Free Trade And Inequality

Matt Yglesias has a great piece up about emerging trends that show that free trade might not be a universal good. The standard theory among most economists is that while free trade between nations might cause concentrated job losses and economic trouble for a few (like auto workers lay off is Detroit because of imported cars) there will be broadly diffused gains from more commerce, economies of scale, opening foreign markets etc. But what the new research is showing is that more than just causing job losses in certain industries, free trade has caused a shift in the balance of power between labor and capital in capital’s favor. As Matt Puts it, “the labor share of national income has fallen because many more industries are exposed to foreign competition in a way that's systematically advantaged the owners of capital.”

Obviously we need to wait for more data before this can be confirmed but it does seem to vindicate the political rhetoric of people like Ross Perot and Dick Gephardt. Free trade does in fact “ship jobs oversees” and even worse it makes it harder for people whose jobs stay in the US to bargain for more wages and benefits.

More broadly this seems to be evidence that when we talk about “inequality” we are talking about more than the fact that Steve Jobs has more money than God or we’ve seen stagnant wage growth for the middle class over the last few decades. We are talking about a shift in the political economy of American society that puts more and more power in the hands of owners of capital and less and less in the hands of the vast majority of American workers. So any policy designed to deal with inequality can’t just be about the old liberal tried and true method of raising taxes on the wealthy to pay for more public services or transfer payments to the poor (although doing that is still very important). We have to look for policies that will transfer bargaining power from owners of capital back to labor.

I imagine a million labor activists and occupy people are now saying “see, I told you so” to neoliberal sell outs like me. And in some ways they have a point. But I would also stress that we should be looking for new policies to deal with this new situation. So taxing the rich to pay for early childhood education Bill de Blasio style is a great idea, and by all means let’s find ways to make it easier to join a union, but we can’t stop there as those policies have, at best, only slowed this trend over the last few decades. So we should be looking at ways to make our monetary policy honesty strive for full employment because jobs are great but also because tight labor markets give power to labor in bargaining over wages by definition. We should try and reform banks and Wall Street but also acknowledge that a social policy that rewards going massively into debt to buy a big house, i.e. American housing policy since World War 2, is going to structurally empower capital by putting most people massively in debt to banks.

Basically our regular liberal policies of tax and spend and more regulations is probably not enough to change growing inequality and we need to be looking for new and novel ways to tackle this problem.