US economic dilemmas: immigration, inequality, trade and the budget

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The nationalism, nativism and xenophobia given voice by Donald Trump are understandable reactions to the global changes that are harming many working-class Americans. They are not, however, intelligent responses to them.

That’s because they miss the real problems driving employment and wage declines for (essentially) non-college-educated, white males outside the country’s thriving coastal economies. The data are fairly clear-cut, if a bit more nuanced than the usual black-and-white debate allows: Virtually all studies show that immigration boosts the economy, at least in the aggregate. But that’s in the aggregate.

Whether immigration undercuts wages for “real Americans” turns out to be more complicated:  Pia Orrenius, senior economist of the Federal Reserve Bank of Dallas, found a slight increase in wages for professionals – but a slight decline (less than 1%) for manual workers.  Another economist, David Card of the University of California at Berkeley, similarly found a decrease in wages among low-skilled workers – an effect that was stronger in cities where there were more immigrants and amongst workers with lower skills – but increased wages for high-skilled workers.  In sum, immigration is a major driver of the US economy overall, but the benefits – as with everything – are not uniform: The top of the pyramid benefits greatly; low-skilled workers suffer.

That makes immigration an emotional and economic flashpoint. Instead of allowing it to become just another zero-sum struggle over scarce jobs and benefits, we need to do better in creating new employment opportunities for those displaced by immigration and trade, and make such flows themselves an engine of net job creation and economic growth. For instance, many programs already allow individuals to channel public benefits into starting new businesses instead of welfare and unemployment support; this ought to be more an explicit focus of aid to immigrants as well.

Ultimately, as all developed countries, the US faces a burgeoning fiscal problem over the next three decades as the older generation – the core of the Trump vote – enters its final, and extremely expensive, years. Perhaps not this year, but in the near future, these voters simply will be forced to choose between cutting healthcare and retirement benefits or growing the workforce and increasing the number of young workers supporting each retiree, providing more low-cost caregivers for the aging population, and generating higher tax revenues. How? Immigration.

Trade is a more legitimate job-costing concern – but also a more complex trade-off. The high-wage manufacturing jobs that used to be available in plenitude to non-college-educated Americans did not, in fact, disappear because foreigners came to take them. They disappeared because many of these jobs were sent overseas. The rest are disappearing as automation – spurred on by both technological advancement and the capital-substitution incentives of the Great Recession – increases the hollowing out of jobs that no longer need humans.

Renewed trade restrictions would drive back up some of the wages in the manufacturing fields hardest hit by foreign competition, at least in the short term – but they would hurt long-term demand for their products by reducing US access to foreign markets, and would increase the cost-of-living for Americans across the board. Again, trade benefits America in the aggregate; it nonetheless hurts many individual Americans. These workers would – and increasingly will – be coming out on the short end of the economic stick anyway, however, as the value of manufacturing jobs decays relative to other fields requiring newer skills and higher levels of education, and as businesses find themselves more able to substitute capital (in the form of technology and robotics), more cheaply, for workers.

I am therefore asked surprisingly frequently – mostly by foreigners – whether there is any way the US can avoid retreating from its current leadership of a more prosperous free-trade world in the current atmosphere of anti-globalization. There is – although free trade “purists” tend to object: The idea that the US should engage in free trade ultimately depends implicitly upon others doing so as well – and it is pretty clear that that isn’t always the case (read, “China”). Chinese currency manipulation and steel dumping are legitimate grievances for the US to pursue (and, to its credit, the Obama administration has done so), especially as China increasingly seeks access to the world trade system. A quarter-century ago (with the parties’ current positions on trade reversed), Joel Reidenberg, now a Fordham University law professor and expert on technology flows, and I suggested a “third way” approach to such problems (“Trade Solution Should Avoid Extremes: Nations Can Compensate For Unfair Acts By Adjusting Prices At The Border,” St. Louis Post-Dispatch, January 24, 1989):

“Rather, what is needed is a pragmatic fair-trade policy that, in effect, simply readjusts prices at the border.

To the extent that a foreign product is subsidized by foreign governments, the value of that subsidy should be imposed as a tariff before the product can enter the United States. The amount of any tariff imposed by a foreign country on US goods ought to be ''refundable'' as a federal tax credit to the US company. The credit would in effect lower the product's price in the foreign market to its real market level.

In such a fair-trade system, retaliatory practices are tied to specific actions of other trading nations in a sensible and straightforward manner. The animus is neither protectionist nor punitive, but rather compensatory and economically efficient. In fact, GATT currently makes some attempts as such equalizing, but they are unsystematic, sporadic and largely political."

“Of course,” we cautioned, “putting such a policy into practice would be considerably more complicated. To be truly fair, US subsidies would have to be factored in as well. And not all government subsidies are equally identifiable or calculable.” As always, real policy solutions are going to be more complex than what can fit on a campaign bumper sticker or, these days, in a made-up-on-the-spot Donald Trump soundbite.

But the real challenge from global trade comes not so much from the existence of cheaper labor abroad as from US companies moving jobs there to take advantage of it. Both nominees this year offer unsatisfying solutions to this problem. Trump has claimed, to great fanfare, that he will simply prohibit firms from doing so. How? By fiat? By turning the US into a business gulag from which companies are prohibited to escape? Not happening. Clinton starts down the more promising path of tax reform to change incentives and “claw back” some of the advantages in abandoning American workers – but her “exit tax” is unwieldy, limited, and unlikely to help. Instead, there is an older and simpler approach: taxing all revenue earned from Americans and crediting companies for all investments – plant and equipment or wages and benefits – made in Americans.

That means basically combining unitary taxation, which stops companies from playing accounting games to move profits artificially out of a jurisdiction, and the USA (Unlimited Savings Allowance) corporate consumption tax concept of rewarding companies for moving investment into a jurisdiction. The former is generally backed by liberals, the latter by conservatives and moderate Democrats (although, if the usual USA Tax proposal were amended to include credit for wages and benefits, it would suit the ends of liberals, as well).

This would dovetail well with current arguments for re-patriating American corporate profits abroad while cracking down on corporate foreign tax inversions, tax havens, tax-avoiding renunciations of US citizenship and other unpatriotic ploys of the rich and famous – but would result in the more comprehensive corporate tax reform desired by Republicans.