There are always malcontents. But the portion of Americans sick of crony capitalism, ruthless corporate efficiency and do-more-for-less work is growing large enough to threaten advantages big companies have enjoyed for decades.
This economic frustration, of course, is propelling the insurgent presidential campaigns of Republican Donald Trump and Democrat Bernie Sanders. Trump, who seems increasingly likely to be the GOP nominee, favors steep new tariffs on imports and other protectionist measures meant to reverse key elements of globalization and bring more jobs back to America. He has also caused publicity problems for companies such as Ford (F), Nabisco (MDLZ) and Carrier (UTX), by calling out their plans to close U.S. facilities and open new ones in Mexico.
Sanders rails repeatedly against “disastrous trade deals” and “billionaires on Wall Street who destroyed this economy,” while calling for breaking up big banks, imposing sharp tax hikes on the wealthy and giving the government more control over the economy than it has had at any time since World War II. With those ideas gaining traction, rival Hillary Clinton has moved left, opposing certain trade deals she once supported.
The revolution could peter out. It’s quite possible that Clinton—an establishment centrist on many economic issues, with close ties to Wall Street—will be the next president, more or less muzzling the roar of discontent until the next election cycle. Yet even so, the forces behind this voter outrage won’t go away, and might even intensify during coming years. And another recession is inevitable at some point, which will swell the ranks of the angry dispossessed.
The attack on capitalism that’s defining the presidential election focuses on free trade, a complex topic policymakers are beginning to rethink. Economists have long thought free trade, with minimal tariffs or other restrictions on the flow of goods between countries, would make everybody better off, overall. Goods would be produced as efficiently as possible, keeping inflation low and assuring strong returns on corporate investment. There would be losers as work shifted from high-cost areas to lower-cost ones, but displaced workers would find comparable jobs in other parts of the economy, with government aid as a backstop. Employment, productivity and living standards would rise faster than in a more closed economy that discouraged trade.
Economists are now discovering, however, that the broader benefits of free trade with some countries—China, in particular—are taking far longer to develop than they should. And they may never arrive. A new study by economists David Autor of MIT, Gordon Hanson of the University of California, San Diego, and David Dorn of the University of Zurich finds that China’s rise as a manufacturing powerhouse during the last 25 years has caused a “trade shock” in many parts of the U.S. economy that still hasn’t subsided. “Employment has fallen in U.S. industries more exposed to import competition, as expected,” they write. “But offsetting employment gains in other industries have yet to materialize.” Instead of finding other rewarding opportunities in “non-trade exposed” industries, many displaced workers suffer repeated bouts of unemployment and depressed lifetime earnings. That’s when they start paying attention to Donald Trump or Bernie Sanders.
Most U.S. multinationals have shifted work to China and other low-cost counties, because they have little choice: Once competitors lower labor costs, they have to do the same thing. When they don’t, they end up like the U.S. auto industry in 2008, which had such bloated costs, compared with foreign automakers, that GM and Chrysler declared bankruptcy and Ford nearly did.
What has been missing from 25 years of mostly unfettered globalization is an adequate safety net for American workers harmed by free trade. Washington offers a benefit known as trade adjustment assistance to workers who lose their jobs because of foreign competition, but it’s so small that the paper's author calls it “effectively inconsequential.” Employers, for their part, mostly rely on the free market to absorb displaced workers. But the market hasn’t been up to the job.
While the unemployment rate today is a low 4.9%, the labor force participation rate--the portion of eligible adults either working or looking for work--has been falling for 15 years and is now at the same level as in 1977, before women joined the labor force in large numbers. The U.S. economy has more jobs than ever, but household income, adjusted for inflation, is still lower than it was in 2000. By definition, that means the typical family is earning less.
Aside from the 2009 stimulus program, Congress has done little to address the problem. U.S. corporations, meanwhile, are focused on ways to keep profits strong in a slow-growing economy, and that doesn’t usually involve a boost in benefits for workers or safety-net programs. Instead, companies are aggressively seeking new ways to dodge U.S. taxes, which has led to the phenomenon of corporate “inversions” and other complex ways of shifting profits to other countries with lower tax rates. A 2015 study by Citizens for Tax Justice found that 358 of the Fortune 500 companies—72%--used offshore tax havens in places like Bermuda and the Cayman Islands to lower their U.S. tax bills. Companies with the most money held offshore include Apple (AAPL), General Electric (GE), Microsoft (MSFT), Pfizer (PFE) and IBM (IBM). Everybody’s doing it, which means everybody has to do it.
Americans have been souring on these corporate practices for a while. Only 21% of people said they have confidence in big business in the latest Gallup poll, down from 30% in the late 1990s and a peak of 34% in 1975. A recent survey by Just Capital, a new corporate watchdog group, found that 52% of Americans feel corporate behavior is going in the wrong direction, with just 30% saying it’s going in the right direction. And more than 70% said it’s “never okay” for corporations to pay very low wages, under a variety of scenarios—even if it would create more jobs.
Corporate America has mostly shaken off such concerns, as if it’s mere billowy rhetoric likely to blow over. But a sustained shift in public attitudes may now be leading to real policy changes that hit the bottom line. In the United States, the Trans Pacific Partnership—a free trade deal championed by President Obama—seems increasingly likely to fail in the Senate, which must approve the deal for it to go into effect. Obama and other supporters argue that the TPP, which includes Canada and 10 Pacific nations—but not China—is meant to create a trade bloc with minimal barriers to trade that’s able to counter China’s growing heft. But critics argue it would send even more U.S. jobs overseas, and whether they’re right or wrong, the clamor of opposition to new trade deals could doom the TPP.
That’s not all. Wall Street banks are failing to win much relief from the 2010 Dodd-Frank regulations, and a prominent official from the George W. Bush administration—Neil Kashkari, president of the Minneapolis Federal Reserve Bank—now agrees with Bernie Sanders that the government should break up the biggest banks. Meanwhile, the next president may have the momentum to pass new laws penalizing China for currency devaluation (whether it’s actually happening or not), banning corporate inversions, ending the controversial “carried interest” tax provision that almost exclusively benefits the wealthy, and plugging other corporate tax loopholes.
The party could be ending overseas, as well. “Countries around the globe seem to be fed up with profits being shifted to tax havens,” Credit Suisse analysts wrote in a recent report. “It looks like tax risk is on the rise and the companies that have been benefiting most … could see their tax rates head higher over time.” Last year, the European Union published a “ blacklist” of tax havens naming 30 countries it deemed “non-cooperative” on tax compliance. And new EU rules announced just this month will require multinationals to disclose more information on where they stash profits, a move meant to discourage tax dodging and boost revenue for member nations.
Corporate America will undoubtedly survive, even if new policies crimp profits. But it may be time for enlightened CEOs to take more responsibility for workers harmed by globalization and push harder for policies that would create good jobs, such as more spending on infrastructure or public-private programs to train workers in the skills employers need most—coding, say, or other technical abilities. Doing nothing is an option, too, but that may not work as well as it has in the past. Voters seem to have other plans—and finally, the ear of politicians.
Rick Newman’s latest book is Liberty for All: A Manifesto for Reclaiming Financial and Political Freedom. Follow him on Twitter: @rickjnewman.