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Is Globalization Good For America’s Middle Class? Part 1

In this blog, I have frequently documented economic trends that have been bad for the middle class: Decline in real wages, regularly fall for health care money, stagnant level of education, the gigantic cost of tax havens, etc. With this post, I want to start exploring one of the possible reasons for the economic insecurity of the middle class, namely globalization. Today we will take a look at who wins and who loses in international trade, one of the key elements of globalization.

In some circles, we will probably see a variation of the claim that “everyone” is better off through freer trade. Even according to the most common economic theory, this is simply not true. The workhorse theory for determining the distributive effects of trade (i.e. who wins and who loses) is called the Stolper-Samuelson Theorem, first stated in an article by Wolfgang Stolper and Paul Samuelson in 1941.

To understand this theory, you should know that economists think of national economies in terms of the amount of land, labor, and capital they have. compared to all other countries in the world. These “factors of production” may be in relatively large quantities compared to the rest of the world, in which case they are called “abundant” or in relatively small quantities compared to the rest of the world, in which case we call them “rare”.

The theorem can be stated in fairly simple terms, but its consequences are not at all simple: as trade expands, the owners of abundant factors of production benefit and the owners of scarce factors of production are harmed. Here, “advantage” means their real income increases, while “harmed” means their real income decreases.

Remember that trade can grow for two main reasons. Early technological innovations can reduce the cost of transportation, making it possible first and then cheaper to ship goods over long distances. For example, political scientist Ronald rogowski, in his ledger Trade and coalitions shows how the introduction of the steamboat made it possible to export North American wheat to Western Europe, displacing wheat from Eastern Europe. Second, policy changes like the North American Free Trade Agreement (NAFTA) or trade agreements incorporating the World Trade Organization (WTO) reduce or eliminate costly barriers to trade and lead to its expansion.

The example of grains helps to show why trade creates winners and losers. The provinces of the American Midwest and the Canadian Prairies are a gigantic breadbasket made possible by low population density, which implies abundant land and scarce labor. The expansion of trade gave these farmers new markets and higher incomes. In a much more densely populated Europe, the reverse is true: labor is plentiful and land is scarce. As a result, the expansion of the grain trade meant increased import competition and lower incomes for European farmers.
Fast forward to today and we can ask ourselves what America’s factor endowments are currently. As an internationally rich country, the United States is bound to be a capital rich country. As a country with a comparatively low population density, land is plentiful but labor is scarce. The answer to our original question is then quite clear: expanding trade is detrimental to American workers because imports of labor-intensive products and services from abroad create competition for them. American workers, reducing their real wages. As I mentioned before, real wages in the United States have remained below their peak for 39 consecutive years, just as the Stolper-Samuelson theorem predicted.

What about all the cheap stuff we buy now from Wal-Mart? That doesn’t change that story at all, as the drop in the price of imported goods is already reflected in the rate of inflation we use to calculate real wages.
Rogowski’s book also argues that we can expect certain patterns of political coalitions to form, with the winners of trade on one side and the losers on the other. NAFTA illustrated this well, with capital and agriculture generally in favor of the deal (minus a few small, specialized agricultural products like oranges), while workers strongly opposed. And of course, that only helps us understand the economic reasons for supporting or opposing trade agreements; for non-economic reasons like the environment, we have to look elsewhere. Although beyond the scope of this article, Rogowski’s analysis of the entire world through phases of rising and falling trade (i.e. the Great Depression) gives strong credibility to his affirmations. You should definitely read his book someday.

Economists are divided on the magnitude of this effect. In the 1990s, when I first started teaching, the most common view of economists was that technological change was driving the higher premium for highly skilled labor while reducing wages. low-skilled labor. Book by Adrian Wood from 1994, North-South trade, employment and inequalities, argued that trade was in fact the main culprit, (a good unclosed analysis is that of Richard Freeman “Are your wages fixed in Beijing? Although this met with much resistance at the time, Wood’s opinion has gained much popularity among economists based on developments over the past 15 years or so. Paul Krugman, a particularly notable example in because of his Nobel Prize, went from being a fanatic follower of free trade to someone who sees trade as a big deal, even though today he is not quite willing to end free trade.

An important point made by Rogowski (and Stolper and Samuelson made it before him) is that the theory of comparative advantage tells us that the winners of trade win more than the losers lose, which in principle compensates for the losses. losers and everyone be better. disabled. But he also argued that those who profit economically from trade will see their political power increase, which has certainly been confirmed in the United States more than 20 years since the publication of his book. So it’s less likely that such compensation will happen, and we certainly haven’t seen any policy in the United States that comes close to making everyone’s situation better through trade.

A little bit of comfort comes from Paul Krugman’s book The conscience of a liberal (pp. 262-3). It gives us a reason to believe that the Stolper-Samuelson theorem is not necessarily fate, because it shows that the United States and Canada, two countries with the same factor endowments as each other, have distinct differences in policy outcomes, especially in union density rates.
Overall, unfortunately, it seems the answer to today’s question is clear: Trade liberalization has hurt and hurt America’s middle class. But globalization is more than trade, and I will continue to analyze other elements of globalization in my next articles.

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