The Dark Side of Free Trade

Those of us with a few years under our belts have probably seen an incident like this: A proud father boasts to his colleagues about his successful offspring. They’re doing so well, he beams, that they now make more than the old man.

Sadly, the days of watching such a scene unfold may be over. U. S. kids are increasingly unlikely to do better than their parents. Proof comes from social scientists at the Brookings Institution, who sifted through a document called the Panel Study of Income Dynamics, a product of the Institute of Social Research at the University of Michigan. In a nutshell, they compared parents’ family income in the late 1960s with their children’s family income in recent years. The conclusion: One in three Americans now lives in a family that earns less than his/her parents did.

The figures are even worse than they first appear. Matt Miller, a senior fellow at the Center for American Progress, points out that families work longer total hours than they did in the 1960s because they are typically two-earner families. All in all, he says, the U. S. now offers its citizens a smaller chance of upward mobility than do France, Denmark, Norway, Sweden, Canada, and Germany. After World War II, about a quarter of U. S. men whose fathers had been poor eventually became part of the top quarter of income earners. The figure today is more like 6%.

Globalization could accelerate these trends. Miller points out we haven’t seen anything yet when it comes to offshoring. Though it is hard to estimate, current figures predict only about 3.3 million jobs will be lost to offshoring by 2015. For comparison, the Bureau of Labor Statistics put the number of total U. S. jobs in 2009 at a little less than 134 million. But the labor force available for global producers will continue to mushroom. Economists say up to 40 million U. S. jobs could be affected by this trend in the next couple decades.
Some argue that such trends are benign because they lead to lower prices for consumers and eventually expand the economy by creating more markets for goods. But economist William J. Baumol and mathematician Ralph E. Gomory say this theory is incomplete. There are gains from free trade, they say, only when each country’s productive capabilities are fixed. Obviously, that isn’t the case when whole factories are uprooted and sent to Asia or design work can be done in India and zapped across the globe electronically.

Testifying to the U. S. House Committee on Science and Technology, Gomory said, “There is nothing in either common sense or economic theory which says that improvement in the productivity capabilities of other countries is necessarily good for your country.” He explains that as a developing nation acquires greater capabilities and assumes a larger share of world production, free trade with it eventually becomes harmful to a more-industrialized country. “Then, a firm that is moving production of goods and services overseas may find that it is generating greater profits for the company, but the same action can also result in an actual loss of national income for the company’s home country,” he says.

One final insight: Don’t expect higher U. S. education standards to fix this. As Gomory says, proposals for better education “are harmful if they create the mistaken belief that these measures can deal with the problem.”

© 2010 Penton Media, Inc.