Was Reich Right on Global Competition for Jobs?

By now you may have seen the Wall Street Journal op-ed by Martin Neil Baily, Matthew J. Slaughter, and Laura D’Andrea Tyson on the global job growth picture. The basic argument is that U.S.-based multinational firms face strong incentives to shift job creation from the U.S. to overseas markets:

Despite the common allegation that multinationals simply “export jobs” out of the U.S., research shows that expansion abroad by these firms has tended to complement—not substitute for—their U.S. operations. More investment and employment abroad have tended to create more American investment and jobs as well. From 1988 to 2007, employment in foreign affiliates rose to 10 million from 4.8 million. During that same period, employment in U.S. parent companies rose to 22 million from 17.7 million.

But there is no guarantee that the past will be prologue. McKinsey conducted in-depth interviews with senior executives from 26 of America’s largest and best-known multinationals. Their message is sobering: Today the U.S. is in an era of global competition to attract, retain and grow the operations of multinational companies that it’s never faced before.

Drawing on the survey, the authors caution policymakers:

It is our strong belief that their concerns must be taken seriously by U.S. policy makers at all levels. We aren’t saying that America’s economic policy should be driven by the considerations of U.S. multinational firms alone—far from it. But when millions of American workers are facing severe hardship, driving our strongest companies with the best-paying jobs overseas certainly won’t help.

Last August, Zachary Karabell made a parallel argument in his excellent op-ed titled “Corporate Earnings Are No Sign of Recovery“:

Many larger companies have been profiting because they can focus on where the growth is around the globe. Companies such as Intel, Caterpillar, Microsoft and IBM now derive a majority of their revenues from outside the U.S., with the dynamic economies of the Asian rim and above all China assuming an ever-larger role. Companies are thriving in spite of economic activity in the U.S., not because of it.

That suggests the connection between corporate profits and robust economic recovery in the U.S. is tenuous at best. In fact, the financial crisis hastened the trend toward efficiencies, toward leaner inventories, and towards integrating both technology and global supply chains that has been taking place over the past decade.

That has led to severe pressure on the American working class and eroding employment. As these companies profit from global expansion and greater efficiency, they have little or no reason to rehire fired workers, or to expand their work force in a U.S. that is barely growing. If you are a global company, you want to hire and expand where the most dynamic growth is. Unfortunately for Americans, that’s not the U.S.

This discussion reminds me of Laura D’Andrea Tyson’s debate during the early 1990s with Robert Reich. Both went on to become Clinton Administration officials, yet they disagreed about the importance of aiding U.S.-based multinationals. Reich’s argument, in his popular book The Work of Nations and elsewhere, was that the U.S. should focus on building the skills of U.S. workers rather than on supporting “national champions.” Tyson, in contrast, maintained that U.S.-based multinationals were a key driver of economic and job growth. Back in 2005, she revisited the debate:

In my debate with Robert Reich, I made two main arguments. First, the competitiveness of the American economy is linked to the competitiveness of American multinational companies. Second, economic policy should focus on maintaining America’s position as an attractive location for high-wage production by both domestic and foreign companies. Since then, the number of U.S. manufacturing jobs has plummeted; the U.S. trade and current account deficits have exploded; and improvements in information technology have enabled offshoring to low-wage locations. But my two basic arguments hold.

She emphasized that her differences with Reich were minor while they agreed on the essentials:

Globalization is here to stay, but rapid globalization only confirms the basic policy conclusion, which Reich and I share, that the overarching goal of U.S. economic policy should be to enhance the competitiveness of the U.S. economy as a place for global companies — domestic or foreign — to locate high-wage activities.

First, the United States must dramatically increase national saving. The trade and current account deficits have exploded since 2001, not because American companies have gone on an offshoring binge but because the gap between what America spends and what America produces has jumped.

Second, the United States must invest more in its workforce, transportation, utilities, and communications infrastructures, and its research base — the most important im- movable assets on which national competitiveness depends. The Bush administration’s economic agenda, driven by large tax cuts for the well-off, fails spectacularly on both counts.

So far, so banal. I get the sense that Tyson isn’t fully owning up to her enthusiasm for intervening on behalf of U.S.-based firms, which led to fierce and incisive criticism from the Paul Krugman of yesteryear. Reich’s timing might have been off. But his emphasis on investing in U.S. human capital rather subsidizing U.S. firms resonates in the current climate.