In the wee hours of
last Thursday morning, the House passed the Central American Free Trade
Agreement (CAFTA), lowering trade barriers between the United States and six,
small Latin American countries by a two-vote margin (and a one-vote margin if
Republican Representative Charles Taylor’s vote was counted). On Friday, the
Commerce Department released figures indicating that the economy grew at a
healthy 3.4% in the second quarter of the year. These two, separate,
seemingly positive events actually demonstrate the gloomy structural change
undergone by the U.S. economy over the past 50 years.
On the surface,
freer trade between states and an increase in Gross Domestic Product (GDP) are
decidedly excellent developments for the United States. Yet, when one goes
behind the numbers, a drastically different picture comes into focus.
From an economic
viewpoint, free trade is overwhelmingly good. It creates greater competition
as more companies are working to serve the same market. It forces firms to
innovate, lower prices, and become more efficient, which leads to
specialization, where the companies focus on the specific tasks they do best.
David Ricardo articulated this principle through his theory of comparative
advantage. If Guatemala can produce nails cheaper and better than Nicaragua,
and Nicaragua can produce cutting boards cheaper and better than Guatemala,
than Guatemala should produce nails, Nicaragua should produce cutting boards,
the countries should trade, and then both will be better off.
States often
protect politically powerful industries from outside competition through
subsidies, tariffs, and quotas and the U.S. is no exception. Consumers here
have paid twice the world price of sugar for the past 75 years thanks to
protectionist measures successfully secured by the sugar industry. Though
$0.24 a pound compared to $0.12 a pound may not seem like much, it quickly
adds up –at both the checkout line and the sugar industries bottom line.
CAFTA would actually begin to chip away at this inequitable situation, but the
issue with CAFTA is not world sugar prices but world labor wages,
environmental standards, and workplace safety regulations.
The reason that
many developing countries can produce goods more cheaply than the United
States is quite simply labor and regulation costs. The labor market in
countries from El Salvador to Honduras is much looser than in developed
countries. In addition, a dollar’s purchasing power is much greater.
Therefore, multinational companies can pay workers comparatively much less
than in developed countries and workers will accept that wage because it is
comparatively better than anything they were receiving before.
The cost of
business is also much cheaper in developing countries. There are not as many
stringent regulations related to the environment and workplace safety.
Companies can pollute much more in the Dominican Republic and not pay for it,
while in the U.S. they would be required to clean up the mess they made (to an
extent). Firms also do not need to worry as much about complying with laws
for disabled workers or insuring that workers will not become disabled on the
job. The loser in developing countries is society as a whole: workers receive
lower wages than they should, companies institute few protections and benefits
in the workplace, and the environment becomes increasingly polluted.
Opponents argue
that just as the U.S. had to go through its messy industrial revolution with
lower wages and poor sanitation, so do developing countries today, and in the
long run these developing countries will more closely mirror the U.S. and
everyone will be better off. Yet, developing countries do not have to go
through the messy process the U.S. went through precisely because of where we
are at today.
We are in a
free-trading, globalizing world, where economic models are changing. The U.S.
is pushing to liberalize trade between developing countries and us, and every
country wants access to our market because of its vast size and American
consumers’ propensity to spend. The U.S. can use that negotiating muscle, its
economic might and ideological influence known as soft-power, to create better
trade agreements that improve working and living conditions in developing
countries. Our government could create stipulations that if your country
wants in to the best market in the world, then you have to pay your workers a
fair wage, companies cannot desecrate the environment, and firms have to be
accountable to government regulations and workplace safety concerns.
The catch is that
this leverage only works when there is no agreement signed. Once a free-trade
deal passes, it is close to impossible to reverse course and pursue labor and
environmental conditions. The U.S. is at a momentous point where it is
currently negotiating scores of trade agreements around the world with
countries who would do almost anything to sell goods to American consumers.
These stipulations would be good for American jobs too as companies would not
outsource so many jobs so soon since operating expenses, while still lower
than at home, would not be at the bargain basement levels currently in
existence. Yet, corporate influence is too much for government leaders.
The problem is that
the balance between CEOs and wage earners is completely off-kilter and the
reason is the current state of globalization. Multi-national companies allow
firms to compete in different markets, seek the cheapest place to do business,
and constantly move if governments or unions restrict their activity too
much. These companies can traverse the globe, find what suits them best, and
leave the rest behind. Conversely, unions are stuck in one state, one region,
or one country. They cannot compete with multi-national corporations
precisely because unions are not multi-national. In our new globalized world,
corporations have all the clout and advantages and unions are left behind.
The results for workers have been disastrous.
Big companies are
doing great. In the current economic climate, thanks to Bush’s tax cuts,
reduction in business oversight by the government, and freer trade, corporate
profits as a share of GDP are as high as they have been in 40 years.
Remember, the economy grew at a healthy 3.4% last quarter, the ninth straight
quarter that growth has been above 3%, the longest streak since the
mid-1980’s. Income and wealth for those at the top keep growing, but what
about the rest of us?
The same day that
the Commerce Department released its report on GDP growth, the Labor
Department reported that wages and salaries increased 2.4% over the previous
12 months. At first glance, this may seem like good news, but inflation rose
over 3% during that same period, so real wage growth was actually negative.
It used to be that when the economy grew, everyone benefited somewhat. Now, a
few people are becoming extremely wealthy and the rest of us are getting
poorer in real terms. To be fair, a good part of the anemic wage growth has
to do with increasing health care costs, a separate problem altogether.
Still, a consistent factor for poor wage growth has to do with the way the
world is globalizing. Trans-national companies in a pro-CEO climate without
trans-national labor unions put enormous downward pressure on wages and upward
pressure on profits.
50 years ago, only
one-parent in a family was usually in the workforce and that was enough to
support an entire family, send their kids to college, and have enough leisure
time to enjoy life and living. Today’s world is starkly different. College
tuition is through the roof, both parents work, and there are fewer and fewer
hours to just appreciate life. Many families are still not making ends meet
and with inflation going up faster than wages. The future looks none too
bright.
Numerous studies
from academic think-tanks to mainstream journalism such as The New York
Times and The Economist have cited the growing inequality gap as
cause for concern. The political structure in place where money talks only
reinforces the inequalities in the system. There is nothing wrong with free
trade, in fact, it should be looked at positively, but the way it has been
done has enriched those already rich while squeezing the middle class.
Technological innovations have created the illusion of rising
standards-of-living, when in reality technology is merely propping up lower
wages. While it is laudable that globalization has helped hold down prices,
the externalities caused by freer trade, from environmental degradation to
workplace hazards, are not worth the cost. Through soft-power and
trade-agreement leverage, America can shift the way we are globalizing to a
more utilitarian structure, helping the most people and leaving the fewest
behind.
From a superficial
level, U.S. economic and trade policy appears to be working very well, but
when one looks at exactly how these abstract tasks are carried out, an ugly
pattern soon develops. It is not too late to shift course. The U.S. still
has plenty of leverage left to use, and as the CAFTA vote illustrated, many
Representatives have alternative views on our current economic model. It is
time to shift the media focus from GDP growth to wage growth, from free trade
to fair trade, to insure that the next 50 years see the pendulum swing back to
where equality of opportunity actually means something.