Global Squeeze: The Coming Crisis for First-World Nations
Richard C. Longworth
Whenever we see the reality of momentous shifts in society, it’s always good to go back and take a look at the people who saw it coming far away. Generally speaking, there were usually people who understood what was happening in advance. For example, Daniel Bell wrote his book The Coming of Post-Industrial Society in 1976. There were probably even other earlier books touting the same theme.
One person who clearly saw the challenges that globalization would bring to the developed countries was Richard C. Longworth. Longworth was a reporter for most of his career, and a long time foreign correspondent at the Chicago Tribune. Most readers here probably know him from his 2008 book Caught in the Middle: America’s Heartland in the Age of Globalism.
But arguably more important was his 1998 book Global Squeeze: The Coming Crisis for First-World Nations, a book in which Longworth predicted most of the dynamics that would play out in the next two decades, culminating (so far) with Trump’s election. He predicted massive job displacement from China’s entry into the global trading system, describes how developing world countries would move up the value chain, predicts the erosion of middle-class standards of living, the rise of the gig economy, and the deterioration in race relations. He puts his finger on the nationalism vs. globalism debate and anticipated populist revolt. He didn’t predict everything, but he nailed an awful lot of it.
I don’t know how this book performed in the market, but its timing was certainly inauspicious. It came out right as the dot com boom was going nova. Just as one contemporaneous event, on March 30 of that year James Glassman and Kevin Hassett wrote an op-ed in the Wall Street Journal (which no longer appears to be online) that became the basis of their now infamous 1999 book Dow 36,000.
I was then in my late 20s and about to leave Andersen Consulting (now known as Accenture) for a telecom startup. I had no inking of how the future would ultimately play out, but I was incredibly, and naively, optimistic. Since coming out of school at the end of the early 90s recession, the tech industry had been booming beyond belief. The post-mainframe tech transitions of the 90s, plus the nationalization (and early stage globalization of business) drove fantastic demand for consultants and while collar workers. It was truly the golden age for young people with college degrees. Unlike today’s Millennials, who are experiencing downward economic mobility, our salaries were soaring.
Having a great employer and living in a nascently gentrifying Chicago, I was living in a bubble. I certainly did not see trouble ahead in these boom times. I was aware that manufacturing was in structural decline, but my assumption was that this was transitional and generational. Future generations would enter the exploding white collar workforce as I had and industrial displacement would be as forgotten as agricultural displacement had been.
I didn’t see it coming. But Longworth did, even in those boom times.
A Critique of Free Trade
It’s interesting to see how Longworth, someone you’d certainly place today as in the mainstream of center-left thinking, was at that time sharply critical of what is now considered conventional wisdom by both parties, such as free trade dogmatism. For example, he criticizes the doctrine of comparative advantage:
World trade is based on the idea that each nation should make what it makes best and most cheaply, and then trade those wares to another nation for what that nation makes best and most cheaply. In the process, both nations will prosper and will have access to better goods than if they tried to do it all themselves. This is the principle of ‘comparative advantage.’ It also has very little to do with trade in the real world of the global economy….Trade as it exists today bears little resemblance to the textbook images dear to the heart of free traders, for several reasons. One reason deals with the ability of giant firms to create comparative advantage and move it around the globe. If world trade used to take place between companies in different countries, it goes on as often now between branches of the same company operating in many different countries…These are not cases of countries taking advantage of their natural competitive advantages to make goods and services that can be sold freely to less-favored countries. They are cases of companies using technology to build enclosed and controlled trading systems.
This is part of his general disdain for the economics profession:
[Robert Z.] Lawrence and most of his mainstream colleagues are devoted free traders, literally trained from their undergraduate days to reject the thought that trade can cause more harm than good. Lawrence has even warned against letting such ideas get around, saying, ‘The very perception that a link exists [between trade and labor problems] could put the continuing evolution of trade and investment flows at risk.’ No one actually accuses these economists of faking their evidence to protect the sanctity of free trade. But it’s clear that many economists have carefully limited their research to product the results they wanted. The growing evidence that free trade can indeed cause severe damage, and that this damage may even outweigh the gains is producing nothing less than a religious crisis among the true believers in the economics departments of American universities.
They may possibly have had a momentary crisis of faith in the 1990s, but if so, they quickly repented of their heresy. If anything, the economics profession today is more militant and more hysterical about any impingement on global trade than they used to be, even as they finally start to admit, belatedly, that just maybe trade with China has had some negative effects on American workers.
I’ve been wanting to dig more deeply into trade economics because like Longworth I’m not convinced that the studies that are touted regarding trade’s effect on employment tell us what they are marketed as doing. For example, we frequently hear that research shows that relative few jobs were off shored, and that most job losses have been due to automation and other onshore productivity improvements.
Yet I then read articles saying that just one company, Apple, and its subcontractors employ 700,000 people in China. And I wonder: were these 700,000 jobs a) lost to trade/off shoring b) lost to automation or c) counted in some third bucket we’re not being told about? If they aren’t in large part doing jobs that would otherwise be done somewhere else, what the heck are all these untold tens of millions of workers in China manufacturing products for export actually doing?
Longworth points out the hypocrisy inherent in some free trade arguments by pointing to China’s extremely state managed economy and highly protectionist legal system. By the standard arguments, this should have torpedoed them. Yet China has had a three decade run of fabulous growth so far. Even if they crash tomorrow, that’s remarkable. Far from chasing away businesses, even companies they’ve banned like Facebook continue to prostrate themselves before Emperor Xi hoping to get back in, all while delivering sanctimonious lectures to governments back home. And speaking of the tech industry, Longworth saw that China was using its trade discrimination rules to move up the value chain too:
[China] has every intention of upgrading its exports from clothing and toys to high-end, high-tech, high-profit goods such as cars, electronics, and pharmaceuticals….and it is using its trade and investment policies to force Western companies to help it achieve this mastery, which it clearly intends to employ to compete with these countries in the future. Western and Japanese companies that want to invest in China are forced to bring in modern technology and teach the Chinese how to use it.
The Primacy of the Nation and Its Social Integrity
In contrast to the pre-Trumpian mainstream thinking of the Clinton-Bush-Obama years, Longworth argued that even if it’s economically inefficient, some type of protectionism was necessary in order for developed country societies to survive China’s entrance into the global trade system intact:
If Japan was a problem, China will be a catastrophe. It seems impossible that the world trade system, with all its benefits, can withstand an assault of this sort….The major nations must now begin planning new rules to limit aggressive exports of this sort and to demand strict reciprocity – equal access to the markets of China…This is of course, both protectionism and managed trade, and will be attacked as such by purists who consider anything less than free trade a sin. But trade is an economic issue, not a theological one. The First World nations have civilizations worth protecting. If the price of that protection is some protectionism aimed at global predators, it seems folly not to pay it.
This was of course rejected, and these civilizations are in fact badly damaged. And the global trade system is in serious jeopardy as a result, as Longworth predicted.
This passage also gets at the core debate at the heart of contemporary politics: nationalism vs. globalism. Longworth tables this as they key issue in the opening passage of the book: “What is the purpose of an economy? If it is not solely for the well-being of the people who live within it, what is an economy for?”
Longworth at this point in time clearly sided with the nationalist perspective, though as we’ll see in part two this review, his personal and political background created cognitive dissonance on this point that caused him to ultimately side with the very people he raked over the coals in this book.
He saw that on the path the country was on, the prognosis for the middle class was grim and threatened our very understanding of a fair society. Sadly, he was accurate here too:
This is the proletarianization of the middle class, which once considered itself set for life in cushioned cubicle of big corporations but now finds itself pitched onto the pavement, a loser in the global competition for jobs. If there is a focal point of the growing debate on the global economy, it is here, where people work….The global emphasis on profits, the unrelenting pressure of the capital markets, and the search for best practice preclude comforting answers. The truth is that no one at this stage can give answers with assurance. The logic of global markets leads to more pressure on workers, not less. Millions of new workers appear on the world market every year, all hungry and ready to compete. The power of computer-driven automation makes it at least possible that, for the first time, new technology will be a job destroyer, not a job creator….This is the “race to the bottom,” a process that drives incomes ever lower. It is also straightforward supply-and-demand economics at work…This is the dehumanization of labor. No other major country treats its workers as commodities in this way, as raw materials or components that can be bargained to the lowest price.
He also correctly foresaw that race relations would degrade with economic stresses. Not only did this cause the white working class to prioritize its own self-interest (the same as every other group), but if the white working class sneezes, the black working class gets a serious case of Spanish flu. As Longworth says:
Racial progress, if not racial harmony, is real. The past three decades in particular have seen once-closed doors open for the vast majority of blacks. Anyone who can recall the legal segregation of the immediate postwar years must marvel at the changes. But economic problems threaten much of this progress.
The retrogression of the racial fabric that we’ve seen is part of that social unraveling that he saw unfettered globalization imposing on America.
And there’s much more he got right, including seeing the rise of the “gig economy” in a section called “A World of Temps.”
The Moral Bankruptcy of the American Elite
One of the major themes woven throughout the book is the moral bankruptcy of America’s elite and more broadly those who, like me at that time, were living large and loving life thanks to this new economy.
He adopts Robert Reich’s “secession of the successful” thesis:
The upper 20% retreats to its gated communities in the suburbs, withdrawing not only physically but psychologically and socially from the country around it. They are not only the wealthy, the executives and traders, but also the economists, journalists, and others who tout the global economy largely because they are best equipped to cope with it and most insulated from its effects. These fortunate few go by different names. Rohatyn calls them the “technological aristocracy.” Robert Reich, the former secretary of labor, calls them “symbolic analysts”….I prefer to think of them as global citizens, having more in common with the elites of Tokyo and Frankfurt than with the other Americans who live beyond the gates, in the shantytowns on the outskirts of the global village. Any country needs its elites. It needs their money, and more important, it needs their leadership. Now the United States is losing its elites.
He talks about the dismal ethics and reckless behavior of much of the financial class:
American traders usually have more formal schooling than their British counterparts, but they have no less ambition and no more real knowledge of the world. Most know the difference between normal risk and betting the bank. But some don’t. Most are honest. But some aren’t. Barely prepared and innocent of ethics, these traders are pitched into stupendous sums of money.
He describes how major Western corporations came to think of themselves as post-national, and repudiated the social contract:
Once the social contract expressed a deal between the wealthy and the poor, between businesses and their employees. Economic change has always brought both gain and pain. But in the short run, the wealthy were more likely to get the gain, and the poor more likely to feel the pain. The great stabilizer of postwar industrial society was the recognition by government and business that, if change creates both winners and losers, then the winners have an obligation to help and compensate the losers. This was more than simple fairness. It was good politics. It was the price that the winners paid to pacify the losers, who had the vote. If the pain became too great, the losers would stop supporting the system that caused the pain. So the Western nations created the safety net, a social balm that soothed the pain and kept the losers non-mutinous.
This social contract has been broken. Footloose global corporations have stopped paying the taxes that financed it. The slack has been taken up, at least partly, by higher taxes on workers. In other words, workers are financing their own social contract. It’s robbing Peter to pay Peter. The losers are comforting the losers, while the winners pay minimal taxes in Indonesia or buy bonds in cyberspace.
Or set up shell companies in Ireland or Luxembourg. The merits of corporate taxation are debatable. But we’ve all read the stories of how these Silicon Valley firms have racked up gigantic profits while using complex strategies to pay little if any tax. It’s indisputable these companies have little concept of the social contract as previous generations understood it.
These global companies have even seceded from national legal systems in favor of private justice.
Even the functions that the governments used to do are being taken over by the global market. With no global laws or regulations to discipline these global markets, a sort of privatized form of justice has arisen. Around the globe, private arbitrators and arbitration centers are producing a “transnational legal profession and indeed a transnational private judiciary. These arbitrators, being private, compete for business and so depend on the goodwill of the corporations they judge. These corporations, in turn, use this private judicial system largely to escape the jurisdiction of national courts.
These private courts can even force nominally sovereign nations to submit to them. That’s because these trade treaties set up international arbitration courts that empower businesses to sue countries outside of those countries’ home court systems. This is nothing less than a destruction of sovereignty, and one of the biggest complaints critics have about these “trade” treaties. There’s a reason it takes 5500 pages to print a so-called “free trade pact” – and it’s not free trade.
As you can see, there’s a ton that Longworth got right 20 years ago – and he put his finger on issues that are if anything more relevant to public debates now than they were then. In fact, a few anachronisms aside, Global Squeeze holds up very well and is still eminently worth reading today. If nothing else, doing so will make clear that anyone who claims “we didn’t see it coming” isn’t telling the truth. Some people did see it coming. But they were ignored.
That’s not to say Longworth predicted or got everything right. In the second part of this series I’ll highlight the areas he missed, and also how cognitive dissonance on his part and that of others like him who were sharply critical of globalization back then fatally undermined their efforts at reform and led them to ultimately be perceived as champions of globalization.
Aaron M. Renn is a senior fellow at the Manhattan Institute, a contributing editor of City Journal, and an economic development columnist for Governing magazine. He focuses on ways to help America’s cities thrive in an ever more complex, competitive, globalized, and diverse twenty-first century. During Renn’s 15-year career in management and technology consulting, he was a partner at Accenture and held several technology strategy roles and directed multimillion-dollar global technology implementations. He has contributed to The Guardian, Forbes.com, and numerous other publications. Renn holds a B.S. from Indiana University, where he coauthored an early social-networking platform in 1991.