TRADE-2019/02/01 1 THE BROOKINGS INSTITUTION SAUL/ZILKHA ROOM KIMBERLY CLAUSING: THE PROGRESSIVE CASE FOR FREE TRADE AND GLOBALIZATION Washington, D.C. Friday, February 1, 2019 PARTICIPANTS: Introduction and moderator: DAVID WESSEL Senior Fellow and Director, Hutchins Center on Fiscal and Monetary Policy The Brookings Institution Presentation: KIMBERLY CLAUSING Thormund Miller and Walter Mintz Professor of Economics Reed College Panelists: KIMBERLY ELLIOTT Visiting Fellow Center for Global Development SOUMAYA KEYNES U.S. Economics Editor The Economist LORI WALLACH Director, Global Trade Watch Public Citizen * * * * * ANDERSON COURT REPORTING 1800 Diagonal Road, Suite 600 Alexandria, VA 22314 Phone (703) 519-7180 Fax (703) 519-7190 TRADE-2019/02/01 2 P R O C E E D I N G S MR. WESSEL: Good morning. Welcome to Brookings and the Hutchins Center on Fiscal and Monetary Policy. I'm impressed to see that all of you have braved what passes for a blizzard in Washington. (Laughter) I want to assure you we have plenty of facilities here if you get trapped because we have an inch and a half of snow. We can take care of you for a few hours. I'm very pleased today to be helping celebrate Kim Clausing's new book, "Open: The Progressive Case for Free Trade, Immigration and Global Capital." The timing couldn't be better. We are, I think since the -- even before the last presidential election, engaged in a huge debate about whether globalization, immigration, free trade, flows of global capital are (a) responsible for everything good that's happened to the U.S. economy over the last couple of decades, or (b) responsible for everything bad that's happened over the last couple of decades. As you know, the world is never black and white. As a journalist I always said that our job was to make the shade of gray a little darker, a little lighter, so that people could understand what was going on, and we're going to try and do that today. The order of business is Kim Clausing is going to make a presentation. Kim is a professor of economics at Reed College where she specializes in international trade, international finance, and particularly taxation of multinational firms. Then I'm going to be joined up here by a panel of three people with very different perspectives, so I'll introduce later. So, Kim, can I call on you? And welcome to Brookings. (Applause) MS. CLAUSING: Thank you so much, David. It's a real honor and a pleasure to be at Brookings to talk about my book. I am also really grateful for the panel you've put together, which looks awesome. I'd like to start with a few words about why I wrote this book, and for me the starting point was really the 2016 election. And the rhetoric of that election on both the left ANDERSON COURT REPORTING 1800 Diagonal Road, Suite 600 Alexandria, VA 22314 Phone (703) 519-7180 Fax (703) 519-7190 TRADE-2019/02/01 3 and the right made two things very clear to me. One, the economic dissatisfaction was very deep. People were upset with the rising inequality over the prior decades, with the wage stagnation, with declining opportunity. And even though the last eight years had seen improvement in economic wellbeing, there was still a lot of economic discontent. But the second theme of that election was the swelling tide of nationalism. And this was seen in the rhetoric of candidates on both ends of the political spectrum. Foreigners and trade agreements like NAFTA were held up as responsible for the weakening status of the middle class. Now, the outcome of that election, as we all know, was a result of many different factors. But on inauguration day, the one promise that Trump made the American people was to put America first. And this theme was frequently appealed to in the years since in terms of economic policy. And I would point out that the United States is not alone in this appeal to economic nationalism. Brexit reflected a tide of nationalism and a rejection of EU trade and migration policies. We've seen nationalism on the rise in Poland and Hungary, and Brazil's recent election, and elsewhere. So this book is one economist's three pronged response to that rising tide of nationalism. The first question asked is what's going on with the American middle class, why is it that we see wages stagnant despite increases in GDP? What's caused the increase in income inequality over the last few decades? And how much should we blame the global economy for that? The second big question is what are the consequences of openness for American workers? And by openness I look at it in a lot of different ways, I look at trade, capital mobility, multinational corporations, and immigration, and I ask how do these factors affect U.S. workers, but also importantly, what if we were to curtail those factors or to limit them, how would that affect U.S. workers? And the final question is what to do about all of this. And in the closing chapters of the book I suggest a policy agenda to respond to these recent decades of ANDERSON COURT REPORTING 1800 Diagonal Road, Suite 600 Alexandria, VA 22314 Phone (703) 519-7180 Fax (703) 519-7190 TRADE-2019/02/01 4 economic outcomes. So today I only have 20 minutes, so I'm going to give you a brief taste of these arguments, but hopefully this and the conversation that we have afterwards will inspire you to engage with the longer arguments in the book, which by the way is for sale in the back a full month before you can get it on Amazon. So let's start with what's happening with the American middle class. And you see in this picture here the blue line is showing you the increase in GDP per capita over the last few decades. And that's been very substantial. There's been an over 60 percent increase in GDP per person in the United States over the last 3 decades, enough so that if distributed equally everyone could have more than $20,000 of additional real income over these previous decades. But notice the red line is far flatter. What the red line is showing you is median household income. So at a time when GDP per capita has been rising strongly in real terms, real median household income is much flatter and, in fact, less than a quarter of the growth that you see in GDP per capita. And that's of course problematic for your typical household. Why has that occurred? In short, income inequality. And if you look at these two eras of income inequality you see a very different pattern. So in the first 35 years after World War II cumulative income growth for the bottom 90 percent of the population was about 100 percent. So they expected their income to double. They roughly doubled over that 35-year period, whereas income growth at the top, the other three bars of the top 10 percent, the top 1 percent, and the top .01 of 1 percent. That income growth was actually smaller than that of the bottom 90 percent. So that was an era when rising tides lifted all boats. But this most recent era, the 35 years just previous, had a very different pattern. The bottom 50 percent of the population sees almost no economic cumulative income growth. The 50-90th percentile see less than half what they did in the earlier period, and the growth is really spectacular only for those at the top, the top 10 percent, the top 1 ANDERSON COURT REPORTING 1800 Diagonal Road, Suite 600 Alexandria, VA 22314 Phone (703) 519-7180 Fax (703) 519-7190 TRADE-2019/02/01 5 percent, and even better the top .01 of 1 percent. So if you look at that period, that shows us that there really is a good reason for economic discontent. The economic growth isn't necessarily helping everybody. And so there's a lot to worry about here. So the next question is why is this happening. So one thing you could say is, okay, in the second period there was definitely more trade, there was more immigration, there was more foreign direct investment. Maybe foreigners are the problem. And that's one possibility. But one thing to keep in mind is that a lot else changes between these two periods that might contribute as well. One example would be technological change, right, the role of computers, mechanization, the internet, have displaced the need for a lot of unskilled labor and probably shifted demand away from those workers and towards others in the economy. And so technological change is an important issue. But there are several other important things that have changed too, market power is a much more salient feature of today's economy than it was earlier. We see sales and profits are much more concentrated in a few companies than they used to be, and a larger share of society's savings is in the hands of corporations. We see changes in labor markets where there's less unionization and a richer reward for those at the very top of most labor markets. We see change in social norms. Now the typical CEO earns 300 times the average worker's salary. In 1980 that was 30 times. So that's a big change in executive compensation.