what they want -- and that they have a policy vision of their own.

For starters, they must demand a stop to the bleeding. Under present conditions, the more trade expands, the larger the trade deficits grow. The promiscuous promotion of more trade agreements simply makes our competitiveness problem worse and drives us further into debt. Congress should therefore immediately impose a strategic pause on all trade negotiations, and postpone approval of agreements not yet signed, until we have a credible program, agreed to by Congress and the president, that does three things: reduces the current account deficit at least to the point at which it is not rising faster than our income -- roughly about 2 percent of GDP; improves American competitiveness; and renews the country's social contract and safety net.

The political feasibility of such an abrupt shift is no longer out of the question. The chairs of the committees responsible for trade (House Ways and Means and Senate Finance) are unlikely to agree to it. But at least one major presidential candidate -- Hillary Clinton , no less -- has suggested a “time out” on trade deals. On a direct vote, there would probably be a majority (including some Republicans) in the House today. In the Senate, all of the new Democrats have critized our trade policies and several -- Sherrod Brown, Jim Webb, Bernie Sanders -- have very developed and strong opinions.

After halting further damage, the next and more complex step is to design a new more comprehensive plan for coping with global integration. Herewith, some suggestions:

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Three actons should be taken regarding trade policy itself. First, the president's authority to put negotiated trade deals on a congressional "fast-track" expires at the end of June. Congress should refuse to re-authorize this privilege unless any new agreements for which the president uses fast-track authority contain provisions for enforceable labor rights and environmental standards, protect against trading partners manipulating their currencies to gain trade advantages, and allow government, at the state and federal levels, to favor domestic producers for purposes of economic development.

Secondly, imports made under conditions that violate basic worker rights -- including the rights to organize, to be free of physical abuse and discrimination, and to have a safe workplace -- should be prohibited from entering the United States. The principle of regulating imports according to how they are made has already been established: WTO trade rules have made products that violate corporate patents and copyrights, as well as items made from certain types of animal skin, illegal. Outlawing products made by sacrificing human beings should be no less of a moral or political priority.

Finally, the U.S. government should organize a soft-landing for the dollar against the currencies of its major competitors, an approach similar to then-Treasury Secretary James Baker's 1985 Plaza Accord. Although rebalancing the U.S. current account is in the long-term interest of the rest of world, doing so this time around will be harder. Europe and Asia no longer need the United States to protect them from the Soviet Union, and relative to the economy our trade deficit is more than twice as large now as it was in 1985. Moreover, George Bush's unpopular policies certainly have made bailing out America a harder sell. To gain bargaining leverage, therefore, the United States should be prepared to restrict imports through temporary across-the-board tariffs or the auctioning off of licenses to bring in a fixed amount -- a proposal that Senators Byron Dorgan and Russ Feingold introduced last year.

Beyond trade, various major domestic policy reforms are required to meet the task of integrating into the global economy while bolstering shared prosperity at home. Most basically, the United States cannot maintain its living standards in a global economy without a healthy industrial base. This will require increased public investments in infrastructure, education and training, and research and development -- but all geared toward ensuring that new products will be produced in the United States. An expansion of state and local technical assistance to manufacturing and the elimination of obsolete tax incentives to invest overseas should also be part of the package.

On the energy front, we need a serious government-led program to reduce our dependence on foreign oil, on the scale of our great public-private enterprises of the past that produced railroads, highways, rural electrification, jet engines, and computers. A combination of public investment, tight conservation regulation, and a planned gradual rise in the price of energy could bring forth the private investment in alternative systems needed to create millions of new jobs while diminishing the threat to both economic and geopolitical security.

The restoration of bargaining power, meanwhile, remains a priority. In a democratic society, there is no substitute for trade unions -- both in providing a voice at work and in providing some balance to the natural political advantages of the investor class in a globalizing market. Roughly half of American workers say they would join a labor union if they could. Yet, because of labor laws that have erected obstacles to collective bargaining, only 13 percent are union members. Reforming these obsolete laws is essential for reversing the inequality that globalization is generating.

Beyond labor law reform lies the need to lift the burdens of health-care and pensions off of businesses. When the United States was a largely self-contained economy, having private employers serve as the basis of crucial health and pension systems might have been justified. But today, when governments of other advanced nations have taken over much of the costs from their domestic producers, U.S.-made goods and services operate at a disadvantage. Universal health care and a new, publicly organized and portable pension system need to be part of any successful globalization strategy.

Even given such reforms and under the best of circumstances, however, economic integration will inevitably speed up capitalism's process of creative destruction -- requiring people to adapt to more rapidly shifting market forces. The advanced nations that are the most successful have developed effective systems of re-training and income maintenance that fulfill the promise of moving workers up the job ladder. Denmark, for example, spends some four percent of its GDP on joint union-management training programs to keep its workforce competitive. The U.S. equivalent in training and adjustment assistence would total at least ten times the amount (roughly $50 billion) that the country is currently spending on all forms of worker adjustment.

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But of course, in a global economy, no workplace is an island. Concern for workers beyond American borders is not just a humanitarian issue -- it is an essential element in maintaining U.S. living standards. Yet policies promoted by successive U.S. governments have generated a widening gap between what workers produce and what they earn in virtually every nation. Whether at the WTO, the IMF or the World Bank, America representatives should now be using their influence to establish effective social protections in the rules and policies that make up the global economic "constitution."

In that regard, we should begin here in our own neighborhood by proposing that NAFTA be replaced with an agreement that gives workers and the environment the same attention and protections the existing deal has given to corporate investors.

Moving globalization policy out from its present narrow trade-deal culture will require some institutional changes. Each chamber of Congress should establish a Select Committee on Globalization, to include members not only from the Ways and Means and Finance Committees, but also from the committees dealing with commerce and energy, education, labor law, transportation, telecommunications, foreign affairs, armed services, and other relevant areas. The purposes would be to connect the dots of economic integration among the various committees.

In the executive branch, meanwhile, the Office of the U.S. Trade Representative should be relieved of its cabinet rank. USTR should be defined as an instrument for negotiating trade objectives set by policy-makers. A new department of industry and trade should be formed out of the USTR and Commerce Department, and its mandate should be the support of job creation in the United States.

The policy agenda described above cannot of course be implemented until the current bankrupt administration is out of office. But Congress can begin building the framework now. It can implement a strategic pause, put conditions on fast track, revise R&D guidelines, support new energy initiatives, and start putting the national social contract back together by allowing workers the freedom to join a union. And, through hearings and debate, it can spark a long overdue national discussion on just whose interests will define America's role in the global economy.

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Related: See Jeff Faux's "Why Populists Need to Re-think Trade," and an exchange between Galbraith and Faux on globalization and progressive priorities: "Trade War."

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