Commentary

The Truth on Trade

By Daniel Griswold
This article appeared in the New York Post on November 7, 2007.

President Bush urged Congress yesterday to pass four pending trade agreements, telling a White House audience that open markets boost economic growth, raise standards of living by creating higher-paying jobs and deliver more choice and better prices for consumers. Despite claims to the contrary by populist opponents of trade expansion, the president has the facts and decades of experience on his side.

Critics of trade counter that real wages have stagnated while the middle class has been squeezed by a loss of jobs to low-wage competitors such as China and Mexico. Democrats in Congress point to those anxieties to justify their opposition to any meaningful trade-expanding legislation — including pending free trade accords with South Korea and Colombia and renewal of presidential trade-promotion authority.

Like so many assumptions about trade, the belief that more global competition has somehow lowered the living standards of the average American worker and family is just a myth.

The critics have it all wrong: The middle class isn’t disappearing — it’s moving up.

The Census reports that the share of U.S. households earning $35,000 to $75,000 a year (in ‘06 dollars) — roughly, the middle class — has indeed shrunk slightly over the last decade, from 34 percent to 33 percent. But so, too, has the share earning less than $35,000 — from 40 percent to 37 percent.

It’s the share of households earning more than $75,000 that’s jumped — from 26 percent to 30 percent.

Trade has helped America transform itself into a middle-class service economy. Yes, the country’s lost a net 3.3 million manufacturing jobs in the past decade — but it’s added a net 11.6 million jobs in service and other sectors where average wages are higher than in manufacturing. Most of these new jobs are in better-paying categories, like professional and business services, finance and education and health services.

Trade and globalization have also helped bolster the balance sheets of American households by delivering higher incomes, lower interest rates and wider investment opportunities. From 1995 to 2004, the real median net worth of U.S. households jumped by 31 percent, boosted by rising home values and stock prices. (Even with the recent housing slump, average home values remain more than 2.5 times what they were a decade ago, according to the S&P/Case-Shiller index.)

Despite frequently heard worries, American families are not “drowning in debt.” Yes, total household debt has risen in the past decade — but total assets have risen in value even faster.

On average, U.S. households spent 14.4 percent of their income on debt payments in 2004, not much different from the 14.1 percent they spent in 1995. The bulk of what we’ve borrowed hasn’t paid for groceries or big-screen TVs but for housing — which, again, has appreciated strongly in the last decade.

Like so many assumptions floating around about trade, the belief that more global competition has somehow lowered the living standards of the average worker and family is just a myth. In fact, trade has delivered lower prices, higher worker compensation and an upwardly mobile middle class.

The critics have it all wrong: The middle class isn’t disappearing — it’s moving up.”

Critics of trade repeat as a mantra that real wages have been stagnant since the 1970s. But the data on real wages exclude benefits — which have been rising as a share of worker compensation. Those data also rely on a cost-of-living index that has systematically overstated inflation and thus understated real income gains.

The U.S. Bureau of Labor Statistics reports that the average real hourly compensation earned by Americans has actually grown by 22 percent during the past decade — even as trade and other measures of globalization have grown rapidly.

Trade has brought us lower prices on a broad range of goods — from fruits and vegetables to consumer electronics and automobiles — stretching the paychecks of U.S. workers.

Household incomes have also been rising. When they point to a small decline in median household income compared to 2000, opponents of trade are cherry-picking their numbers. That year was the frothy peak of a decade-long expansion. Use 1996 — the comparable point in the previous business cycle — as the baseline, and you see a 6 percent rise in median income.

Convincing Americans that we are worse off than we were in years past has become a popular line of attack against globalization and trade expansion. But trade has played an important part in the positive story of long-term gains in hourly compensation, household income and net wealth.

To promote further progress for U.S. workers and their families, Congress and the administration should work together to pursue policies that expand the freedom of Americans to participate in global markets.