The Agenda

Tyler Cowen on America’s Export-Oriented Future

Tyler Cowen has an excellent essay in The American Interest, a magazine that suits his discursive style and wide-ranging interests. A few of the core ideas:

(1) As manufacturing grows more capital-intensive, and more automated, labor costs and relative wage levels will matter less and other factors will matter more. This suggests that we’ll see more insourcing. Yet even as labor costs and relative wage levels diminish in importance, it’s not obvious that big emerging markets won’t continue to capture a growing share of manufacturing activity. Proximity to end-users in those countries will become increasingly valuable as they grow more affluent. So the insourcing we’re likely to see will presumably be import-substituting insourcing, destined for North American end-users. Tyler briefly mentions that this represents an opportunity for Mexico as well as the U.S. (Given that Mexico has lost ground to China in recent years, this makes intuitive sense; once China’s cost advantage erodes, Mexico’s proximity advantage will grow in importance.)

(2) The shale gas revolution will reduce net energy imports. Moreover, the speed with which fracking has taken hold is an indication of America’s enduring flexibility advantage relative to Europe.

(3) As emerging economies grow more affluent, their appetite for U.S. exports will increase. The following passage is particularly interesting:

Over the past twenty years, the United States has suffered an oddly unfavorable position in the global economy. China has been wealthy enough to bid up resource prices, including oil, but not wealthy enough to buy enough major American exports to bring buying and selling into even rough balance. Nor has China been innovative enough to come up with new products for American consumers. As China continues to grow, America will become a bigger winner. Just as Canada and Australia have prospered over the past ten years because their specialties matched Chinese demands, the United States is likely to be the bigger winner in the next ten years as Chinese (and other) demands mature. It’s a trend that has clearly already begun. In 2010, for instance, American exports to China rose by 32 percent, according to a 2011 report by the U.S.-China Business Council. Furthermore, American companies, with their practicality and marketing expertise, will be well positioned to convert scientific innovations from Chinese labs into new commercial products once such innovations start to arrive in large numbers.

Indeed, Tyler goes on to offer a strikingly positive vision of America’s export-oriented future: persistent trade deficits will mostly close, the U.S. military will retain its strength and global reach, the Americas will grow more peaceful and more politically and economically integrated, opposition to free trade will start to evaporate, etc. 

Yet what we won’t see — and here is where Tyler’s vision of what an export-oriented future can and can’t mean — is a significant improvement of the labor market position of less-skilled workers. The ranks of elite labor will grow. One assumes that knowledge-intensive services will flourish in this world, for example. But legions of high-wage blue-collar manufacturing jobs? They’re not coming back. 

To some extent, these trends resonate with the old saying, “Live by the sword, die by the sword.” Jobs in the export sector face intense competition, precisely because U.S. companies are increasingly selling into a global market, and that means wages in this sector cannot be guaranteed to rise. They might, and they might not, depending on how creative, efficient and well managed we are. Services, in contrast, are often produced inefficiently, but the jobs are more extensively cocooned within a protected domestic market, often based on government privileges and market-distorting third-party payment schemes.

The more America becomes an export-oriented economy, the more it and the nation as a whole will live by the principles of competitive markets. Let’s be clear what this means: Our companies will be living under this market pressure, not most of our jobs. We will continue to cut a proverbial “deal with the devil”, in which ever more jobs will be created in the relatively protected service sectors, while much of the economic dynamism and income gains will accrue to the capitalists, CEOs and managers who dare to export. A lot of people complain about this deal from both sides of the political spectrum, but few observers are willing to countenance a truly open, competitive set of educational, governmental and health care institutions as a remedy. Libertarian-leaning recommendations for open competition everywhere may or may not be acceptable to us, but they have a bracing way of pushing the truth before our eyes. When it comes to protecting service-sector jobs and paying for their enormous inefficiencies, we are sleeping in the bed we ourselves made some time ago.

In a sense, the critical debate for export-oriented America is whether we maintain the extensive (and expensive) cocoon protecting workers in the subsidized education and health sectors or if we embrace open competition. The latter approach will tend to increase real incomes, yet it might also intensify wage dispersion — that is, the gains at the top will be bigger than the gains at the middle and at the bottom, though all will be better off in real terms. We might prefer to maintain a large cocoon and milk the competitive export-oriented sectors to afford the subsidies, i.e., we might continue on the current path.

It’s a well-known description in the literature of political economy that the economy of a developing country may have two quite distinct tiers: a relatively dynamic export sector and a relatively backward domestic sector, often comprised largely of agriculture and local production. That used to be true of the Japanese economy in the early postwar period, and today think of the relatively efficient automobile production in Thailand, backed by Japanese capital, and compare it to the millions of Thais who grow their own food on small-scale plots or run very small local businesses. Workers clamor for posts in the better-paid export sector, but the exporting firms can absorb only so many, so they are sorted by education, social status and connections.

In the next stage of development, a country moves beyond this picture to having virtually all of its sectors become dynamic, as we have found in most of the United States, Japan after around 1970, and Western Europe. These days, this old portrait of the two-tiered economy, originally applicable to a developing economy, may be re-emerging for the United States. We had not thought through seriously enough the possibility that the world’s most technologically advanced economy would, over time, develop persistent and indeed growing productivity differentials across sectors. It clearly has, and the social and political frictions this has caused now dominate our politics—or soon will.

Tyler’s essay is about much more than exports: it paints a bright, optimistic scenario for the U.S. economy in which the political problem posed by inequality grows more rather than less intense.

Have you ever seen a plausible story about how we might drive wage and wealth compression in the U.S. in the coming decades? We often hear that increasing public investment in human capital will do just that, but I’m not sure that’s true. Creating a more innovative, competitive K-12 ecology might improve the human capital endowments of young people form disrupted households, etc. But it will also help children from more stable, affluent backgrounds move even further ahead. We could use punitive taxes to mitigate post-tax-and-transfer inequality. Yet this might have growth-dampening effects, and it won’t do much to address the underlying causes of dispersion. Those of us who aren’t instinctive egalitarians don’t find this intrinsically problematic. But of course many of our interlocutors are egalitarians — so how do we get to where they want us to go?

Reihan Salam is executive editor of National Review and a National Review Institute policy fellow.

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