Op-Ed

Finding a New Deal for America

Allan Mendelowitz and Robert E. Litan

Robert Zoellick, the US special trade representative, has made clear his priority to push for free trade: he has just launched a vigorous campaign for “trade promotion” authority, which would enable George W. Bush, the president, to negotiate future trade agreements.

It is a welcome start but the new administration will have to overcome opposition on Capitol Hill if it is to pursue its free trade agenda.

The main question centres on whether—and if so, how—the administration can craft an approach to free trade that somehow ensures any further trade agreements adhere to labour and environmental standards, primarily among less developed countries, without offending the business community or pure free traders.

Labour and environmental standards are important but they reflect an underlying anxiety that many Americans have about trade. Whether or not they work in trade-related industries, workers fear that expanded trade will cost jobs and suppress wages.

In fact, increased trade ranks far behind technological change and immigration as a source of job losses and the 20-year decline in real wages of the country’s least skilled workers. No amount of supporting evidence is likely to ease workers’ growing concern. So organised labour and other interest groups that are nervous about—or opposed to—trade liberalisation strike a chord when they say that more trade, especially with countries with less stringent labour and environmental standards, will not only threaten US workers but produce a “race to the bottom” among all countries in setting those standards.

The best way to address worker anxiety is to meet it head on: Mr Bush and the Congress should introduce programmes better designed to cushion the economic pain of job losses, in a way that encourages workers to find gainful training and employment quickly.

The current unemployment insurance programme eases some of the pain but does not address two of the greatest concerns of workers: the decline in wages often associated with accepting a new job and the inability to pay for health insurance while unemployed. Meanwhile, there is little evidence that government-provided job training programmes help many workers, which is not surprising given that workers have no guarantee that there is a job at the end of the line.

One way to allay fears is to take up a recent, but little publicised, recommendation by the bipartisan Congressional Trade Deficit Review Commission. This argued for a new, more comprehensive worker adjustment package that included “wage insurance” and that would be available to displaced workers regardless of the cause of the loss of employment.

To function properly, workers seeking compensation for job loss would have to meet two conditions. First, they would have to be truly “displaced”—have lost their jobs through company closure or downsizing. Second, they would have to have occupied their previous job for at least two years. An essential element of the proposed wage insurance is that it would only be available once workers had found another job.

Authors

Robert Litan and Lori Kletzer of the Institute for International Economics have costed out such a programme on the assumption that the compensation equals half the drop in a worker’s income, is capped at $10,000 per year, and is paid for up to two years after the loss of the initial job.

Even if the unemployment level rises to 5 per cent (well above the current 4.2 per cent), the annual total cost of this programme would be just under $3bn. That compares with more than $20bn spent by the federal government each year on unemployment insurance.

If the government also paid half the health insurance premiums for all “displaced” workers for up to six months until they found a new job, the additional cost would be about $800m.

The government could do more to allay concerns about displacement if the new adjustment package also reduced the need for displaced workers to cash out their pension benefits and made it easier to move pension benefits from one job to the next.

Meanwhile, because wage insurance would not be paid until workers found new jobs, it would provide strong incentives to accept new employment in positions where they can best find new training—on the job itself rather than in a training programme.

Such a scheme would address many of the root causes of US workers’ fears about change more broadly defined, whether induced by trade, shifts in consumer demands or improvements in technology. The fate of freer trade depends on how soon and how well these underlying fears are met.