The US’s trade policies over the past 25 years have been the primary fuel for the Trump’s popularity, the deterioration of the middle class, and stagnant wages. If not resolved, I also don’t believe we will see much improvement in the financial health of the lower-middle class. In addition to the low labor force participation (~10%) which is a drag, the trade deficit is nearly $500 billion. We send ~$500 billion of hard earned dollars out of the country each year. That’s a lot of money that, if recycled within the economy, would increase prices of goods (for all), but also increase wages (for the poor). Republicans and Democrats have both supported the trade agreements that may have helped increase national GDP overall, but “definitely” shifted a higher share of that income to the well-educated and away from the lower skilled, less-educated workers. Neither party has done anything significant to counteract this effect nor has any good proposal on how to do so. Considering trade agreements have been written mostly by executives at large corporations, and those corporations fund both parties’ campaigns, it’s not difficult to understand why.
Jeffrey Sachs explains the situation clearly in The Truth about Trade. Read the whole thing to save countless hours listening to Bloomberg / CNBC analysts deliberate in a perplexed way about why the economy is…still…not rebounding and wages haven’t increased in 30 years. Here’s an excerpt from the article.
“The first major point about expanding US trade with lower-wage countries is that it tends to improve efficiency — enlarge the pie — but also to redistribute the US economic pie toward capital and highly educated workers and away from workers, especially less-educated ones. For capitalists and highly educated workers, greater international trade is a no-brainer, a very good thing indeed. For less-educated workers, it can be a curse, pushing down wages and pushing some lower-skilled workers right out of the labor force entirely.”
Many less-educated, middle aged individuals will never break out of the low-paid job market as it takes an investment of time, energy, and savings. However, their children potentially could. While creating new industries around new technology is “a,” if not “the” key to developed countries creating jobs, by completely neglecting the low-skilled economy, we’re making it increasingly difficult for those families to afford to educate their children. And the cycle continues.
What’s the solution? For starters, check points in trade agreements would help. I’ve seen from working in mainland China for 4 years, China gets what it wants from its trade partners, despite what any agreement it signed says. By not having a check point (say 5 or 10 years) to evaluate whether the agreement is working, the US locks itself into multi-decade agreements that don’t end up working in the way we thought they would. The primary authors of US trade agreements are the major domestic exporting companies themselves, so they want predictable policies so their investments at home or abroad will be amortized. However, predictable policies for the few at the expense of a positive outcome for the many and national interest, is just a silly trade. The two must be balanced. Secondly, why abide by WTO rules with China when China does not. China has brilliantly managed to remain the most protectionist country in the world while getting the US to open its gates 24/7…for 20 years. It’s impressive, but more so it’s sad and embarrassing how badly China has beat us, especially while we have so much unused leverage…enter the $500B trade deficit with China alone. Add a huge tariff, force US manufacturers to relocate their production to other parts of Asia, and use the near term tax revenue to fund innovative tech/education.
What else? When it comes to government involvement, funding the technologies of the future that lead to the creation of entirely new industries is key. The US does this well with defense related tech; if you check the DOD’s grants website, you can find thousands of grants available for private sector research and tech development. We do it poorly with other sectors, especially ones that are divisive domestically, like energy, artificial intelligence, etc. Considering technological advancement is a primary source of new, high paying jobs in developed countries, we need to both provide more funding for technological development, while rigorously supporting leap frog education initiatives. Which leads me to the next point.
Working from the bottom up is equally important. A war-like, decade long, multi-trillion dollar education initiative targeting those children that are most likely to end up in the low-skilled workforce, would at least start us on a path to reducing the number of Americans that are competing directly with more motivated laborers in developing countries. This involves strategizing and attacking all of the barriers that exist along one’s path to breaking out of their likely trajectory, be they social, geographic, race related, or other. Now just for that multi-trillion dollar budget?? 🙂