Economy & Business

Free-Market Republicans Risk Irrelevance by Ignoring the Concerns of Blue-Collar Voters

Trump supporters at a rally in Cedar Rapids, Iowa, June 21, 2017. (Reuters photo: Scott Morgan)
We need a plan for faster growth that doesn’t come at the expense of the middle and working classes.

Prior to the president’s victory, protectors of free enterprise, foreign-policy hawks, and social conservatives controlled the GOP by giving each other what they wanted most: lower taxes and restrained spending; larger defense budgets; and judges who limited the federal government. President Trump’s supporters upended this coalition, seized control of the GOP, and won the presidency with victories in Pennsylvania, Ohio, Michigan, and Wisconsin — states Republicans haven’t swept in decades.

Candidate Trump succeeded by championing the interests of blue-collar voters who believe that trade, low-skilled immigration, and labor-saving automation slow their wage gains; that competition for government spending threatens their Social Security and Medicare; and that identity politics diminishes their economic opportunities. While the president’s supporters were inclined to vote Republican, they felt betrayed by the GOP’s support for trade and low-skilled immigration. President Trump’s supporters want a shortage of labor to raise their wages. They don’t want labor so cheap we can afford to brew coffee a cup at a time.

Support for free enterprise has always been fragile. Free-market Republicans must recognize they can’t build a winning coalition without the president’s supporters. In our two-party democracy, agendas without winning coalitions are largely irrelevant.

Dismissing President Trump’s supporters as racist, antiestablishment, or lemmings of polarized media trivializes their concerns and deflects attention from their agenda. His supporters view criticism of the president as self-serving, undermining their leader’s effectiveness, and subordinating their objectives to other priorities — the very fear of these previously underrepresented voters. Whether the criticism is valid or not, the president’s supporters won’t vote for it. If free-market Republicans want to regain the trust of the president’s supporters and influence the GOP by wielding electoral muscle, they need to address these voters’ concerns.

Protecting free enterprise demands growth that benefits an electable majority of Americans. Previously, economies of scale from capital-intensive manufacturing drove growth. High-skilled workers designed products for lesser-skilled mass-market consumers and created higher-paying jobs for them. Capital investment increased blue-collar productivity and wages.

In today’s information-driven economy, high-skilled workers are in demand — and their presence or absence is what enables or constrains growth. As a result, high-skilled workers design products and processes that increase high-skilled rather than low-skilled productivity. Capital investment has shifted toward these products as well. Blue-collar productivity and wage growth have lagged.

A relative shortage of U.S. talent exacerbates the problem. Twenty-five percent of Americans score in the top-third globally on comparable tests of academic skills, according to data from the Organization for Economic Cooperation and Development, while forty-five percent score in the bottom third — meaning America has roughly one high-scorer for every two low-scorers. A third of Germans score in each the top, middle, and bottom third, leaving Germany with one high-scorer for every low-scorer — twice as many high-scorers per low-scorer as America. Scandinavia has three times as many; Japan, nearly five times. A shortage of high-skilled labor leaves America’s unskilled workers less supervised relative to those in other high-wage economies, especially when innovation gives America’s high-skilled workers better opportunities than their counterparts in other high-wage economies.

At the same time, trade allows America to sell high-skilled labor — Apple operating systems for example — and buy cheap low-skilled labor. Trade puts upward pressure on high-skilled wages by increasing the demand for high-skilled workers and downward pressure on low-skilled wages by increasing the supply of low-skilled workers.

America can’t make what it can buy for less and remain competitive. We must trade with low-wage economies.

But neither can we ignore trade’s redistributive effects. Access to low-cost offshore labor drives manufacturing abroad and pressures onshore manufacturers to accelerate productivity growth. As domestic manufacturing employment declines, rural workers can’t export their labor at high wages to more prosperous cities. Communities that lose factories don’t recover lost wages. The productivity of America’s rural areas is no longer converging with that of its large cities.

Talent migrates to America’s fastest-growing cities, leaving lesser-skilled workers to fend for themselves. This brain drain slows American low-skilled productivity and wage growth.

Hope may spring eternal, but free-market Republicans haven’t won the last three presidential elections.

Meanwhile, a shortage of real estate in America’s most successful cities drives up rent, canceling out the wage gains that blue-collar workers could reap by moving there. For the first time, low after-rent wages drive middle-class workers from these cities. Why should workers support free trade and innovation-driven growth concentrated in a handful of cities if they don’t share the benefits?

Blue-collar jobseekers also find 60 million foreign-born adults and their native-born adult children, including 35 million largely low-skilled Hispanic adults, looking to the same small pool of talented entrepreneurs to create competitive, high-wage blue-collar jobs for them. Spreading talent over more low-skilled workers slows low-skilled productivity and wage growth.

The counterarguments are unconvincing. When talent and risk-taking constrain growth, capital investment on its own doesn’t increase blue-collar productivity and wages. Successful investment requires talented engineering and supervision that’s deployed more profitably elsewhere. High blue-collar wages in America’s fastest-growing cities show automation has not capped wage growth. The overlapping distribution of low-skilled domestic- and foreign-born workers’ wages indicates these workers largely compete with, rather than complement, each other. Blue-collar workers have logically grown skeptical of trade, low-skilled immigration, and free enterprise.

Adding to their concerns, looming fiscal deficits threaten Social Security and Medicare. Education doesn’t produce enough high-earning workers to pay for retiring Baby Boomers without growth-crushing tax increases or unsustainable borrowing that leaves America vulnerable to a growing Chinese military threat. Organic growth fast enough to fund retirement benefits is a pipe dream.

Hope may spring eternal, but free-market Republicans haven’t won the last three presidential elections. Free enterprise must provide real solutions to the problems facing blue-collar workers. Given the burden already borne by these workers, proposals that balance America’s budget by reducing retirement benefits are politically untenable. In an economy where talent, and not capital, constrains growth, ultra-high-skilled immigration — a squandered opportunity — is America’s only viable alternative. Faster growth that doesn’t come at the expense of the middle and working classes would go a long way toward “making America great again.”

Edward Conard — Edward Conard is an American Enterprise Institute visiting scholar, a former Bain Capital partner, and author of The Upside of Inequality: How Good Intentions Undermine the Middle Class.

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