Trade and the Safety Net

As the campaign starts to focus on Ohio, a traditionally blue collar manufacturing state, the issue of international trade and who will push back harder against trade agreements will undoubtedly receive a lot of attention.

Both Clinton and Obama are appealing to populist sentiment. There is much to dislike in the way corporate interests are carefully negotiated during "free" trade negotiations. Labor and environmental considerations are secondary concerns that tend to serve more as window dressing.

As unpopular and as distasteful as these agreements might be, and while it makes a lot of political sense to rail against them, they should not detract from the broader idea that there are large economic gains from trade to be had. Exports are one important factor that has helped keep the economy afloat during the housing downturn and credit crunch.

These gains from trade however, are broadly dispersed among all consumers (e.g. cheap toys from China) while the costs are highly concentrated in specific industries and specific regions (e.g. textile workers in the South). I think there is a reasonably strong consensus among many economists in Democratic policy circles that we finally have to stop paying lip service to the idea that we need a stronger safety net for displaced workers. Much of our current safety net is antiquated.

In 2004 during the Democratic primaries, there was growing talk about broader wage insurance policies that would help address the dramatic losses to permanent income that accompany job losses, irrespective of whether they are due trade or other structural changes in the economy. I guess I'm a little bit disappointed that the candidates are largely avoiding talking about such policies.

I checked Hillary Clinton's website and could find nothing related to trade and trade-related safety net policies under "issues" [in an earlier post, Don Pedro noted that Hillary would expand the TAA based on a information in a Clinton press release]. Obama, to his credit, does have a section on his website discussing several specific policies that deal with expanding the safety net:

Improve Transition Assistance: To help all workers adapt to a rapidly changing economy, Obama would update the existing system of Trade Adjustment Assistance by extending it to service industries, creating flexible education accounts to help workers retrain, and providing retraining assistance for workers in sectors of the economy vulnerable to dislocation before they lose their jobs.

Ideally I think its important to go farther than this. Robert Lalonde, an economics professor at the University of Chicago recently wrote a detailed report (pdf) entitled "The Case for Wage Insurance". He makes the case that its time to move beyond just linking support for dislocated workers with international trade. That approach has not successfully bought political support for trade but only undermined it.

...the linking of displacement assistance to trade has helped foster the false impression that displacement largely results from liberalized trade, whereas the truth is that technological progress and changing patterns of consumer demand contribute more to job churning. A program that might have made trade deals more politically salable has therefore risked having the opposite effect of cementing the connection in popular debates between trade and economic hardship. The misleading connection between assistance and trade has also created an undesirable double standard: workers displaced by trade are offered help while those displaced for other reasons often are not, even though there is little policy justification for this distinction and it can be hard to tell what caused a particular worker to lose his or her job.

Congress needs to address this problem by going beyond the traditional conception of trade adjustment assistance and modestly funded low-intensity retraining programs for displaced workers. Policies toward displaced workers need to be better funded than in the past. They need to include all displaced workers rather than just those affected by trade, and they need to offer meaningful wage insurance. In principle, these prescriptions could have bipartisan appeal. Wage insurance extends help to middle-aged, middle-class workers, which should attract support from labor unions and their allies. But wage insurance proposals envision paying benefits only when eligible displaced workers find and keep jobs, which should make the program palatable to conservatives.

Unfortunately, until recently, both labor groups and conservatives have been skeptical of wage insurance, characterizing it alternatively as “burial insurance” or as
excessively expensive. But there have been hopeful signs recently in Congress. Senator Max Baucus (D-MT), the chairman of the Senate Finance Committee, which has jurisdiction over trade, and Senator Norm Coleman (R-MN) are pushing a TAA proposal that includes wage insurance. Jim McDermott, a Democratic representative from Washington State and chairman of the Joint Economic Committee, and Senator Charles Schumer (D-NY) have coauthored a freestanding wage insurance bill. House Republicans have offered an alternative wage insurance plan that would be funded at the expense of unemployment insurance. None of these proposals is sufficiently ambitious, as this paper will argue. But they are evidence of the hopeful gathering of support for the concept of wage insurance.

The politics of trade have grown so toxic that wage insurance cannot guarantee a resumption of liberalization. But polling evidence suggests it would help. Kenneth F. Scheve and Matthew J. Slaughter, the leading experts on globalization and public opinion, report that Americans understand that trade brings lower prices and greater variety, but that a growing majority nonetheless opposes trade liberalization because of fears of stagnant or falling wages. Similarly, a Program on International Policy Attitudes (PIPA)–Knowledge Networks Poll conducted in January 2004, “Americans on Globalization, Trade, and Farm Subsidies,” concludes that, “If the government would make substantial, visible efforts to mitigate the side effects of expanded trade, support for the growth of trade would be substantially higher than it is. When the possibility of helping workers adapt to changes associated with increased trade is considered, support for free trade becomes very strong.”

Moreover, irrespective of the potential benefits from trade liberalization or from technological changes that lead to permanent job losses, wage insurance is desirable in its own right. As this report explains, wage loss following displacement can be as financially catastrophic as the loss of a house. But whereas private markets offer insurance for storms and fire, no such insurance is available when a middle-aged worker loses a job and suffers a permanent drop in wages. There is a market failure here, and government should correct it.