The suggestions in Chapters 9 through 11 are about meeting the needs of the middle class directly and effectively. They tackle the challenging problems of middle-class stagnation and income inequality described in Chapter 2. These suggestions preserve the many benefits of open economies; I do not suggest closing borders or erecting walls.
Instead, the policies go straight to the problems of American workers. Chapter 9, 10, and 11 deal with three aspects of this policy response. Chapter 9 focuses on strategies to help workers meet the demands of the global economy. Chapter 10 describes how a grand bargain for true tax reform can both help American workers and modernize the tax system, making it more suited to a global economy. (The tax law changes that went into effect in 2018 make true tax reform even more necessary; these changes largely work against the principles I articulate in Chapter 10.) Chapter 11 describes a new partnership with the business community, one that embraces the global economy and provides an excellent business environment, but also raises expectations for social responsibility on taxation, labor, and competition.
Bold and responsible solutions require a reshaping of our politics, and that is a particularly tall order. We are suffering from a dangerous polarization in this country, with a far right of the political spectrum that too often sees government as the source of every problem, and a far left that too often sees business interests as the source of every problem. Each camp is skeptical of the other, and each curates its own news, commentary, and view of reality, aided by the personalized information delivery of the internet.
Income inequality and economic stagnation contribute to this polarization, as both the left and right see vindication of their disparate views in the same economic events, becoming more deeply entrenched in their original positions. As a result, we elect legislators who are less likely to compromise in order to govern, and government itself functions poorly, reinforcing the sense that something in Washington is deeply dysfunctional. This polarization is dangerous. It leads to either paralysis or, worse, the embrace of seemingly quick and easy solutions to our problems, solutions that will only end in frustration for voters, workers, and citizens.
Steps toward a More Equitable Globalization
Equipping Workers for a Modern Global Economy (Chapter 9)
Better utilize trade agreements to counter policy competition, keeping an open world economy
Help workers meet the demands of the world economy through wage insurance, free community college, and greater economic security
Support community adjustment to trade and technology shocks
Solidify economic fundamentals needed to compete in the world economy, by increasing funding for education, research and development, and infrastructure
Tax Policy Suited to Our Modern Global Economy (Chapter 10)
Strengthen the earned income tax credit for lower-income workers, helping those at the bottom prosper
Retain and strengthen progressive tax system, to ensure that all benefit from the modern global economy
Tax all types of income earned by the same person or business at the same rate, regardless of form or location; close loopholes, including international tax avoidance
Address climate change and keep tax rates lower with a carbon tax
Bring together stakeholders in a grand bargain to reform the tax system
A Better Partnership with Business (Chapter 11)
An embrace of the global economy
Simple, fair regulations
A simple, fair tax code; more transparency on taxes
More transparency on pay structure and labor inclusion
More robust antitrust laws
The conclusion of the book, Chapter 12, places the above policy suggestions within a larger discussion of politics. If this is the way forward, how are we to achieve it?
Nine
Equipping Workers for a Modern Global Economy
In this chapter, I suggest four key steps to better equip workers for a modern global economy. We should promote better trade agreements that enable policy cooperation, further international prosperity, and pay attention to the downsides of globalization. We should take serious steps to help US workers adjust to the demands of the world economy and technological change. We should assist communities that have been harmed by trade and technological shocks. And we should shore up economic fundamentals to promote shared prosperity. These four ideas all work to ensure the prosperity of American workers in the global economy.
Better Trade Agreements
Better trade agreements can achieve important goals. First, they can bring nations closer together, fostering peace and prosperity throughout the globe. The past several decades have witnessed more global economic progress than has taken place in any equivalent period in the history of humankind. We should not turn our backs on this progress. We should celebrate these gains, while making sure that those harmed by the forces of economic change are made whole.
Second, good trade agreements can help governments work together on important global problems that require coordinated solutions. We live in a world where many key economic forces and policy problems are global, yet government policies are made at the national (or even subnational) level. Climate change, for example, is a truly global problem that affects all people, and actions in one country affect the entire planet. Tax competition and regulatory competition are also global problems. If the countries of the world lose tax revenue to tax havens, or if environmental regulations cause dirty production to migrate as a consequence, these are problems that clearly cross borders.
Good, smart trade agreements can be part of the solution to these problems. The benefits of international trade provide carrots that draw nations to the bargaining table, where they can mutually benefit by cooperating to solve problems such as climate change and international tax evasion. Good examples of countries coming together to make progress have already included the Paris Climate Agreement (COP21) and the OECD / G20 project on Base Erosion and Profit Shifting. While each of these agreements marked only a step toward solving a big problem, every journey begins with a single step. These are clear moves in the right direction. Going alone is not enough.
While issues such as climate change and tax competition are not central to international trade, there is no reason why trade agreements can’t be flexible enough to support an international response to these problems. In the past, trade agreements have often included non-trade issues. Despite legitimate concern about prioritizing some non-trade inclusions (intellectual property rights, investor-state dispute settlement), trade agreements can and should be about more than trade. Countries can cooperate to avoid the harmful aspects of tax and regulatory competition, and trade agreements provide a natural forum for such cooperation. Indeed, it is odd that trade policy has been traditionally dealt with multilaterally, but tax policy has not.1
COP21: A Pale Blue Dot in the Balance
The Paris Climate Conference (officially known as the Twenty-First Conference of the Parties, or COP21) has a serious goal: to save the planet from catastrophe. Under the Paris agreement, more than 190 countries made emissions-reduction plans, called INDCs (intended nationally determined contributions). These plans aim to prevent the planet from warming by more than two degrees Celsius, the agreed-upon threshold for avoiding cataclysmic change, although under the plans submitted so far, global temperatures are likely to increase a more threatening three degrees. INDCs have no binding power, and rely on individual participant governments to pass legislation and implement their commitments. Under the agreement, nations will be required to share their progress every five years starting in 2023, allowing the international community to take stock of progress.
Even as President Trump announced that the United States would withdraw from the agreement (a four-year exit process), COP21 still boasts a list of almost two hundred participant nations and includes China, the world’s biggest emitter today. The importance of meaningful, internationally-coordinated environmental regulations
is difficult to overstate. The future of the planet is at risk.
A Prisoner’s Dilemma in Tax Avoidance?
Perhaps the most celebrated result in the discipline of game theory—the study of strategic interaction—concerns the prisoner’s dilemma. Two prisoners are separated, and each is promised a lighter penalty if they confess to a crime, implicating their partner. In this famous game, both prisoners end up confessing, and facing harsher punishments, since it is in their individual interest to confess, regardless of the choice their partner makes (confessing or not). Yet it is the criminals’ mutual interest to coordinate, so that neither confesses.
Tax competition presents a similar game, with both governments and multinational companies acting as strategic players. Each country has an individual incentive to lower tax rates and provide loopholes, in an effort to attract multinational corporate activity and a larger tax base. Companies respond by moving profits into tax haven jurisdictions and even generating income that goes untaxed in any jurisdiction. If governments instead coordinate to stem tax base erosion, they can achieve a more favorable outcome. Companies would have fewer ways to avoid taxation, and governments would be able to collect revenues from more stable tax bases.
Such cooperation need not imply that countries choose the same tax rate. Rather, they can coordinate actions to shut down the easy methods of tax base erosion that have become so common lately. Recently, the Organization for Economic Cooperation and Development, together with the G20, worked on an international project to stem corporate tax base erosion and profit shifting. After several years of negotiation and the drafting of nearly two thousand pages of suggested guidelines, more than seventy ministers met in June 2017 to sign a multilateral convention to implement tax treaty measures related to the project. While this is far from an end to the prisoner’s dilemma, it is certainly a step in the right direction.
In addition, while trade agreements have not been the cause of worrisome labor market trends in the United States, such agreements can be part of the policy response to them. First, trade agreements should take care to liberalize trade slowly, to slow the pace of economic disruption. Second, trade agreements can help promote workers’ interests by containing provisions that support core labor rights and encourage the bargaining power of labor, as the Trans-Pacific Partnership (TPP) attempted to do. By undertaking joint agreements on such matters, countries reduce the competitive pressures on governments to provide lax regulatory environments in hopes of attracting highly mobile businesses.
Helping Workers Meet the Demands of the World Economy
Setting appropriate rules for the world trading system is important, but even more important is giving workers the tools they need to succeed in our modern global economy. More should be done for workers that are experiencing disruption due to trade or technological change. Several policy solutions are promising. First, much can be done through the tax system. The earned income tax credit (discussed further in the following chapter) is one of our best anti-poverty tools, and it is has support across the political spectrum.2 Under the earned income tax credit, workers with low incomes receive a tax credit for every dollar that they earn. Unlike many traditional anti-poverty programs, this program encourages work by increasing the reward for work for low-income workers.3
Also, wage insurance has been tried on a small scale, but it could be substantially expanded. Since 2015, there has been a small program known as Reemployment Trade Adjustment Assistance (RTAA). If a worker loses a job due to trade and accepts a lower-paying job, the program pays that worker 50 percent of the difference between their old and new incomes, up to a maximum of $10,000. The program is limited to workers over fifty years of age earning below $50,000 at their new jobs, and it applies only to workers who are certified to have lost their job due to trade pressures or international shifts in company operations. In 2015, 413 Trade Adjustment petitions were received, and 57,600 workers were covered and eligible for some type of trade adjustment.4 Only a small fraction of those workers received wage insurance.
While linking such assistance to trade disruption may help build political support for international trade, that linkage minimizes the economic pain caused by other types of economic disruption, including technological change. The certification required to receive wage subsidies through RTAA also likely goes too far in limiting access to this type of assistance. Losing one’s job to a robot is not less painful than losing it to a surge in imports, and losing one’s job at age forty-five is as disruptive as losing it at age fifty-five. Wage insurance should be expanded to cover more workers and more causes of job loss. Care can be taken to avoid abuse by requiring some threshold-level of job experience and placing time limits on benefits. Like the earned income tax credit, wage insurance encourages work and reemployment. It also reduces the chance that workers become disengaged from the labor force, permanently lowering their economic prospects.
There may also be an important role for relocation assistance. The US economy is large and diverse, and economic conditions vary a great deal by region. As discussed in Chapter 4, trade shocks can often be quite localized, affecting particular areas much more heavily than others. The same is true for technical change. Even as some areas of the country experience negative shocks, other areas are doing well, and some areas even face labor shortages. It may be useful to help workers move to places with more abundant opportunities, and to help workers acquire the skills needed to succeed in those new jobs.
In recent years, for example, the Dakotas have boomed, due to the oil industry expansion after fracking techniques allowed oil extraction in new areas. As of mid-2017, North Dakota had the nation’s lowest unemployment rate, at 2.3 percent; South Dakota’s 3.3 percent rate is also unusually low. The boom in the Dakotas has been so substantial that the region has suffered from labor shortages. Menards (a home improvement chain) even resorted to flying in workers each week from its Wisconsin base, and putting them up in North Dakota hotels.
Relocation assistance is not a panacea, however. Workers may be limited in their ability to pack up and move by the fact that the same negative economic shock that affected them also took its toll on housing prices in their locale. When housing prices fall, mortgage holders can easily end up owing more money on their homes than those homes are worth. This makes relocation difficult—and strengthens the case for prudent lending practices, consumer protection such as the CFPB (Consumer Financial Protection Bureau), and community-level assistance.
Our swiftly churning capitalist economy creates ever-changing labor demands and therefore frequent needs for worker training. Community colleges fill a vital role in providing education and credentials throughout workers’ lives. Community college education should be expanded and subsidized, reducing tuition. Ideally, community college would be free of cost altogether. Even if some tuition is retained, workers who have recently lost their job (after some experience threshold) should automatically qualify for tuition-free community college for the following three years. As of this writing, ten states, including California, are considering free community college legislation, following the successful implementation of programs in Tennessee, Oregon, and Minnesota. For example, Tennessee’s Promise program, adopted in 2015, funds two years of community college or technical school enrollment; it created a 30 percent increase in community college enrollment and a retention rate 16 percentage points higher.
More broadly, community colleges fill a vital role in providing higher education to students who are not seeking a traditional four-year college experience. In the fall of 2015, 24 percent of full-time undergraduates attended community colleges, and 49 percent of all students who received their bachelor’s degree in the 2015–2016 academic year had attended a two-year institution previously. Also, students who begin their college educations at community colleges have success at four-year programs that is similar to that of traditional students entering these programs from high school.
Community colleges also fill important ne
eds by helping older workers refresh their skill sets. Community colleges typically tailor their programs to local job markets, offering specialized classes for workers hoping to improve their résumés. The dramatically lower costs of community college make higher education more affordable; the average cost of a year of community college was $3,350 in 2014–2015.
Finally, workers need more security. Progress has been made in giving all Americans access to affordable health insurance—which should not depend on employment, as it often did in years past—but we still have a long way to go. The Affordable Care Act (ACA) was a huge step in the right direction, but we should work to improve rather than weaken it. When Congress recently repealed the individual mandate requiring Americans to purchase health insurance, it weakened the entire structure of the ACA.5 Economic insecurity is also tied to consumer indebtedness. We should bolster the Consumer Financial Protection Bureau (CFPB), which works to help protect consumers from financial instability. More generally, financial regulation must be strong enough to keep the financial system stable, supporting sustainable economic growth.6
Better Community Adjustment
The best response to economic disruption is to help those individuals who are directly harmed. Sometimes, however, entire communities have been hurt by trade shocks and technological disruption. Policies directed at these communities, such as investments in infrastructure and education, can be quite useful. These investments are likely to help attract business activity.
The Federal government can also play a bigger role helping communities adjust. By its very nature, the federal government helps smooth shocks across regions: it collects less in federal taxes from regions that are not doing well economically, and at the same time spends more on means-tested programs and unemployment insurance in regions that are experiencing downturns. Research finds that the federal tax system reduces the negative impact of lower incomes by one-third or more, while automatic federal spending increases have a smaller beneficial effect due to their smaller size.7 When regions experience unusual economic downturns or shocks, it would be wise to increase federal spending, particularly on infrastructure and education needs.
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