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Amitrajeet Batabyal

Innovation

Reversing the Downward Spiral of U.S. Manufacturing

Place-based policies can help reverse stagnating wages and unemployment

Published: Wednesday, September 23, 2020 - 12:01

Arguing against globalization is like arguing against the laws of gravity, said former United Nations Secretary General Kofi Annan. Globalization, the international trade in goods and services with minimal barriers between countries, may seem inevitable as the world’s economies become more interdependent.

Properly regulated, globalization can be a powerful force for social good. For wealthy nations, globalization can mean less expensive goods, additional spending, and a higher standard of living. For those who live and work in poorer nations, globalization can lead to greater prosperity with the power to reduce child labor, increase literacy, and enhance the economic and social standing of women.

But not everyone gains from globalization. An analysis of 120 countries between 1988 and 2008 and published by the World Bank illustrates who has lost. The U.S. trade deficit with China, for instance, has had an adverse effect on American workers, effectively eliminating 3.7 million jobs between 2001 and 2018. More than 75 percent of those job losses were in manufacturing, accounting for more than half of all U.S. manufacturing jobs lost or displaced during this period.

If globalization is inevitable, then what are the best strategies to help American workers get back into the workforce when their jobs have been eliminated?

Job loss and the working class

The economist Branko Milanovic, using data from the World Bank, argues that the losers from globalization are working people in rich nations. Milanovic’s research demonstrates that a large portion of the lower middle class in the United States and Western Europe have seen little to no gain in income since 1988. At the same time, 200 million Chinese, 90 million Indians, and nearly 30 million people in Indonesia, Brazil, Egypt, and Mexico have profited from globalization.

Many American workers have been negatively impacted by liberalized trade with China, the so-called “China trade shock,” because goods that China exports to the United States have substituted for comparable American-made products. From an economic perspective, China successfully increased its share of world manufacturing exports from a little more than 2 percent in 1991 to 28 percent in 2018. By contrast, in 2001, U.S. trade began to increase with China when the latter joined the World Trade Organization, the international organization that determines the global rules of trade. Even though U.S. exports to China have increased over time, because the United States buys more from China than it sells to them, a large trade deficit has opened up. The growth of this deficit means that the United States is losing jobs in manufacturing and foregoing opportunities to add jobs in this sector because imports from China have skyrocketed, while exports have not increased as much.

The trade deficit has had different impacts on regions within the United States. Some regions are devastated by layoffs and factory closings, while others are surviving but not growing the way they might if new factories were opening and existing plants were hiring more workers. This slowdown in manufacturing job-generation is also contributing to stagnating wages and incomes of typical workers and widening economic inequality.

Retraining and moving for work

What are the solutions for the millions of American workers who have lost their jobs? Economists generally support “people-based” over “place-based” policies and investments. The rationale is that it’s more important to invest in workers rather than bolster a place where workers live. Economists would argue that directing public funds into regions doing poorly is akin to wasting money. The logical outcome of such policies is that towns that have lost their economic base are allowed to shrink while other economies take their place.

The Department of Labor’s Trade Adjustment Assistance for Workers program helps workers displaced by international trade with job training and relocation assistance, subsidized health insurance, and extended unemployment benefits. Trade Adjustment Assistance is a “people-based” policy because it invests in workers. I believe that, relative to the magnitude of the job losses, Trade Adjustment Assistance provides too little relief. Although there is little support among economists for place-based policies, recent evidence demonstrates that such policies may deserve another look.

Examples of place-based policies include enterprise zones where economic incentives are offered to firms to create jobs in economically challenged areas, and policies that seek to promote economic development by investing in infrastructure. An example is the Tennessee Valley Authority, which, since 1933, has provided electrification to the rural South, promoting industrialization and enhancing the quality of life in that region.

Adapting to joblessness

People-based policies are predicated on the assumption that if given the right incentives, people will leave economically strapped areas and move to flourishing regions. Yet research shows that even in regions of the United States where deep manufacturing-job losses have occurred, workers frequently did not move to new jobs. Those who lost their jobs adjusted, spent less money, and stayed put, resulting in a further reduction of economic activity in regions that, in turn, became poorer.

Workers who can move to more promising locales, but choose not to, is a phenomenon not only in the United States but in Germany, Norway, and Spain, even if economically depressed regions have a negative impact on those who live there. Men—particularly young, white men—in the United States are less likely to graduate from college, more likely to come from broken families, and more likely to suffer from what the economists Anne Case and Angus Deaton have called “deaths of despair.” These deaths arise because of a deep sense of hopelessness stemming from unemployment, lack of resources, and alcohol and drug dependency.

Strengthening a place called home

If relatively low-skilled workers are unwilling to move, then should policies that favor people-based programs continue? Or is it better to make place-based investments, as the 2019 Nobel laureates Abhijit Banerjee and Esther Duflo suggest?

I believe that the United States should back policies that support people where they live and invest in those places when global trade, specifically liberalized trade, has taken a toll on American workers. Regional policy making might ask what is needed so that those who are unemployed do not feel, as Nobel Prize-winning poet Gabriela Mistral writes, that “everyone left, and we have remained on a path that goes on without us.”The Conversation

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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About The Author

Amitrajeet Batabyal’s picture

Amitrajeet Batabyal

Amitrajeet A. Batabyal is Arthur J. Gosnell Professor of Economics at the Rochester Institute of Technology (RIT).