Greenspan confirms foreign competition depressed US wages.

"Too Much Fed" quotes from a Wall Street Journal review of Alan Greenspan's new book in this Mark Thoma post:

Many economists say the Fed, by cutting short-term interest rates to 1% in mid-2003 and keeping them there for a year, helped foster a housing bubble that is now bursting. In his book, which was largely written before much of the recent turmoil in credit markets, Mr. Greenspan defends the policy. "We wanted to shut down the possibility of corrosive deflation," he writes. "We were willing to chance that by cutting rates we might foster a bubble, an inflationary boom of some sort, which we would subsequently have to address....It was a decision done right."

He attributes the housing boom to the end of communism, which he says unleashed hundreds of millions of workers on global markets, putting downward pressure on wages and prices, and thus on long-term interest rates.

Notice how he seems to like low wages and low prices and does NOT like stagnation in stocks, bonds, and housing prices. He does seem to like (asset) bubbles though.

Greenspan oddly credits the end of communism for a global labor glut when he should have credited globalization. Communism only ended in the Soviet Union and affected a relatively small number of workers in nations with minimal trade relations with the West. At its peak, just before dissolution in 1991, the Soviet Union had a population of 293 million, whereas Mexico, China, and India had a combined population more than 10 times that size. Alan, don't try to lay off on the commies the competitive pressures on US wages; you and the free trade coalition were responsible for our declining middle class.

Update on Thursday, January 8, 2009 at 08:48AM by Skeptic

Other prominent economists have lately said that globalization has contributed to the decline of the American middle class, and even the New York Times editorial board has admitted it.  If we want the results to change, we have to change our policies.

Update on Friday, June 26, 2009 at 08:55AM by Skeptic

The National Bureau of Economic Research has published a study confirming that the offshoring activities of US multinational companies to low wage nations and import competition depress US wages. The Abstract:

In this paper, we link industry-level data on offshoring activities of U.S. multinational firms, import penetration, and export shares with individual level worker data from the Current Population Surveys. We examine whether increasing globalization through offshoring or trade has led to reallocation of labor, both within and out of manufacturing, and measure its impact on the wages of domestic workers. We also control for the “routineness” of individual occupations. Our results suggest that (1) offshoring to high wage countries is positively correlated with U.S. manufacturing employment (2) offshoring to low wage countries is associated with U.S. employment declines (3) wages for workers who remain in manufacturing are generally positively affected by offshoring; in particular, we find that wages are positively associated with an increase in U.S. multinational employment in high income locations (4) much of the negative effects of globalization operate through downward pressure on wages of workers who leave manufacturing to take jobs in agriculture or services and (5) the downward pressure on aggregate U.S. wages operating through import competition has been quite important for some occupations. This effect has been overlooked because it operates across, not within, industries.

Update on Monday, August 31, 2009 at 09:48AM by Skeptic

Berkeley professor Ann Harrison summarizes the work of herself and colleagues on International trade, offshoring, and US wages.

Did the negative effects of international trade and offshoring activities on US wages increase in the 1990s relative to earlier decades? We find that they did, and that the negative impact of offshoring to low-wage countries on both US wages and employment only became important in the 1990s. The wages of older workers appear to have been disproportionately hurt by offshoring activities.

Interestingly, they found that offshoring to high-wage countries actually increased US wages in the same industries. 

Update on Thursday, October 8, 2009 at 03:31PM by Skeptic

Larry Summers said 3 years ago that the middle class in high-wage nations was being left out of global economic growth.  The beneficiaries have been the owners of capital and workers in low-wage nations.

Some anti-globalisation sentiment can be seen as a manifestation of resistance to the US arising from the Bush administration’s foreign policy misadventures. But there is a much more troubling source: the growing recognition that the vast global middle is not sharing the benefits of the current period of economic growth – and that its share of the pie may even be shrinking.

Two groups have found themselves in the right place at the right time to benefit from globalisation and technological change. First, those in low-income countries, principally in Asia and especially in China, who are able to plug into the global system. The combination of low wages, diffusible technology and the ability to access global product and financial markets has fuelled an economic explosion.

. . . .

Second, it has been a golden age for those who already own valuable assets. Owners of scarce commodities have seen their returns rise prodigiously. People running businesses that can take advantage of globalisation to source labour less expensively and sell to larger markets have seen their incomes rise far faster than incomes generally. Certainly those in the financial sector in a position to benefit from the asset revaluations associated with globalisation have prospered.

Everyone else has not fared nearly as well. As the great corporate engines of efficiency succeed by using cutting-edge technology with low-cost labour, ordinary, middle-class workers and their employers – whether they live in the American midwest, the Ruhr valley, Latin America or eastern Europe – are left out. This is the essential reason why median family incomes lag far behind productivity growth in the US, why average family incomes in Mexico have barely grown in the 13 years since the North American Free Trade Agreement passed, and why middle-income countries without natural resources struggle to define an area of comparative advantage.

. . . .

The economic logic of free, globalised, technologically sophisticated capitalism may well be to shift more wealth to the very richest and some of the very poorest in the world, while squeezing people in the middle.

Mr. Summers clearly regards this as a political problem but offered no solution. I wonder if he's got one now that he's chairman of the National Economic Council.