Protecting Globalization from its Discontents

A fascinating new study published by Foreign Affairs concludes that future expansion of globalization (i.e. free trade and free borders) is being endangered because "real income growth has been extremely skewed, with relatively few high earners doing well while incomes for most workers have stagnated or, in many cases, fallen."

The study's authors note:

U.S. policy is becoming more protectionist because the American public is becoming more protectionist, and this shift in attitudes is a result of stagnant or falling incomes. Public support for engagement with the world economy is strongly linked to labor-market performance, and for most workers labor-market performance has been poor.

To stymie this rise in protectionism by the American electorate, the study proposes:

The best way to avert the rise in protectionism is by instituting a New Deal for globalization -- one that links engagement with the world economy to a substantial redistribution of income. In the United States, that would mean adopting a fundamentally more progressive federal tax system. The notion of more aggressively redistributing income may sound radical, but ensuring that most American workers are benefiting is the best way of saving globalization from a protectionist backlash.

Now whenever a conservative like myself hears the phrase "redistribution of income," I might be liable to toss the study aside. However, I was curious to see just how these "liberal" professors from Northeastern schools like Yale and Dartmouth would solve this little conundrum they described above. And what I found was shocking:

A New Deal for globalization would combine further trade and investment liberalization with eliminating the full payroll tax (The payroll tax contains a Social Security portion and a Medicare portion) for all workers earning below the national median. In 2005, the median total money earnings of all workers was $32,140, and there were about 67 million workers at or below this level. Assuming a mean labor income for this group of about $25,000, these 67 million workers would receive a tax cut of about $3,800 each. Because the economic burden of this tax falls largely on workers, this tax cut would be a direct gain in after-tax real income for them. With a total price tag of about $256 billion, the proposal could be paid for by raising the cap of $94,200, raising payroll tax rates (for progressivity, rates could escalate as they do with the income tax), or some combination of the two. This is, of course, only an outline of the needed policy reform, and there would be many implementation details to address. For example, rather than a single on-off point for this tax cut, a phase-in of it (like with the earned-income tax credit) would avoid incentive-distorting jumps in effective tax rates.

These Northeastern professors actually proposed a tax cut for the lower earners as a method to help promote globalization. The study finds that the United States has gained $500 billion annually from
trade and investment liberalization and that our nation's future economic prosperity hinges on "averting a protectionist backlash."