Posted inEconomics / ToMl

Trade Flows during “Free Trade” Era Have Exacerbated U.S. Income Inequality

Tonight President Obama is expected to address two linked subjects in his State of the Union address: the historic rise in U.S. income inequality and a trade policy agenda that threatens to exacerbate inequality. As we’ve repeatedly pointed out, Obama cannot have it both ways: he cannot propose to close the yawning income gap while pushing to Fast Track through Congress a controversial Trans-Pacific Partnership (TPP) “free trade” deal that would widen the gap. The TPP would expand the status quo “free trade” model that study after study has found to be an increasingly significant contributor to U.S. income inequality.

As unfair trade deals have been Fast Tracked into law, U.S. income inequality has jumped to levels not seen since the robber baron era. Today, the richest 10 percent of the U.S. is taking over half of the economic pie, while the top 1 percent is taking more than one fifth. Wealthy individuals’ share of national income was stable for the first several decades after World War II. But that share has shot up 51 percent for the richest 10 percent and 146 percent for the richest 1 percent since the passage of Fast Track in 1974, a time period characterized by a series of unfair trade deals. The income share of the richest 10 percent escalated particularly abruptly after the 1994 enactment of the North American Free Trade Agreement (NAFTA), as indicated in the graph below.

Since 1941 standard economic theory has held that trade liberalization will contribute to greater income inequality in developed countries like the United States. In the early 1990s, as U.S. income inequality soared amid the enactment of U.S. “free trade” deals, a spate of economic studies put the theory to the test, aiming to determine the relative contribution of trade flows to the rise in U.S. income inequality. The result was an academic consensus that trade flows had, in fact, contributed to rising U.S. income inequality. The only debate was the extent of the blame to be placed on trade, with most studies estimating that between 10 and 40 percent of the rise in inequality during the 1980s and early 1990s stemmed from trade flows.

More recent studies have concluded that trade’s role in exacerbating U.S. income inequality has likely grown since the 1990s, as U.S. imports from lower-wage countries, and U.S. job offshoring to those countries, have grown dramatically, impacting an increasing swath of middle-class jobs. Further, an array of studies now project future increases in the offshoring of U.S. jobs, suggesting that even under current U.S. trade policy, trade flows will soon be responsible for an even greater share of rising U.S income inequality. Attempts to Fast Track through Congress controversial deals like the TPP, which would incentivize further offshoring, would only exacerbate the historically high degree of U.S. income inequality.

— source citizen.typepad.com

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