Globalization Did Not Hollow Out the American Middle Class

For years, I’ve been calling for the U.S. to promote manufacturing. When Americans started getting excited about reindustrialization, I cheered. I was a big supporter of Joe Biden’s industrial policy, and I even praised Donald Trump for smashing the pro-free-trade consensus in his first term.

Trump’s tariffs haven’t changed my mind about any of that. Yes, the tariffs are a disaster. But they’re not a disaster because they promote manufacturing; indeed, they are deindustrializing America as we speak, by destroying American manufacturers’ ability to leverage supply chains and export markets. When America has finally realized the futility of Trump’s approach, it will be time to turn once again to the task of reindustrialization — in fact, that task will be even more urgent, given the damage that Trump will have done.

And yet at the same time, I think there’s a misguided narrative about globalization, manufacturing, and the American middle class that has taken hold across much of society. The story goes something like this:

In the 1950s and 1960s, America was a smokestack economy. Unionized factory jobs built a broad-based middle class, and we made everything we needed for ourselves. Then we opened up our country to trade and globalization, and things started going downhill. Wages stagnated due to foreign competition, and good manufacturing jobs were shipped overseas. American cities hollowed out, and we became a nation of winners and losers. The college-educated upper middle class thrived in their professional jobs, while regular Americans were forced to fall back on low-wage service work. Eventually the rage of the dispossessed working class boiled over, resulting in the election of Donald Trump. (...)

Like all such narratives, this one consists of layers of myth wrapped around a core of truth. But not all grand economic narratives are created equal — in this case, the layers of myth are thick and juicy, while the core of truth is thin and brittle. Everyone knows about the China Shock paper and the collapse of manufacturing employment by about 3 million in the 2000s. That’s the core of the story, and it’s very real. But there are a lot of big important economic facts that place that story in perspective, which most of the people talking about this topic seem not to know.

Ultimately, the trade-driven collapse in manufacturing was only a small part of the economic story of America over the last half century.

America is not actually that globalized

Pundits and politicians alike talk incessantly about the flood of cheap Chinese goods into America. But overall, this is a small percent of what we buy. The U.S. is actually an unusually closed-off economy; as a fraction of GDP, imports are much lower than in most rich countries, and lower even than China: (...)

In terms of imported components, America manufactures most of what it uses in production. China’s exports to the U.S. are actually more likely to be intermediate goods rather than the consumer goods we see on the shelves of Wal-Mart — another thing the typical narrative misses. But even so, China makes only about 3.5% of the intermediate goods that American manufacturers need: (...)

The American middle class was never hollowed out

Americans, as a people, are startlingly rich. This isn’t just true because a few very rich people pull up the average. If you take median disposable household income, the U.S. comes out way ahead of the pack:

Note that this includes taxes and transfers, including in-kind transfers like government-provided health care.

Other countries may have protected their manufacturing sectors, but middle-class Americans are richer than the middle classes in other countries.

And middle-class Americans’ income has not been stagnant over the years. Here’s real median personal income, which isn’t affected by the shift to two-earner families:

This is an increase of 50% since the early 70s. I wish it had been more, of course, and it has its ups and downs, but 50% is nothing to sneeze at.

As for middle-class wages, they’ve grown less than incomes, since some of the increased income has been in the form of corporate benefits (health care, retirement accounts), investment income, and government benefits. But they have still grown:

Wage growth has resumed since the mid-1990s, despite increasing trade deficits. Note that the China Shock, which threw millions of manufacturing workers out of their jobs, utterly failed to stop wages from resuming their upward climb. Wage stagnation and hyperglobalization just don’t line up, timing-wise. Jason Furman has another good chart that shows this very clearly:

A lot of commentators have gotten so used to the idea that incomes are stagnant that they have trouble believing this data is correct. But as Adam Ozimek points out, the Economic Policy Institute — a pro-union think tank that frequently complains that wages are too low — chooses a very similar measure for median wages. EPI writes that wages “have not been stagnant”, but “have…been suppressed”.

by Noah Smith, Noahpinion |  Read more:
Images: Maximillian Conacher on Unsplash; OECD/Wikipedia; US Census Bureau.]