Failure to Adjust REVIEW
“This issue on which the whole future of U.S. trade (and perhaps investment) policy may rest is how we decide, as a nation, to deal with the real dislocations to workers and firms caused by import competition. There are only two choices: to limit the imports themselves, or to help the dislocated workers and firms adjust to the new competition.” —C. Fred Bergsten, “The International Economy and American Business,” May 1973.
This is one of those books that everyone should read. Because they probably won’t, it is a book that every American teacher should read. Because they won’t, I am writing a brief review.
Edward Alden (the author) graduated from high school a year before I did. For those of you (and there are not many of you reading my blog) who were not around then, that was just when Ronald Reagan was coming to power in America and things began shifting in favor of the business-owning and investor class. It was also when it began to make more and more sense for American businesses to take advantage of trade liberalization to move their manufacturing plants to “better pastures” overseas. Alden explains why this boon to owners was not a boon to workers. “Such mobility,” he says of the ability that companies acquired to move to the states where the lowest wages were,
“tended to level wages within the United States as well since industry was just as mobile as labor—though, very importantly, not more so. While people could move to take advantage of higher wages, companies could also move to take advantage of lower labor costs.”
“By the time I went off to college in the fall of 1979, …. the conditions that had produced this self-sufficiency had largely disappeared. In the decade from 1970 to 1980, international trade as a share of the US economy had nearly doubled to more than 20 percent.”
This means that workers were losing their ability to simply move to the new state where the jobs had moved to. And because the new workers were not Americans, they could not put any political pressure on companies to improve wages or benefits. An underpaid and exploited American worker can vote in an American election. A similar person in Jamaica cannot.
“. . . For those who earned their livings making steel or stitching clothing or assembling TV sets, the nature of competition had changed profoundly. If one domestic car company gained market share at the expense of another, it had little impact on those who made cars; the employees let go by one company would likely be hired by another. But if the competitor was in another country, the impact was not so benign. Given the tight immigration restrictions in place in most countries, not to mention generally insurmountable cultural and linguistic barriers, laid-off auto workers could not simply pick up and move to another country where carmakers were hiring.”
No one explained these things to me in any of my courses in high school or college. But the implications for me could have been more profound (had I been inclined to make my living in manufacturing or in serving those who did make their money in that sector). “The ease with which companies can move across international borders has given them enormous leverage over their workforces,” Alden explains,
“Capital is far freer to move in search of investment opportunities, but labor cannot follow. That has given business far more power than it had enjoyed in the more self-sufficient economy of a generation ago.”
And thus, he concludes, “America’s leading companies are thriving, but the prosperity they are producing is not being shared broadly among U.S. citizens.”
The title of the book, Failure to Adjust does not implicitly identify who failed to adjust but the gist of the book suggests that it was everyone. Companies did not adjust by sponsoring more programs to retrain workers. The government did not adjust by upgrading the education system to better meet the competitive challenges. Tax codes did not adjust to sufficiently obtain the rising profits made by companies overseas. Institutions of secondary and higher education did not adjust to make training affordable. And, ultimately, the workforce itself did not adjust by heading down to the local library of community college. Indeed, many of these workers simply took their lower wages and expressed their anger by voting for politicians who promised to do something to bring their old jobs back.
“Far too many Americans are simply unprepared for the competition they are now in,” Alden writes,
“They are like overmatched boxers who keep getting knocked down, only to be told by their corner that they just have to get back in the ring and keep taking the punches in the hope that eventually they will become better fighters. It would make more sense to pull them out of the ring for a year of training and conditioning before sending them back again.”
For the worker who has the same skill as some overseas worker willing to work for half the wages of an American, the prospects have been bleak. “Companies have enormous leverage to demand government subsidies, tax cuts, or a compliant, low wage workforce as a condition for investment,” Alden explains. And thus, not only are the take-home wages lower, the wages must be taxed at a higher percentage to cover the loss of the corporate taxes that are now insulated from local taxation policies by the fact that such taxes can only be levied if the company brings the money back into the United states to spend.
Alden has more bad news. His chapter on trade agreements highlights why it is that the promise of global trade has not worked to the benefit of American workers. American politicians have often used trade deals for diplomatic purposes, handing over one commercial trade advantage after another to allies and potential allies as payment for their loyalty in our geopolitical games. Deals that make allies happy at the cost of American workers have been the order of the day for decades. Strategic goals continued to outweigh economic ones for US policymakers and this perception of political callousness on the part of those making those deals was at the heart of Donald Trump’s surprising electoral victory in 2016.
Though politicians continued to genuflect to the working classes to get their votes, it appears that what they were doing involved the selling of a certain amount of snake oil. What they were doing was passing trade regulations without creating the mechanisms for enforcing them. Just as they were passing immigration quotas that they never intended to actually enforce, they made trade deals that ultimately never had any teeth in them. So long as investors and corporate donors did not really want them enforced, it seemed to work. “We need a commitment to better results, not just better rules,” Alden insists.
“US corporate profits hit record levels in 2013 and 2014, and as a share of national income, corporate profits were the highest recorded since I 929. A steadily larger share of those profits is now earned overseas. Nearly half the revenue for companies on the S&P 500 now comes from outside the United States, and some 60 percent of their cash is held outside the United States.”
Cash made overseas is cash not taxed by the U.S. or its individual States. Take Apple for example, Alden writes,
“While Apple paid more than 30 percent in federal tax on its US profits that year, the tax rate on its foreign earnings was just 2.5 percent. The difference matters enormously because Apple earns the majority of its revenue outside the United States –“
What does this mean? It means that the owners of companies like Apple get to enjoy the benefits of living in an American society that they are not being taxed proportionately to pay for. Whether I entirely agree with Bernie Sanders’ solutions to this reality is immaterial. He is correct to insist that it is a moral as well as political problem. Is it enough for us that Americans who have invested in Apple pay 15% of their earnings in taxes when Apple itself pays executives with dividends instead of salaries so that they can pay significantly less in U.S. taxes than they might otherwise?
“In the past half century, American corporations have become increasingly adept at using profit shifting to low-tax or tax-haven countries to drive their tax bills lower and lower. Even as corporate profits have hit record levels, corporate taxes as a share of total federal tax payments have fallen to their lowest levels since the United States began taxing corporate income a century ago. This falling corporate share has contributed to the federal budget deficit, leaving less money for education, research, infrastructure, and other public investments that could help the United States in responding to international economic competition.”
“In recent years, several high-profile companies have undertaken what are known as ‘inversions,’ in which a US-headquartered company merges with a foreign partner and then relocates the headquarters outside the United States to take advantage of lower corporate tax rates in countries like Ireland or even Canada. The companies include drug giant Pfizer, auto parts and HVAC maker Johnson Controls, and fast-food giant Burger King.”
“With further clever tax planning of the sort that Apple, Starbucks, and other companies employ, the bulk of those profits can be ‘earned’ in low-tax jurisdictions like Ireland or no-tax jurisdictions like Bermuda or the Cayman Islands. In Apple’s case, according to the Senate investigation, 64 percent of the company’s global pretax income (i.e., income earned outside the United States) was recorded in Ireland, even though only 4 percent of Apple’s employees and 1 percent of its customers are in Ireland.”
Obviously, some companies cannot simply move elsewhere. If they mine things out of the ground or sell things to consumers who are not going to drive to China to buy them, they must stay where they are and pay their corporate taxes. And thus, “The highest tax rates are paid by relatively immobile companies …” Thus, Ironically, Walmart pays way more U.S. taxes than Apple.
In Failure to Adjust, Edward Alden argues that the solution is not to put obstacles in the way of U.S. companies who wish to compete in international marketplaces. If one simply brought jobs back to American where these companies would have to pay double wages, they would lose the ability to compete in international markets. They would not sell the same number of iphones and solar panels around the globe. Because of the way international competition works, they would simply go out of business.
“If GM were not building those cars in China, some other competitor—Volkswagen, BMW, Toyota, Honda—would probably do so instead and capture most of the Chinese market growth.”
Alden’s argument is thus not for protectionism and tariffs or for forcing companies to relocate manufacturing plants back in the U.S. . His argument is that as a country, we have failed to recognize the nature of new realities and when we have recognized that reality, we have failed to educate people to adjust to it. We have failed to go into negotiations with a view to the interests of all citizens.
“The failure to help American workers adjust to the new scale and intensity of global competition,” he concludes, “is one of the bigger mistakes of US 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.”
Question for Comment: The question that is left on the table for me is not, “should people re-invent themselves with the help of teachers who can help them meet these new challenges? That question to me is a slam dunk, “yes.” The difficult question is, “Who should pay for that training?” Should companies themselves pay for it? Should State governments (who generally are in control of education budgets) pay for it? Should the Federal government whose trade deals and tax policies are causing the problem, have to pay to retrain people whose lives are impacted? Or should the responsibility of educational costs rest on the shoulders of workers themselves?