Workers and Globalization: The Need for a New Deal

IMGXYZ686IMGZYXIntroduction

Good morning everyone and welcome to the Carnegie Endowment for International Peace.  My name is Sherman Katz and I am a Senior Associate at Carnegie.  We are pleased and honored to present this discussion with Congressman Jim McDermott (D-WA) on “Workers and Globalization, The Need for a New Deal.”
 
After I introduce the topic and Congressman McDermott briefly, we’ll hear his remarks, and then we’ll turn to the audience for discussion beginning with questions from two experts on this subject, Howard Rosen who chairs the Trade Adjustment Assistance Coalition and Thea Lee of the AFL-CIO.

As I think we all now know it will be increasingly difficult this year and in future years for the U.S. to remain a leader for global trade liberalization if we do not do more than we have done to help workers who have been hurt by technology and trade.
 
As Congressman McDermott put it so well,
 
“In the mid-1990s, globalization accelerated to 100 miles per hour.  Unfortunately, nobody was standing around and thinking about what was happening to American workers…While some level of dislocation is inevitable in an era of globalization, a comprehensive vision of promoting employment calls for supporting workers through these periods of transition. Unfortunately, our present safety net for dislocated workers has more holes than net...”
 
I also like this formulation of the issue from a Republican source, the chief economist of Wachovia Bank [John Silvia] who previously worked in Congress for two then Republican-controlled committees.  He said, “There’s a clear social contract between capital and labor. When a corporation reallocates its resources, we cannot just leave these people flat and dead.”
 
Congressman McDermott has proposed replacing half of the difference between a worker’s old and new salary for up to $10,000 for two years to (a) reduce the level of hardship and (b) to give the worker time to gain experience, on the job training and some job seniority.
 
He says, “To those who say we should never concede that a worker may have to take a lower paying job, I say, ‘I am not a very good ostrich.’”
 
We look forward to his educating us about his ideas.
 
Congressman McDermott is a psychiatrist who served 15 years in the State of Washington legislature, then served as a foreign service medical officer based in Zaire giving help to FSO, AID and Peace Corps personnel in sub-Saharan Africa while based in Zaire.

He was elected to the House from Seattle in 1988 and is now in his 9th term.  He chairs the House Ways and Means Subcommittee on Income Security and Family Support.
 
Also in Congress, he founded and chairs the Congressional Task Force on International HIV/Aids.  He is the co-author of Single Payer health care legislation and leads the fight in the House to guarantee all Americans comprehensive health care coverage.
 
While in the state legislature, he developed the country’s first state program to provide low-cost health insurance to the unemployed and the working poor.
 
Congressman McDermott, we look forward to your comments.

Congressman McDermott’s Remarks
 
Good morning. Thank you, Sherman.  I'm glad to be here because I believe the topic we're going to discuss today is fundamental to America's economic strength and stability--- therefore, our personal and national security in the 21st century.
 
From the first day the founders declared our independence, America has always had the will to succeed.  Over the course of our history we shaped new ways to succeed in the face of a changing world.  We’ve done it by being competitive, ingenious, adaptable and pragmatic.  In other words, we’ve never shied away from a challenge.  And we face a new one.

The first production Model T Ford was assembled in Detroit on October 1, 1908, and it changed the world. Almost exactly 100 years later, technology--- from satellites, to cell phones, to Blackberry's, to the Internet--- has reduced the world to information packets connecting us at the speed of light, which is slightly faster than that first production Model T. 
 
This technological Renaissance is re-defining commerce as we have known and practiced it.  And much like October 1, 1908, this is just the beginning of dramatic change that we can either embrace or fight, but we can’t ignore. 
 
American life has changed.  Our society has changed, and it will continue to.  Fortunately, Americans and policy makers can shape this change, or at least respond to it in ways that help our families and empower the workers and the businesses that rely upon them.  We’ve been down this road before.

President Franklin Delano Roosevelt created the New Deal to drive new pillars of stability and security into America’s economic foundation, and it has been a phenomenal success.  It’s time for a New Deal.

It’s time for a new covenant between workers and business.  It’s time we recognize that we will increasingly work in a global economy. 
 
This path we are on - globalization – isn’t accidental.  Our nation’s founders chose to pursue capitalism and democracy as a means by which American workers would be limited only by their ambition.  By the mid-1930s economic bust, we recognized as a nation that some regulation and an economic safety net were vital for America to succeed.  Enactment of the Social Security Act in 1935, which gave dignity for the elderly and income insurance for the unemployed, ensured that all Americans continued to have a stake in the economy and in the future.  Now we need to make some adjustments to reflect the economic realities of our times.

Everyone here knows how globalization is changing our economy.  Some of these changes result from decisions by Congress to allow capital and goods and services to move more freely.  Other changes result from the technology we embrace.  By and large, the bottom line is a boon to economic growth and the value of U.S. corporations, but we can’t say the same for the American worker.  Wages for workers have stayed flat while anxiety over job security keeps rising.
 
The first visible signs of the collision between economic uncertainties and a global economy actually came in Seattle, my congressional district.  Everyone here knows of the unrest seen in Seattle during the 1999 WTO Ministerial Conference.  Despite a U.S. economy that was still enjoying record expansion, people were worried, and feeling economically vulnerable with little or no say over their economic future.
 
Unfortunately, the response to Seattle was to ignore this growing unease.  There is more dissatisfaction with the way the economy is being handled and the way in which we are pursuing trade liberalization.  The polls are clear on this, despite a booming stock market and steady GDP growth.
 
To pretend as though the people have it all wrong would be foolish, particularly for elected officials.  I believe the 2004 Indian elections provide us with some insight.  Over the past 15 years, India has been the second fastest-growing country in the world.  A 2003 study by Goldman Sachs projected that over the next 50 years, India will be the fastest-growing of the world’s major economies. 
 
Going into the 2004 elections the governing, center-right VJP party promoted the slogan “India Shining.”  And looking at the economic numbers, India was shining.  But in 2004 the electorate threw the governing party out of office.  While overall economic growth was impressive, many Indians were not sharing the benefits of the economy. 
 
I think we can also look more globally at a similar dynamic.  Global trade negotiations, which used to be dominated by the G-7, are now at a standstill because developing nations are not sharing in the benefits of trade as much as the rich nations.  And so there is gridlock.

I don't want to see economic gridlock threaten America, and I believe the best defense is a good offense.  We have to be realistic and we must be proactive.  In order to ensure that our economy continues to grow and develop, we must ensure that Americans have a stake in such growth.  When the Dow breaks records, and investment income soars, but wage income stagnates for the majority of Americans, the status quo cannot hold.  So what do we do? 
 
First, it’s not enough to say that there are going to be winners and losers from trade, then tell the losers we’re going to give them an unemployment check and a little retraining.  When a worker loses his or her job because of trade or outsourcing, government intervention is already too late.  Case in point: the Trade Adjustment Assistance program provides benefits that are too little and too late. 

Second, it’s not enough to simply say that if trade agreements included enforceable international labor standards that there would be a level playing field.  It’s just not true.  An American job can be among the most expensive in the world compared to its counterpart overseas. 

I think we really need to understand two things.  First, the nature of job dislocation has changed.  In the past, people would lose their jobs when the business cycle slowed, but those jobs would return when the economy rebounded: cyclical unemployment.  Today, people lose jobs that will never return, even during good economic times: structural unemployment.  Blue collar and white collar workers are increasingly equally vulnerable to job loss because of international competition.  And that’s not going to change.  Today’s workers will change jobs frequently.  Tomorrow’s workers will change jobs even more. 
 
Second, we need to understand what the employment picture means when we continue to tie health insurance and pensions to employment?  How can employers meet the challenges and opportunities of international competition when they provide employees what foreign firms often do not?  So what do we do - what does a New Deal look like?

First, we have to do away with employer-provided health insurance.  Globalization means more unpredictable employment; it should not mean more unpredictable health care.  Single payer health care, guaranteed by the government, would be tremendously helpful to every American family.  And done the right way, it would make American firms better able to compete. It would cost less and cover everyone.
 
Second, we need to ensure that each and every American has access to affordable continuing education.  We no longer live in a world where a worker can stop learning and training.  We need to provide education and training to workers before they are uncompetitive, not just afterwards.  We can’t approach the 21st century by financing education like we did in the 20th century.  Federal grants, loans, and tax incentives are designed for the traditional student that leaves high school directly for college.  These schemes don’t work for the non-traditional, working student, which is the fastest growing segment of college enrollees.

Third, we have to recognize that structural unemployment is here to stay, just as a global economy is here to stay.  Therefore, I believe we need to improve our policies that help workers when they transition from job to job.  We need to reform the Unemployment Insurance program to meet the needs of a modern workforce.  And, I believe the nation would benefit with from a program to insure wages, for those instances when a worker is laid off and decides to take a job with lower pay.
 
Let me talk about unemployment insurance reform first.  Established in 1935, the program provided a worker some income during a spell of unemployment that resulted from a layoff.  It cushioned families and communities, and helped diverse sectors from logging to airplanes weather cyclical downturns.  It should still serve the roll of helping workers where and when it can. But today over half of the unemployed do not qualify for unemployment insurance benefits because the program hasn’t kept up with the changing workforce.  For example, unemployment insurance was designed when women largely stayed home.  Today millions of women with children work part-time, but many states which administer the program disqualify part-time workers from receiving benefits. We can fix the holes in the unemployment insurance program quickly, and with little relative cost.
 
Many of you know that I’ve drafted legislation that would implement a national wage insurance program.  Under my bill, if a worker is laid off and ultimately accepts a new job with lower pay, the worker would receive a wage insurance supplement equal to half of the lost wages.  So, if a Microsoft programmer loses his $50,000 a year job because it was outsourced to India, where the programming can be done cheaper, and ultimately takes a new job that pays $40,000 per year, the wage insurance supplement would be $5,000 per year, for up to two years. 
 
Wage insurance is a response to the very simple fact that some jobs will leave and never come back.  When a worker loses a job like this, the worker often will go into a field where he or she has more limited experience and is more likely to take a pay cut.  Government data shows this to be true -- among reemployed full-time workers between 2001 and 2003, average earnings dipped by 13 percent.  The Congressional Budget Office tells us that one in five workers experienced an earnings decline of at least 25% from one year to the next.

Over time after reemployment a worker’s experience grows and becomes more likely to receive a pay increase.  Wage insurance helps during this transition and can be financed for about $20 per year for each worker. 

The concept of wage insurance has bipartisan appeal, and bipartisan criticism.  There are those that would prefer fewer entitlements for American workers, rather than more.  These people fail to recognize that it’s the entitlements that have, in part, enabled Americans to broadly share in the nation’s success. 
 
There are others who see wage insurance through the prism of our debate on trade liberalization.  Critics like the AFL-CIO view wage insurance as a response to a condition it views as unacceptable -- that American workers will sometimes lose jobs and accept new ones with initially lower pay.   This is short sighted. 
 
For almost a century federal policy has been to reduce global barriers to commerce, and that’s not going to change.  Today we are on the verge on a watershed moment where our trade policy could include promoting international labor standards. 

As important as this development is, it isn’t going to much affect income volatility.  Even if we halted approval of any new trade agreements, the structural unemployment situation that workers are coping with would not change, and the need for wage insurance would remain.  I suspect we’ll talk more about the issue during the question and answer period so let me conclude with this thought.

The political center on globalization cannot hold if we continue the status quo of embracing globalization for some, and ignoring its consequences for others.  Globalization can not be a zero-sum dynamic.  Lessons in history show us that societies move forward when they find ways for everyone to win.  Managing trade and economic integration effectively can ensure that workers on the trading floor, factory floor, and sales floor all win.  The American economy and standard of living is in jeopardy if we do not fundamentally rethink the way we ensure access to affordable healthcare and lifelong education and training.
 
We must address our economy as it is, and the world as it is.  The days of working for the same employer for 30 years, then retiring with an employer provided health and pension plans are gone.  The advantages that the American workers and businesses had coming out of the Second World War no longer exist.  Overseas competition will only continue to intensify, and we need to craft public policies to address the economic reality of a new century.   We can start by renewing the social compact established in the 1930s that led to the creation of the richest nation on earth and an economy that is the envy of the world. 

Thank you.

Discussion Session

Thea Lee of the AFL-CIO raised two concerns about Congressman McDermott’s wage insurance proposal.  First, she worried that better wage insurance would provide the wrong kinds of incentives for workers to shorten their job searches and settle for lower-paying jobs.  If there is no guarantee of on-the-job training and upward mobility in the reemployment that displaced workers find, how can we be sure that wage insurance will achieve the things it is supposed to?  Can such things be required of employers before wage insurance is provided?

Second, Lee acknowledged that including International Labor Organization core labor standards in future U.S. trade agreements is not a complete solution for the challenges posed by trade to American labor.  But she asked if Congressman McDermott supported slowing the pace of negotiating new trade agreements if core labor standards cannot be included, as proposed by some Democratic members of Congress.

Congressman McDermott responded that wage insurance is not a “silver bullet” and that pensions and health care, among other issues, must also be addressed.  The focus on wage insurance is partially a product of the jurisdiction of the House Ways and Means Committee.  He agreed that wage insurance should be tied to some kind of employment ladder that would include training and upward mobility.  Welfare reform in the 1990s forced many women to take dead-end jobs in order to meet program requirements, and we should learn from this experience.  The question of which jobs to give wage insurance to should be on the table, and the answer should be the result of democratic debate.  Congress has not changed its unemployment insurance law in 15 years, and it needs to be updated, for example by including part time workers.

On the second point, Congressman McDermott wondered why the U.S. should not require any countries with which it has trade agreements to institute a minimum wage of 50% of their median income.  He does not support a prohibition on new free trade agreements as a matter of policy.  In fact, he sees positive signs in the current trade politics of Congress, pointing out that legislators on both sides of the aisle are now communicating far more than they did under former-Ways and Means Chairman Bill Thomas (R-CA).  He reminded the audience that democratic legislating takes time.  Too much legislation has been rushed through by one party alone in the last few years.

Howard Rosen of the Trade Adjustment Assistance Coalition and Peterson Institute for International Economics stated that no major changes had been made to American unemployment policy since the New Deal 70 years ago.  Ideas for reform have been discussed for decades (by a blue-ribbon commission, by the “Nation At Risk” study), but no legislation has been passed.  He asked why we have not seen any progress on this issue.

Congressman McDermott lamented the lack of bipartisan cooperation and traced the problem back to the early 1980s.  Republican strategists determined that using a more divisive brand of politics was the only way they could reclaim control of Congress.  The spirit of collegiality was greatly weakened during the speakership of Newt Gingrich (R-GA).  The challenge we face now is how to get away from wedge issues and back to working together.  Gay marriage, for example, does not threaten America’s future, but the looming health care crisis does.  If Republicans agree that health care is a problem, then what is their plan?  It may take a collapse to jolt legislators into cooperating again.  Debates should be hard fought but eventually resolved.

Peter Whitney of American University said that job churn in the U.S. economy is tremendous (in the millions).  Trade represents only a small percentage of this.  He asked whether the wage insurance proposal will cover all job loss or just that which can be attributed to trade.  He also asked about whether the political situation in Peru should be a factor in the U.S. debate over a free trade agreement with that country.  Recent elections were close, and if the U.S. does not solidify this partnership, the country could move closer to President Hugo Chavez of Venezuela.

Congressman McDermott agreed that requiring strict determinations of which jobs were lost as a result of trade creates a lot of needless bureaucratic work and is ineffective.  We should make adjustment assistance available to all workers.  Regarding Peru, he thought it prudent to wait to see what compromise the White House and leadership of the Ways and Means Committee can reach on labor provisions in free trade agreements.  Latin America has turned away from the U.S. because of the way our country has been acting in recent years.  There may be other ways to fix the situation than breaking off trade negotiations.

Steve Charnovitz of George Washington University asked why Congress does not tackle the unemployment program broadly and try to accomplish something really big.  If Congressman McDermott does not attempt it, no one else will.  Charnovitz suggested that the wage insurance proposal is a tax on employers and does not necessarily empower workers.  Would this proposal make much difference if passed?

Congressman McDermott responded that much of what happens in the next two years will be a setup for the 2008 presidential election.  Congressional expectations of the White House are so low now that it would be difficult to pass meaningful legislation.  Congress intends to hold hearings, identify problems, and craft an agenda for the next president.  He said there is plenty of “low-hanging fruit” when it comes to reforming unemployment benefits, so it makes sense to try to forge a consensus on more minor changes now.

Alan Platt of Gibson, Dunn & Crutcher asked for an assessment of the chances for progress on the multilateral trade front within the next two years. Congressman McDermott said it will be difficult to getting anything done given the current state of affairs.  Trade promotion authority could be extended to the president for another year or eighteen months, but only if core labor standards are included.  At the moment, a deal on this remains distant.

Kim Elliott of the Peterson Institute for International Economics expressed hope that U.S. trade preferences would be reformed and extended and that a renewal of trade promotion authority for the Doha Round could be achieved.  She brought up Republican objections to core labor standards and dismissed the idea that including these in trade agreements would necessarily require changes in U.S. law.

Congressman McDermott remarked on the decline of U.S. influence in the world and said we are going to have to accept that other countries are now resistant to acquiesce to all of our demands.

Jane Siegel of the U.S. Department of Commerce’s International Trade Administration mentioned that the U.S. economy is 80% service based (most of this comprises private sector services).  Thirty percent of our trade comes from services, but the division of both personnel and attention within the trade policy community in Washington is still focused disproportionately on manufacturing and trade in goods.  Currently, we do not have enough information to understand the net gains or losses to U.S. service industries due to trade.  What should we be doing, on the education front and others, to prepare Americans for the service jobs of the future, in engineering and other fields?

Lawrence Bruser of Mitsui & Company asked why there was so much focus on core labor standards abroad when the problem of displaced workers is fundamentally a domestic one.

Paula Stern of the Stern Group said that the U.S does not have a sufficient supply of workers to satisfy the demand for labor in the domestic information technology industry.  She proposes creating a military-civilian IT pathway program, so that people who have been trained in IT in the military can use their skills to become teachers in community colleges and elsewhere.

Congressman McDermott said that core labor standards have become a symbol about the direction of U.S. trade policy and represent an achievable objective. Many in Congress feel that the promises made about labor in side letters to the North American Free Trade Agreement have proven to be insufficient.  That is why people want labor included in the agreements themselves.

The Congressman supports the idea of pathway programs, and advocated a similar idea for turning military medics into physicians’ assistants after the Vietnam War.  In the IT sector, we are going to need to figure out ways to make it attractive for employers to hire 50-year-old workers who have retrained themselves in IT rather than cheaper foreign labor.

This summary was prepared by Matthew Ocheltree, Research Assistant at the Carnegie Endowment.