Growing Pains

Charlie Thompson spent 34 years working at a paper mill in Courtland, Alabama, until the plant closed in 2014. His experience is far from uncommon, of course; millions of U.S. manufacturing jobs have disappeared since 1980, whittling the ranks of the middle class in the process. Listen to any stump speech on the campaign trail, or take a look at the rusting industry and boarded-up businesses that pockmark America’s heartland—it is no secret that large portions of the middle class are struggling.

This phenomenon is not unique to the United States. Less widely understood, though fundamentally intertwined, is the plight of middle income countries. Dozens of nations have fallen victim to the so-called “middle income trap,” wherein their exports lose competitiveness as cheaper labor becomes available elsewhere in the world. Thompson, who watched inexpensive foreign labor undercut the price of his own wages, finds himself in a comparable economic predicament. Only a handful of countries have managed to escape the middle income trap, a testament to the difficulties middle earners face. From them, however, one can understand the adaptations that labor markets must undertake if they are to thrive in the globalized age—changes that policymakers have often been slow to encourage elsewhere in the world, not least of all in certain sectors in the United States.

Perhaps no country has been more successful in this endeavor than the Republic of Poland, which has become a veritable economic powerhouse despite its profoundly troubled economic history. Combining regional economic integration with educational and infrastructural investment, often with the help of funds provided by the European Union, Poland is beginning to mitigate globalization’s darker implications for middle earners. The same sorts of investments could begin to alleviate the woes of the U.S. middle class, as well, but there is little indication that the United States intends to pursue them in a meaningful way.

The middle is a precarious position to occupy in the globalized age, often not so much a stop on the way to riches as a place where prosperity goes to die. While the U.S. has fallen short in addressing the needs of its faltering middle class, Poland appears to have made more effective policy choices to safeguard its vulnerable economic standing as a middle earner. Domestic policymakers would do well to take note of how they did it—and to consider borrowing a page from their playbook.

In late 2014, International Paper announced that it would close its Alabama mill and lay off 1,127 employees—including Charlie Thompson. As demand for paper in the United States dropped sharply in recent years, IP has compensated by gradually shifting production to overseas facilities that have lower operating costs. And because these foreign mills serve distant markets in which technology is often less integrated in the workplace, demand for paper is increasing in their immediate global neighborhoods. If the U.S. paper market should grow in the future, the Wall Street Journal reports, IP plans on using its new overseas mills to meet demand. The company now has facilities in 10 countries.

“It was kind of like a sucker punch,” Thompson said of the plant’s closing in an interview conducted by the Alabama Farmers Federation. The mill’s eventual shuttering may have surprised its employees, but larger forces had been dealing the factory a series of blows for decades. The very nature of contemporary commerce and communication necessitates that emails are sent around the world, and that documents are often viewed on screens instead of in hard copy. In turn, consumer demand for paper has shrunk. But this jab, one which the mill might have absorbed, was followed by a haymaker: the availability of foreign low-skilled manufacturing labor, the price of which is well below that of its domestic counterpart. The Alabama mill, which opened in 1971, was the largest employer in the county; Thompson and his co-workers typically earned between $20 and $32 USD per hour. Today, his job is on another continent.

Despite the heated political debate inspired by free trade agreements, and notwithstanding countless stories like Thompson’s, there remains a wide consensus among economists that most Americans will benefit from freer trade. “International trade is fundamentally good for the U.S. economy,” declares an open letter to congressional leaders written by N. Gregory Mankiw, a Harvard economist and former Chairman of President George W. Bush’s Council of Economic Advisers. “It is beneficial to American families over time, and consonant with our domestic priorities.” The letter, signed by economists who have served in every administration from Ford to Obama, urged leaders in Congress to renew Trade Promotion Authority—a measure that would speed approval of the forthcoming Trans-Pacific Partnership (TPP).

While the TPP is a popular whipping boy on the campaign trail, most economists will unabashedly sing its praises. Robert Z. Lawrence, a distinguished economist at Harvard University’s John F. Kennedy School of Government, projects that by 2030 the benefits of the TPP will total more than 100 times its costs. Damage inflicted by lower wages and higher unemployment in some specific sectors will be more than offset by higher productivity and lower prices throughout the economy, resulting in substantial net gains for the average American. In bringing cheaper goods to U.S. markets, the deal helps boost the purchasing power of consumers—and especially of the poor, the Economist points out, as they spend the greatest share of their income on traded goods.

Yet even Mankiw and his allies concede that the TPP would hasten the rate at which certain types of American jobs are shipped overseas. Of the 11 other nations included in the agreement, nine have lower manufacturing labor costs than the United States. Alan S. Blinder, former Vice Chairman of the Federal Reserve, has suggested that more than 20 percent of today’s U.S. jobs could eventually be offshored, a trend that would be accelerated by new trade agreements. These job losses, along with others caused by advancements in productivity and the Great Recession of 2007-2008, have hit American communities hard.

Middle income countries have suffered a similar fate. Twelve years ago, Geoffrey Garrett, Dean of University of Pennsylvania’s Wharton School, warned that globalization was leaving middle earners behind not just in a domestic sense, as is so frequently acknowledged, but internationally as well. The world’s wealthiest 25 percent of nations saw a strong 50 percent upsurge in per capita income from 1980 to 2000, while the bottom 45 percent realized a staggering 160 percent increase. Those in between, Garrett cautioned, saw only meager income gains during the same period of unprecedented global wealth creation—just 20 percent. Little has changed since. A 2012 World Bank report identifies 101 countries that were classified as middle income in 1960 based on average household earnings relative to those in the United States. As of 2008, the report details, only 13 of those 101 had graduated to high income status.

What can explain this stagnation? Countries tend to have two paths to relative prosperity in today’s world: a low-wage economy or a knowledge economy. The problem is that middle income nations are not well suited for either one. Poor countries like Vietnam and Nigeria industrialized heavily in recent decades, embracing low-wage economic models and in turn flooding the world with cheap exports. Meanwhile America and other wealthy nations used their considerable resources to spur technological innovation, boost productivity, and invest in capital. Then, as their economies drifted gradually toward knowledge-driven sectors that paved the way for the wealth explosion of the 1980s and 90s, they began to import many products that were once made domestically. But the typical middle income country cannot not offer competitively priced low-value exports compared to those produced by low income countries in Southeast Asia and Africa, nor can it compete with high income countries like Japan and the United States for high-value production due to a lack of infrastructure and investment. Thus it becomes trapped, unable to participate in either the low-wage or knowledge-based domain.

For the United States and other wealthy nations, this was all something of a devil’s bargain. America got rich—very rich. Yet not everyone would benefit from changing employment landscapes and new access to cheap markets: life in a knowledge-based economy can be exceedingly difficult for those who possess only industrial skills. Bureau of Labor Statistics data show that in 1980, one in five American jobs was in manufacturing; by 2024, just 7 percent will be. American manufacturing workers, like middle income countries, have been unable to remain competitive in an increasingly globalized world inundated with cheap labor, and often struggle to move up the income ladder to more prosperous economic roles.

The bargain America struck was considerably more palatable when economists were confident in the ability of labor markets to adjust to trade shocks. Trade might cause job loss in some sectors, but economists believed that workers would be able to reinvent themselves and find new jobs, even if the process was painful. That bit of conventional wisdom has been challenged. In 2016, a groundbreaking paper headed by David H. Autor, a prominent MIT economist, finds that wages and labor force participation rates remained low more than a decade after the China trade shock hit U.S. labor markets. Rather than bouncing back, as many economists expected them to do, workers exposed to trade shocks instead suffer substantially reduced lifetime incomes.

A highly publicized Pew Research Center study from 2015 shows that for the first time in more than half a century, the middle class—those Americans who make between 67 percent and 200 percent of the national median household income—no longer constitute a majority in the United States. Often this report is touted as proof of the economic destruction that globalization has wrought on the middle class. Rarely acknowledged, however, is the same study’s finding that more middle-earning Americans moved up the income ladder than down it since 1970. In other words, the middle class is shrinking mainly because people are getting rich, not becoming poor. Globalization does have “losers,” but they are vastly outnumbered by “winners.” Unfortunately, the losers, people like Charlie Thompson, tend to lose big.

Considering the wealth that trade agreements generate, and that globalization has bestowed upon the United States, compensating those who have lost out seems a reasonable undertaking. Federal programs exist to serve workers who lose their jobs from trade, but they are woefully inadequate to help workers survive the throes of globalization. Most notable among these programs is Trade Adjustment Assistance (TAA), which has sparingly doled out benefits and wage insurance to those who have lost jobs from trade since 1962. It is available to any worker who has lost a job as a result of trade, by way of either job offshoring or competition from imports.

Only recently has TAA been expanded to cover workers who lose jobs as a result of trade in general, rather than formal trade agreements. Not until 2009 were countries like China, with whom the U.S. has no formal free trade agreement, included—too little too late for many of the two million Americans who lost their jobs due to Chinese trade shocks from 1999 to 2011, according to a recent study in the Journal of Labor Economics. And this is to say nothing of the fact that increased global competition represents only one of the challenges globalization poses to American workers. Technological development has made manufacturing more efficient, causing job losses, as well. Even as the U.S. manufacturing sector has bled jobs, output is at a 30-year high.

But this assumes that TAA actually helps workers, which in fact data suggests that it does not. A 2012 Department of Labor report shows that four years after losing their jobs, TAA beneficiaries fared worse than ordinary Americans who were collecting standard unemployment benefits. This poor performance likely stems from theoretical misunderstandings about the kind of assistance workers need in today’s labor market. As Lawrence explains in another paper, TAA was created more than 50 years ago, at a time when displaced workers were more likely to face one-time adjustments—someone employed in a struggling manufacturing industry could find new work in another, safer one with a little help from the government. By contrast, today’s workers face “manifold adjustment challenges”—that is, “continual adjustment as new technologies and competitors, both domestic and foreign, make existing capital equipment and skills obsolete.” A program designed to help workers move from a failing manufacturing industry to a surging one is not worth much in an economy where manufacturing jobs are vanishing across the board.

If retraining programs are going to work, they need to be designed for this era. Charlie Thompson’s job evaporated not only because paper can be produced more cheaply in foreign countries, but also because changes in global commerce and technological innovation have fundamentally altered the way the world communicates. That should not make him any less deserving of assistance. Beyond broadening eligibility, new programs must also reconsider what kind of challenges many laid-off workers face today and adapt accordingly. Existing programs, obsolete and underfunded, function primarily as political cover for politicians who support trade deals rather than as serious policy initiatives.

It is here that the United States could learn from countries that have escaped the middle income trap. After decades spent beneath the yoke of communism, Poland has transformed itself from a perennial economic underperformer to a powerhouse. According to a World Bank paper, Polish GDP has doubled since 1989, expanding at twice the rate of the EU15’s (a group made up of pre-2004 EU members). The country has enjoyed 24 straight years of growth that continued even through the global financial crisis of 2008-2009.

Yet today Poland stands at a crossroads. Sometimes called the “China of Europe,” it owes much of its economic success to its low wages, which hover around one-third of those in the EU’s most prosperous countries. For Polish living standards to rise further, however, wages will have to grow, ultimately rendering Poland a less desirable destination for many businesses unless productivity rises apace. This makes the country a strong candidate for the ranks of the middle income trap. The challenge, as Mitchell A. Orenstein explains in one segment of Foreign Affairs's "Six Markets to Watch" series, is for Poland to “rise up the value-added ladder and begin producing more high-tech and knowledge-intensive exports” that will bring higher-paying jobs. So far, the sprawling Central European nation has already played many of its cards correctly.

As Orenstein explains, Communist rule, for all its faults, bequeathed Poland one of the highest literacy rates in the world. Policymakers have poured money into secondary education of late, as well. In 1989, just 10 percent of Poland was university educated, while as of 2014 more than 50 percent of young Poles graduate from a higher learning institution. For context, only 39 percent of young Americans do the same. Coupled with Poland’s strenuous efforts in human capital formation is a massive investment in physical infrastructure and research and development. The European Union deserves a great deal of credit: the 2014-2020 EU budget promises nearly $120 billion USD to Poland, a package that, as Orenstein points out, equals the sum of the entire Marshall Plan in today’s dollars. Booming Polish technology and startup sectors can continue to grow thanks to these funds, and can draw on a highly educated population to staff themselves. These efforts all boil down to one projection: Poland is on pace to be one of the world’s 20 largest economies by 2030.

Of course, the analogy between middle income countries and the American middle class is not perfect. But the predicaments that the two face have enough in common that the U.S. could draw lessons from countries to its east that seem to be successfully managing life in the middle. In particular, while U.S. trade assistance programs appear to leave participants worse off than if they had not received special, trade-related assistance, Poland has effectively prepared much of its population for the jobs of tomorrow. And it is important to note that Poland did not take these steps on its own—few, if any, middle earners would be in a position do so—but with the help of a massive but well-spent EU cash infusion. There is now a class in the United States that, like the countries who have fallen victim to the middle income trap, struggles to compete with cheap overseas labor, but lacks the skills to move up the income ladder to knowledge-based sectors of work. Unfortunately, the corresponding American political discourse is dominated not by policy proposals which might replace dated U.S. trade-related assistance programs, but by anti-trade tirades.

One hundred thirty years ago, Henry George famously wrote in Protection or Free Trade that “what protection teaches us is to do to ourselves in time of peace what enemies seek to do to us in time of war.” Shying away from trade, which hardly seems feasible in today’s interconnected world, is unlikely to solve the issues that the U.S. middle class faces. Earnest attempts to save American industry by way of protectionism typically devolve into games of Whac-A-Mole. And even if such a venture were to succeed, it would involve a sizable transfer of wealth to a relatively small number of Americans—the employees and owners of firms in protected sectors—at the expense of the rest of the country, many of whom are also dealing with difficult economic circumstances.

Rather than protectionism, a different brand of philosophies can help middle earners in America. Trade, to put it simply, makes our country richer, and we ought to embrace it. But opting to abandon those whose way of life globalization threatens is a difficult position to defend. The United States needs to overhaul the active labor market policies that are intended to help workers weather the throes of trade shocks and globalization. Existing programs like TAA are grossly inadequate to aid people like Charlie Thompson—a man who did not, after all, lose his job because of a formal trade agreement. If there is any doubt that government policies can help middle earners adapt to a changing employment landscape, it can be dispelled by looking to the nations abroad who have escaped the middle income trap and are gradually rising up the income ladder to more prosperous roles.

The logic of collective action makes very clear what happens to initiatives with diffuse benefits and concentrated costs. If trade advocates continue to preach only the benefits of openness for the many while dismissing the very substantial costs for others as mere collateral damage, important agreements like the TPP will no longer be politically feasible. We stand perilously close to that point, already. Globalization need not be so painful.

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Cover photo courtesy of Flickr/Meriol Lehmann