"Free" Trade, Jobs, & Income Inequality: It's Not As Easy As We Might Think

Tyler Durden's picture

Submitted by Charles Huigh-Smith of OfTwoMinds blog,

Cheap imports, offshoring of production and the global expansion of financial markets have driven U.S. corporate and financial profits to unprecedented heights.

Globalization (a.k.a. "free" trade) has become an election issue for two reasons: many voters blame "free" trade with China and other nations for job losses in the U.S. and rising income inequality as globalization's "winners" in the U.S. outpace its far more numerous "losers."

A recent article in the New York Times looks at the issue from the perspective of recent economic studies: On Trade, Angry Voters Have a Point (via Lew G.)

The case for globalization based on the fact that it helps expand the economic pie by 3 percent becomes much weaker when it also changes the distribution of the slices by 50 percent.

Before we dig into this complicated set of interconnected macro-dynamics, let's stipulate that there is no such thing as "free" trade. Every trade agreement defines winners and losers by the very design of the agreement.

Also, other issues that are outside the confines of the actual trade agreement can have outsized influence on trade's winners and losers.

For example, trade between the U.S. and China cannot possibly be "free" because China pegs its currency to the U.S. dollar (USD). This peg enables China to arbitrarily keep its products cheaper than they might be if the market set the value of China's yuan.

We must also keep in mind that the owner of the reserve currency, the U.S., must export its currency in size, i.e. run a permanent and substantial trade deficit. I've explained Triffin's Paradox many times; please read (or re-read) these essays if you want to understand why trade deficits are integral to the reserve currency and are not a feature of any particular trade agreement:

Understanding the "Exorbitant Privilege" of the U.S. Dollar (November 19, 2012)

The Federal Reserve, Interest Rates and Triffin's Paradox (November 19, 2015)

Many overlook the fact that central bank interventions play an enormous role in establishing globalization's winners and losers. By lowering interest rates to zero (or less than zero) and flooding the banking sector with credit/liquidity, central banks encouraged an explosion of global carry trades, in which financiers borrow cheap in one currency to buy high-yielding assets in another currency/nation.

The central-bank fueled explosion in credit also threw gasoline on speculative investments in emerging market nations, distorting currencies, markets and trade. The point here is that globalization, financialization and central bank interventions are tightly bound together. We cannot talk about any of these drivers in isolation; together, they form one system we loosely call "global trade."

Let's move on to globalization's impact on jobs, income and income disparity. The article linked above notes that one study found trade with China erased 2.4 million jobs in the U.S. Other studies have found an offsetting consequence: the purchasing power of middle-class and working class households rose by 26% due to globalization's relentless reductions in the cost of imported goods.

We must take all such estimates with a grain of salt, as there are many dynamics in play. The U.S. economy has been roiled by deep structural changes since the late 1960s; there has been no let-up in systemic turbulence: the end of the Bretton Woods stability in foreign exchange markets; the rise of Japanese and Asian imports in the 1970s and 80s; oil shocks and stagflation in the 1970s; the cost of dealing with industrial pollution of our air, water and soil; the tech boom--the cost of processors and memory have fallen while advances in software and robotics accelerate; the explosive changes wrought by the Internet; the rise of China and the Asian Tigers as the world's low-cost workshop, and various speculative debt/fraud bubbles that burst with catastrophic consequences for participants and non-players alike.

At the risk of overloading you with data, let's look at a few key charts and mark the rise of China's influence, the rise of financialization and income inequality and the explosive rise in U.S. corporate profits.

Here are the charts we'll be reviewing:

-- Civilian employment-population ratio (the percentage of the population who are employed in some fashion, including self-employed and part-time)

-- Productivity (and income disparity)

-- Income inequality

-- U.S. Financial profits

-- U.S. Corporate profits

On the face of it, the U.S. experienced a multi-decade boom in employment from the early 1980s to 2008. Many have noted that the key demographic driver of this rise in employment was the mass entry of women into the work force. Many believe the loss of purchasing power in the stagflationary 1970s pushed women into the work force as the only means of maintaining household buying power. There were other drivers, of course; nothing this structural reduces down to one single cause.

This chart looks like a giant head-and-shoulders pattern that correlates with the rise and fall of financialization, which is the commodification of previously safe assets such as housing and the explosive rise in debt, derivatives and financial gaming (which quickly morphs into fraud if regulatory agencies fall asleep at the wheel).

It's difficult to separate China's rise and the bursting of the tech bubble, as both occurred in the same time frame; undoubtedly both negatively impacted employment.

The disconnect between productivity and wages really took off with the rise of financialization and cheap technology tools in the early 1980s. This is not coincidental, and can't be pinned on globalization or trade with China, which occurred much later.

As we see in this chart of income inequality, the top 10% (the "winners" in financialization and tech) had already pulled away from the bottom 90% when China entered the WTO in 2001. Clearly, the disparity began before China's trade was large enough to impact the U.S. economy; the dramatic increase in trade with China post-2001 had little impact on the disparity between the top 10% and the bottom 90%.

This chart of financial profits and debt/GDP shows the dramatic expansion of debt from the early 1980s and the explosive rise in financial profits as interest rates were pushed to zero and the debt/housing bubble #2 took off.

Could globalization have been a factor in this monumental expansion of financial profits? As noted above, it's clear that the globalization of finance--carry trades, the expansion of financial markets in emerging nations--gave U.S. financiers, corporations and banks an enormously expanded field for skimming fees and profits via debt, derivatives and speculation.

Total U.S. corporate profits soared once trade with China and the financial free-for-all of housing/debt/fraud took off. This chart makes it clear that the winners from 2001 on were financiers and corporations exploiting two dynamics: offshoring production to China and maintaining product costs to reap outsized profits, and borrowing cheap money to expand overseas and skim profits from carry trades.

What do we get if we add these charts up?

1. Offshoring of production jobs to China et al. undoubtedly slashed jobs for the bottom 90%, but these losses were offset (or masked) by the rise of housing/debt/fraud bubbles that boosted employment in the FIRE sector (finance, insurance, real estate).

 

2. Financialization and central bank intervention greatly rewarded those with the skills and sociopathologies needed to participate in the resulting debt/fraud booms.

 

3. U.S. corporations reaped the gains from offshoring jobs, and these gains flowed to top management and those who own corporate shares, i.e. the top 5%.

 

4. The trend of rising income disparity started long before China's trade was significant enough to impact the U.S. economy, and correlates with the rise of financialization and cheaper technology tools.

 

5. These trends rewarded management, finance and technology expertise, which are concentrated in the top 10% of the work force.

 

6. Cheap imports, offshoring of production and the global expansion of financial markets have driven U.S. corporate and financial profits to unprecedented heights. Since these profits largely flow to top management, financiers, technocrats and owners of corporate capital--roughly speaking the top 10% or even top 5%--it's no wonder wealth and income disparity is rising: there is no other output possible in the current system.

Slapping fees on imports (which by the way is illegal in treaties such as the WTO) will not solve the larger problems of reduced employment, stagnant wages and rising income inequality. To make a dent in those issues, we'll need to tackle central bank and central-state policies that have pushed finance and speculative churn to supremacy over the productive economy.

 

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TeamDepends's picture

Oh it's easy, alright. Free means "don't cost nothin'".

SILVERGEDDON's picture

FREE TRADE MEANS THE PRODUCERS AND THE CONSUMERS GET FUCKED.

That part is free. Everything else costs more.

Stuck on Zero's picture

You don't need to apply tariffs to balance trade. Simply reject all the imports you don't want because they contain arsenic or fail standards.  The Asians are masters at rejecting anything they don't want. Find one Nissan with a broken tail lamp and then stop all shipments for two years until their quality control issues are fully understood and controlled. France did it to Japan to end their predatory practices.

JamesBond's picture

When, and by whom, did the word Tarrifs, become a dirty word in our society?

 

Seems as if a lot of powerful people don't want to impose tarrifs -  might it be they no longer want to pay an "American' wage or abide by environmental and other laws?  Better to have the United States a 50% service industry and a 50% dependent on government money society.  Keep those damn jobs overseas.

 

jb

redd_green's picture

Oh yeah.  The group of crooked, evil people who run Walmart, for example, paid a whole lot of money to sway public opinion.  Meanwhile, just try to export a fucking pencil to China or India or Japan. 

Oldwood's picture

So, if I understand this correctly...we CAN buy all the foreign shit we want, and borrow all the money we want to supposedly pay for it...and still have a good paying job?

COOL!

And here I thought all these years that I would actually have to work to pay for my shit.

Theonewhoknows's picture
Theonewhoknows (not verified) Mar 22, 2016 6:47 PM

Compare the times of those two: statistical method of measuring inflation and breaking the link of productivity and wage increase. It is the method we are measuring the inflation that changed - and while the money has been printed away by the FED and other central banks (look at the recent policies of NIRP and TBTF http://independenttrader.org/the-madness-of-the-ecb.html ) and tell me is it how it's supposed to be??

Whole material about inflation here:  http://independenttrader.org/lies-damned-lies-and-statistics.html

NoWayJose's picture

It sorta made sense until the last paragraph - then became drivel...

Free trade is only to let US companies move factories overseas and not worry about tariffs when they send their products back to the US -- and that is not a central bank action!

Oldwood's picture

I support the notion of tariffs as well as free trade. I just don't trust the government to do either. My ideal is an educated consumer exposed to real data and analysis so we can behave as protectionists in the exercise of "free trade". The hope would be that once we understand the real consequences of our choices we would modify them. Unfortunately, there will ALWAYS be those there to lie and deceive us to their advantage.

Ultimately this is our conundrum....do we treat each other as adults (as free men) or do we treat each other as children (sheep). We complain of being treated like sheep, yet we continue to behave as sheep, bleating for our evening feeding and pressing at the gate for entry and protection from the wolves. Our government elites treat us as sheep because at our first opportunity we BEHAVE as sheep. Our circumstances WILL be determined by each of us through our actions and choices. All we have to do is make the choice of independence, of self reliance of the free range chicken subject to the consequences of freedom, wolves and all. Or we can just strut about our pen, bitching and moaning about the ineptitude and corruption of our providers.

RopeADope's picture

The golden age of financial fraud started in 1997 when Paul Carey was SEC commissioner.

Winston Churchill's picture

Out of their cold dead hands only.

It may happen,I'm getting that feeling ,same one I had in Dacca,Kabul and

Tehran.

What happened next is history.

huggy_in_london's picture

globalisation has nothing to do with free trade and everything to do with job outsourcing and income loss for the west

Government needs you to pay taxes's picture

Tax and environmental policy differences between the US and its trading partners are as much to blame for the negative job/wage shituation in the US as anything mentioned in the NYTimes blog.  You simply cant expect employers to choose the US, with its 38% corp tax rate and intricate web of environmental regulations.

Oldwood's picture

Its all of it, but our government policies are OUR policies, and IF we actually were forced to pay for them through higher costs, then maybe we would have changed them, but because we have debt and entitlements to shelter us from those costs we just go on and on till one day it all just stops.

g3h's picture

So productivity rose at the same pace?

Paul Kersey's picture

Even if factory jobs were brought back to the US, those jobs would be highly automated, less labor intensive and would pay, allowing for inflation, far lower wages than factory workers were being paid in the 1960s.  The Chinese factory owners have already figured out that they can squeeze out higher profits by replacing even their low wage workers with machines.  There is a rapicly growing, world wide lobor glut, so there is no fix for unneeded labor capital.

Workers in the US will have to be agile, adaptable and willing to accept a lower standard of living in the future. The very rich, of course, will continue to get richer.

Oldwood's picture

Automation is expensive and requires ROI, which in turn requires customers. I contend that the disruptive aspects of technology are due to debt and wealth redistribution schemes that allow tech development to outpace our economy.

How do we unemploy our customers? Who will buy unless they get money from somewhere and we know where that somewhere is. It will come from debt or it will come from the pockets of those still with a job.

WildHare69's picture

This thing is riddled with so many false assumptions and flat out misstatements it's hard to decide where to begin.

Suffice it to say  it's a piece of crap.

The charts are nice though.

TuPhat's picture

Charles, you just don't get it. The markets are a fraud. The whole global trade thing is a system to defraud the citizens of this country. It isn't about trade or markets or finance. It is only about power and control. It will all collapse some day but until it does the scam will go on. Your articles are far from reality and you have no good advice or solutions that will help anyone.

Cycle's picture

Slapping fees on imports (which by the way is illegal in treaties such as the WTO)

That is wrong.  If you bother to read through WTO, it allows a country to place general tariffs against a country with whom it has a continuous trade deficit.  The only restriction is that it must be on all goods, and not selected goods/services.

frankly scarlet's picture

maybe China will invest and re industrilize America...but I wouldn't count on it.

TheAntiProgressive's picture

Total Bullshit.  The country originally didn't have an income tax, let alone a Progressive income tax.  All government expenditures, budgets or whatever were covered by tariffs.  Unless you can fix the Central Banks and the trade wars they are massively engaging in with out of thin air fiat currencies there is only one simple quick method.  Tariffs.  There are numbers published for average incomes from countries all corners of the world.  With those countries we continually run massive trade imbalances with, then tariffs need to be engaged to lower the imbalance to something "reasonable".  Personally I think nation based, wage equalized tariffs, trade imbalance tariffs or whatever need to be erected. Unless you can compete against a $9.00/day wage rate, then something needs to happen.  These need to be flat rate based tariffs on everything or the politicos get to do "deals".  That doesn't work out and only furthur distorts markets.

So unless you can make it with your own monthly nut on an $9.00/day income, if indeed we want "free" trade, then the shackels to truly free trade need to be removed.  I think that Americans can compete with anyone given a level playing field.  We do not have an level playing field today, just like we don't have a standard of living similar or equalized with say China or Vietnam but the politicans are working on it.  I import stuff from overseas and evaluate it on a make or buy basis and it is impossible to compete domestically, you have to import.  The problem is, we here in America are always losing, always losing.  Giving away our "good paying jobs" to make a short sighed "savings" ultimately at our own expense.  Who is going to buy all this stuff in the American "consumer" economy if no one can make a "living wage", to afford or even consider being an "after tax"  consumer.

 

 

redd_green's picture

"Productivity" is horse shit. It juse means output divided by input.  Which just means that people are working more hours (those lucky enough to have jobs),  for LESS pay.   

Thanks to the No Wage Is Too Low politicians.   So, why aren't there angry lynch mobs dragging these people off and feeding them to the hogs?   Fluoride in the water?

redd_green's picture

Don't even get me started on this free trade garbage.  The Romney's of the world, make literally billions buying up good solid American manufacturing companies, shutting them down, firing Americans and moving production to contract manufacturers who use slave labor, in mexico, china, and india.  

Don't try to feed us this bullshit that tarriffs don't work.  Just you go try to export a fucking pencil to China or Japan.  Save that shit for the tourists.