America’s social contract is broken—of course the people are reacting

“You cannot simply say that there will be growth and they will get back into the labor force later.”
“You cannot simply say that there will be growth and they will get back into the labor force later.”
Image: Reuters/Chris Tilley/File Photo
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A few weeks before the presidential election, Jared Bernstein, a former adviser to vice president Joe Biden, had some unintentionally prescient words to fans of globalization as hitherto practiced. After presenting an outline of how US trade policy could be reformed, Bernstein cautioned the very sophisticated crowd at a Washington think tank against reflexive opposition to change.

“If your response is: ‘We don’t like what you said and we don’t have any ideas of how to do it differently,’” Bernstein said, “then you may not be the friend to globalization that you like to think you are.”

Bernstein had, in essence, called out the world’s elites for failing to look after those who lost out to globalization, and for creating an international order tilted toward their own particular talents. No one in the room had the faintest notion, myself included, exactly how vociferously many Americans agreed with Bernstein, and how readily they would seize the moment that 2016 offered.

Political scientists will no doubt argue for a long time to come about the role that trade policy specifically, and globalization more broadly, played in this year’s US election. We can conclude that it was extremely important, even if we don’t agree that it was decisive. President-elect Donald Trump played on fears and criticism of deals like the North American Free Trade Agreement, offshoring and outsourcing, lost manufacturing jobs, China’s rise, and the very notion that borders should consist of anything but a very tall wall.

Now Trump announced plans to halt US participation in any new trade deals and promised to renegotiate existing ones. In short, the world now faces that very scenario that free-traders warned against for years if the United States did not fight for ever-freer trade: that China, rising, confident, and unabashedly illiberal in its politics, would seize the mantle of leadership from the United States.

You’ll be able to see the Chinese lay down a marker about the post-American world in a month when Chinese president Xi Jinping attends the World Economic Forum in Davos, Switzerland. The oh-so-cosmopolitan gathering will see the first-ever Chinese leader head his country’s delegation, normally extremely small because it coincides with the lunar new year holidays. Yes, you read that right: a real-live Communist is headed to a meeting of what you might call, oh, the central committee of the bourgeoisie. If future historians search for a moment when the migration of global leadership from Washington to Beijing got underway, they’ll surely read Xi’s speech in Davos.

A few decades ago, the global elites who laid the foundations for what we now call our globalized world, reached a pact—an implicit agreement—about the rules of the game. At the time, the Cold War was wrapping up, China stood on the brink of an historic renaissance, and Latin America was shaking off a decade of low growth and dictatorship.

The year was 1989. The rules became known as the Washington Consensus, and explaining why the world’s elites failed to hold up their end of that bargain, to follow the rules, throws a lot of light on why Donald Trump can win 45%+ of the American electorate. It was the closest thing to a social contract for globalization that ever existed.

The idea of a social contract—a pact between people who seek to live together in peace—dates back millennia. The actual practice of it probably dates back to the first time homo sapiens discovered that sacrificing a bit of freedom to the collective raised their odds of survival in an unforgiving world. Since then a parade of now-dead white guys articulated the nature of the social contract in political philosophers’ terms: Socrates, Hobbes, Locke, Rawls.

A still-alive white guy named John Williamson, a British economist, first wrote of what he called the Washington Consensus to highlight the converging belief that free-market policies represented the best antidote to stagnation and, later, post-Communist revival. The ten-point list includes overlapping policy prescriptions that emanated from Washington-based institutions like the World Bank and the International Monetary Fund. They now have somewhat poisonous overtones on both left and—thanks to Trump—right: trade liberalization, open foreign investment, deregulation, competitive exchange rates.

The Washington Consensus, which has important caveats and exceptions that are frequently overlooked, was not terribly off-base. But that global, mostly Western, elites violated the social contract they themselves wrote. The reaction to their self-dealing helped elect Trump, and accelerate China’s primacy in the international order. And some of those violations are so obvious that it’s hard to believe anyone actually read even the Cliff’s Notes version of Williamson’s work.

An economist at what is now the Peterson Institute for International Economics, the second point Williamson made in his manifesto—after fiscal discipline—was investment in education, health care, and infrastructure. When I pointed this out to Adam Posen, the current president of the institute—and host to Bernstein’s talk, no less—he began nodding his head vigorously at the broader point.

Any sustainable system has to account for people who are displaced by the overall commitment to internationally free markets because people do lose their jobs from trade, and a bolt-turner cannot easily become a software designer. “You cannot simply say that there will be growth and they will get back into the labor force later,” Posen said.

He also cited the growing economic literature on “persistence,” the idea that a spell of unemployment affects a person’s earnings for far longer period than the time of joblessness, particularly after the Great Recession that began in Dec. 2007. One pair of economists found that when Americans lose their jobs and the unemployment rate is 8% or above, they’ll lose a “staggering”—their word—2.8 years of earnings because they’ll end up making less than before. In your own mind, right now, multiply your annual salary by three and think about losing that amount of money!

Yet the idea of a cushion for people left behind in the United States still ends up in the buzzsaw of rhetoric over freeloaders, bootstraps, and (alleged) socialism. Opposition to universal health care, at the very least in the version pushed through by president Barack Obama, remains a touchstone for Republicans. They even oppose the meager program, known as Trade Adjustment Assistance, that offers support to people and communities affected by free-trade deals.

All the while, free-trading elites engaged in the very protectionism that the Washington Consensus cautions against.

Trade agreements like NAFTA, the World Trade Organization, and others have created an open, level playing field for producing and selling all manner of widgets of the sort that Detroit autoworkers, Pennsylvania steelworkers, and Iowa farmers produce. They were exposed to global competition, and many lost their jobs. That said, we have to acknowledge that free-trade theory panned out: those wares got cheaper for consumers. But it’s instructive to look at what trade agreements protected as well.

Those deals could have been designed to make other things cheaper for consumers, like legal services—absurdly expensive in the United States in particular—or pharmaceuticals. But trade deals didn’t loosen licensing requirements for attorneys or make it easier to import cheap drugs from developing countries. In fact, stronger patent rules have been a hallmark of American trade policy since the 1980s. The pharmaceutical industry is now trying to wangle American-style extended patent protection—protection from competition, in other words—for advanced therapies.

In short, trade deals cheapened the value of sweat and exertion on the assembly line, precisely the thing that many Western workers have to offer. But they only raised the value of the sort of intellectual capital that highly educated Americans and Europeans peddle as financiers, engineers, doctors, and lawyers.

If the essence of a durable social contract is that people benefit by sacrificing some measure of freedom for a bit of shelter from the storm, then the globe’s elites got it horribly backwards. They sacrificed everyone else’s protection for their own benefit. Now the backlash is in full swing.