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Home Publications Blogs Beat the Press Income Inequality and Globalization: The Protectionists Rule!

Income Inequality and Globalization: The Protectionists Rule!

Wednesday, 24 October 2012 12:47

David Leonhardt tells readers today that income inequality is primarily due to technology and globalization. It is possible to tell the story of technology if you are prepared to jump over a few hoops. (The big problem is that economists confidently told us in the 90s that technology favored people with college degrees. In the last decade it seems to only favor people with advanced degrees. If that sounds like a "make it up as you go along" story, welcome to the state of modern economics.)

However, the globalization story requires even more hand-waving. The simple story is that we have hundreds of millions of people in developing countries who are prepared to work for a fraction of the wages of our manufacturing workers. This has caused us to lose millions of manufacturing jobs, depressing the wages of both the remaining workers in the sector and the workers in other sectors who must compete with displaced manufacturing workers.

This is undoubtedly a true story. However the part of globalization that economists seem to have difficulty understanding is that there are also tens of millions of potentially highly educated workers in the developing world who are willing to work for much lower pay than their counterparts in the United States. For example, while the average doctor in the United States gets close to $250,000 a year, there would be no shortage of doctors in India, Mexico, China and elsewhere who would be happy to train to U.S. standards and work for half this wage. The same would be true of lawyers, dentists, economists and all the other highly paid professions.

The reason that huge numbers of foreign professionals have not come to the United States and depressed the wages of the highest earning workers in the United States is that we have a large number of professional and legal barriers that make it difficult for foreign professionals to work in the United States.

(Note the use of the word "difficult," rather than "impossible." Economists often believe that because they know an Indian economist who teaches at a major university they have proven that there are no obstacles to foreign professionals working in the United States. This is sometimes referred to as the "Mexican avocado" theory of international trade. According to this theory, if I can buy an avocado grown in Mexico at my local supermarket I have proven that there are no barriers to imports of agricultural goods in the United States. This is of course a ridiculous view, but one that nonetheless usually arises in any discussion of professional barriers.)

Trade agreements like NAFTA were quite deliberately crafted to make it as easy as possible for companies like General Electric to set up manufacturing operations in Mexico. In fact, the industry groups were invited to help write the treaty to ensure this outcome.

If we want to ensure that we enjoy same sort of free flow of professional services as we do of manufactured goods we would need to craft treaties designed by hospital administrators, major law firms, and university presidents that eliminated all the obstacles that made it difficult for them to hire foreign professionals.

While this move toward freer trade would offer enormous benefits to consumers and the economy by reducing the cost of health care, education, and a whole range of services, there have been few steps in this direction. In fact, in the 90s the United States deliberately restricted the inflow of foreign doctors out of a concern that they were depressing the wages of doctors in the United States (see, e.g., "Caught in the Middle," by Lena H. Sun, Washington Post, 3/19/96, Health Section, page 10; "A.M.A. and Colleges Assert There is a Surfeit of Doctors," by Robert Pear, New York Times, 3/1/97, page A7). 

In short, the fact that globalization has led to downward pressure on the wages of less educated workers is the result of a policy decision. It is not the result of some natural process. If policy were controlled by people who care about inequality and increasing economic efficiency, then the globalization would be directed in a way that lowered the wages of the most highly paid workers.

There are other ways in which policy has almost certainly contributed to inequality. For example, if the minimum wage had kept pace with productivity growth since the late 60s (when the unemployment rate was less than 4.0 percent), it would be close to $18 an hour today. Also, the fact that unionization rates have plummeted is almost certainly due in part to policies that have made it more difficult to unionize. Canada, which has a very similar economy and culture, has not experienced a decline in unionization rates of the same magnitude.

There are other ways in which policies can be identified that have contributed to massive upward redistribution of the last three decades. (Read The End of Loser Liberalism: Making Markets Progressive for more on this topic [it's free].) But it is far too simple and easy to just treat the surge in inequality as a natural phenomenon. It isn't.

Comments (18)Add Comment
written by Luke Lea, October 24, 2012 8:22
So the answer is to push down the wages of professionals too? And strip the less developed countries of their talent in the process? Shees!

Wage subsidies (expanded EITC) financed by a graduated expenditure tax (see Kaldor) is the only fair and efficient way to address issue of the distribution of the fruits of trade and automation in a lopsided world. GET for GATT would be a good bumper sticker.
Intra-99% squabbling
written by Robert, October 24, 2012 8:56
I'm all for bringing doctor salaries back to Earth and exposing the hypocrisy of Bloomberg if this will make health care more affordable. But your readers shouldn't be under any illusion that your proposals on trade and immigration will address the main problem of inequality, which is the massive amount of wealth that's been transferred up to the very top sliver of the 1%.

Exposing professionals to foreign competition and thereby lowering prices for their services is basically just shuffling money around within the 99%, while in your formulation also siphoning off a substantial cut for "hospital administrators, major law firms, and university presidents." This does nothing to stop the root problem of America turning into a plutocracy.

Also, as you're happy to point out in the case of Japan, there are costs to increasing the population through immigration, such as increased stress on the environment, traffic, crowding, and higher land prices.

What you propose is an unnatural coalition of the very wealthy, non-professionals, and the developing world.

A strategy with a much greater chance of success is to extend the labor market buffers against foreign competition from skilled workers to less skilled American workers. These two groups actually have mutual obligations to each other as fellow citizens. And opposing the form of globalization that's currently transferring wealth both up to the 1% and down to the third world combines class interest with nationalism, which in the past have worked against each other.

I realize that this solution doesn't fit your meme of promoting greater equality through econ 101 solutions, but protectionism happens to have been how America industrialized. And as you've pointed out many times economic growth rates were plenty high in the decades after WWII before the current patterns of globalization took shape.

Consider the difference between physicians and computer programmers. Programmers are probably just as smart and had to study just as hard to learn their craft, but are much more vulnerable to competition from H1-B visas and outsourcing, in addition to age discrimination. Why would you want to subject more middle class Americans to this precariousness?

Many professionals would be happy to support tariffs that personally cost them in terms of higher prices for manufactured goods. They have friends and relatives who aren't as insulated as they are, and it's also very expensive to insulate yourself and your family from the dysfunctions caused by inequality. To put your kid on the path to a skilled "protected" job now requires an expensive house in a decent school district, stratospheric tution for the top tier colleges, hours of helicopter parenting that weren't required in the 1950s, etc.

Only an economist would notice professionals benefitting from globalization and non-professionals being hurt by it and come up with the solution of making things more equal by also hurting the professionals. It is 100% analogous to noticing that public sector workers have kept defined-benefit pensions while private sector workers have lost them, and then proposing that greater equality could be achieved by also forcing defined-contribution plans onto the public sector (and in the process increasing fees for the financial industry). In the case of pensions reasonable people should instead want to extend the better plan to more workers. And in the case of trade reasonable people should also want to extend labor market protections to their fellow citizens.
written by Jane , October 25, 2012 5:15
Robert pretty much raises the question that kept coming up for me as I was reading "End of Loser Liberalism". I realize you're trying to beat the free marketeers at their own game by pointing out the hypocrisy of subjecting only a portion of the public to the downward wage pressure of globalization, but are you outlining a serious plan for the economy, or just pointing out that what is called free trade is actually not free at all, and that manufacturing and service workers, for example, should, through unionization, enjoy the same protections given professionals by the lobbying power of their professional associations? It's a clever argument, but is it a serious one?
written by ellen1910, October 25, 2012 6:52

Ah, yes; there's always been a bit of unattractive ressentiment bubbling away in Dean's anti-WaPo witches' brew.
curious too
written by paul, October 25, 2012 7:09
@Dean, I think Jane's comments/questions are worth responding to. I mean you discussed one of your achievements being the debate over the estimates of NAIRU. Isn't determining that "baseline" relevant for determining the costs and benefits of trade?

Would you respond to Robert and Jane by saying trade is inevitable and potentially beneficial, but the devil is in the details? Or specifically, that the crucial consideration is the rapidity of the change and how we as a society collectively manage to ameliorate the costs and stress of the transitions?

I mean, for progressives, the trade question has been a burning one for decades now. It would be good to hear your thoughts.

Speaking as someone who actually knows something about comparative politics, the US is the worst advanced industrial nation for counting on the legislative process to respond to major crises of any type (our system is uniquely slow, undemocratic/unaccountable etc.) Given that, who is to say that progressive "protectionist impulse" isn't so irrational.
I second Robert's, Jane's, and Paul's sentiments.
written by LSTB, October 25, 2012 8:09
Is the free-trade-for-professionals argument a zinger to the neoliberals or is it substantive policy?

If it's substantive policy, then it would be a lot easier to simply lower the standards to allow Americans to compete for professional jobs, for this is how professional shortages are created in the first place. Doing so addresses the parameters of the problem, as the lawyer example illustrates:

If we want to ensure that we enjoy same sort of free flow of professional services as we do of manufactured goods we would need to craft treaties designed by hospital administrators, major law firms, and university presidents that eliminated all the obstacles that made it difficult for them to hire foreign professionals.

Except foreign lawyers can become licensed in the United States—and not just in places like South Dakota. We're talking New York and California, where many of the major firms are headquartered, and partners' earnings are still high. Such firms have every opportunity to hire foreign-trained lawyers. Data from the National Conference of Bar Examiners bear this out. In 2011, 5,620 people who went to law schools outside the U.S. sat for bar exams here. True, only 30% passed (probably mostly Canadians), but that's because bar exams are needlessly hard, test irrelevant material, and create too many false negatives, none of which has anything to do with immigration. These folks are the real deal, not Mexican avocados.

Even the ABA agrees on allowing more immigrant lawyers to practice here(http://www.abajournal.com/maga...p_foreign/). It may be insincere, but that I can't prove. Nevertheless, as a substantive policy, foreign lawyers isn't a very good one. There are hundreds of thousands of law-trained people in the United States who don't work as lawyers because there's no demand for them—even before the housing bubble popped. Requiring foreign lawyers to train to our standards when those standards are needlessly high and there are no jobs for them (and they didn't go to elite law schools) will simply create underemployed foreign lawyers. This is not a worthwhile policy; lowering the capricious standards is the solution.
programming robotic doctors?!
written by frankenduf, October 25, 2012 8:10
yo robert- programmers r not just as smart and medicine requires more study than programming, fyi- i think part of the distaste here is that physicians deserve a higher social status and so deserve a higher compensation- that is, disconnecting salary from social status i think is inherently against our capitalist upbringings
written by liberal, October 25, 2012 8:24
frankenduf wrote,
programmers r not just as smart and medicine requires more study than programming

While certainly some doctors are smarter than some programmers, it's hard to see how that's true on average.

Look, I was trained in a discipline that lies at or near the top of the pyramid for intellectual prestige, and I myself think programming is overrated in that sense. But medicine?

My dad, who is a PhD scientist in a biological field, told me early in life that medical school was, as far as concepts and intellectual content was concerned, not much more advanced than high school. Sure, there's a ton of memorization and long hours, but it's actually not too difficult.

While programmers on the whole might not be as smart as, say, physicists or electrical engineers, I don't see any evidence that they're smarter than programmers.

OTOH, sure, physicians require more training. Doesn't mean they're smart. A very good friend of mine trained as a computer scientist/electrical engineer quit an extremely prestigious radiology internship because it was so boring, at an intellectual level.
written by liberal, October 25, 2012 8:29
"...I don't see any evidence that [doctors are] smarter than programmers. ..."
written by liberal, October 25, 2012 8:33
Luke Lea wrote,
financed by a graduated expenditure tax (see Kaldor)

Garbage. The best way to finance government is through taxing economic rents, which is the only form of taxation which is both just and efficient.
Free trade for professionals is substantive policy
written by Dean, October 25, 2012 2:07

we are losing -- please take notice. The professionals are not like public sectors workers with DB pensions, they are like cry babies who are taking out money. Close to 20 percent of the 1 percent are doctors, more than 10 percent are lawyers http://www.nytimes.com/package...ndex.html.
We have to use the market to take back from these people and give to the other 99 percent. You can dream of protectionist policies to try to do the same thing, but that would both be bad policy (protectionism really does distort markets, meaning that you will throw a lot of money in the toilet and make a lot of people rich gaming the system) and is very hard to do politically in a trading system that was set up to prevent it.

So let me be as clear as possible, we must use the market to beat up the 1 percent and a big part of that is free trade in professional services.
Dean have you been to a university lately?
written by pete, October 25, 2012 3:31
E.g., the Financial Management Association meetings last week in Atlanta...probably 80% of the new phds are Asian. Mostly Korean, Chinese, Indian. And then a bunch from the former Soviet Union. The easiest way to get a visa is with a phd. Try and get a visa as a carpenter.
What's the null hypothesis here?
written by LSTB, October 25, 2012 6:42
Close to 20 percent of the 1 percent are doctors, more than 10 percent are lawyers. We have to use the market to take back from these people and give to the other 99 percent ... We must use the market to beat up the 1 percent and a big part of that is free trade in professional services.

Just because an occupation appears in the one percent does not mean that it cheats. The null hypothesis is that *some* lawyers and doctors are in high demand, giving them high earnings. Many people in occupations in the one percent could be earning a lot less, e.g. the waiters in the NYT link, which measures household and not personal occupations.

It is up to those who believe otherwise to demonstrate with facts that the occupation in question is shutting out people, foreign or not, who could competently do the work. Simply asserting that some occupations make a lot of money and require licenses does not allow one to leap to the conclusion that there is a shortage in that occupation or that the occupation is barring foreigners from entry. This is important because the 99 percent does not benefit one bit if we pay to train foreigners for jobs that do not exist. I have seen evidence tending to show a shortage of doctors and dentists. I have never seen such evidence for lawyers, certainly not on Beat the Press.
written by Robert, October 25, 2012 9:13
Dean, you're missing the point. While there may be a nontrivial fraction of professionals within the 1%, the vast majority of professionals do not make several hundred thousand dollars a year. A recent law school grad who's saddled with debt and underwent a mass layoff doesn't have much in common with an oligarch. These are the targets of your redistributive plan. The 1 percenter is the senior partner who will get to slash the pay and benefits of his associates because of all the aspiring lawyers from other countries willing to work for less, or the tenured department chairman who will get to convert all the junior faculty members to temporary adjunct positions. It's very hard for me to see why this as a recipe for greater equality.

In any case, as you move up the pyramid from the 1% to the .1% or .01% where the real inequality problem is concentrated, the number of professionals almost certainly shrinks. You don't notice many orthodontists in the Forbes 400. There's a reason why it was called Occupy Wall Street instead of Occupy the Dentist's Office.

While I'll be the first to admit that protectionism and trade wars would be incredibly complicated, that's why it's important to start with the low hanging fruit. A hypercompetitive dollar would be the functional equivalent of an across-the-board tariff. The other major piece of protectionist fruit, which the left has no appetite to eat, would be a moratorium on low-skilled and reunification immigration and enforcement of our existing immigration laws. This would raise the wages of American citizens working in construction, the service industry, and other non-tradable positions. If you want to allow immigration of medical specialists to bring down health care costs, that's fine with me, but we always hear that employment isn't growing fast enough to keep up with a growing population, and it isn't a law of nature that we have to allow a million legal immigrants a year in the middle of an unemployment crisis.
written by diesel, October 25, 2012 10:05
For what it's worth, I agree Robert. But professional economists don't see a connection between an abundance of cheap labor and our stagnant minimum wage. They won't acknowledge that with more than half of all recent immigrants receiving some form of public assistance, with the education of their non-english speaking children requiring disproportionately expensive tutoring in our public schools and with their higher crime rates adding an economic burden to our criminal justice system, their contribution to the economy is a net loss.
Protectionist barriers for doctors and lawyers
written by Dean, October 26, 2012 9:55

sorry, I didn't realize that anyone questioned that there were protectionist barriers for doctors, lawyers and other professionals. here you go http://www.cepr.net/documents/...lement.htm

I'm sorry if beating up on the professionals in the top 1 percent hits some folks who aren't. Any policy we want to pursue will hurt people we don't want to hurt. if anyone thinks otherwise, it is only because they haven't thought about the policy closely enough.
The solution to the problem addresses the problem.
written by LSTB, October 26, 2012 2:36

Thanks for responding and the link, but it doesn't prove that there's a shortage of lawyers that can only be eased through increased foreign access. All it shows is that, as one would expect, 51+ jurisdictions have 51+ sets of rules on how lawyers should be licensed, which is why I wrote:

Simply asserting that some occupations make a lot of money and require licenses does not allow one to leap to the conclusion that there is a shortage in that occupation or that the occupation is barring foreigners from entry.

The facts are: Many states bar foreigners from entry to the legal profession, but some notable ones don't where earnings for some are sky high. However, protectionist barriers alone aren't evidence of a domestic shortage—just evidence that there are market distortions, which I'm fully in favor of easing for everyone. Evidence of a shortage would involve something like quotas on the number of bar applicants, which we don't have. Instead we have a former admissions counselor (at a law school in California, where foreigners are allowed to sit for the bar) swearing under oath that her superiors ordered her to lie to prospective applicants about the school's graduates' unemployment rate.

Thus, I think Robert, above, is right. We can totally deregulate the legal profession, but it won't reduce the earnings of the one-percentian partners at Wall Street firms. They have experience, name recognition, and they are capital owners. They are simply not interchangeable with foreigners anymore than they are with the hundreds of thousands of law school graduates who don't work as lawyers because there's no demand for them.

Allowing more foreign lawyers will not result in one-percentian lawyers being beaten up (it may work for doctors and dentists, though). It will instead result in more underemployed lawyers and more rentier law schools, which doesn't help the 99 percent.
The Use of the Word "shortage"
written by Dean, October 27, 2012 6:00
The U.S. did not have a shortage of manufacturing workers before we started imported tons of manufactured goods. The wages fell because we vastly increased the supply. It actually turns out that real wages at top law firms are now falling. They have not raised the wages for first-year lawyers for 5 years.

I'm afraid that you're going to have to do some real big twists and turns to convince me that the wages of any group is totally unaffected by the supply -- not a lot of evidence for that in the world.

furthermore, if we have a policy that drastically lawyers health care costs and other costs for the bulk of the population, at the expense of many high-end earners, so what if it doesn't fully address inequality. There are other poilicies

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.