Globalization, International Trade, Globalization, International Trade, and Outsourcing: Understanding and Outsourcing: Understanding

Economic Growth and Polarization in Economic Growth and Polarization in AmericaAmerica

25th Anniversary Montana Arbitration and Labor 25th Anniversary Montana Arbitration and Labor Relations ConferenceRelations Conference

Barry BluestoneBarry Bluestone

Northeastern UniversityNortheastern University

Bozeman, MTBozeman, MT

September 23, 2004September 23, 2004

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%A

vera

ge A

nnual G

row

th

1800-18401840-1870

1870-18901890-1913

1913-19291929-1939

1939-19491949-1959

1959-19691969-1979

1979-19891989-1995

4.2%

5.1%

4.5%

4.1%

2.9%

0.1%

4.5%

3.9%

4.4%

3.2%3.0%

2.3%

Long-Term Real GDP Growth in theUnited States 1800-1995

Sources: David (1800-1840); Gallman (1840-1870); Maddison (1870-1929); CEA 1987 (1929-59); CEA 1997 (1959-1989); "EconomicIndicators" (1989-2000)

DEPRESSION

WW II

Glory Days

The Post-War Glory Days1947-1973

Rapid Rapid GDP GrowthGDP Growth in the U.S.: in the U.S.: 1950s: 1950s: 3.9%3.9% 1960s: 1960s: 4.4%4.4% 1970s: 1970s: 3.2%3.2%

Real Real Family IncomeFamily Income doubles doubles (+104%)(+104%) Declining UnemploymentDeclining Unemployment

Unemployment Rate declines to Unemployment Rate declines to 3.8%3.8% -- --

1966-19691966-1969 Rising Incomes for Rising Incomes for Most FamiliesMost Families

$6.50

$7.00

$7.50

$8.00

$8.50

$9.00

59 64 69 74 79 84 89 94 99 4

Real Average Hourly EarningsTotal Private Sector ($1982)

1972

1982

1993

2003

1959

1972-93 - 16%

1993-03

+ 10%

1959-72

+ 34%

0%

1%

2%

3%

4%

Annual P

erc

ent C

hange

Lowest 20%Lower Middle

MiddleUpper Middle

Top 20%

3.0%

2.6% 2.7% 2.7%2.4%

How U.S. Family Income Grew1947-1973

Why the U.S. Grew So Fast

1947-1973

Y= C+I+G+X-M Consumer BoomConsumer Boom

Pent up Savings & Pent up DemandPent up Savings & Pent up Demand Union collective bargaining gainsUnion collective bargaining gains

Investment BoomInvestment Boom Conversion to Civilian ProductionConversion to Civilian Production

Government Spending BoomGovernment Spending Boom State & Local Spending on Urban Renewal, State & Local Spending on Urban Renewal,

New Suburbs, New RegionsNew Suburbs, New Regions Cold WarCold War

Export BoomExport Boom - Marshall Plan - Marshall Plan Import ImplosionImport Implosion - Legacy of WWII - Legacy of WWII

Wage & Security-Led Growth

Rise of Collective Bargaining 36% of American Workforce Unionized36% of American Workforce Unionized Another 1/3 or so benefit from Another 1/3 or so benefit from

“sympathetic” pressure“sympathetic” pressure Traditional Workplace Contract

AIF/COLA Wage FormulaAIF/COLA Wage Formula ““Fringe” BenefitsFringe” Benefits Seniority SystemSeniority System Grievance SystemGrievance System Work Rules/Job ClassificationsWork Rules/Job Classifications Union Security ClauseUnion Security Clause Management Rights ClauseManagement Rights Clause

Consumption

PublicSector

DemandStimulus

Pent-upDemand

Pent-upSavings

Investment

ProductivityGrowth

OutputGrowth

Wage &BenefitGrowth

VirtuousCycle

UnionCollective

BargainingGains

TechnologicalInnovation

The Post World War IIVirtuous Cycle

Growth inLabor Supply

FederalR&D

Spending

The End of Affluence …..

An Age of Diminished

Expectations

0%

1%

2%

3%

4%

5%

Ave

rag

e A

nn

ua

l G

row

th R

ate

1959-1969 1969-1979 1979-1989 1989-1995

4.4%

3.2% 3.0%

2.3%

Revised GDP Growth Rates1959-1995

Declining Growth Rates

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Annual U

nem

plo

ym

ent R

ate

1960s 1970's 1980's

5.3%

6.2%

7.3%

Average Unemployment RateUnited States 1960-1989

Source: Bureau of Labor Statistics, Handbook of U.S. Labor Statistics

Rising Unemployment

$6.50

$7.00

$7.50

$8.00

$8.50

$9.00

59 64 69 74 79 84 89 94 99 4

Real Average Hourly EarningsTotal Private Sector ($1982)

1972

1982

1993

2003

1959

1993-03

1972-93 - 16%

-1%

0%

1%

2%

Annual P

erc

ent C

hange

Lowest 20%Lower Middle

MiddleUpper Middle

Top 20%

-0.6%

-0.2%

0.2%

0.5%

1.3%

How Family Income Grew1973-1995

Source: U.S. Department of Labor

Increasing Income Inequality

So Why Did the U.S. Growth Engine Sputter in the 1970s?

Oil CrisisOil Crisis in the 1970s in the 1970s Business forced to focus on Business forced to focus on energy energy

efficiencyefficiency, not new products or new , not new products or new technologiestechnologies

Corporate Myopia Corporate Myopia andand Arrogance Arrogance in face of in face of new competitionnew competition

Little emphasis onLittle emphasis on productivity, quality, and productivity, quality, and innovationinnovation

Global Competitors Global Competitors stepped instepped in Imports Imports clobbered the economyclobbered the economy

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

Ave

rag

e A

nn

ua

l G

row

th

1949-1959 1959-1969 1969-1973 1973-1979 1979-1989 1989-1995

3.4%

3.1% 3.1%

1.3%1.2% 1.1%

Labor Productivity Growth1949-1995

1949-1973 1973-1995

Plummeting Productivity

TrumanEisenhower KennedyJohnson Nixon FordCarter

2%

4%

6%

8%

10%

12%

14%

16%

Perc

ent

4748

4950

5152

5354

5556

5758

5960

6162

6364

6566

6768

6970

7172

7374

7576

7778

7980

8182

8384

8586

8788

8990

9192

9394

9596

9798

9900

0102

0304

Imports as % of GDP

Reagan BushClinton

1929 Import/GDP Ratio

Bush W.

TrumanEisenhower KennedyJohnson Nixon FordCarter

-500

-400

-300

-200

-100

0

100

$ b

illions

4749515355575961636567697173757779818385878991939597990103YEAR

U.S. Trade BalanceExports - Imports (Goods)

Reagan BushClintonBush W.

So Why Did Inequality Explode?

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

Surprise, Surprise!

Prosperity Regained …1995-2000

0%

1%

2%

3%

4%

5%

Ave

rag

e A

nn

ua

l G

row

th R

ate

1959-19691969-19791979-19891989-19951995-1999

4.4%

3.2% 3.0%

2.3%

4.5%

Revised GDP Growth Rates1959-1999:III

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Annual U

nem

plo

ym

ent R

ate

1960s 1970's 1980's 1990-95 1996-98

5.3%

6.2%

7.3%

6.4%

4.9%

Average Unemployment RateUnited States 1960-1998(II)

Source: Bureau of Labor Statistics, Handbook of U.S. Labor Statistics

$6.50

$7.00

$7.50

$8.00

$8.50

$9.00

59 64 69 74 79 84 89 94 99 4

Real Average Hourly EarningsTotal Private Sector ($1982)

1972

1982

1993

2003

1959

1959-72

1972-93 - 16%

1993-03

+ 10%

So Why did the U.S. Grow Again?

The New Conventional The New Conventional Wisdom:Wisdom:

The Wall Street ModelThe Wall Street Model

Wall Street ModelWall Street Model Weak Trade UnionsWeak Trade Unions kept wages and prices down kept wages and prices down Welfare ReformWelfare Reform increased labor supply, keeping increased labor supply, keeping

wages and prices lowwages and prices low Tight monetary policyTight monetary policy kept inflation under control kept inflation under control

and interest rates lowand interest rates low Deficit Reduction/Surplus GenerationDeficit Reduction/Surplus Generation raised raised

aggregate savings rate, lowering interest ratesaggregate savings rate, lowering interest rates Free TradeFree Trade depressed wages, forced prices down, depressed wages, forced prices down,

and kept inflation under controland kept inflation under control >>>>>>>>>>>>

All leading to a stock market boom All leading to a stock market boom and new investmentand new investment

RisingStockPrices

SubduedInflation

IncreasedWealth

IncreasedSpending

OutputGrowth

IncreasedCorporate

Profit

VirtuousCycle

TechnologicalInnovation

Wall StreetVirtuous Cycle

IncreasedCapital

Investment

ImprovedProductivity

SubduedInflation

FallingInterestRates

FallingInterestRates

IncreasedSavings

IncreasedSavings

So Who’s responsible for the new economic boom?

Was it Was it BillBill ClintonClinton … who got the deficit under … who got the deficit under control?control?

Was itWas it Alan Greenspan Alan Greenspan … who got inflation under … who got inflation under control?control?

Was itWas it Ronald Reagan Ronald Reagan … who got government under … who got government under control?control?

Answer:Answer:

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 Long Lags in Technology/Productivity CycleTechnology/Productivity Cycle

0%

1%

1%

2%

2%

3%

3%

4%

Avera

ge A

nnual G

row

th R

ate

1949-19591959-19691969-19731973-19771977-19811981-19891989-19931993-1999

3.4%

3.1% 3.1%

1.5%

0.8%

1.6%1.7%

2.1%

Revised Productivity Growth Statistics1949-1999:III

Productivity Rebound began in the 1980s

1

1.5

2

2.5

3

3.5

4

4.5

Pro

ductivity

1 8 15 22 29 36 43 50 57 64 71 78

Time

"Learning Curves"Introduction of New Technologies

TechnologyRelease 1.0

TechnologyRelease 2.0

TechnologyRelease 3.0

Actual Productivity Trend- - - - - - - - - - -

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

1.1

1.2

La

bo

r P

rod

uctivity G

row

th in

%

1660 1680 1700 1720 1740 1760 1780 1800 1820 1840 1860 1880

Productivity Growth during theBritish Industrial Revolution

0.4%

0.2%

0.5%

1.1%

"Initial" Phase

"Diffusion/Learning"Phase

"Mature"Phase

"Pre-Revolution" Phase

Source: Adapted from Jeremy Greenwood, 'The Third Industrial Revolution"

Figure 3.4

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

La

bo

r P

rod

uctivity G

row

th in %

180018051810181518201825183018351840184518501855186018651870

Productivity Growthduring the U.S. Antebellum Period

0.63%

0.30%

1.40%

"Diffusion/Learning"

Source: Adapted from Jeremy Greenwood, "The Third Industrial Revolution"

New Technologies that spurred New Technologies that spurred Economic GrowthEconomic Growth

Steam EngineSteam Engine …. 19th C. …. 19th C. ElectrificationElectrification …. Early 20th C. …. Early 20th C. Integrated CircuitIntegrated Circuit …. Late 20th C. …. Late 20th C.

Computer HardwareComputer Hardware Computer SoftwareComputer Software InternetInternet e-commercee-commerce

But each takes decades to But each takes decades to impact productivity and growthimpact productivity and growth

Where did the new technology come from for the 1990s

Boom? The Missile RaceThe Missile Race following Sputnik (‘50s/’60s) following Sputnik (‘50s/’60s) The The Space RaceSpace Race with Russia (‘60s/’70s) with Russia (‘60s/’70s) From From Government Spending onGovernment Spending on Defense to the Private Defense to the Private

SectorSector in a Quarter Century in a Quarter Century It was hideously expensive, terribly wasteful, but in a It was hideously expensive, terribly wasteful, but in a

peculiar way it paid off decades laterpeculiar way it paid off decades laterSo who’s most responsible for U.S. Economic Boom?

Nikita Khrushchev

Public Sector + Private SectorWorking Together

Federal GovernmentFederal Government provided Basic provided Basic Research fundsResearch funds

Local, State, and Federal GovernmentLocal, State, and Federal Government educated and trained a labor force to educated and trained a labor force to effectively use the new technologyeffectively use the new technology

Private sectorPrivate sector converted basic research converted basic research to applied developmentto applied development

.... and productivity .... and productivity soaredsoared

Public Investment in the 1960s, 1970s, and early

1980s ... ... Basic ResearchBasic Research Education (after Sputnik)Education (after Sputnik) Public Infrastructure (Interstate Public Infrastructure (Interstate

highways, airports, internet)highways, airports, internet)

............PAID OFF IN THE LATE PAID OFF IN THE LATE 1990s1990s

Since 2000 .....

-200

-100

0

100

200

300

(in thousands)

HooverRoosevelt-Truman

EisenhowerKennedy-Johnson

Nixon-FordCarter

Reagan-BushClinton

Bush W.

-177.3

89.5

33.5

168.1

117.6

210.6196.5

235.4

-93.6

Monthly Net Job Growthfrom Truman to George W. Bush

0

5

10

15

20

25

30

Month

s

1953-541957-581960-611970-711974-751981-821990-91 2001-

Months of Continous LossMonths of Year-over-Year Loss

Duration of Job LossRecession Years 1947-2003

?

-2

0

2

4

6

8

10

Perc

ent C

hange

2001 2002 2003:I 2003:II 2003:III

0.3

2.4

1.4

3.3

7.2

1.9

5.4

2.1

7.0

8.1

-1.3

-0.4-0.1 -0.1

0.1

Real GDP ProductivityEmployment

Growth, Productivity, & Employment2001-2003:III

0%

1%

2%

3%

4%

5%

6%

7%

Early 1980s' RecessionEarly 1990s' Recession

Early 2000s' Recession

6.0%

3.2%

2.0%

4.6%

1.9%2.1%

3.3%

1.9%

2.3%

1.5%

1.0%

1.4%

Less than High School GradHigh School Grads Some College College Grads

Percentage Point Changein Unemployment Rate

“Democratizing” Unemployment

Federal Outlays for Physical Capital, Research and Development, and Education and Training: As a % of GDP

1.5

1.75

2

2.25

2.5

2.7519

62

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

Year

% o

f G

DP

2.7%

1.75%

Federal Outlays For Research and DevelopmentAs a % of GDP

0.5

0.75

1

1.25

1.5

1.75

2

2.2519

62

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

Year

% o

f G

DP

2%

1%

Federal Outlays for Non-Defense R&DAs a % of GDP

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1962

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

Year

% o

f G

DP

1%

0.4%

Federal Outlays for Research and Development in National DefenseAs a % of GDP

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

1962

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

Year

% o

f G

DP

Reagan “Boomlet”

Federal Outlays For General Science R&DAs a % of GDP

0.00%

0.10%

0.20%

0.30%

0.40%

0.50%

0.60%

0.70%

0.80%

1962

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

Year

% o

f G

DP

.75%

.10%

Federal Outlays for Energy R&DAs a % of GDP

0.00%

0.02%

0.04%

0.06%

0.08%

0.10%

0.12%

0.14%

1962

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

Year

% o

f G

DP

Energy Crisis.12%

.015%

Federal Outlays for Transportation R&DAs a % of GDP

0.01%

0.02%

0.03%

0.04%

0.05%

0.06%

1962

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

Year

% o

f G

DP

.04%

.02%

Federal Outlays for Natural Resources and Environment R&DAs a % of GDP

0.01%

0.02%

0.03%

0.04%

0.05%

0.06%

1962

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

Year

% o

f G

DP

.02%

.05%

Federal Outlays for Health R&DAs a % of GDP

0.05%

0.10%

0.15%

0.20%

0.25%

1962

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

Year

% o

f G

DP

.25%

.10%

A Model of Growth for the

21st Century

Regaining and Sustaining Prosperity

Quick stimulus in short runQuick stimulus in short run

Public investment in basic Public investment in basic research, education, research, education, homeland security, and homeland security, and infrastructure in the long runinfrastructure in the long run

Restoring Social Equity

Higher Minimum WageHigher Minimum Wage Labor Law Reform to Foster Labor Law Reform to Foster

UnionizationUnionization Fair TradeFair Trade Invest in Public SchoolsInvest in Public Schools Universal Health Care CoverageUniversal Health Care Coverage Expand Public Goods (e.g. Expand Public Goods (e.g.

Transportation, Day Care, Elder Transportation, Day Care, Elder Care)Care)

Consumption

FederalReserve

Policy

Investment

ProductivityGrowth

OutputGrowth

Wage &BenefitGrowth

VirtuousCycle

UnionCollective

BargainingGains

TechnologicalInnovation

21st CenturyMain Street Model

Virtuous Cycle

Growth inEnhanced Labor

Supply

IncreasedMinimum

Wage

PublicInvestment in

R&D

PublicInvestment inInfrastructure

PublicInvestment inEducation &

Training