A New Deal for Globalization

Kenneth F. Scheve and Matthew J. Slaughter

From Foreign Affairs, July/August 2007

Summary:  Globalization has brought huge overall benefits, but earnings for most U.S. workers -- even those with college degrees -- have been falling recently; inequality is greater now than at any other time in the last 70 years. Whatever the cause, the result has been a surge in protectionism. To save globalization, policymakers must spread its gains more widely. The best way to do that is by redistributing income.

Kenneth F. Scheve is Professor of Political Science at Yale University. Matthew J. Slaughter is Professor of Economics at the Tuck School of Business at Dartmouth and Adjunct Senior Fellow for Business and Globalization at the Council on Foreign Relations. He served on the White House Council of Economic Advisers from 2005 to 2007.

Because the protectionist drift reflects the legitimate concerns of a now very large majority of Americans, the policy debate needs fresh thinking. There is reason to worry even if one does not care about social equity. When most workers do not see themselves as benefiting from the related forces of globalization and technology, the resulting protectionist drift may end up eliminating the gains from globalization for everybody. Current ignorance about the exact causes of the skewed income growth is not reason for inaction. Policymakers may not be able to attack the exact source (or sources) and likely would not want to even if they could identify them, because doing so could reduce or even eliminate the aggregate gains from globalization.

Supporters of globalization face a stark choice: shore up support for an open global system by ensuring that a majority of workers benefit from it or accept that further liberalization is no longer sustainable. Given the aggregate benefits of open borders, the preferable option is clear.

Current policy discussions addressing the distributional consequences of globalization typically focus on the main U.S. government program for addressing the labor-market pressures of globalization -- Trade Adjustment Assistance (TAA) -- and on investing more in education. These ideas will help but are inadequate for the problem at hand.

The problem with TAA is that it incorrectly presumes that the key issue is transitions across jobs for workers in trade-exposed industries. Established in the Trade Act of 1974 (with a related component connected to the North American Free Trade Agreement), the program aids groups of workers in certain industries who can credibly claim that increased imports have destroyed their jobs or have reduced their work hours and wages. TAA-certified workers can access supports including training, extended unemployment benefits while in full-time training, and job-search and relocation allowances.

In short, TAA is inappropriately designed to address the protectionist drift. The labor-market concern driving this drift is not confined to the problem of how to reemploy particular workers in particular sectors facing import competition. Because the pressures of globalization are spread economy-wide via domestic labor-market competition, there is concern about income and job security among workers employed in all sectors.

Today many are calling for reform and expansion of TAA. For example, President Bush has proposed streamlining the processes of eligibility determination and assistance implementation to facilitate reemployment. This year, TAA is due to be reauthorized by Congress, and many legislators have proposed broadening the number of industries that are TAA-eligible. TAA improvements like these are surely welcome. But they alone cannot arrest the protectionist drift.

The idea behind investing in education is that higher-skilled workers generally earn more and are more likely to directly benefit from economic openness. The problem with this approach, however, is that upgrading skills is a process that takes generations -- its effects will come far too late to address today's opposition to globalization. It took 60 years for the United States to boost the share of college graduates in the labor force from six percent (where it was at the end of World War II) to about 33 percent (where it is today). And that required major government programs, such as the GI Bill, and profound socioeconomic changes, such as increased female labor-force participation.

If the United States today undertook the goal of boosting its college-graduate share of the work force to 50 percent, the graduation of that median American worker would, if the rate of past efforts are any indication, not come until about 2047. And even this far-off date might be too optimistic. In the past generation, the rate of increase in the educational attainment of U.S. natives has slowed from its 1960s and 1970s pace, in part because college-completion rates have stalled. Rising income inequality may itself be playing a role here. Since 1988, 74 percent of American students at the 146 top U.S. colleges have come from the highest socioeconomic quartile, compared with just 3 percent from the lowest quartile. Moreover, even college graduates and holders of nonprofessional master's degrees have experienced falling mean real money earnings since 2000. If this trend continues, even completing college will not assuage the concerns behind rising protectionism.

GLOBALIZATION AND REDISTRIBUTION

Given the limitations of these two reforms and the need to provide a political foundation for engagement with the world economy, the time has come for a New Deal for globalization -- one that links trade and investment liberalization to a significant income redistribution that serves to share globalization's gains more widely. Recall that $500 billion is a common estimate of the annual income gain the United States enjoys today from earlier decades of trade and investment liberalization and also of the additional annual income it would enjoy as a result global free trade in goods and services. These aggregate gains, past and prospective, are immense and therefore immensely important to secure. But the imbalance in recent income growth suggests that the number of Americans not directly sharing in these aggregate gains may now be very large.