Globalization, International Trade, and Outsourcing: Understanding Economic Growth and Polarization in America 25th Anniversary Montana Arbitration and Labor Relations Conference Barry Bluestone Northeastern University Bozeman, MT September 23, 2004

Glory Days

The Post-War Glory Days Rapid GDP Growth in the U.S.: Rapid GDP Growth in the U.S.: 1950s: 3.9% 1950s: 3.9% 1960s: 4.4% 1960s: 4.4% 1970s: 3.2% 1970s: 3.2% Real Family Income doubles (+104%) Real Family Income doubles (+104%) Declining Unemployment Declining Unemployment Unemployment Rate declines to 3.8% -- Unemployment Rate declines to 3.8% Rising Incomes for Most Families Rising Incomes for Most Families

Why the U.S. Grew So Fast

Y= C+I+G+X-M Consumer Boom Consumer Boom Pent up Savings & Pent up Demand Pent up Savings & Pent up Demand Union collective bargaining gains Union collective bargaining gains Investment Boom Investment Boom Conversion to Civilian Production Conversion to Civilian Production Government Spending Boom Government Spending Boom State & Local Spending on Urban Renewal, New Suburbs, New Regions State & Local Spending on Urban Renewal, New Suburbs, New Regions Cold War Cold War Export Boom - Marshall Plan Export Boom - Marshall Plan Import Implosion - Legacy of WWII Import Implosion - Legacy of WWII

Wage & Security-Led Growth Rise of Collective Bargaining Rise of Collective Bargaining 36% of American Workforce Unionized 36% of American Workforce Unionized Another 1/3 or so benefit from “sympathetic” pressure Another 1/3 or so benefit from “sympathetic” pressure Traditional Workplace Contract Traditional Workplace Contract AIF/COLA Wage Formula AIF/COLA Wage Formula “Fringe” Benefits “Fringe” Benefits Seniority System Seniority System Grievance System Grievance System Work Rules/Job Classifications Work Rules/Job Classifications Union Security Clause Union Security Clause Management Rights Clause Management Rights Clause

The End of Affluence ….. An Age of Diminished Expectations

Declining Growth Rates

Rising Unemployment

Increasing Income Inequality

So Why Did the U.S. Growth Engine Sputter in the 1970s? Oil Crisis in the 1970s Oil Crisis in the 1970s Business forced to focus on energy efficiency, not new products or new technologies Business forced to focus on energy efficiency, not new products or new technologies Corporate Myopia and Arrogance in face of new competition Corporate Myopia and Arrogance in face of new competition Little emphasis on productivity, quality, and innovation Little emphasis on productivity, quality, and innovation Global Competitors stepped in Global Competitors stepped in Imports clobbered the economy Imports clobbered the economy

Plummeting Productivity

So Why Did Inequality Explode? Skilled-Biased Technological Change Skilled-Biased Technological Change Rise of Service-based Economy Rise of Service-based Economy Industry Deregulation Industry Deregulation Declining Unionization Declining Unionization Lean Production & Destruction of Job Ladders Lean Production & Destruction of Job Ladders “Winner-Take-All” Labor Markets “Winner-Take-All” Labor Markets Growing International Trade Growing International Trade Outsourcing & Capital Mobility Outsourcing & Capital Mobility Immigration Immigration Trade Deficits Trade Deficits

Surprise, Surprise! Prosperity Regained …

So Why did the U.S. Grow Again? The New Conventional Wisdom: The Wall Street Model

Wall Street Model Weak Trade Unions kept wages and prices down Weak Trade Unions kept wages and prices down Welfare Reform increased labor supply, keeping wages and prices low Welfare Reform increased labor supply, keeping wages and prices low Tight monetary policy kept inflation under control and interest rates low Tight monetary policy kept inflation under control and interest rates low Deficit Reduction/Surplus Generation raised aggregate savings rate, lowering interest rates Deficit Reduction/Surplus Generation raised aggregate savings rate, lowering interest rates Free Trade depressed wages, forced prices down, and kept inflation under control Free Trade depressed wages, forced prices down, and kept inflation under control >>>>>> >>>>>> All leading to a stock market boom and new investment All leading to a stock market boom and new investment

So Who’s responsible for the new economic boom? Was it Bill Clinton … who got the deficit under control? Was it Bill Clinton … who got the deficit under control? Was it Alan Greenspan … who got inflation under control? Was it Alan Greenspan … who got inflation under control? Was it Ronald Reagan … who got government under control? Was it Ronald Reagan … who got government under control? Answer: None of the above.... None of the above.... Despite all the ballyhoo, the Wall Street Model does NOT explain the U.S. boom in the late 1990s

It takes a little bit of history to understand America’s new prosperity... Long Lags in Technology/Productivity Cycle

Productivity Rebound began in the 1980s

New Technologies that spurred Economic Growth Steam Engine …. 19th C. Steam Engine …. 19th C. Electrification …. Early 20th C. Electrification …. Early 20th C. Integrated Circuit …. Late 20th C. Integrated Circuit …. Late 20th C. Computer Hardware Computer Hardware Computer Software Computer Software Internet Internet e-commerce e-commerce But each takes decades to impact productivity and growth But each takes decades to impact productivity and growth

Where did the new technology come from for the 1990s Boom? The Missile Race following Sputnik (‘50s/’60s) The Missile Race following Sputnik (‘50s/’60s) The Space Race with Russia (‘60s/’70s) The Space Race with Russia (‘60s/’70s) From Government Spending on Defense to the Private Sector in a Quarter Century From Government Spending on Defense to the Private Sector in a Quarter Century It was hideously expensive, terribly wasteful, but in a peculiar way it paid off decades later It was hideously expensive, terribly wasteful, but in a peculiar way it paid off decades later So who’s most responsible for U.S. Economic Boom? Nikita Khrushchev Nikita Khrushchev

Public Sector + Private Sector Working Together Federal Government provided Basic Research funds Federal Government provided Basic Research funds Local, State, and Federal Government educated and trained a labor force to effectively use the new technology Local, State, and Federal Government educated and trained a labor force to effectively use the new technology Private sector converted basic research to applied development Private sector converted basic research to applied development.... and productivity soared.... and productivity soared

Public Investment in the 1960s, 1970s, and early 1980s... Basic Research Basic Research Education (after Sputnik) Education (after Sputnik) Public Infrastructure (Interstate Public Infrastructure (Interstate highways, airports, internet) highways, airports, internet) PAID OFF IN THE LATE 1990s

Since

“Democratizing” Unemployment

2.7% 1.75%

2% 1%

0.4%

Reagan “Boomlet”

.75%.10%

Energy Crisis.12%.015%

.04%.02%

.05%

.25%.10%

A Model of Growth for the 21st Century

Regaining and Sustaining Prosperity Quick stimulus in short run Quick stimulus in short run Public investment in basic research, education, homeland security, and infrastructure in the long run Public investment in basic research, education, homeland security, and infrastructure in the long run

Restoring Social Equity Higher Minimum Wage Higher Minimum Wage Labor Law Reform to Foster Unionization Labor Law Reform to Foster Unionization Fair Trade Fair Trade Invest in Public Schools Invest in Public Schools Universal Health Care Coverage Universal Health Care Coverage Expand Public Goods (e.g. Transportation, Day Care, Elder Care) Expand Public Goods (e.g. Transportation, Day Care, Elder Care)