Editor’s Note: Edward Alden, former Washington bureau chief of the Financial Times, is a senior fellow at the Council on Foreign Relations, where he specializes in U.S. economic competitiveness. The first excerpt from his new book, “Failure to Adjust: How Americans Got Left Behind in the Global Economy,” ran here on Making Sen$e on Nov. 2. This is the follow-up.
The states that put Donald Trump over the top to win the presidential election were all hit incredibly hard by global competition in manufacturing. From 2000 to 2010, following China’s admission to the World Trade Organization, Ohio lost 368,000 manufacturing jobs, North Carolina lost 360,000 manufacturing jobs, Michigan lost 340,000, and Pennsylvania lost 314,000. While unemployment rates in each have since fallen to near the national average, many of the new jobs pay those once mostly unionized workers far less than what they were earning before.
The U.S. government has long recognized that while freer trade would bring broad benefits to Americans through lower prices on everything from clothing to TV sets, there would be real costs. And they would be concentrated in certain parts of the country, and among certain workers, especially in manufacturing. The government promised to help, but rarely did so.
The program of trade “adjustment assistance” for workers who lost their jobs to import competition began with President John F. Kennedy. His signature trade legislation, the Trade Expansion Act of 1962, was a more ambitious version of authority that had been available to presidents since the mid-1930s, when Congress had renounced the protectionism of the infamous 1930 Smoot-Hawley Tariff Act and authorized President Franklin D. Roosevelt to negotiate with other nations on mutual tariff reductions. But the 1962 act contained one radical innovation. It proposed for the first time a trade adjustment assistance program aimed at helping both companies and workers harmed by import competition. Prior to the 1962 act, the federal government had only a single tool for aiding such workers or industries: temporary trade protection in the form of higher tariffs or quotas. Kennedy wanted another option, a means to continue trade liberalization while protecting American workers and companies from some of the negative consequences.
Kennedy was a committed free trader. Increasing imports would help U.S. allies in Asia and Europe and keep them out of the Soviet orbit, he argued. At home, the tariff cuts would help the economy through lower-priced imports, which would benefit American consumers and force American companies to become more efficient, productive and competitive. But imports would also likely hurt some sectors, driving companies out of business and forcing employees to scramble for new work. Those harmed were deserving of government support, Kennedy argued. “When considerations of national policy make it desirable to avoid higher tariffs, those injured by that competition should not be required to bear the full brunt of the impact,” Kennedy said in introducing the legislation.
Under Trade Adjustment Assistance, Kennedy proposed, industries lagging in the face of import competition would be eligible for government assistance, including tax breaks, technical assistance, loans and loan guarantees for new investments that would help the company retool to meet the competition or to find other lines of business. Similarly, workers who lost their jobs or faced significant reductions in working hours due to import competition would be eligible for income assistance and retraining. His proposal called for these workers to receive 65 percent of their wages for up to a year, vocational education or other retraining to develop “higher and different skills” and moving expense payment if they needed to relocate to find new employment. The goal, as suggested by the name, was not temporary income support but more lasting adjustment. The program, Kennedy insisted, “cannot be and will not be a subsidy program of government paternalism. It is instead a program to afford time for American initiative, American adaptability and American resiliency to assert themselves.” The aim was “to strengthen the efficiency of our economy, not to protect inefficiencies.”
The theory underlying Kennedy’s trade adjustment assistance program was one long embraced by economists — that trade creates many winners but also some losers. In their classic model first published in 1933, Swedish economists Eli Hecksher and Bertil Ohlin had posited that as a country moved from autarky to freer trade, overall national welfare would rise and consumption would increase due to falling prices as countries specialized in the production of goods in which they enjoyed an advantage.
Later additions by American economists Wolfgang Stolper and Paul Samuelson, as well as others working with the same model, demonstrated that within any country, there would be winners and losers depending on the country’s particular comparative advantage — its “abundant factors of production.” In a highly developed country like the United States, the main advantages were ample capital for investment and a highly educated and trained workforce (the United States was triply blessed because rich soil and a mild climate also gave it an advantage in agriculture).
For developing countries, in contrast, or even for fairly wealthy countries that were not at the level of the United States, the primary advantage was lower-skilled, lower-wage labor. The theory suggested that as the U.S. economy opened to the world, returns to capital were likely to increase, and higher-skilled Americans were likely to see their wages rise, because markets would grow for capital-intensive and highly skilled sectors. Lower-skilled Americans, however, were likely to see wages fall and work opportunities diminish, because they could not compete with the many similarly skilled workers available in other countries who were paid much less. While wages for those workers in poorer countries would rise, there would be a long transition period — likely many decades — before their wages began to approach U.S. levels.
Despite these losses for some, the theory went, the total gains to the economy from freer trade far exceeded the losses to disadvantaged workers. The jobs and wages of lower-skilled Americans could be protected through higher tariffs but at a large cost to the overall economy. Therefore, rather than continuing to protect some industries through tariffs or quotas, which would reduce overall economic gains, the correct response, economists argued, was for the winners to “compensate” the losers through progressive taxation or subsidies or other forms of income transfer.
Enter Richard Nixon, stage right
In a long 1971 memo to President Richard Nixon warning of the coming storm from increased global competition, Pete Peterson, the president’s top advisor on international economic policy, had embraced the same formula and recommended an acceleration of adjustment efforts.
“A program to build on America’s strengths by enhancing its international competitiveness cannot be indifferent to the fate of those industries, and especially those groups of workers, which are not meeting the demands of a truly competitive world economy,” Peterson wrote. “It is unreasonable to say that a liberal trade policy is in the interest of the entire country and then allow particular industries, workers, and communities to pay the whole price.”
Peterson recommended that the U.S. government set as a broad national policy the goal of “helping to facilitate the processes of economic and social change brought about by foreign competition.” The adjustment program should encourage capital resources and workers to redeploy “from activities no longer economically viable to those that are.” Assistance to displaced workers would have to be accelerated and in some cases even extended to whole communities. Peterson particularly stressed the need to bring organized labor on board. “Union support is critical to the program’s success,” he wrote. “Unions standing to lose membership through the retraining of their members for new crafts will have to be convinced that their workers will enjoy real benefits as a result.”
The concept of adjustment assistance was in theory a significant advance over the economists’ idea of compensation. Compensating the unemployed for not working, through welfare or disability programs or other schemes, might be a fair and reasonable way to redistribute the gains from trade, but would produce no lasting benefits for the economy. In contrast, retraining workers in ways that provided them with new skills and moved them as quickly as possible back into the workforce would enhance the economy’s competitiveness.
In the 1960s and 1970s, as U.S. integration into the global economy was accelerating, the idea of government assistance for workers harmed by global competition was embraced in theory by both Democratic and Republican administrations. Business went from being a skeptic in the 1960s to a supporter by the early 1970s. Fred Bergsten, the top economic aide to Nixon’s national security advisor Henry Kissinger, had left the government in 1972 and headed up a Chamber of Commerce task force that in 1973 recommended a massive expansion of manpower training and other assistance in response to an increasingly competitive international economy.
“Freer trade causes dislocation for a few in order to benefit all,” Bergsten testified to the House Ways and Means Committee in 1973. “The personal hardships that result are often severe and must be alleviated. Those who are hurt by a policy that is thus pursued in the general interest should be compensated adequately for their losses, and the opportunity should be seized to enable them to increase their contribution to the national welfare.”
Donald Kendall, the chief executive of Pepsi and the chairman of the Emergency Committee for American Trade, lead the fight in the early 1970s against the Burke-Hartke bill, a union-backed measure that would have imposed higher tariffs and rigid quotas on imports. “It is inexcusable that instead of a national program of industrial adaptation that would allow the worker to retain pension and other rights, our economy offers only inadequate training or the dole,” he said. “It is easy to understand why labor leaders call the present system of adjustment ‘burial insurance.’”
By 1972, when Kendall made those comments, organized labor had already moved from strong support for freer trade to deep skepticism, in part because adjustment assistance had failed to deliver on its promises. In the first six years of the program, for example, 25 petitions were filed with the government commission overseeing Trade Adjustment Assistance seeking benefits for thousands of workers.
But the commission interpreted the law so narrowly that not a single worker received benefits. And when President Ronald Reagan came to office in 1981 on a promise to slash government spending, Trade Adjustment Assistance was one of the first programs to be targeted. Payments to workers were reduced, eligibility time was cut, and the criteria tightened. While the budget for Trade Adjustment Assistance has ebbed and flowed over the decades since — growing in particular as a result of the massive stimulus package approved by Congress following the 2008 financial crisis — it has never touched more than a fraction of the workers potentially eligible for assistance.
In 2015, Democratic opponents of further trade agreements had become so frustrated that they voted to kill the Trade Adjustment Assistance program in an effort to keep President Barack Obama from winning new trade-negotiating authority. While that vote was later reversed, it showed how deep the anger has become over the failure of the U.S. government to offer more than token help for workers hurt by import competition.
The tragedy of Trade Adjustment Assistance
The failure to help American workers adjust to the new scale and intensity of global competition is one of the bigger mistakes of U.S. government economic policy in the last half century, one that has resulted in an enormous waste of human capacity and in eroding popular support for international trade and U.S. engagement with the world.
While many other countries have overhauled, refined and expanded their labor market adjustment schemes, the basic structure of U.S. federal programs remains unchanged since the creation of unemployment insurance in 1935 as part of the New Deal. That program was designed for an economy in which most unemployment was cyclical and the result of inadequate demand during temporary economic recessions; unemployment insurance payments were supposed to bridge the gap for laid-off workers until the economy picked up, and they were rehired by their former employers or others in the same industry. Unemployment insurance is a short-term income supplement, with no requirement that recipients retrain or upgrade their skills. Other federal job-training programs cover only a small fraction of dislocated workers, fewer than 10 percent.
As both Kennedy and Nixon recognized, the challenge in an era of global competition was to redeploy workers from sectors that were uncompetitive internationally to ones that were more competitive. That required not just temporary compensation, but new education and retraining to allow individuals to move into entirely new fields of work. Governments, companies and labor unions would all need to be engaged in promoting that transition.
Other advanced countries have done far more to help their citizens adjust to competition. Denmark spends more than 2 percent of its GDP helping unemployed workers back into the workforce, about 20 times as much as the United States. France and Germany spend five times as much. Every other major economy spends at least twice what the United States does. Denmark’s worker-retraining program is available throughout a career; if a factory closes, government counselors meet with each unemployed worker, drawing up individual plans for retraining and following up to make sure the goals are met. In 2006, the Wall Street Journal reported on the closing of a Danish meatpacking plant that had 500 workers. Within 10 months, all but 60 were back at work, one as a golf course landscaping apprentice, another as a math and science teacher. Such interventions are unheard of in the United States.
The result has been pretty much what the economists would have predicted: Lower-skilled American workers have seen a steady fall in both employment and wages since the early 1970s. Many of those who lost jobs in uncompetitive industries were unable to find new work at all. A 1986 task force set up by the secretary of labor looked at the plight of nearly 11 million workers who had lost their jobs as a result of plant closures in the previous five years, during the height of Japanese import competition. The findings were grim. One-third were either still unemployed in 1986 or had dropped out of the workforce entirely. Of those who found new jobs, the average loss in earnings was 10 to 15 percent, while nearly 30 percent of blue-collar workers took wage cuts of 25 percent or more. Help for these workers, from either governments or companies, was “spotty and narrowly focused,” the task force reported.
Two decades later, when another round of mass layoffs followed a surge in Chinese imports, the result was little different. A landmark series of studies by economists David Autor, Gordon Hanson and David Dorn looked at the impact of Chinese competition in U.S. communities that were competing most directly with Chinese imports, such as San Jose, California, Providence, Rhode Island, Manchester, New Hampshire and a raft of southern cities, including Raleigh, North Carolina. They examined the effects of import competition over a 15-year period, from 1992 to 2007, during which Chinese imports to the United States were growing very rapidly (and prior to the Great Recession). From 2000 to 2007, imports from all low-wage countries rose from 15 to 28 percent of total U.S. imports, with China accounting for almost all of the growth. The findings were striking: Employees in the most trade-exposed industries suffered much higher unemployment and loss of earnings than those in less exposed industries.
“The effects are very concentrated and very visible locally,” said Autor. “People drop out of the labor force and the data strongly suggest that it takes some people a long time to get back on their feet, if they do at all.”
The effects are also long-lasting. “Labor market adjustment to trade shocks is stunningly slow,” Autor, Hanson, and Dorn wrote in a separate paper, “with local labor-force participation rates remaining depressed and local unemployment rates remaining elevated for a full decade or more after a shock commences.”
Trade adjustment assistance did little to help; instead, nearly 10 percent of unemployed workers applied for and received Social Security disability payments, under which injured workers can receive early retirement and Medicare benefits if they persuade a doctor that they are unable to go back to work. Few of those ever return to the workforce, instead collecting benefits until they die. In the U.S. regions most exposed to Chinese competition, the authors found, the increase in per capita Social Security disability payments was 30 times as large as Trade Adjustment Assistance payments. The total costs of these government benefits were so high as to negate much of the broader economic gains coming from lower-cost imports. But instead of using government money to help people back to work, Washington and the states are paying people to stay out of the workforce — at huge cost to the overall economy.
“We do not have a good set of policies at present for helping workers adjust to trade or, for that matter, to any kind of technological change,” said Autor. “We could have much better adjustment assistance — programs that are less fragmented, and less stingy.” Such programs, he said, should be “directed toward helping people reintegrate into the labor market and acquire skills, rather than helping them exit the labor market.”