Average income for the top 10% of the population (red line, right-hand scale above) rose roughly in line with that of the bottom 90% (blue line, left-hand scale) from 1930 through 1970. Then something happened: income growth accelerated for the top 10% and flattened for everyone else.
What happened in the 1970s to cause this? We could point to many factors. One obvious suspect is China’s opening to world trade and the onset of globalization. Over the next few decades that process would transfer many low-skilled jobs from the US to various emerging-market countries. It changed the relative value of capital and labor all over the world. Wealthy people get a larger share of their income from investments than from their labor. They own the “means of production,” and the producers did increasingly well from the ’70s forward. That’s one reason the red line picked up steam.
Businesses moved production overseas mainly to take advantage of lower labor costs. This next chart, again from Minack, shows how manufacturing pay changed in the US, Japan, Brazil, Korea, and China.


Some of this wage convergence is due to currency movements, of course. Note also that the chart has a semi-log scale. Each horizontal line is double the one below it. Nevertheless, the results are pretty obvious. Chinese workers’ pay grew more than 10x during this period. US factory workers saw much less wage growth. Making workers from all these countries compete with each other had the predictable effect: their pay converged into a narrower range.
The result for American workers, once you consider taxes and inflation, is the flat line in the chart above. The pain is greater for those with less education, as we see in this chart from BLS. Anything less than a bachelor’s degree means below-average wages.


People in the lower tiers of this chart are struggling. Would getting them more education help? Maybe, but getting them better jobs would help even more. It isn’t happening, because those jobs no longer exist in this country. Hence people’s attraction to Trump and Sanders, who promise to bring those jobs back.
But what jobs? From where? Everybody talks about the demise of American manufacturing, but that’s really a myth. Note in the chart below that in the last 30 years US manufacturing output has almost doubled, while output per worker is up 2.5 times and employment is down 30%. Since 1980, we have lost nearly 9 million manufacturing jobs in the US.


The losses are not due simply to outsourcing. There are other factors involved, which we will get back to later in the letter. But first we need to look at some of the prevailing wisdom that is gaining consensus on both the left and the right.

Two Out of Three
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David Warsh, formerly of the Boston Globe, wrote an interesting blog post last week, titled “Dani Rodrik and Mr. Trump.” Warsh believes that Rodrik, a Harvard economist, will be next to “enter the pantheon” of names we should all know. That’s because Rodrik largely predicted the present situation in his 1997 book, Has Globalization Gone Too Far?

I have not read this book, but Warsh makes it sound interesting. According to Warsh, Rodrik argued two decades ago that trade would create deep divisions between skilled and unskilled workers. Few of the gains from growing trade were going to the less skilled, which Rodrik said would inevitably result in a backlash. We can look back and see that the income gap between the Protected and the Unprotected began to open in the mid-’70s. From the time Rodrik wrote his book, it took 19 more years to get here, but the backlash has arrived.

Rodrik later developed what he called the “globalization trilemma.” Democracy, national sovereignty, and global integration were mutually exclusive, he said. Nations could have any two of them but not all three, at least not in strong form.

The trilemma is an appealing explanation for some of today’s problems. The Brexit fight pitted those who would sacrifice integration with the EU against those willing to give up national sovereignty in economic matters.

US political culture has looked much like the British “Leave” camp for most of our history. We were big enough and possessed enough resources to grow nicely without deeply integrating our economy with others.

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