Spheres of Affluence

A short while ago, the end of the Cold War seemed to signal the advent of a borderless world economy. The collapse of Soviet communism suggested not only the superiority of a market economy over a command economy but also the superiority of the particular kind of market economy identified with Anglo-American liberal capitalism. Privatization and free trade agreements would be the order of the day. Whether radically free market or mildly social democratic, economic unions like the European Community and the North American Free Trade Agreement would ultimately converge into a single world market characterized by free movement of goods, capital, and labor. This new world order would be sponsored and policed by the United States, the sole remaining superpower, acting either alone or as the chief agent of a revitalized United Nations.

Four years, several armed conflicts, and a global recession later, this perspective looks increasingly dated. The European project has stalled. NAFTA passed only over the bitter opposition of a majority of Democrats in Congress. Commitment to idealized free trade remains strong in the foreign policy and economic establishments, but popular discontent with unfettered multinational capitalism is growing as that system's failings become more apparent.

And why not? In a low-growth, high-unemployment economy, popular concern about increasing wage competition with the workers of the South--whether in the form of immigrants in advanced countries, or as workers in overseas production facilities--cannot be dismissed simply as a resurgence of misguided nativism or of protectionist fallacies. When it comes to the grim new world economic order, the anxieties of growing numbers of workers in the North may be a better guide than the academic dogmas that now prevail over the intellectual debate.


A Virtuous Circle?

The debate about global laissez-faire confounds the usual ideological divide, as proponents of laissez-faire trade policy include both conservative libertarians and free trade liberals. On the conservative side, today's libertarianism is far more dogmatic and devoid of qualification than the liberalism of Adam Smith or J.S. Mill. Like Marxism, libertarianism is a utopian worldview based on an economic-determinist vision of history. Unlike Marxism, libertarianism is highly specific in its predictions about the transition to the utopian world order, rendering it vulnerable to fact.

In contemporary libertarianism, particularly in the crude forms in which it is purveyed by journalists, think-tank ideologues, and politicians, a number of specific propositions are woven together into a complex whole. What might be called the virtuous circle of libertarianism works like this: Free trade promotes higher economic growth in all countries. In developing countries, trade promotes industrialization. Trade-based industrial development creates a consumerist middle class, which agitates for democracy instead of authoritarianism. At the same time, economic growth reduces the incentives for workers from the South to try to migrate, legally or illegally, to the countries of the North. Furthermore, rising living standards automatically lead to reductions in fertility, solving the problem of overpopulation.

In the industrial democracies, the effects of freer global trade are supposedly just as automatic and just as benign. Although "sunset" industries are lost to developing countries, workers will move into "sunrise" industries, such as service professions demanding higher skills and paying higher wages. Lower labor costs in the South will also help workers in the North, as cheaper imports replace more expensive domestic goods (whose prices reflect First World labor costs). Even defense costs can go down, because in a world united by economic interdependence, war will become less likely. Thanks to the virtuous circle of libertarianism, free trade, if practiced on a global scale, will more or less automatically and without human intervention enrich the North, industrialize the South, stabilize world population, end mass migration, and bring about universal or near-universal liberal democracy and world peace.

When a system of thought is dependent on many subordinate, independent claims, to discredit any one of them is to threaten to undo the entire design. Unfortunately for the proponents of this ideology, nearly every one of its fundamental assertions is questionable, if not demonstrably false.

Take the most basic assertion of libertarianism: trade drives economic growth. The historical record suggests the opposite. In the late nineteenth century United States, increased protectionism drove extremely rapid industrialization. The annual rate of increase in per capita gross national product was 1.8 percent between 1850 and 1870; 2.1 percent between 1870 and 1890; and 2 percent between 1890 and 1910. Beginning in the Civil War, the United States, dominated by Northern manufacturers, imposed high tariffs on imported manufactured goods, averaging 45 percent from 1866 to 1883. Far from falling behind, as libertarian theory would predict, the United States became the world's largest and most advanced manufacturing economy. What drives long-term productivity growth and prosperity is not increasing trade in a technologically static world but the substitution of technology for labor. Laissez-faire trade can retard this process.


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It is often claimed that American economic nationalism was discredited by the role of American tariffs in causing or worsening the Great Depression. In reality, the Smoot-Hawley Tariff Act of 1930, which affected less than 1 percent of world trade, was a response to a worldwide collapse already under way; its negative effects were minor at best. The problem was not trade barriers but the collapse of demand, illustrated by the fact that duty-free imports into the United States dropped at almost the same rate as dutiable imports between 1930 and 1932.

The American example is not unique. All of the major industrial countries today, including Germany, Japan, and the Little Tigers (South Korea, Taiwan, Singapore, and Hong Kong), industrialized by following import-substitution policies, protecting their large home markets from being flooded with cheaper, superior products from the mature industrial countries of their day. Libertarians are unable to point to a single leading industrial country that industrialized by following laissez-faire policies of the kind that they insist today's ex-communist and developing countries follow.

In the 1980s, the U.S. government spent several hundred million dollars encouraging the relocation of U.S. manufacturing to 204 low-wage Caribbean export processing zones. While lowering wages and destroying jobs in the U.S. electronics and apparel industries, this offshore production failed to kindle Japanese-style development; wages and living standards in the Caribbean basin declined in the 1980s, as did overall exports from the region. In 1991 the U.S. International Trade Commission concluded that expatriation of U.S. manufacturing to low-wage Caribbean countries "has not fueled economic growth and development in the region."

The fostering of multinational investment can play an important role in development but only where it is a subordinate element of a government-orchestrated economic strategy. In Singapore, for example, the government has combined hospitality to multinational corporations with an ambitious policy of infrastructure development, technology policy, and state capitalism. The government owns a variety of enterprises from Singapore Airlines to shipyards, banks, and factories, and has taxed salaries to create a huge pool of investment capital, the Central Provident Fund. As this example suggests, the orthodoxy of neoclassical economists in the U.S. government, academy, and multinational institutions like the International Monetary Fund and the World Bank, it appears, is increasingly out of touch with reality. History has evidently refuted Adam Smith, as well as Karl Marx, while vindicating the developmental economic nationalism of Alexander Hamilton and Friedrich List.

The libertarian promise that more trade means better wages is being undermined by the growing ability of multinational corporations to move production to low-wage countries and to use the threat of expatriation to bid down wages and social benefits at home. U.S. multinationals lead the world in the race to shift production to low-wage countries. Even some Japanese corporations are following U.S. multinationals to the South for export not merely to third countries but to the home market; for example, Nissan's automobile factory in Aguascalientes, Mexico, will make cars for Japan as well as Mexico and the rest of the Western Hemisphere. The end of the Cold War, freeing defense-industrial complexes for commercial production, and the privatization of state industries in Southern countries, dramatically increasing the number of highly skilled but poorly paid workers competing with their counterparts in the industrial North, has exacerbated these problems.

The libertarian conventional wisdom insists that these great geopolitical and geo-economic changes are unrelated to the economic problems of the industrial democracies. The slow growth and the lack of new, well-paid jobs in the industrial world supposedly result from a failure of national governments, alone or in concert, to pursue proper macroeconomic policies. All would be well if the Unites States reduced its deficit, if Germany lowered its interest rates, or if Japan liberalized its consumer market or revalued the yen. All should wait patiently for the end of the latest cycle of recession. Those who claimed to see a connection between Northern troubles and immigration or industrial expatriation were guilty of appealing to chauvinist and racist sentiments, in order to make immigrants, or developing countries, scapegoats for public policy problems of the North's own making.

This view, however, is becoming harder to credit. Since 1989, industrial production has languished at a mere 0.1 percent yearly growth rate in the advanced industrial nations, even as it has grown at a 4.6 percent annual rate in the developing world. Since 1989, more than 1.6 million manufacturing jobs in the United States have been lost. The number of jobs created from March 1991 to July 1993 is far below the average of other postwar recoveries, leading to talk of a "jobless recovery." Among jobs the recovery has generated, more than a quarter have been part-time jobs created by temporary employment agencies. The effects of these trends on wages are predictable. Between 1991 and 1993, hourly wages of service-sector workers dropped 0.3 percent, while hourly compensation of blue-collar workers dropped 3 percent. What is more, this downturn hit white-collar workers and managers more severely than past recessions. While many of these jobs have been eliminated by automation and corporate downsizing, the expatriation of industry has made the trends worse.


Free Trade Plus

A number of liberal scholars and policymakers, including Labor Secretary Robert Reich and New Jersey Senator Bill Bradley, have recognized the weakness of pure libertarian theory. To complement it, they have articulated a conception of political economy that would grant a limited role to the visible hand of government, without questioning the basic faith in ever-widening trade liberalization. Clinton has often endorsed this theme, emphasizing that if people are to accept necessary change they need a measure of basic economic security. Presumably the markets will not provide that security--job retraining, lifetime learning, workplace empowerment, higher value-added jobs.

Call this school of thought "free trade plus." The United States will benefit from global free trade, these liberals argue, as long as it makes the necessary investments in human capital and domestic infrastructure. The leading industrial democracies should concentrate on high-wage, high-skill sunrise industries and allow low-wage, low-skill sunset industries to migrate to the South.

Not only should the government retrain workers displaced by trade competition for better-paying jobs, but it should also work on enhancing the skills of the entire American work force. While ever more of the iceberg of a multinational enterprise is located in low-wage countries in the South (beneath the metaphorical water line), the actual size of the high-value-added sector (the tip of the iceberg in the North) expands as a proportion of the Northern work force.

AT&T's experience would seem to provide an example of the iceberg strategy in practice. Between 1984 and 1992, the company eliminated 21,000 blue-collar jobs in the United States while creating 12,000 new low-wage factory jobs in other countries. At the same time, it increased its white-collar work force in the U.S. by 8,000. "I need more engineers, designers, and high-skilled technicians, but fewer people who make circuit boards," claims William J. Warwick, president of AT&T's microelectronics manufacturing division. Such comments give a certain plausibility to Reich's theory that we need more retraining, not protection. "Even if you put a wall around the country," Reich, arguing for NAFTA, recently told the House Ways and Means Committee, "those low-wage, low-skilled jobs would still be disappearing because of automation." The Clinton administration proposes--in principle--to cushion the impact of NAFTA through reorganized federal retraining programs and fuller funding of labor adjustment programs, though the money is not yet forthcoming.

Notwithstanding the implausibility of additional public spending on labor subsidies, the theory suffers from more fundamental flaws. For example, its proponents mistakenly tend to treat entire industries as more or less primitive or advanced. Experience shows that any industry can be "advanced," with the right kind of technology-intensive development. For example, U.S. agriculture is the most productive in the world not so much because of superior natural advantages as of intensive application of advanced technology. Proper investment might turn the textile or shoewear industries, usually dismissed as primitive "sunset industries," into high-tech, high-wage, high-skill economic sectors. However, the selection of industries for this kind of intensive technology strategy precisely violates the dogma of free trade.

Another problem with the free-trade-plus theory is that while both expatriation and automation may destroy similar jobs, they do not necessarily produce similar consequences for the country. The entire nation arguably benefits when employers pursue higher productivity through investing in new technologies while still manufacturing in the United States; the same cannot be said when employers choose to take advantage of low-wage labor abroad using existing production technologies. To the extent that the iceberg strategy encourages corporations to treat low wages in Southern countries as a quasi-natural endowment to be exploited, it may reduce the incentives to substitute capital and technology for labor, at great cost to technological advance. (The windmill, known in the ancient world, was not exploited because of the abundance of slave labor.)

Furthermore, it is far from clear that the high-skill jobs for which displaced workers will be retrained will not vanish along with the low-skill jobs. A growing number of high-skill, white-collar jobs in the United States are now endangered by the combination of global corporate strategy with high levels of competence in developing countries. Metropolitan Life employs 150 insurance examiners in Ireland to examine claims from around the world, at 70 percent of the costs of American examiners. Software research and design is now being done by local computer specialists in India by Texas Instruments; in Russia by Sun Microsystems; and in Poland by CrossComm, a Massachusetts-based company. The 34 Polish software developers who have designed CrossComm's most recent and advanced software from offices at the University of Gdansk make between $7,000 and $18,000 a year.

If even software design can be done better elsewhere, what high-wage, high-skill jobs are incapable of being exported? One answer is professional jobs. Since 1979, the real wages of high school dropouts have declined by 20 percent, while the incomes of workers with more than four years of college have risen by 8 percent, according to the Economic Policy Institute. Edward E. Leamer of the University of California at Los Angeles has tried to calculate the effect of the growth of international trade on U.S. wages from 1972 to 1985. According to his model, increasing trade raised the income of professionals by 9 percent ($33 billion) and reduced the income of nonprofessionals by 3 percent ($46 billion). Lest this seem like an even trade, it should be remembered that nonprofessionals enormously outnumber professionals in the United States (less than 10 percent of the American male work force has completed a graduate or professional education).

There are two ways to interpret the better performance of professionals relative to other workers in the new, internationalized economy. The most common explanation is that the world economy, in some vague way, rewards skill, intelligence, initiative (individual qualities that just happen to coincide, in most cases, with an expensive professional degree and/or inherited family wealth). If the global economy were really the primary cause of the dramatic rise in managerial-professional incomes in the United States, then the fees of doctors, lawyers, and corporate executives in Europe and Japan should have shot up during the 1980s. They did not; indeed, in Japan the wage gap between corporate managers and workers has actually shrunk. A more plausible, if less dramatic, explanation is that American professionals are the beneficiaries of a hidden protectionism based on credentialism and licensing. A corporation can hire an Indian computer programmer to do the work of an American computer programmer for a fraction of the wage; but it cannot hire an Indian lawyer to try a case in the United States via fax and conference phone. American professional accreditation is a nontariff barrier par excellence--representing the very reverse of the kind of economic globalization to which the rise in professional fees and wages, inaccurately, is attributed. Similarly, American corporate executives are less likely than assembly-line workers to see their jobs exported.

Even the hidden protectionism that boosts the incomes of managers and professionals, however, can be defeated, if corporations replace full-time professional work with part-time professional work. During the 1980s, temporary work grew 10 times faster than overall employment; as a result, Manpower, a temp agency, has replaced General Motors as the largest private employer in the United States. To cut costs, the Bank of America is phasing out most of its full-time employees; ultimately, it hopes to have 80 percent of its staff made up of part-timers who work less than 20 hours a week. In the European Community from 1983 to 1988, part-time jobs grew 27.7 percent while full-time jobs increased only 2.4 percent. Even managers are not exempt; in 1991, as a result of corporate downsizing, unemployment among managers rose 55 percent, compared with only 15 percent among the population as a whole.

Even the most conservative projections of the growth of populations in the Third World suggest that labor forces in poor nations will grow faster than the supply of jobs. This means that competition with high-skill, low-wage Southern workers will continue to drag down wages in the industrial North under the laissez-faire scenario. Calculations of the number at which the earth's population will stabilize at steady-state "replacement fertility" before the year 2100 vary, from a low of 8.5 billion to a high near 11 billion. Even if only a fraction of the exploding Southern population becomes as productive as Northern workers, there will still be millions, perhaps billions, of workers, some of them with very advanced skills indeed, who are willing to work for Northern-based multinationals for a fraction of the wages paid in the North.


Selective Multilateralism

In the face of these trends, there is a grave risk that under pressure from their populations, governments in North America and western Europe will sacrifice significant aspects of the liberal international trading order to protect their workers and citizens from low-wage competition. The failure of free trade plus to arrest and reverse the decades-long decline in real wages for the average American is likely to produce a directly protectionist rather than a neo-libertarian response. There is a growing risk that parties in all the industrial nations will sacrifice a liberal society at home in order to defend living standards. Indeed, in order to preserve the elements of a liberal society that are worth saving, we need to sacrifice libertarian fantasies about trade that are actually self-defeating.

It would be tragic if an overreaction to extreme claims for trade liberalization produced an equally extreme protectionism. Instead, we need a policy of selective multilateralism to buffer low-wage competition in key industries while preserving a relatively high degree of free trade among the industrial democracies. In industries selected for their job-creating possibilities as well as strategic importance, the United States might impose a social tariff on imports from low-wage countries that would not affect imports from high-wage countries. The competition from high-wage countries (presumably based on better technology or superior management) would pressure American manufacturers to improve productivity, while the social tariff would discourage them from cutting costs by lowering wages and benefits. The tariff would also press newly developing nations to adopt the social and labor standards necessary to join the liberal trade club.

Selective multilateralism would not solve the problem of worker displacement by automation. (Here the kinds of retraining programs advocated by Reich and former Labor Secretary Ray Marshall make sense.) Nor would it address other important issues, like the organization of work and the distribution of profits from increased productivity. (Here federal legislation is probably needed to limit the reliance of employers on part-time employees and to mandate profit-sharing with workers.) Northern countries will continue to make exceptions to the norm of free trade among themselves, to protect or create industries critical to national security and the long-term development of an advanced technology base. In addition, Northern countries that engage in mercantilist practices at the expense of their trading partners might be punished multilaterally (for example, the United States and European Community could penalize Japan for its persistent trade imbalances). Nevertheless, selective multilateralism could help balance the desire for freer trade among the industrial countries with the need to discourage multinationals from adopting high-skill, low-wage economic strategies.

The adoption of a wage-based social tariff would mean limiting the exposure of Northern markets to many Southern goods. In practice, there might be two exemptions. The first involves trade in industries in which nature provides comparative advantage, like raw materials or agriculture (economic nationalists like Hamilton and List did not favor trade protection in agriculture). Unless there are national security reasons to do otherwise, it makes sense to import inexpensive oil, minerals, or farm products. Second, for strategic reasons, Northern countries may need to negotiate bilateral special relationships with countries of "the near South" to reduce political instability and migration. These bilateral agreements between rich countries and their poor neighbors should take the form of concessions in specified sectors, rather than free trade agreements that permit the poor countries to be used as low-wage export platforms for Northern multinationals selling to their home-country markets.

The proposal that the South develop by means of exports to Northern markets cannot work for the majority of poor countries. The United States, in particular, cannot continue to be the market of first resort for developing-country exports. Between 1980 and 1984 alone, 71 percent of the growth in manufactured exports from East and Southeast Asia went to the United States, while only 9 percent entered the Japanese market. Ultimately, most of the consumer markets of Southern countries must be in the South itself.

In the long run, the best hope for development in most of the world will be to create new Japans from late-industrializing countries. This can be accomplished with intelligent combinations of import-substitution and export strategies with rising domestic purchasing power. If new centers of the world economy appear, it will be because developing countries will have taken the same approach as the United States and Germany in the nineteenth century and Japan and the Little Tigers in the twentieth century: protecting infant industries through formal and nontariff barriers, state subsidies, strong and competent government, and a casual approach to intellectual property. While trade in some manufactured goods might be reduced in such a world, transnational investment might flourish (British investors helped develop the United States at a time when a wall of tariffs kept out British manufactured imports).


Appeal Across the Spectrum

A trade policy of selective multilateralism might appeal to politicians and thinkers across the political spectrum. While conventional conservatives remain wedded to the liberal internationalism (originally of Democratic vintage) that they adopted in the 1950s, there is growing interest among serious conservative thinkers as well as right-wing populists in the submerged American tradition of Hamiltonian economic nationalism, ignored for decades by the disciples of Adam Smith, Ayn Rand, and the Austrian School. A growing number of thinkers on the right are questioning libertarian orthodoxy, including Republican trade expert Clyde Prestowitz, Republican political analyst Kevin Phillips, and former Cold War hawk Edward Luttwak.

The contemporary Republican Party, however, is largely unreceptive. The Goldwater-Reagan movement transformed the Republican Party from a developmental-protectionist alliance of Midwestern mainline Protestants and American domestic manufacturers into an alliance between white Protestant fundamentalists in the South and West (the least industrialized regions) and an economic elite of financiers, realtors, foreign lobbyists, rentiers, and executives of multinationals with little or no material stake in manufacturing within U.S. borders. Accompanying this shift has been the replacement of the bourgeois, modern, progressive nationalism of Lincoln and Theodore Roosevelt by an ideology reminiscent of the anti-modern, culturally pessimistic conservatism of an older Europe (which also idealized a transnational order--that of the ancien regime).

Disaffected Perot Republicans and some former neoconservatives might find a socially moderate and economically nationalist Democratic Party more appealing than a Republican Party dominated by Wall Street and the Christian Coalition. A reorientation of that magnitude would require populist leaders in the tradition of FDR, Harry Truman, and Lyndon Johnson, rather than conservative Democrats at war with their own party base, like Jimmy Carter and Grover Cleveland.

Today the United States and the other industrial democracies must choose between a strategy that defends wages and living standards in the North while seeking to raise them in the South, and a strategy that pits Northern versus Southern workers, driving down wages and living standards in one or both regions. A high-skill, high-wage strategy of selective multilateralism that realistically addresses the need for government regulation of cross-border flows of goods, labor, and capital, while preserving the ideal of free trade among the industrial democracies, will probably become increasingly attractive to policymakers responding to pressure from the wage-earning majority. We are fortunate that in this case the policies that are most popular are also, for the most part, the best ones.

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